TABLE OF CONTENTS:
CHAPTER 1 GLOBALIZATION – A DECESIVE POWER TODAY
1. Definition of Globalization
2. Signs of globalization
2.1 Increased role of the international organizations and treaties
2.2. Reduction of Tariffs
2.3. Increased role of transnational corporations
2.4. Increased trade flows
2.5. Increased capital flows
2.5.1. Foreign direct investment
2.5.2. International financial assistance
2.6. Labor flows and remittances
2.7. Regional blocs and trade agreements
2.8. International tourist flows
2.9. Spread of information and communication
3. Forms of Economic Globalization
3.1. At the company level
3.1.1. Functional forms
3.1.2. Forms according to their scope
3.2 At the country level
4. Driving Forces, History and Major Actors Today
4.1. The first wave – the early empires
4.2. The second wave – the Age of Discoveries
4.3. The third wave – the Industrial Revolution
4.4. The forth wave – the Information Revolution
4.5. The current situation and the main actors
4.5.1. The World Trade Organization
4.5.2. The International Monetary Fund
4.5.3. The World Bank
4.5.4. Regional trade agreements and individual countries
18.104.22.168. The European Union
22.214.171.124. Other trade groupings
126.96.36.199. The United States of America
4.5.5. The transnational corporations
4.5.6. The antiglobalization movement
CHAPTER 2 OUTSOURCING
1. Definition and Distinction from Similar Concepts
2. Development and Forms of Outsourcing
2.1 Some history
2.2. Types of outsourcing
3. The Debate on Outsourcing
3.1. Home country case
3.1.1. The theory
3.1.2. and the reality – the example of the USA
a) Cost savings
b) Labor market effects
c) Effects on productivity
d) Effects on consumer welfare
e) Effects on exports
3.2. Host country case
3.2.1. The theory
a) Direct effects
b) Indirect effects – spillovers
3.2.2. and the reality – India and its emerging competitors
a) Employment effects
b) Effect on output and exports
c) Effect on wages
d) Government revenues
e) Competitiveness of human resources
f) Effect on infrastructure
g) Effect on country reputation
h) Effect on the stability in the country
4. Necessary Factors for Outsourcing
4.1. Factors in the client country
a) Labor market factors
b) Regulatory framework
c) Nature of the outsourced activities
4.2. Factors in the supplier country
a) Cost advantage
b) Sufficient labor pool
c) Availability of skills
d) Language proficiency
f) Security and protection of intellectual property
g) Cultural compatibility
h) Time zone differences
i) Legal framework and government support
CHAPTER 3 OUTSOURCING AND BULGARIA
1. Bulgaria and Its Future Accession to the EU – Related Economic Problems
1.1. Copenhagen economic criteria
a) Existence of a functioning market economy
b) Capacity to cope with competitive pressure and market forces within the Union
1.2. Maastricht criteria
1.3. The Lisbon targets
2. SWOT and STEP Analysis of Bulgaria
2.1. SWOT analysis
2.2. STEP analysis
a) Social trends
b) Technological trends
c) Economic trends
d) Political trends
3. The Policies of the EU and Their Possible Impact on Bulgaria
3.2. Consumer protection
3.3. Monetary policy
3.5. Education and training
3.6. Employment and social affairs
3.10. External trade
3.11. Information society
3.12. The Internal Market
3.14. Regional policy
4. Potential Effects from Developing Offshore Outsourcing Capability
4.1. The case study – the software and related services industry
4.2. The macroeconomic dimension
4.3. Possible microeconomic effects
4.4. Other impact
APPENDIX 1 OUTSOURCING IN EUROPE – MAIN SUPPLIERS AND HOW DID IT HELP THEM IN SOLVIGN THEIR PROBLEMS
APPENDIX 2 TABLES
APPENDIX 3 FIGURES
CHAPTER 1 GLOBALISATION – A DECESIVE POWER TODAY
There are many examples showing the tremendous power of economic globalization today. When people speak of the latter, there are many differing opinions, but what unites them all could be brought together in a single word – “interconnectedness”.
In today’s world it is common for example to live in France; drive a German car, assembled in Mexico or the UK; watch satellite TV from USA; work with PC, made in Taiwan and so on and so on. The world of the late 20th and early 21st century is characterized by numerous such connections in all aspects of our life crossing the frontiers and spreading all over the globe.
Globalization is a fact of our life. It creates many problems, but opens also unlimited opportunities for those ready to expose them to its influence. The aim of this work is to present one of these opportunities – the international outsourcing in the service industry – and to analyze what could be the potential impact of adopting it as a national strategy for development of Bulgaria in the European context. Although it has proved beneficial to some countries, there is still the question whether it will work also for Bulgaria. In this perspective, a thorough analysis of the country will be done, reflecting its characteristics and the probable consequences from the coming EU accession on its potential for becoming a preferred outsourcing location.
As a background for this topic, Chapter 1 focuses on the broader trend of globalization, in which the international outsourcing is flourishing. It presents the nature of globalization, by defining it and reviewing the main indications, showing that it is taking place. Further on, a brief overview of the existing forms of globalization on company and country level is done, giving a basic idea of how it is actually happening. The next subchapter is about the driving forces, presented in their historical context and about the development of the phenomenon. More attention is dedicated to the present-day situation with the main actors, which are influencing the speed and the forms that globalization is taking, and the conflicts that arise from their behavior.
Chapter 2 provides a detailed description of the international outsourcing. First, outsourcing is defined and a distinction from similar terms is made. In the next subchapter it is presented how the international outsourcing appeared (with more details about the outsourcing in services), following major changes in the world environment, created by the globalization. Since outsourcing is a relatively young trend, it is still not very well researched, so there is a considerable debate on its consequences, especially on the home (client) countries. For this purpose and also in order to clarify the possible impact that it can have on Bulgaria, there is a presentation of the current theoretical debate, combined with some facts from the actual situation. In the third chapter are examined the possible consequences and potential benefits for Bulgaria from becoming an outsourcing supplier and also the necessary conditions for this. More specifically, there is an analysis of the future accession of the country to the EU and the associated problems Next an evaluation of the existent and possible future conditions and developments in the context of the country’s accession to the EU is provided by the next subchapter. A detailed outline of the potential impact of the Union’s policies on business conditions in general and the opportunities for outsourcing is given in this respect. The last subchapter deals with the potential consequences from developing outsourcing on a national scale in macro- and microeconomic aspect, as well as in the social, political, and technological ones.
Since the democratic changes from 1989, Bulgaria has fallen in the abyss of economic destruction and widespread unemployment and proliferation of poverty. This has been a result largely of the lack of national vision for economic development. At times unclear and doubtful government strategies have been announced wiped out as soon as possible by the next government to come. This has continued already for 15 years, but with the prospects for the accession of Bulgaria to the EU, the country must find its own way for development and improving the living standard, which is lagging far behind from the majority of the European nations. Given that at the moment there is hardly any feasible national strategy for development in Bulgaria, this paper may provide a valuable clue towards the adoption of one. It does not pretend to offer the best solution to the problems of the country, but nevertheless it aims to show the world of opportunities that outsourcing opens and that could benefit also Bulgaria.
1. Definition of Globalization
Today globalization is much criticized and contested by different groups, organizations and even countries, but no one claims that is does not exist – it is here and now and everyone of us is touched every day by the changes it brings. In spite of the consent on the question about its existence, there is no single opinion what exactly globalization is. Almost everybody has his or her own view on the topic. Some put the accent on the integration of the single economies into one global one, while others stress more on the diminishing importance of national boundaries.
One of the supporters of the first view, Patricia Hewitt, a former Secretary of State for Trade and Industry of the United Kingdom, describes the globalization as the growing interdependency and interconnectedness of the world, which can be seen from the “increased ease of movement of goods, services, capital, people and information across national boundaries”.
The official definition of the World Bank of globalization is the “freedom and ability of individuals and firms to initiate voluntary economic transactions with residents of other countries”. Another international institution suggests somewhat similar definition: “the growing economic interdependence of countries worldwide through increasing volume and variety of cross-border transactions in goods and services, freer international capital flows, and more rapid and widespread diffusion of technology”. Collin Hines of Greenpeace says that it is “integration of national economies into the global economy through trade and investment rules and privatization, with the help of technological advances.” The Chief Economist of the Organization for Economic Co-operation and Development, Ignazio Visco, argues that globalization can be described as “a process towards closer economic integration of markets”, which is done through trade in goods and services, mobility of capital and labor. The European Commission, in its paper “Responses to the Challenges of Globalization: A Study on the International Monetary and Financial System and on Financing for Development” notes that the “trend towards greater integration and interdependence between countries and regions on the globe” can be defined as globalization. The definition of the United Nations Conference on Trade and Development (UNCTAD) is that globalization denotes “the process of increasing economic integration among nations through cross-border flows of goods and resources together with the development of a complimentary set of organizational structures to manage the associated network of activities”.
Globalization, seen through the prism of the decreasing importance of borders, is very well described by Williem Buiter, Chief Economist of the European Bank for Reconstruction and Development: “...a process of diminishing importance of distance, geography and national boundaries in shaping all kinds of human activities. It therefore refers to trade liberalization, trade integration; it refers to increased capital mobility. It refers in certain regions to increased labor mobility; and it also refers to the enhanced mobility of just about everything and anything that is permitted by the combination of technological change, lower transportation costs and communication costs that have been going on for a long time.”
As can be seen, there is a considerable diversity in characterizing the process of globalization, but from all these definitions one can extract the key common points. Globalization is:
- Integration into the world economy, which is accompanied by growing interdependency and interconnectedness between countries and regions
- Manifested by increased volume and accelerated mobility of trade, information, capital and labor flows across national borders.
- Carried out by means of new and better technologies and organizations – public (intergovernmental bodies) or private (transnational corporations), capable of managing the associated processes.
The process of globalization is multi-dimensional, covering not only economy, but also culture, technology and politics and reshaping them every day. It has been facilitated greatly by the improvement of technologies and especially the appearance of the Internet as a fast and unlimited source for information. Globalization has reached even the remotest corners of the human civilization and affects more or less everyone today. But not only cultural, political and economic patterns have spread on a global scale. The ease with which information is diffusing and trade and capital flows are going today has made it possible also their use for criminal and inhuman purposes. A frightening example is the flourishing illegal trade with illicit drugs and weapons. After the collapse of the Soviet Union and its communist satellites much of its weapons arsenals have been sold out to criminal groups from around the world. There are also suspicions that some countries with no democratic governments have acquired even nuclear and other weapons for mass destruction or the technologies for their production through such illegal trade channels. Even more striking examples of the force of globalization have been the terrorist attacks on the World Trade Center and the Pentagon from 11 September, 2001. The terrorists have managed to organize themselves on a world-wide scale, using modern means of communication to contact with one another. Bombs preparation technology has been acquired through the Internet for future terrorist strikes.
These two examples come to show that globalization is a two-sided process that must be examined not only in positive terms. Together with the increased opportunities it has brought for trade, investment, movement of people and diffusion of technology and information, it has also offered the same to criminals, terrorists and dictators. It is a long-term goal of the democratic international community to increase the positive and to limit as much as possible the negative effects from globalization. In achieving this fostering opportunities for free and fair international trade among disadvantaged nations and society groups will sharply decrease the possibilities for such manifestations of discontent and evading / breaking the laws and further spread the benefits of globalization.
2. Signs of Globalization
In accordance to the given descriptions of globalization, the signs showing that a country is going global, should refer exactly to these three key characteristics of the process. In the following subchapter there is a presentation of the main changes in the economic environment that give the ground to claim that the world is being globalized. Such manifestations of the process of globalization are the increased role of the international institutions and the transnational corporations; the reduction of tariffs; the increased trade and capital flows; the increased movement of people, etc. Each one of them is examined closely in the next pages.
2.1. Increased role of the international organizations and treaties
Maybe logically the first sign for the level of globalization of a country is its involvement in international organizations, the international treaties that it has ratified and the real importance these play in the economic, political and social life. The more they are, the bigger their role in the signing country and that is why this country must comply not only with its own needs, but also with those of the rest of the world. In the Globalization Index of A. T. Kearney and Foreign Affairs Magazine, there are such indicators, measuring the membership in a basket of international organizations and also the number of international treaties, signed by a country. For example, according to the participation in international bodies, the USA ranks 1st, being member of 15 organizations in 2003; the UK is a member in 13 such organizations, Canada – 14, Austria – 12, Germany and France – 14, the Netherlands – 13. On the other extreme are less developed countries, which are members of less international organizations – Iran, Bangladesh, India and Sri Lanka. There is an interesting trend that can be tracked when the data for the different years is compared. There is a tendency, especially among the less developed countries and the former communist countries from Central and Eastern Europe, to integrate more and more with the rest of the world, which becomes evident when one sees the ever growing number of international organizations in which these countries are members.
Among the international organizations, regulating the world economy, the biggest impact have the World Trade Organization (formerly GATT) and the International Monetary Fund. More limited influence has also the World Bank. When the General Agreement on Tariffs and Trade (GATT) was established in the second half of the 1940s, there were less than 50 states that signed the agreement for its establishing. From then on the GATT grew in size, competences and affected more and more the world through its handling. Nowadays around 150 countries are members of the successor of the GATT, the World Trade Organization. Since its establishment, the WTO has elaborated the international regulation of trade not only with physical goods, but also with services, through numerous international settlements. Moreover, the supervising authority that it has on the international trade system and its dispute settlement mechanism make it a real active force of globalization. Individual nations must comply with the WTO rules more and more if they want to avoid isolation from world trade.
The other major institution that influences today the dealings of many governments and in doing so, its role is bigger and bigger, is the IMF. There is no major financial crisis today that is not treated by this organization. The examples are many – all countries from Central and Eastern Europe, developing nations from Asia and Latin America, Africa. It is another question how well it handles the particular situations, but nevertheless its supremacy on the international financial arena is up to now unchallenged. By providing loans bound to certain conditions that the countries must fulfill, the Fund is shaping the international financial system and its role is more and more important, especially with the envisaged broadening of its competences.
The World Bank, through its various assistance programs for the developing and transition economies has also an impact on the individual countries, thus promoting globalization. Moreover, it finances often such projects that are of strategic importance to the country involved, which presupposes that this same country will have better capabilities to participate in the global processes after the program finishes. A small example aiming to clarify this argument is the current restructuring of the national energy and water supply sectors of many countries, mainly from Eastern Europe. The goal of all these programs is to make these sectors fit for integration in the European energy market and for the privatization of the national water companies.
2.2. Reduction of tariffs
A major consequence from the growing importance of such intergovernmental organizations is the reduction of tariffs. This was done on several rounds of the General Agreement on Tariffs and Trade (now – World Trade Organization), spanning over a couple of decades. After the last and the longest of them – the Uruguay Round – in which 123 countries have taken part, the tariff protection today is at unprecedented low levels. In the last decade the group of the developed countries reduced their unweighted tariffs towards the rest of the world by roughly 50% and the developing countries - between 40 to 70 %. Although the tariffs of all developing regions have fallen, they remain relatively high in comparison to the developed countries. The tariff levels in the developing countries are between 9% in Central America and the Caribbean to more than 25 % in North Africa, while the average non-discriminatory tariff of the developed countries is around 3 - 4 % at the moment. The elimination of trade barriers has spurred the international trade, because they have facilitated enormously the market access.
2.3. Increased role of the transnational corporations
In the era of globalization there are international organizations of another type, different from the intergovernmental public institutions, dedicated to regulation of the world trade and financial system. These organizations are private by nature and often have equal or more power to influence the lives of people. They are the transnational corporations (TNCs). The very term “transnational corporation” suggests that these are enterprises that control assets in countries, different from their home country. These companies have many and various ties with their affiliates in the recipient countries – in production, logistics, distribution, finance, etc. It is often cited that intra-trade between foreign affiliates and mother companies may be a considerable part of the total trade (imports and exports) of a country. That is why the number of TNCs in a country and their role in the economy, could be treated as a sign for the level of globalization. Of course, the more such companies in a country and the bigger they are, the more integrated it is into the global economy. From the report of UNCTAD “Development and Globalization: Facts and Figures” (2004) is evident that among the top 50 non-financial TNCs from the developed countries, 11 come from the USA, 8 from France, 8 from Germany, 7 from the UK and 4 from Japan. These companies, when compared to the TNCs from the developing world, highly surpass them in total assets owned, sales and employees. Only the foreign assets of the top 5 TNCs from the first group of countries amount on more than US$660 billion, more than the total assets of all the 50 TNCs from the developing countries. This fact shows how far the developed countries are in the integration with the rest of the world in comparison to the others. There is, however, a strong tendency in the developing world, especially in Asia and South and Central America, for their companies to increasingly connect to the other countries. In this sense, the Chinese companies – from Singapore, Hong Kong SAR, Taiwan and China itself - are leading: from the top 50 from the developing world almost the half comes from these countries and territories.
The TNCs create connections and influence other countries through their affiliates abroad, where they can produce final goods or commodities, distribute them, etc. Currently there are more than 64,000 TNCs worldwide with more than 866,000 foreign affiliates. This fact is important enough for considering the role of the TNCs’ divisions aboard as worthy. The extent, to which the TNCs have integrated themselves into the world economy can be seen, for instance, from the fact that in such companies now are employed more than 52 million people, up from 19 million in the 1980s. The significance of the foreign companies in the recipient country could be quite big, which is illustrated by the fact, that in Ireland they create around 40 % and even in China - 5 % of the total added value in manufacturing.
2.4. Increased trade flows
Continuing the logical order, as a result of the reduced tariffs and the increased activity of TNCs, the world trade and capital flows have multiplied during the last decades impressively. In 2002 the total world merchandise exports were $ 6.41 trillion and that of services - $ 1.61 trillion. With the advent of the Internet the trade in services has experienced a real revolution, created by the digitalization of many of them. This has enabled the emergence and the rapid development of the e-commerce with services, which is expected to grow on average with 30% per year till 2008. The total trade in services for comparison will grow just with 6.9% annually.
During the years the share of the different country groups in the merchandise exports has changed considerably, mostly in favor of the developing courtiers, speaking for their increased level of integration with the world economy. For example, this group exported in the 1970s around 19 % of the world merchandise exports, but in the end of the century they increased their share to 32 %. While the same group of countries has much smaller share in the trade with services, they have made a big progress, contributing now to almost 23 % of the world exports in services.
It doesn’t matter whether the country is small or big, the degree of integration into the global economy could be surprisingly high for very small countries and vice versa. But the size is not irrelevant to the level of economic globalization. In combination with the level of economic development (as well as political and technological) it becomes clear that the degree of economic globalization will be greater for better developed countries and even higher when these countries are big, because they have at their disposal bulk of different natural resources for the development of their economies and the trade with the outside world. For example, such small but relatively developed nation as Taiwan exports much more than Kenya – $143.5 billion vs. $2.4 billion (2003 data). On the other hand when one compares Russia and Turkey, which have approximately similar GDP per capita but differ greatly in size and natural resources endowment, the pattern confirms –Turkey exports around $51.6 billion, while Russia – almost $136 billion. Again comparing Russia, but this time with the USA – the only comparable country in terms of size and natural resource endowment – reveals the same feature. Russia as a country, which is far behind the United States in its economic development exports also much less: the exports of the USA for 2003 is $716.4 billion. This correlation between the level of economic globalization, expressed through the involvement in international trade and the level of economic development and the size of the countries is summed up in the following matrix.
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2.5. Increased capital flows
The next element in measuring the degree of economic globalization is the volume of the capital flows. The bigger they are, the more integrated the single economy in the global one. They can be divided in three main groups – foreign direct investment (FDI), short-term portfolio investment and international financial assistance.
2.5.1. Foreign direct investment
Here again the size, in combination with the level of economic development, play a vital role, especially for the first two kinds of capital flows. For example Bangladesh attracted only $280 million FDI in 2000 and the much smaller country of Ireland managed to gather more than $25.5 billion worth of foreign investment during the same year. China, although much less developed than Ireland, but with incredible economic potential, due to its size, availability of natural resources and huge population received $40.7 billion in the same year. But China’s success in attracting money from abroad seems quite modest, when compared to the USA, which was the main destination for foreign investors in 2000 - $314.0 billion.
Most of the capital flows come from private sources, where the TNCs have the leading role. For measuring the degree of integration with the world economy, one should take into account not only the capital inflows, but also the outflows. The latter are even a better proof for the globalization of a country, because they show the country’s own ability to create connections with the rest of the world, mainly done by its companies. Looking back to the report of UNCTAD, one can note that in 2002 the group of the developed countries was the main destination for FDI – 70.7 % and at the same time, it was also the main place of origin of investment, accounting for more than 90 % of the capital outflows. But, again comparing data from a longer period, there is a clear tendency in increasing the importance of the developing world for the foreign investors. They have managed to attract only 15 % of the world capital during the 1970s, but in the first years of the new millennium their share has climbed to around ¼ of the world’s total. On the other hand, as a result of their development, these countries have achieved a dramatic growth in their investment abroad – from mere 0.33 % in the 1970s up to more than 8 % in the end of the century.
2.5.2. International financial assistance
This type of capital flows, although not very big in comparison to the private investments, sometimes achieves, or not, results in the recipient economy, which can become tangible for the whole world. That is why the financial aid from abroad could also be treated as a sign of the globalization. International aid has played an important role for the former Soviet satellites in the first years after the fall of communism. In the last decades, however, the assistance for the developing countries has decreased, being replaced by private capital flows such as investments. This process is in the right direction, but only given that the poor countries are granted the opportunities to participate and find their place in the world trade. The least-developed countries can earn much more than the official assistance that is currently given to them, using their own resources where they have comparative advantage – usually in agriculture, low-skills and labor-intensive production of textiles, commodities, simple electronics, etc. This is only to happen, when the developed countries allow them to export such products on a non-discrimination basis, reducing or eliminating all barriers to trade.
2.6. Labor flows and remittances
One of the elements characteristic for the globalization are the increased labor flows. In comparison with the freedom of trade and investment, the movement of people is still with quite a limited scope. Labor migration has become something usual with millions of people traveling abroad for seasonal or permanent jobs. According to the International Labor Organization more than 120 million people live and work in a foreign country, including the illegal emigrants. With the falling transport costs falling, more and more people make the quest to a foreign country. Many do it however, illegally, due to the numerous barriers imposed by the developed countries on immigration from the developing countries. In the last decade the problem of the illegal immigration has been growing, especially for developed countries that are bordering developing ones, such as the USA and Mexico, Italy and Albania, Spain and Morocco. The degree of this problem can be evaluated when recalling the reaction of the US to the illegal emigration from Mexico – the more than 2500 km long wall of 6-meter high metal spikes along the common border. The Italian Carabineers still have the problems with illegally infiltrating Albanians who cross the Adriatic Sea on overloaded boats. Nevertheless, in the last years, the workers’ remittances have continued to grow with steady pace and in 2001 they reached more than $60 billion. For a number of developing countries, the money that their residents sent back home have become an important source for foreign exchange, as in the case of the Philippines for example. The meaning of the workers’ remittances is even bigger for small economies like Jamaica, El Salvador and others, where the portion of these as a part of the total exports and the GDP (the labor, provided by the residents of the given country abroad is treated as service exports) of the country can reach as high as 50 % from the former and 20 % from the latter.
A pushing power for this indicator may be the level of economic development and the overall situation in the home country, the level of skills in the labor force, visa regimes, and even cultural patterns. The main destinations for workers from the developing countries are the developed and the petrol-producing countries from the Middle East, where they can employ their good technical skills.
Some other nations, such as France, Switzerland, Austria, the United Kingdom and the United States rely on highly qualified staff such as engineers, managers, etc. for getting a bulk of money from abroad as compensations for their citizens and consequently – as remittances to the home country.
And one last group could be formed from the countries of Eastern Europe and Russia. Their constantly increasing involvement in the global movement of labor force is dictated by the bad economic and social conditions in these countries. So for example, it is estimated that since the changes from 1989, approximately 1 million people (more than 10% of the total population) have left Bulgaria in searching better opportunities for employment and life abroad, mainly in Germany, Greece, Spain, the USA and the UK. 25% of all the professionals of the country are now working abroad. The emigrants provide the single biggest flow of foreign currency of more than $1 billion annually, thus surpassing the FDI in the country, which has been rather anemic. Some other nations from the former communist bloc such as Moldova or the Ukraine have lost in this way more than 30% of their professional labor force. This trend shows again that globalization brings not only good, but also bad consequences to the countries. However, all these examples are of countries that are lacking good national policies for economic development, which proves, on the other hand that globalization is not a malignant force per se, but it may be made such by poor government policies. Part of these policies should have provided the environment, in which globalization could bring its “fruits”, such as increase in the foreign investment, spread of new technologies, job creation etc and growing living standard in general.
2.7. Regional blocs and trade agreements
Another characteristic of our time is the forming of regional trading blocs and signing of trading agreements, encompassing from several to more than a hundred countries.
Some of the most famous are the European Union, North American Free Trade Agreement, Free Trade Area of the Americas, Central European Free Trade Association, Association of the East Asian Countries, MERCOSUR and most of them, if not all, put in their purposes the economic integration between their members. Nowadays the countries, which are outside such trading blocs or agreements, have become extinct, just because of the fact that the rest of the world is integrating rapidly and for the single country is more and more difficult to survive and develop successfully against the might of these blocs.
Although numerous such trade agreements and groupings were created, the intra-trade between their members has stayed in most of the cases at modest levels. The most successful in the integration with the rest of its members, according to the intra-trade indicator, are the European Union (61 % from the total exports), NAFTA (56%), FTAA (60.7%) and the Asia – Pacific Economic Co-operation (73.5%). As for the achievements of the trade groupings from the African continent, it can be noted that they are very insignificant in comparison with the others - none of the various co-operations from the “black” continent could surpass the level of 13% of their total exports as trade between the members of these communities.
2.8. International tourist flows
Another indicator for the growing power of the globalization is the increased flow of international tourists. Due to the cheap transport, the borders and the distances are not so insurmountable obstacles nowadays. More than half a billion people traveled abroad at the end of the century. The most visited countries are the Mediterranean Three (France, Spain, Italy), Mexico, the USA, China and Russia. But there are new competitors like Poland, Hungary, Turkey, Malaysia and Thailand, which are attracting more and more visitors every year.
A major consequence from the development of the international tourism industry is that it contributes to the flow of foreign exchange in the hosting countries. Of course, it depends a lot on what kind of tourists are attracted to the given country – whether they are from rich countries, or not; whether they prefer luxury, or not, etc. This is how some countries like Russia, which are a relatively popular destination (22 million international tourists, 2001), actually do not profit much from this – the average amount of money that a foreign tourist spends there is only $163, while countries with considerably less tourists from abroad like South Korea, for instance earn much more money ($1238 of expenditures per tourist). In spite of these differences international tourism creates an ever growing part of the national GDP of many developed and developing countries. This is trend is accelerating in the developing countries, most of which offer cheap tourist services and thus attract tourists from abroad. For countries like Turkey, Thailand and especially the small ocean nations in the Atlantic and the Pacific globalization brings prosperity, allowing more and more people to travel abroad and visit remote places around the world.
2.9. Spread of information and communication
According to Joseph Stiglitz, globalization consists of five main elements: trade flows, foreign direct investment, short-term capital flows, labor movement and knowledge transfer. The increased transfer of knowledge worldwide is of extreme importance nowadays, because it facilitates to a big extent the economic growth, especially in the developing countries. It is not by accident, that many theorists speak today of the “economy of knowledge”. Knowledge can be not only of technical nature, but it can also be abstract ideas, which can prove to be beneficial for creating working market economies and market institutions.
Internet, as a source of knowledge and a place for doing business, is of growing importance today. One of the fastest developing sectors is the e-commerce, the trade through the Internet. In the USA, where this business is most advanced currently, the business-to business commerce generates approximately $1,000 billion annually and in the EU – around $200 billion. So, this can be a substantial source in creating the GDP of the country. But from this booming sector the developing countries have only a very small portion – only about 5%. However, it is forecasted that in the coming years their share will grow rapidly, but again it will be concentrated only in the main exporting countries.
The presented main indicators, showing the level and speed of globalization are not exhaustive, but they offer a good picture of the various processes that are under way in the globalization context. The main feature of these signs is that they are characteristic for the world as a whole, only their intensity differs among the various countries, with the developing ones markedly lagging behind. Yet, the strong tendency is towards the fuller and faster integration of these countries with the rest of the world by means of their increased participation in global trade and capital movements. The growing awareness in the huge populations of these countries for the opportunities that globalization can open to them, pushes their governments to make their claim more and more actively and to increase their overall political and economic power.
3.Forms of Economic Globalization
Since globalization indicators could be used for companies, as well as for countries, this suggests that the forms of globalization could be also utilized either by the individual company, or by the country. In the case of companies, predominantly transnational by nature, the forms that are available are marked by great variety. The choices that have the countries, however, are more limited – currently the forms of globalization at the national level are the customs union, free trade area, monetary union and common market. The following subchapter will present in short these forms of globalization on micro (company) and macro (country) level, providing some examples of each of them.
3.1. At the company level
Companies may go global as a result of a whole set of factors, which can be specific for the sector, the country or the company itself. What decision about its internationalization will the company make, depends on the combination and the characteristics of these factors. Of course, the main goal of every company is to maximize its profits through increasing the margin between the production costs and the selling price. In doing this, they have available a whole gamma of possible solutions for internationalization of their operations – from the simple exporting of the finished products till the investment in new facilities abroad.
3.1.1. Functional forms
The forms of globalization could be divided according to the character of the globalized activities. Several types, encompassing the different business functions, can be distinguished according to this criterion. A further division of this type can be made according to the legal personality of the performing party – is it the company itself (or its affiliate) or an independent sub-contractor. This latter case is usually called outsourcing.
This is probably the most used form, because it is the easiest and the cheapest to organize. It involves the selling of the finished product abroad, using own or foreign channels for this. This is, in fact, another criterion for the division of this type in sub-types. The companies may use their own channels for this, but it is very costly in terms of money and time and difficult to build them, which is a disadvantage of this type. It is, however, not so when using the opportunities offered by the different forms of distribution agreements. There are many various types of such sales agreements – exclusive distribution, limited distribution, concession sales, export agents and many others. Every one of them has its own advantages, but it depends on the company’s financial abilities and goals which one to choose.
This is another function that can be “exported” abroad. Companies do this for many reasons: to gain advantage of the price differentials that exist between the home and the host countries, to be close to its main markets, to avoid trade barriers, to tap existing pool of natural resources or talent, etc. Not only a product as a whole can be produced in a foreign country, but in more recent times, this is done also for the components of the final product, which then can be assembled in the home country. And again here a sub-division can be done, depending on whether the company makes the production alone or uses sub-contractors. There are many examples of moving production abroad. One of them is the production of Volkswagen in Mexico, Brazil and Hungary, where it produces whole cars. Another is the strategy of many producers of computer hardware – they produce the components in foreign locations and often assemble the product on their home territory. The possible combinations of various production agreements are limited only by the minds of the participants.
By sourcing it is meant the supply with materials, commodities, labor and everything necessary for the production. This could be done either in the companies’ own mines or fields, or it can buy the necessary inputs from abroad like in most of the cases. An interesting example of implementing the global sourcing strategy can be found in the business of the diamond producer De Beers. It produces the rough diamonds in its mines, which are scattered across the world – South Africa, Botswana, China, Russia, Congo, etc. Afterwards the faceting of the extracted rough diamonds is done in the company’s filials in the main market countries – USA, Canada, Great Britain and other European countries.
Of course, sourcing can be not only in tangible goods, but also in intangible such as various business services, necessary for the normal functioning of the business processes. For example, this could be using a foreign advertising agency for the advertising campaign of a product that the company is selling abroad.
Going financially global is a bit more specific, because it does not involve physical movement of tangible assets, but rather it involves the attracting of investment from abroad. This the company can do in many ways – it can be listed on some of the stock exchanges and trade its shares or it can attract investors for various kinds of joint ventures. An example of the first option is the listing of the National Bank of Greece (not to be confused with the Greek National Bank, which is the central bank of the country) on the stock exchanges in London and New York. The second variant, joint ventures, can be found in many industries – for example, it is highly spread practice in engineering projects in the petrochemical or the automotive sectors. Such joint ventures in the petrochemical industry are established by PETRONAS, the national oil and gas corporation of Malaysia, in Thailand, Indonesia, Australia and Argentina, where the company is interested in gas transmission activities.
- Management and labor force
In globalizing the management or the labor force in the company, it recruits its staff from abroad. While this is a common practice when it is about the top management, the recruitment of workers from abroad (with the exception of the case where the company has factories abroad) is very rare. But this depends on many factors like workers’ skills and productivity, labor costs, legal obstacles, etc. and can occur. Very often this strategy of recruiting staff from abroad is utilized in the cruise industry, where the personnel varies greatly by nationality, even within a single company.
3.1.2. Forms according to their scope
According to this criterion, there is a wide variety of forms of globalization, ranging from the simple functional forms till the most complicated forms of foreign direct investment, involving ownership of equity stakes. Somewhere between the two ends of the scale are the so-called forms of non-equity co-operation.
- Functional forms
These include all the forms, mentioned above, which are the simplest of all. The company may employ one or several of them at the same time.
- Non-equity co-operation
These forms developed rapidly after many developing countries, afraid that foreign companies would “conquer” their economies, introduced many restrictions on FDI and today they constitute a significant part of all international operations of the companies, due to their many advantages and relatively low risk. Non-equity co-operation is characterized by the supply of tangible or intangible assets from the foreign company to a local one, with the foreign company having only a small equity stake in the venture. The typical activities that can be a subject of such co-operation are the research and development; supply of technology, know-how or trade marks through licensing agreements; production sharing agreements, franchising, etc. and can be used almost in all industries – retail, manufacturing, services, etc. There is not a common rule, defining what should be the equity stake to classify this form of globalization as non-equity cooperation and to distinguish it from the FDI. But the general agreement is that in such forms of cooperation, the foreign company does not have a majority stake and power to effectively manage the venture.
Some of the most wide-spread forms of non-equity co-operation are:
- Licensing – Coca Cola is using this kind of agreement for the production of its drinks worldwide, selling to foreign companies the right to use its trademark.
- Franchising – one of the leading franchisers is McDonalds, with more than 5400 fast food restaurants all over the world that work on the basis of franchise agreements.
- Production sharing agreements
- Turnkey agreements – such agreements are usually implemented in the engineering industry, for example in building a plant and its following maintenance. Bechtel, a leading engineering company utilizes turnkey agreements when constructing nuclear facilities.
- Strategic alliances – these are long-term mutually beneficial relationships between companies that have the same goals. They are used very often in the aerospace industry. One such strategic alliance is the STAR Alliance, uniting airlines from Canada, New Zealand, Japan, Korea, Austria, Great Britain, Poland, Germany, the Scandinavian countries, Singapore, Spain, Thailand, USA and Brazil.
- Foreign direct investment
According to the common notion, foreign direct investment is characterized by its long-term relationship and interest in the control of a company that is in another country, different from the country of residence of the investing company. For an investment to be considered as such, it is required for the investor to have at least 10% of the voting shares. This means that he can exert effective control in the management of the foreign enterprise, which is maybe their main advantage, in spite of the relatively big risk.
Mergers and acquisitions are more specific forms of globalization, but also very characteristic for it, because they show one of the typical sides of this phenomenon – the increased volume and speed of capital flows.
Mergers are usually done between big transnational corporations, rather than small companies, but the latter also happens. A merger involves the creation of a new company from the merging of the old parent companies, with all their assets and activities becoming property of the new one. Companies do this in order to gain advantages from each other’s experience, resources, and distribution networks and to achieve economies of scale. The aim of such an operation is to seek for synergetic effects – to complement each other’s strengths and to reduce the risks by using these strengths. A famous example, although not very successful, for a merger is the one between Daimler-Benz and Chrysler. Mergers are also typical for the airlines companies.
Acquisitions are done voluntarily, by the mutual consent of the two parties and involve the buying of majority equity stakes by a company from another one, resident of a foreign country. This operation is done through the stock exchange, where usually bigger companies buy controlling packages of shares of smaller ones. It is a very important distinction, that in acquisitions the interests of both parties are taken into account.
This is not so, however, with take-overs, where the stronger companies buy, so to say, forcefully majority stakes from other companies, which are usually in short-term difficulties. In take-overs, the interest of the attacked company remains unconsidered, but it is often contrary to the interest of the buyer.
3.2. At the country level
When countries form economic blocs, they attempt to obtain some of the benefits of free trade, without giving up too much control. But the more restrictions are removed, the more control is lost. This is why, in order for the countries to adjust, they proceed with the integration in stages, where more and more economic (and sometimes also political) sovereignty is lost. There are four types regional economic integration – free trade area, customs union, common market and economic union.
- Preferential trade area
This is the weakest form of economic integration between countries that is a loose entity of several states that grants preferential access to certain groups of countries and goods, done by reducing tariffs for example.
Example for such area is the one, established between the EU and the countries from Africa, the Caribbean and the Pacific, which were signatories of the Lome Convention of 1975. These are all developing countries, many of them being in the group of the least-developed countries. The Lome Convention regulated the trade relations between the EU and those states till 2000.
- Free trade area (FTA)
FTAs are the most common integration form, because it is the easiest of all. In a free trade area the countries aim at eliminating all import tariffs between them, while at the same time they keep the independence in setting trade policies with third countries. Generally it is assumed that in a FTA the removal of tariffs concerns all the goods and services, but it may be also limited to a specific product category. However, in setting their own tariff rates for third countries, there could be difference in the external tariffs of the different member countries. This could be used by exporting countries, which may import in the member country with the lowest external tariff and then re-export in the rest of the member countries. This strategy could be avoided when the FTA establish rules of origin for the source country of a product.
The most successful examples for Free Trade Areas are those, covering the European and the American continents. The FTA within the framework of the European Union and EFTA are examples from Europe. The FTA within the EU unites all the member states of the Union, while EFTA consists only of Iceland, Norway, Liechtenstein and Switzerland. EFTA was established in 1960 by Western European states that did not participate in the then European Community. Gradually, however, most of its initial members became eventually members of the European Community and this is how today there are only the four mentioned countries left.
Since 1994 there has been functioning the North American Free Trade Area (NAFTA), which includes Canada, USA and Mexico. Its effects has been sharply criticized by many people, but according to US government statistics it has been a success story for all the participating countries, helping them to boost investment, trade, industry and services and living standards. Nevertheless, the reality shows that it has had a controversial impact on the member states.
In South America there are plans about the establishment of South American Community of Nations, which will combine MERCOSUR, the Andean Group and Chile, Guyana and Suriname. This will create a continent-wide FTA of 12 member states with a GDP per capita of $7,187 (PPP). Another even more ambitious project for a FTA, which will cover all nations from the Western Hemisphere except Cuba, is the proposed Free Trade Area of the Americas.
More notable Free Trade Area in the Asian region is the one, which is arranged within the Association of South East Asian Nations, uniting Brunei, Indonesia, Malaysia, the Philippines, Singapore, Thailand, Vietnam, Laos, Myanmar and Cambodia, the latter four practically joining in 2012.
- Customs union
The next level of integration is the establishing of customs union. This is a form of integration, where all the tariffs between the members are eliminated and there is a common trade policy towards third countries. Here the group acts as a single unit in negotiating commercial matters with the rest of the world. Another important distinction from the FTA is that in the customs union, the countries set a common external tariff, which makes it impossible for non-members to use the strategy of transshipment, mentioned above.
There are many examples of customs union around the world. In Europe the most developed one is the former European Economic Community. There are also customs unions between EU and other countries – with Turkey, for instance. In the Americas there are different customs unions between countries from Latin America – Mercosur (Argentina, Brazil, Paraguay and Uruguay), the Andean Group (Bolivia, Colombia, Ecuador, Peru, and Venezuela), Central American Common Market (Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua) and Caricom (Antigua and Barbuda, the Bahamas (not a member of the Common Market, only of the Caribbean Community), Barbados, Belize, Dominica, Grenada, Guyana, Jamaica, Montserrat, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Trinidad and Tobago and Suriname).
An example from Africa is the Southern African Customs Union where the members are the countries of Botswana, Lesotho, Namibia, South Africa and Swaziland.
- Common market
This is a further stage of integration, which includes all the features of the customs union. Besides that, in a common market the controls over the movement of the different factors – goods/services, capital and labor – are removed, which assumes further loss of independence of the national economy.
The world’s most famous example of a common market is the Common Market of the EU. The EU common market leads its beginning from the creation of the European Economic Community in 1958 by Western Germany, Italy, France, the UK, Belgium, Luxemburg and the Netherlands. Now, after the last enlargement of the Union, it encompasses 25 countries, with several more waiting accession. The single market is at the core of the EU today, has been initiated in 1985. Since then the program has been improved by numerous policies in different spheres like competition, agriculture, education, environment, etc. It is arguably the biggest success of the Union, according to some, but there are still some things to be done. While to the free movement of goods, services and capital has been dedicated much attention, the free movement of people is far from the desired situation, especially for the new member states. There are long periods that are foreseen for these states, when their citizens will not have the full rights to move freely within the Union in search of good jobs and living conditions.
More recently has been created also the European Economic Area, which is an entity, combining EU 25 and the EFTA states. It came into force in the beginning o 1994, giving the right of the four EFTA members to participate in the EU Common Market, without being members of the Union.
- Economic union
The most complex form of integration is the economic union. It involves all the characteristics of the common market with the addition of coordinated economic policies and unified institutions. There could be established, however, some supranational supervising bodies, whose decisions are obligatory for all members. If the economic union adopts a single currency, it may become also a monetary union.
The only economic and monetary union nowadays is the one, formed within the European Union by the countries that participate in the Eurozone. Currently Great Britain, Sweden and Denmark are out of the European Economic and Monetary Union and the new member states will join it in 2007.
The EMU was initiated in 1990 with the elimination of foreign exchange controls. In 1992 was signed the Maastricht Treaty, which set up the so-called convergence criteria. They are defining precise target levels of key macroeconomic indicators, such as annual inflation, budget deficit, external debt, etc. With entering into force of the treaty in the beginning of 1993 started the second phase of the building of the EMU. In this second stage were established the institutions that were going to take responsibility for leading the single monetary policy in the Union. These were essentially the European Central Bank (preceded by the European Monetary Institute) and the Stability and Growth Pact, which has the goal to supervise the fulfillment of the convergence criteria. The third stage in creating the EMU started in 1999. The Euro was introduced as a single currency and actual coins and banknotes were introduced in 2002. Since then national currencies of the participating states have ceased to exist and a single monetary policy has been conducted, led by the ECB, which is assisted by the European System of Central Banks. The future trend in the development of the EMU is towards implementing a common fiscal policy, which is however a much disputed question because of the difficulties in leading such a policy given the fragmented nature of the European economies.
The presented forms of globalization serve to provide an overall picture of their variety and to show the opportunities that globalization offers both to companies and countries. By participating in the globalization process both companies and individual countries can benefit from the many advantages – economies of scale, efficient use and distribution of resources and goods, synergetic effects and others.
4. Driving Forces, History and Major Actors Today
What we call today with the term “globalization” is just a part of a millennia-long process, which roots are in the dawn of humanity and which has developed in consecutive waves throughout the centuries. This development was always inspired by revolutionary changes in the social, economic, political and technological environment. These changes were the forces behind the spread of globalization worldwide. The next pages follow in a historical context the emergence of these changes and the effects that they had on the development of the globalization process.
The very first period in the history of this phenomenon can be dated back as far as the early forms of Homo sapiens scattered all across the globe and inhabited all continents with the exception of Antarctica. Of course, that at that time there could not be spoken about any interdependencies, created by means of capital, trade, etc. among regions, e.g. about globalization in the modern sense of the word. This is why many authors call this period with the name “proto-globalization”.
4.1. The first wave – The Early Empires
The first stage in the development of globalization is that of the early empires, when their trade links reached far away from their borders. This subchapter presents the main events during this first period, when globalization was in its nascent years.
The period of proto-globalization is the longest one in the development of globalization, because it continued till the emergence of the early imperial and trading states in Europe and Asia – the Hellenic city-states, the Phoenicians and finally the Roman and the Chinese Empires. These were the first significant and relatively stable state forms, which allowed them to develop technologically, economically, socially and politically very fast, in comparison to the rest of the world. Such technological improvements as irrigation, coinage, shipbuilding, etc. as well as the development and spread of unified languages, political and legal systems across the territories of these states, boosted also their economies. Production of agricultural commodities grew faster, than the population and markets for the surplus were searched for. The improvements in metallurgy, clothing, construction, transport gave an impetus for increased trade within the states, but also across their borders. It is a well-known fact that Phoenician sailors reached till West Africa in search for markets for their goods and sources for new ones. In its zenith the Roman Empire spanned on three continents and traded with its neighbors all along its borders. This illustrates the main characteristic of this stage – globalization at that time was confined to small-scale trade with commodities and final goods (like clothes, pottery, metal objects, etc.) This was a highly risky venture, especially when trade was done with remote regions, because of the many uncertainties and dangers along the route.
After the demise of the Roman Empire in Europe, there was a major slowdown in the pace of globalization, at least in the first centuries, when the new “barbaric” kingdoms were established and asserted their power and influence. But as soon as this was done and relative stability was assured again, international trade slowly began to return to its former levels, as the kingdoms started to trade with one another.
So in the end of this period there were the preconditions for the consecutive reemergence of inter-country trade and movement of people, which gained a strong impetus in the next centuries, especially after the discovery of new lands by the Spaniards and the Portuguese.
4.2. The second wave – The Age of Discoveries
This wave started with the discovery of America in 1492 by Christopher Columbus. During this age there were major changes in the European countries that made it possible to discover the new continents and the following exploitation of the colonies. The results from the colonizing of these territories are presented in this subchapter, giving an idea for the new level to which globalization was boosted at that time.
There were many factors that brought to the Age of Discoveries, as it is known, but the most important ones are the inventions of better means of transport and the need for new markets and sources of natural resources. During that time dominant was the mercantilist view, that a nation gains its wealth through the accumulation of precious metals like gold and silver and any activity, leading to their outflows were undesirable. Naturally, when most of the nations adopted this point of view, free and normal trade between them was everything but possible. This was the reason for the growing interest of the monarchs of the leading countries – at the time these were Spain and Portugal – in discovering and conquering new lands. Otherwise their wealth, which they desperately needed for the leading of wars for the same purposes, could not grow.
With the stepping on the Caribbean islands, began a new era in the development of humanity as a whole and globalization in particular. Soon after the discoveries of Columbus, Da Gama and Diaz, the Britons, the Dutch and the French hurried to take advantage of the newly discovered territories and to colonize them. The colonization created a sharp increase of trade and in the movement of people. At that time were established the state-owned British and Dutch East India Companies, which in fact had the monopoly in trade with spices and other precious commodities from the colonies. These companies, due to their ultra-profitable trade and the subvention from the state, became huge and powerful predecessors of today’s multinationals, with many offices across the world.
Not only trade flows grew much in this phase of globalization, but the same happened to the human flows. Many settlers, eager to try their chances in the new lands or just adventurers, set assail for the new territories, especially in North and South America, where gold and silver were discovered in abundance. Apart from them, many soldiers, who had to secure the new possessions and missionaries, zealous to spread the Christian faith among the “savages”, made their way in the conquests. Unfortunately, a very dark side of the movement of people was a typical feature during that time – the trade with slaves. Millions of people, mainly from Africa, were forcefully transported into other colonies and the metropols, where they had to serve as slaves with no rights, even over their own lives. The trade with slaves had the purpose to import cheap labor for the needs of the development and exploitation of the colonies or the metropols. In nowadays world the same effect is achieved by voluntary migration of the labor force from the developing countries to the developed ones.
An important effect from the colonization process was the exchange of technologies, ideas, plants and just about everything that could prove to be better, interesting and challenging. In many cases this had important consequences for both the colonies and the metropols. So, for example, were imported in Europe the coffee, the tea, the sugar, the cocoa, the corn and the potatoes, which fast became staple diets in the whole continent. The spread of the potatoes across Europe could be even evaluated as a major cause for the following rapid growth of the population, because it gave the people cheap food, rich of calories, which can be easily produced.
In the end of this period started relatively significant movement of capital (in the form of gold and silver) across the globe, mainly from the colonies to the metropols, but in some cases the direction was reverse. The latter occurred in the case of the colonies in North America – today’s Canada and the United States – where an ever bigger migration flow was directed.
This second period of globalization was marked by accumulating of wealth in the major colonial powers in Europe, in the process of which the trade, capital and people flows increased significantly. The wealth from the colonies was a base for the events from the next period, the Industrial Revolution, when the globalization process began already slowly to take its present-day form and scale.
4. 3. The third wave – The Industrial Revolution
The previous stage in the development of globalization ends with the beginning of the Industrial Revolution in Britain, approximately around 1750. This is at the same time, the start of the third wave of globalization, which spans till the First World War. The third wave constitutes a totally new phase, because it is characterized by major qualitative changes in the whole system, as a result of a great number of technological breakthroughs. These historic developments are described in the following pages.
The Industrial Revolution began with the so-called “enclosures” in Great Britain. They were, in fact, the seizure of the land from the peasants by the landlords and turning it into pastures for farming sheep. The wool that was produced from the sheep was later processed and turned into cheap clothing, which was to be exported in big quantities in the colonies and also in other countries across Europe. The manufacturing of woven textiles was revolutionarily changed with the invention of the steam machine of James Watt that allowed the production of cloth much faster and cheaper, because it did not involve much hand labor. Soon after its invention, other people discovered how to use the steam engine in textile manufacturing machines. This was the condition that turned out to be of key importance, because now the textile industry could be organized in a completely different way – in large scale factories, where most of the operations were performed by steam machines.
Another application for the steam engine was found on the divide between the 18th and the 19th centuries – in 1801, when the first steam locomotive was invented and in 1807 was built the first passenger ship, driven with steam power. Very soon these inventions were improved and put the beginning of modern transport.
During the time more and more machines, which were using the steam engine, were created. The process was even supported with all means by the rich factory owners, who aspired to get even more and better machines, which could allow them to calculate bigger profits. As a result of this, more and more iron and steel were needed for the making of more and more machines. But in order to get iron or steel, one had to process the iron ore, which required considerable amount of wood. But wood was becoming scarce, as many of the forests in Europe and North America were already destroyed. This is how, the search for new fuels got an impetus and the coal mining developed fast.
From the development of new methods of metals production, the iron and steel that became possible to be produced, were good enough for the construction of railways, bridges, wheels, etc. This, together with the invention of the steam locomotive, led to rapid development of railway networks and rail transport as a cheap way of physical moving of goods and passengers.
Trade was enhanced also by the fact, that the biggest and most powerful country at that time – Great Britain – was pursuing a policy of laissez-faire, i.e. minimum involvement of the state into the economy. During this period, Britain was so strong economically, that it could afford to trade with foreign countries with zero tariffs on its imports. Most of the countries adopted also the so-called Gold Standard, which in effect made all the currencies convertible, thus facilitating international trade. Another impulse for the growth of trade was the constant increase of the world population, resulting from the improvements in agriculture.
Meanwhile, till the end of the 19th century, migration flows towards the New World were getting bigger and bigger, due to the fall of trans-Atlantic transportation costs and the increased capacity of ships. Most of the settlers in America came from European countries, some of which lost up to 9% of their population.
In the middle of the 19th century some other important technological innovations were made – the discovery of electricity, the exploitation of the first commercial oil fields, the invention of the inner combustion engine, the telegraph, the telephone, a number of chemical substances and many, many others. Furthermore, in 1913 was put the start of the aviation industry, which soon would transform the transport forever. All this made it possible to increase the speed, the volumes and the composition of world trade and in the first years of the 20th century it reached record levels that remained such till the 1970s.
The functioning of financial markets was radically changed, after the invention of the telegraph and after the first transatlantic telegraph cable was laid – it provided a real-time connection with the rest of the world and made it possible to obtain information from every country, which is so vital for the efficient financial markets.
In the end of the 19th and the beginning of the 20th century the concentration of capital was already so huge, that many authors argue that it was the highest ever. The created multinational corporations of Rockefeller, Ford, Carnegie in the USA; Siemens, Bosch and Krupp in Germany and others were already truly global even according to the standards of our time – they operated across continents and had sourcing, production, financing and marketing ties to many countries in the world.
In the end of this period, there was the clear tendency outlined, that the growth in economy worldwide was science-based. Science had the leading role and it will not be overestimated to say that, together with the free trading regimes, it was a major driving force for the spread of global connections among the countries.
4. 4. The forth wave – The Information Revolution
This phase is characterized by even more intensive and fast changes in the world environment, which had a far-reaching impact on the process of globalization. These are presented in the following subchapter together with the development of the globalization in the various fields – trade, capital, technology, people movements, etc.
During the First World War, the leading role of science continued to be unchallenged. Many other discoveries were made, which were initially used for military purposes, but later they proved to be beneficial also in other sectors.
After the end of the war, of course, the world economy was seriously damaged – trade, investment and migration were at much lower levels, than prior the war. The Gold Standard was no longer functioning and although, that many countries tried to re-establish it, these efforts were unsuccessful. As a result of all this and of difficulties in the re-setting the economies from war-time to peace-time functioning, serious crisis like the Great Depression from 1929 emerged and spread across the world. The diffusion of the crisis among the rest of the countries was maybe the first significant evidence for the grown interdependence and interconnectedness across the globe.
The deterioration of the economic conditions during the first half of the 1930s led many countries to economic nationalism in an attempt to counteract the crisis. Free trade was no more existent; instead of it, there were built tariff “walls” from extremely high import tariffs, which had to protect the local industry from foreign competition till it becomes strong enough. This however, had even more detrimentious effects on the national economies, because as it effectively stopped the exports of the other countries, had the side-effect of lowering their national incomes, making them unable to import, too.
This vicious circle was broken by the beginning of the World War Two in 1939 by the Germans. During the time of the war, again the world economy was put under pressure to produce for military purposes.
After the end of the war, the USA emerged as the global leading power in any sense – military, economic, financial and technological. It became the world supplier of capital and technology and, at least in the beginning, the strongest proponent and engine of globalization.
The whole period after the end of the war, was characterized with relative stability, because no other major international war was led. This fact should not be underestimated, when assessing the different factors that contributed to the acceleration of globalization after 1945. It provided the necessary conditions for growth in the economies and the development of the inter-country economic relations.
With the creation of the Bretton Woods system in 1947 and the introduction of the Marshall Plan for the reconstruction of post-war Europe, was put the start of the renewing of the global economy. In the new system a number of international institutions were built, whose task was to guard its proper functioning and to regulate it. The world trade was to be governed and regulated by the General Agreement on Tariffs and Trade, the financial system – by the International Monetary Fund, and the reconstruction from the war, elimination of poverty and the development of poor countries was a task of the World Bank. However, more important role in pushing forward the globalization had the first two institutions – the GATT and the IMF, because they were the main actors in achieving trade and capital markets liberalization.
Liberalization was one of the main driving forces for globalization in the post-war period. In the area of international trade this was achieved with the reduction of tariffs on consecutive rounds by the GATT. Table 1 shows the progress in reducing the average import tariffs of the developed countries on industrial goods during the years.
Since the 1940s the average tariff rate for manufactured goods in the industrialized countries was cut from 40% to less than 4% today. The import tariffs in agriculture, although much disputed are also lowering in the major industrial countries – 17.3% in the EU and 11% in the US, 1999. At the same time, after the war, began the process of decolonization and almost all former colonies won their independence till the late 1970s. In spite of the difficulties that they had in different periods after their decolonization, some of them – notably from East Asia and Latin America – have managed to develop their economies and to get considerably richer, than they were before. The emergence of these countries as fast growing and dynamic economies, with strong export orientation and attractive foreign investment policies, meant the pushing of world economic integration to a higher level. Very soon after the end of the war countries like Japan, South Korea, and Taiwan in Asia and Germany in Europe began to compete successfully with the USA. Many of them entered the GATT, which was transformed into the World Trade Organization after the Uruguay Round, so that in the end of the millennium trade liberalization measures were practiced in 149 countries around the world, covering 98% of world trade.
Trade between countries was given an impetus also by the creation of numerous trade agreements and trading blocs all across the globe. The number of such arrangements rose to 155 till the end of the century and the trade between their members comprises a substantial share of the total world trade.
The increase in international trade was much aided by the better and cheaper transport. While the means of transport were getting bigger, faster and more secure, the costs of transportation were falling down dramatically. Table 2 shows the trend from the 1920s till the 1990s. It is evident, that the shipping costs have fallen down more than three times and the air transport costs – six times, since the beginning of the century.
Up to the 1970s the international financial system was based on the US dollar and all exchange rates were pegged to it, according to the Bretton Woods agreement. In the early 1970s, however, the Bretton Woods system collapsed. The high inflation in the US, the rising price of the oil and the difficulties of many countries with this, reduced the competitiveness of the US and deteriorated its balance of payments. The dollar was no more stable and the dollar-denominated assets began to lose of their value. A change in the exchange rates was needed. This was the reason for the introducing of floating exchange rates around the world and for the gradual abolition of the capital controls. When no pegging was needed, the different capital restrictions, used before for the maintaining the parity with the dollar, became also redundant. With flexible exchange rates, the countries were no longer held dependent on the US monetary policy, but they could determine their own policies and compete for capital with other countries. This is how many developed countries liberalized their capital markets. The capital markets liberalization was pushed further also by the International Monetary Fund, which played the main role in this for the developing countries. Several disadvantages of the capital controls were eliminated with their abolition. First, capital controls could be the reason for modest domestic return rates. In comparison with other markets, the domestic one may be not so developed and may not offer the many opportunities for profit as elsewhere, this resulting in its inefficient functioning. The local residents will have no other choice, but to lend their savings at the low domestic rates. This, on the other hand, has as an effect the general discouragement of domestic savings and consequently – their lowering and from that – small capital market. Another major setback of the capital restrictions is that they discourage also the foreign investors to put their money in the particular country, because of their fears, that once they invest in the country, they would not be easily able, if at all, to withdraw their earnings back.
But with the liberalization of the capital markets worldwide were not only eliminated disadvantages of the previous system, but also were got some benefits. On the first place, capital liberalization results in generally more efficient markets, because it increases competition. The markets become more integrated, which results in the availability of cheaper and more abundant capital. As the capital market controls are removed, this is a good incentive for the foreign capital to enter the country, provided it pursues a proper policy, which in general leads to opening up of the economy and better opportunities for growth. And a last major advantage of the liberalized capital markets is that, they can provide a good possibility for the minimizing the risk, resulting from increased trade specialization of a country.
All these measures created the conditions for the growth of capital flows after the 1970s. According to UNCTAD data, while the growth in the world GDP (in nominal terms) between 1980 and 1999 increased with 5.3% and the growth in world imports was 5.6%, the FDI grew by 16.1%. More than 50 % of the FDI, however, was a result from cross-border mergers and acquisitions. This just reminds about the big role of the multinational corporations in the world economy from the second half of the 20th century.
Many of them, like the American General Motors and Microsoft, the Japanese Matsushita and Sony, the German Volkswagen and Siemens, are far richer, than many of the developing countries. Their capital reaches huge proportions, in the order of tens and hundreds of billions of dollars, and gives them the opportunity to operate on a truly global scale. Their operations span on many levels over the supply chain horizontally and vertically across countries, thus making their integration into the world economy even more serious and deeper. A simple example how a multinational’s decisions can influence the whole world system, is the reaction of the oil price on the world markets after the announcement of a leading Russian company from the sector that it would reduce or increase the production of oil. The fact, that this company may own several percents of the world oil and gas reserves, makes its decision worthy to listen to and the markets do it: after the announcement the price immediately changes.
The functioning of the capital markets was further improved with the better and cheaper communications. While in the beginning of the century, a one minute call from London to New York costed around $300, now it costs less than $3. Thus, the fall of communications costs and also the introduction of new technologies has decreased substantially the costs of remote operations and allowed their rapid proliferation among the companies.
Also the quality characteristics of the communication means changed a lot during the years after 1945. Now we have available totally new communication systems like satellites, computers and finally Internet, which allow the transfer of information almost at the speed of the light. Information, which is of vital importance for the capital markets today and for the people as a whole. These new technologies in the communications made possible the turning of many business activities into “weightless” ones. Today banking, tickets booking, accounting, medical prescriptions, call centers and many others are done through the global information and communication system of Internet and constitute a fast-growing sector. Just in the beginning of the new century, according to UNCTAD data, the digital trade through Internet amounted on almost $2,300 billion, while the forecast for 2006 was that it would reach $12,840 billion, with an annual growth rate of more than 50%.
Another dimension of the globalization – the movement of people – scored more modest results, in comparison to the movement of goods, services and capital. The unlimited migration from the previous centuries was no more existent during the years after the war. Many of the developed countries, which are the main destinations for migrants from the poor countries, introduced different restrictions on the migrants flow. Most of these restrictions aim at increasing the competitive element in their migration policies, meaning that they put high requirements for the qualification of the migrants, in order to limit their number, but at the same time – to choose only the best of them. But nevertheless, the migration flows are a widespread and common phenomenon today and millions of people become sojourners every year, in search of better opportunities for life. As for the other form of the movement of people, the international tourism and travel, it must be said, that in comparison to the beginning of the century, it has seen a real boom. It is estimated, that in the end of the century more than half a billion were only the international plane flights, not to say the travels by sea and land. This incredible increase in the international travel was again caused by the relatively cheaper and more secure transport, which was already discussed above.
The developments in the 20th century created the nourishing ground for the intensification and acceleration of globalization around the world. It has been particularly fast and large-scaled after the WWII, when the Bretton Woods settlement established international institutions that had the responsibility for regulating the world trade and financial systems. A prominent role in promoting globalization has had the US, being the global technological, military and economic leader and pushing hard for trade and capital liberalization.
 Eliminating Poverty: Making Globalization Work for the Poor, Cm 5006, December 2000, p 14, para 10.
 (IMF, World Economic Outlook, May, 1997)
 Colin Hines, Localization. A Global Manifesto, 2000, p 4
 Globalization, Select Committee on Economic Affairs at the House of Lords, Session 2002 – 03, 1st report, p 12, para 26
 SEC (2002) 185, 14.2.2002.
 Globalization, Select Committee on Economic Affairs at the House of Lords, Session 2002 – 03, 1st report, p 13, para 27
 Globalization, Select Committee on Economic Affairs at the House of Lords, Session 2002 – 03, 1st report, p 13, para 30
 A. T. Kearney Globalization Index data, 2004
 UNCTAD, Development and Globalization: Facts and Figures, 2004, p 69 - 71
 UNCTAD, Development and Globalization: Facts and Figures, 2004, p 40
 UNCTAD, Development and Globalization: Facts and Figures, 2004, p 41, 43
 See 15.
 UNCTAD, Development and Globalization: Facts and Figures, 2004, p 44 - 45
 UNCTAD, Development and Globalization: Facts and Figures, 2004, p 48
 A. T. Kearney Globalization Index data, 2004
 A. T. Kearney Globalization Index data, 2004
 UNCTAD, Development and Globalization: Facts and Figures, 2004, p 33
 UNCTAD, Development and Globalization: Facts and Figures, 2004, p 26 - 27
 UNCTAD, Development and Globalization: Facts and Figures, 2004, p 54 -55
 UNCTAD, Development and Globalization: Facts and Figures, 2004, p 65
 UNCTAD, Development and Globalization: Facts and Figures, 2004, p 98
 UNCTAD, Development and Globalization: Facts and Figures, 2004, p 99