Globalization is the tendency of investment funds and businesses to move beyond domestic and national markets to other markets around the globe, allowing them to become interconnected with foreign markets. Proponents of globalization say that it helps developing nations "catch up" to industrialized nations much faster, through increased employment and technological advances. Asian economies are often highlighted as examples of globalization's success.

Critics of globalization say that it weakens national sovereignty and allows rich nations to ship domestic jobs overseas, where labor is much cheaper. What is the real story of globalization?

Key Takeaways

  • Globalization is the flow of investment funds from outside of the domestic market to international markets, allowing for interconnectedness with foreign markets.
  • For businesses, globalization is good, as it leads to cheap labor overseas and lower production costs, improving the bottom line and the stock price.
  • Globalization can lead to improving the economies of developing countries through increased employment and technological advances.
  • Lower prices in domestic markets are also a result of globalization.
  • Job losses in the domestic market as well as in developing countries when businesses find even cheaper markets for production can be a result of globalization.
  • Globalization has led to a widening gap between rich and poor countries and the rich and poor citizens within countries.

The View From the Penthouse

For business leaders and members of the economic elite, globalization is good. Cheaper labor overseas enables them to build production facilities in locations where labor and healthcare costs are low, and then sell the finished goods in locations where wages are high. 

Profits soar due to the greatly reduced wages for workers, and Wall Street rewards the big profit gains with higher stock prices. The CEOs of global companies also get credit for the profits. Their rewards are usually generous compensation packages, in which company stock and stock options figure prominently. Institutional investors and wealthy individuals also take home big gains when stock prices increase.

The View From the Street

But globalization doesn't only affect CEOs and high-net-worth individuals. Competition for jobs stretches far beyond the immediate area in a global marketplace. From technology call centers in India to automobile manufacturing plants in China, globalization means that workers must compete with job applicants from around the world.

Some of these changes arose because of the North American Free Trade Agreement (NAFTA). NAFTA sent the jobs of U.S. autoworkers to Mexico, a developing country, where wages are significantly lower than those in the U.S. A few years later, some of those same jobs were relocated to other developing countries in East Asia, where wages are even lower.

The monetary benefits realized by domestic businesses from globalization don't always trickle down to the workers, which has increased concerns about a disappearing middle class.

In both cases, the auto manufacturers expected U.S. consumers to continue buying those products at U.S. prices. While critics of globalization decry the loss of jobs that globalization can entail for developed countries, those who support globalization argue that the employment and technology that is brought to developing countries help those populations toward industrialization and the possibility of increased standards of living.

The View From the Middle Ground

In the globalization battleground, outsourcing is a double-edged sword.

On the one hand, low wages in foreign countries enable retailers to sell clothing, cars, and other goods at reduced rates in western nations where shopping has become an ingrained part of the culture. This allows companies to increase their profit margins.

At the same time, shoppers save money when they buy these goods, causing some supporters of globalization to argue that while sending jobs overseas tends to lower wages, it may also lower prices at the same time.

Lower-income workers also enjoy some of the benefits of stock price appreciation. Many workers have mutual fund holdings, particularly in their 401(k) plans. When companies outsource jobs and get rewarded with rising share prices, mutual funds with those shares also increase in value.

The Effects of Globalization

The ever-increasing flow of cross-border traffic regarding money, information, people, and technology isn't going to stop.

Some argue that it is a classic situation of the rich getting richer while the poor get poorer. While global standards of living have risen overall as industrialization takes root in developing countries, they have fallen in some developed countries. Today, the gap between rich and poor countries is expanding,  as is the gap between the rich and poor within these countries.

Globalization will not stop, therefore it is imperative to have an educated, flexible, and adaptable workforce that can weather any changes that globalization brings about, including shipping jobs overseas.

Homogenization of the world is another result, with the same coffee shop on every corner and the same big-box retailers in seemingly every city in every country. So, while globalization does promote contact and exchange between cultures, it also tends to make them more similar to one another. At the market level, linked global financial markets propel local issues into international problems, such as meltdowns in Southeast Asia and the 1998 Russian debt default. 

What Lies Ahead?

Deviation from the status quo on this issue is likely to be minimal. The massive outsourcing of U.S. manufacturing jobs that began decades ago continues today. White collar jobs, such as call center workers, medical technicians, and accountants have also joined the outsource parade, leaving many to argue that those profiting from the arrangement have little incentive to change it, while those most impacted by it are virtually powerless.

Politicians have latched onto the idea of the disappearing middle class as a political issue, but none of their income redistribution schemes are likely to have any immediate substantial impact. 

The Bottom Line

The benefits to globalization are large but come with many drawbacks. Public scrutiny of CEO compensation has encouraged business leaders to begin to see that a rising tide doesn't necessarily lift all boats. In many cases, low-wage workers get hurt the most because they don't have transferable skills. The concept of retraining workers is on the radar, but it's easier said than done and decades too late for the American manufacturing industry. Until a better solution is found, education, flexibility, and adaptability are the keys to survival in an ever-increasing globalized world.