Throughout history, commerce and business have been limited by certain geographic constraints. In its earliest days, trade happened between neighboring tribes and city-states. As humans domesticated the horse and other beasts of burden, the distances they could travel to trade increased. These distances increased further with the development of seafaring capabilities.
Although humans have been using ships for centuries to transport goods, cargo, people, and ideas around the world, it wasn’t until the development of the airplane that the blueprint of a “globalized economy” was laid. This was for a simple reason: It allowed us to travel greater distances faster than ever before.
The development of the internet and easier means of communication and collaboration propelled us from those early days of globalization to where we are today: A few taps or clicks away from a co-worker, business partner, customer, or friend.
Globalization has had numerous effects—both positive and negative—on business and society at large. Here’s an overview of the pros and cons of globalization in business.
What Is Globalization?
Globalization is defined as the increase in the flow of goods, services, capital, people, and ideas across international boundaries, according to the online course Global Business, taught by Harvard Business School Professor Forest Reinhardt.
“We live in an age of globalization,” Reinhardt says in Global Business. “That is, national economies are ever more tightly connected with one another than ever before.”
Advantages of Globalization
1. Economic Growth
It’s widely believed that increased globalization leads to greater economic growth for all parties. There are several reasons why this might be the case, including:
- Access to labor: Globalization gives all nations access to a wider labor pool. Developing nations with a shortage of knowledge workers might, for example, “import” labor to kickstart industry. Wealthier nations, on the other hand, might outsource low-skill work to developing nations with a lower cost of living to reduce the cost of goods sold and pass those savings on to the customer.
- Access to jobs: This point is directly related to labor. Through globalization, developing nations often gain access to jobs in the form of work that’s been outsourced by wealthier nations. While there are potential pitfalls to this (see “Disproportionate Growth” below), this work can significantly contribute to the local economy.
- Access to resources: One of the primary reasons nations trade is to gain access to resources they otherwise wouldn’t have. Without this flow of resources across borders, many modern luxuries would be impossible to manufacture or produce. Smartphones, for example, are dependent on rare earth metals found in limited areas around the world.
- The ability for nations to “specialize”: Global and regional cooperation allow nations to heavily lean into their economic strengths, knowing they can trade products for other resources. An example is a tropical nation that specializes in exporting a certain fruit. It’s been shown that when nations specialize in the production of goods or services in which they have an advantage, trade benefits both parties.
2. Increased Global Cooperation
For a globalized economy to exist, nations must be willing to put their differences aside and work together. Due to this, increased globalization has been linked to a reduction—though not an elimination—of conflict.
“Of course, as long as there have been nations, they've been connected with each other through the exchange of lethal force—through war and conquest—and this threat has never gone away,” Reinhardt says in Global Business. “The conventional wisdom has been that the increased intensity of these other flows—goods, services, capital, people, and so on—have reduced the probability that the world's nations will fall back into the catastrophe of war.”
3. Increased Cross-Border Investment
According to the course Global Business, globalization has led to an increase in cross-border investment. At the macroeconomic level, this international investment has been shown to enhance welfare on both sides of the equation.
The country that’s the source of the capital benefits because it can often earn a higher return abroad than domestically. The country that receives the inflow of capital benefits because that capital contributes to investment and, therefore, to productivity. Foreign investment also often comes with, or in the form of, technology, know-how, or access to distribution channels that can help the recipient nation.
Disadvantages of Globalization
1. Increased Competition
When viewed as a whole, global free trade is beneficial to the entire system. Individual companies, organizations, and workers can be disadvantaged, however, by global competition. This is similar to how these parties might be disadvantaged by domestic competition: The pool has simply widened.
With this in mind, some firms, industries, and citizens may elect governments to pursue protectionist policies designed to buffer domestic firms or workers from foreign competition. Protectionism often takes the form of tariffs, quotas, or non-tariff barriers, such as quality or sanitation requirements that make it more difficult for a competing nation or business to justify doing business in the country. These efforts can often be detrimental to the overall economic performance of both parties.
“Although we live in an age of globalization, we also seem to be living in an age of anti-globalization,” Reinhardt says in Global Business. “Dissatisfaction with the results of freer trade, concern about foreign investment, and polarized views about immigration all seem to be playing important roles in rich-country politics in the United States and Europe. The threats in Western democracy to the post-war globalist consensus have never been stronger.”
2. Disproportionate Growth
Globalization can introduce disproportionate growth both between and within nations. These effects must be carefully managed economically and morally.
Within countries, globalization often has the effect of increasing immigration. Macroeconomically, immigration increases gross domestic product (GDP), which can be an economic boon to the recipient nation. Immigration may, however, reduce GDP per capita in the short run if immigrants’ income is lower than the average income of those already living in the country.
Additionally, as with competition, immigration can benefit the country as a whole while imposing costs on people who may want their government to restrict immigration to protect them from those costs. These sentiments are often tied to and motivated—at least in part—by racism and xenophobia.
“Meanwhile, outside the rich world, hundreds of millions of people remain mired in poverty,” Reinhardt says in Global Business. “We don't seem to be able to agree about whether this is because of too much globalization or not enough.”
3. Environmental Concerns
Increased globalization has been linked to various environmental challenges, many of which are serious, including:
- Deforestation and loss of biodiversity caused by economic specialization and infrastructure development
- Greenhouse gas emissions and other forms of pollution caused by increased transportation of goods
- The introduction of potentially invasive species into new environments
While such issues are governed by existing or proposed laws and regulations, businesses have made environmental concerns and sustainability a priority by, for example, embracing the tenets of the triple bottom line and the idea of corporate social responsibility.
Managing the Risks of Globalization
The world is never going to abandon globalization. While it’s true that individual countries and regions put policies and practices in place that limit globalization, such as tariffs, it’s here to stay. The good news is that businesses and professionals willing to confront and prepare for globalization’s challenges and risks have the potential to benefit immensely.
Whether you’re a business owner, member of executive leadership, or an employee, learning how to identify opportunities related to globalization and the risks it might bring can empower you to be more effective in your role and offer more value to your organization.
Taking a course like Global Business is one path toward quickly gaining an understanding of the macroeconomic, political, and social conditions that have and continue to have an impact on modern globalization.
Are you interested in breaking into a global market? Sharpen your knowledge of the international business world with our four-week Global Business course, and explore our other online courses regarding business in society.
