Reading Assignment 4: Economic Globalization---ZHENG YAYUAN

 

What is the relationship between the economy and globalization?

1) Summary

Amidst the cacophony of opinions on economic globalization, there is a clear consensus that the business corporation – specifically the transnational corporation (TNC) – is the central actor: the primary shaper of the global economy. 

In reality, this is a highly misleading stereotype. The purpose of this chapter, therefore, is to provide a more nuanced depiction and explanation of the nature and significance of TNCs in the processes of economic globalization, an approach that is firmly grounded in the empirical reality of a highly differentiated geography whilst, at the same time, providing a theoretical basis for understanding what is, indeed, a highly complex phenomenon. The chapter focuses on five related issues: (1) the scale and geographical distribution of TNCs in the global economy; (2) why and how corporations engage in transnational activities; (3) the geographical embeddedness of transnational corporations; (4) the‘webs of enterprise’ manifested in transnational production networks; (5) the power relationships between TNCs and other actors in the global economy.

Initially, for companies in certain industries (such as textiles, apparel, footwear, toys, and consumer electronics), the main attraction was cheap and often unorganized labor. The so-called "new international division of labor" that came to prominence in the literature of the 1970s and 1980s was based on the notion that firms in Western industrialized countries were fleeing the constraints of high-cost, militant labor to take advantage of cheap labor and the malleable labor of developing countries (see, for example, Fröbel et al., 1980). There is no doubt that certain types of multinational investment have been and remain very sensitive to geographical differences in labor costs. It is indeed possible for multinational corporations to change at least part of their operations to respond to changes in labor costs.

Economic globalization is the cross-border and cross-regional flow of production factors such as commodities, technology, information, services, money, personnel, capital and management experience, which means that the world economy is increasingly becoming a closely linked whole. Economic globalization is one of the important features of the contemporary world economy and an important trend in the development of the world economy. Economic globalization, which is conducive to the rational allocation of resources and production factors in the world, the global flow of capital and products, the global expansion of science and technology, and the promotion of economic development in underdeveloped regions, is a manifestation of human development and progress, and is the inevitable result of world economic development. However, it is a double-edged sword for each country, which is both an opportunity and a challenge. Especially for developing countries with weak economic strength and relatively backward science and technology, the risks and challenges encountered will be more severe in the face of fierce global competition. The urgent problem to be solved in economic globalization is to establish a new economic order that is fair and reasonable to ensure the fairness and effectiveness of competition. Economic globalization refers to the globalization of trade, investment, finance, production and other activities, i.e., the optimal allocation of production factors on a global scale. At its root, it is a product of the high development of productivity and international division of labor, which requires further crossing of national and state boundaries. Since entering the 21st century, the in-depth development of economic globalization and multinational corporations has given a major impetus to world trade, but at the same time has also brought many uncertainties to the economic and trade of various countries, making it appear many new features and new contradictions.

2) Interesting items

There are two main ways in which a company can undertake cross-border activities: one is through so-called "greenfield" investments; the other is through mergers and acquisitions or some form of strategic partnership with other companies. Greenfield investments are simply the construction of completely new facilities (administrative offices, factories, R&D facilities, sales and distribution centers, etc.). By definition, it increases the production stock of the company itself and the country/community in which it is located. As such, it is usually the most favored type of investment by host countries. A particularly important example is the series of new assembly and parts plants built by Japanese automotive companies (Nissan, Toyota, Honda, etc.) in the 1980s and 1990s in North America and Europe (especially the UK). However, greenfield investment is far from the most common model for overseas expansion. Building an entirely new facility, especially a large-scale one, is a risky venture. For this reason, companies may prefer to establish operations overseas through partnerships with existing companies.

Many companies, especially (though not only) U.S. and U.K. companies, prefer to merge with or acquire another company in order to establish or expand their operations in a given overseas location. In fact, much of the growth in world FDI in recent years has been driven by mergers and acquisitions (M&A) rather than greenfield investments. In particular, the second half of the 1990s saw a series of large cross-border M&As, including the $60.3 billion acquisition of the U.S. company AirTouch Communications by the British telecommunications company Vodafone, the acquisition of Chrysler by Daimler-Benz, the acquisition of Asda by Volvo-Mart, and the acquisition of a controlling stake in Nissan by Renault (UNCTAD 2000). Indeed, it is worth noting that the slowdown in FDI growth after 2000 coincided with a significant decline in M&A activity. An M&A involves the transfer of equity between companies; in other words, it involves the transfer of ownership and control of all the assets of two companies.

Another widely used model of MNC expansion is the strategic partnership with one or more other firms. Although collaborative ventures have been around for a long time, what is new about their current manifestations is their size, their proliferation, and the fact that they have become central to the multinational strategies of many firms. Most strikingly, most strategic alliances are formed between firms that are already fierce competitors. In other words, they reflect a new form of business relationship, a "new competition".

3) Discussion angle

How should the unequal relations caused by economic globalization be resolved? How should this problem be solved as the development of countries is becoming more and more stressful and challenging for developing countries?