Globalisation

• FDI?

  The purchase of land, equipment or buildings or the construction of new equipment or buildings by a foreign MNC. Also refers to the purchase of a controlling interest in existing operations and businesses by a foreign MNC.
• MNC

  A firm with a base of operations in more than one country
• MNC transfers

  Technologies of production

  Tastes and styles of living

  Managerial services

  Business practices eg marketing restrictions, advertising

  Focus on profit not development
• MNC benefits from locating in LEDCs

  Lower costs: exploitation of raw materials, agricultural potential due to agribusiness, use of low-wage, non-unionised labour, fewer legal restrictions

  Higher revenues: access growing domestic markets and safeguard their position

  Can be beneficiaries of aid in form of tax breaks, subsidies and grants
• Effect of FDI on BOP

  Initially an inflow as the MNC brings investment to the country

  An outflow due to MNCS importing capital goods

  Goods produced by MNCs may be exported and create an inflow

  Long run profits will be repatriated so is an outflow
• Impact of FDI on AS/AD

  FDI results in increased investment, increasing AD, creating multiplier and an increase in GDP

  In long run, investment increases LRAS as it increases quantity and quality of capital, leading to long run economic growth

  Also rightward shift of LRAS due to infrastructure improvements, and MNCs providing education, housing, healthcare to workers
• FDI on inflation

  As FDI increases investment and AD, it could be inflationary due to demand-pull inflation. Should be limited by an increase in AS

  Yet there may also be cost-push inflation due to a tight labour market: wage-price spiral
• Benefits of FDI

  Provision and transfer of expertise in finance and management, where LEDC firms lack expertise

  Better access to export marled as local managers can learn from MNCs

  Provision of employment

  Development of local support industries eg cleaning, maintenance

  Technology transfer (increases LRAS)

  Tax revenue

  Plug savings gap

  Inflow to balance of payments
• Problems of FDI

  MNCs stifle domestic competition, failure to reinvest

  MNCs influence government policies eg liberal tax concessions

  Low tax competition- less funding for welfare state

  Transfer pricing

  Technology may be inappropriate eg unskilled labour force

  Negative impact of BOP

  Produce unaffordable products for LEDCs
• Globalisation

  The process through which national economies have become increasingly integrated and interdependent
• Economic integration

  The merging together of national economies and the blurring of boundaries that separate economic activity in one nation state from another
• Barriers to trade

  Removed through economic integration

  Tariffs, quotas, government subsidies, tax, exchange rates, barriers to entry, regulatory barriers, national qualifications
• Characteristics of globalisation

  Greater trade in goods, financial capital and technology

  Greater specialisation, labour migration

  Development of global brands

  Inclusion of more economies in the global trading system
• Causes of globalisation

  Reduced transport costs eg containerisation

  Improved communication

  Reduction in trade barriers

  Removal of exchange controls

  Deregulation of domestic financial markets- easier to buy/ sell assets abroad

  Rise of MNCs

  Growth of trading blocs
• Trading blocs

  A group of countries that enter into an agreement to reduce barriers to trade between members eg the EU, NAFTA
• Benefits of globalisation

  Use of specialisation with comparative advantage- operate outside PPF

  Economies of scale

  Greater competition- drives efficiency

  Higher GDP and living standards

  Improved allocative efficiency- more mobile resources

  Benefits of FDI eg increased AD and AS

  Increase development eg infrastructure

  Technology development
• Costs of globalisation

  Primary product dependency and declining terms of trade trap into low development

  Lack of access to developed markets due to trade barriers

  Competition causes lack of wage laws, tax competition

  Benefits developed more

  Temporary gains in employment- footloose

  Automation reduces employment

  Environmental costs

  Inequalities

  Brain drain

  Depress wages due to increased supply from migration in MEDCs