Globalisation

What Globalisation Means

Globalisation: the growing integration of the world's economies, as goods, services, money and people move more freely between countries.

For a business, globalisation means it can sell abroad and buy its inputs from anywhere, while rivals from anywhere can compete for its customers. A small UK coffee roaster might buy beans from Colombia and sell online to buyers in Ireland.

This page covers what globalisation looks like and why it has happened. What it means for firms, workers and countries is covered in Theme 3.

Characteristics of Globalisation

The spec names three signs that the world economy is becoming more connected.

Increased Investment Flows

Foreign direct investment (FDI): money a firm invests in another country to set up, buy or expand a business it controls there, such as a factory, an office or a chain of shops.

A Japanese carmaker building a factory in the UK is FDI into the UK. Money also crosses borders when investors buy shares or bonds in foreign firms without taking control of them. Globalisation shows up as more of both kinds of flow.

World Trade Rising as a Share of World GDP

Trade has grown faster than output, so more of what the world produces is sold across a border. In 1970, world exports and imports together were worth about a quarter of world Gross Domestic Product (GDP), the total value of goods and services produced. Since 2003 they have been worth more than half (World Bank).

Increased Migration

More people now live and work outside the country they were born in. The UN estimates there were about 154 million international migrants in 1990 and about 304 million in 2024, 3.7% of the world's population. For firms, migration widens the pool of workers they can recruit, which helps sectors such as farming, care and hospitality fill vacancies.

Factors Contributing to Globalisation

Five changes over the last 50 years explain why trade, investment and migration have grown so quickly.

Trade Liberalisation

Trade liberalisation: the reduction or removal of barriers to trade, such as tariffs (taxes on imports) and quotas (limits on the quantity that can be imported).

Countries have cut tariffs through rounds of talks in the World Trade Organisation (WTO) and by joining trading blocs such as the EU (unit 2.4.3). Tariffs cut → imported goods are cheaper and firms face fewer barriers selling abroad → more goods and services cross borders.

Capital Market Liberalisation

Capital market liberalisation: the removal of controls on moving money into and out of a country, so that firms and investors can invest abroad freely.

The UK, for example, scrapped its controls on taking money out of the country in 1979. Controls removed → investors can move money to wherever the returns are highest → more FDI and more buying of foreign shares and bonds → firms can raise finance abroad and set up operations overseas.

Political Change in China and the Former Soviet Union

China and the Soviet Union were planned economies, largely closed to Western trade and investment. China began opening up from the late 1970s and joined the WTO in 2001. The Soviet Union broke up in 1991, and Russia and Eastern Europe moved towards market economies.

Countries open up → well over a billion workers and consumers join the world economy → firms can make goods where labour is cheap and sell to new markets → cheaper manufactured goods in UK shops, and more trade and FDI.

Reduced Cost of Transport and Communications

Container shipping, in standard steel boxes that move from ship to train to lorry without being unpacked, has made it far cheaper to move goods across the world. The internet has done the same for information, so services such as customer support can be supplied from another country.

Cheaper transport and communications → a firm can manage suppliers and factories on the other side of the world → production is split across countries, with each stage done where it costs least → more trade in parts as well as finished goods.

The Growing Significance of Global Companies

Transnational company: a business with operations, such as factories, offices or shops, in more than one country. It is also called a multinational corporation (MNC).

A transnational opens a factory abroad → money flows into that country as FDI → parts and finished goods move between its own sites in different countries → trade and investment both grow. Their impact is covered in unit 3.4.1.

The factors feed each other. Cheaper shipping made it worthwhile to build factories in China once it opened up, and capital market liberalisation let transnationals move the money to do it.