What is meant by "globalization" and how has it affected international trade and foreign direct investment?

University Degree Business and Administrative studies

Question a: What is meant by “globalization” and how has it affected international trade and foreign direct investment?

1.0 Introduction

In recent times, the international business scene has been growing rapidly and is closely influenced by global events and forces. International business is carried out today within an integrated, global environment which comprises of three main elements, which are ( Wild, 2003 ) :

Many national business environments
The international business environment
International business management

As national business environments seek to become more engaged in international business, they have slowly removed national economic barriers that once existed to protect their local business from stiff international competition. This has brought upon the world a business phenomenon that has been termed as globalization.

1.1 Globalization

Globalization can be defined as the trend toward greater interdependence among national institutions and economies (Wild, 2003). It can also be said that globalization is basically the cross-border exchange of economic, social and technological elements. Globalization has had no shortage of its skeptics since its emergence to the international business environment. The left critics of globalization claim that the profits of globalization are not being distributed equally amongst nations that are involved, and basically is a case of the rich nations getting richer and the poor nations are being exploited. Anti-globalization activists also cite that globalization is just another word for “Americanization” because American values and culture is wide-spreading throughout the world in the form of American companies and products such as “Nike” and “McDonalds”. The concern of anti-globalization protestors is the fear that globalization is homogenizing the world and destroying the rich diversity of culture it contains (Wild, 2003).

However globalization isn’t short of its supporters as well. This can be clearly seen with the support the World Trade Organization gathers. The World Trade Organization (WTO) is the only global international organization dealing with the rules of trade between nations. At its heart are the WTO agreements, negotiated and signed by the bulk of the world’s trading nations and ratified in their parliaments. According to the WTO webpage, the goal is to help producers of goods and services, exporters, and importers conduct their business. The recent increase of international trade and foreign direct investment due to globalization has proven to be beneficial to the countries involved. It has helped to raise living standards across the world as new technologies spread faster. Besides that, globalization has also increased the efficiency levels of domestic firms because of the competitive nature of foreign firms. At the end of the day, it is the consumer that benefits the most because of the variety of choices available has increased and the prices are more competitively priced. In the case of standards of living being increased across the world due to globalization, recent statistics released by the World Trade Organization suggests that in the past few decades globalization has led to lowered poverty rates, and an increased number of job opportunities for individuals throughout the world. This increase in living standards has also brought about higher life expectancy and there is more food, more education, more democratization, less inequality and less oppression of women worldwide (Norberg, 2003).

1.2 International Trade and Foreign Direct Investment

International Trade can be defined as the purchase, sale, or exchange of goods and services across national borders. As recent times have ushered in the world’s willingness to open up to trade and reduce its economic borders that once existed, countries are developing in a faster rate and their economies are getting stronger. Take South Korea as an example; thirty years ago it was as poor as Ghana, but now it is as rich as Portugal. Another very good example would be China, where 100 million people have escaped the clutches of extreme poverty in the past decade or so. These two countries have gained tremendously from their openness to trade in recent times according to the WTO press release of June 16th 2000.

Globalization has induced international trade to be easily conducted amongst nations. Previously nations had many economic barriers in order to protect their domestic products. These protections still exist in current times but at a much smaller scale. Globalization, hand in hand with improvements of technology such as the Internet, has slowly seduced nations into realizing the importance and advantages of international trade, thus leading these nations to become more open to international trade. It can be clearly seen that those developing nations that enjoying the most economic growth are those that are open to trade. The more open they are ...

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Foreign direct investment (FDI) occurs when an investor based in one country (the home country) acquires an asset in another country (the host country) with the intent to manage the asset. The management dimension is what distinguishes FDI from portfolio investment in foreign stocks, bonds and other financial instruments, according to the WTO press release on October 1996. Foreign direct investment has been expanding at a very fast space throughout the past decade and recorded growths of about 40% per year from 1995-2000. This tremendous rate of growth exceeds the growth of world production and trade. There are two main factors that account for the rising tide of FDI flows over the past decade or so, globalization and mergers and acquisitions (Wild, 2003).

A closer look will be taken into the reasons on globalization being a factor of the rising tide of foreign direct investment. Globalization as discussed previously, has led a hand into trade barriers being either reduced or removed completely. This phenomenon has induced companies to export their products abroad easily due to the reduced restrictions and taxes on imported goods and services. With trade barriers being reduced or removed completely by countries worldwide, companies also realized that they could now produce their products in the most efficient and productive locations abroad instead of solely manufacturing their goods locally which not always was the cheapest of most effective manner. Developing nations or low-cost newly industrialized nations was the prime target of these companies to set-up their production facilities abroad and this brought about a massive growth of foreign direct investment to these nations that were involved. As globalization is increasing in recent times, so has the number of companies worldwide that have started to undertake foreign direct investment.

1.3 Conclusion

Globalization has never been short of its supporters or critics. It has been a highly controversial international business phenomenon for the past decade or so. Withstanding all its praises and criticisms, we have to learn to deal with it because globalization is a wave that has already hit the world and shows no signs of slowing down. International trade and foreign direct investment has seen tremendous growth due to globalization and international businesses have embraced this concept and are already gearing towards a more borderless and less restricted international business environment. As Kofi Annan, the Secretary General of the United Nations, has said: "Whatever cause you champion, the cure does not lie in protesting against globalization itself. I believe the poor are poor not because of too much globalization, but because of too little." This statement is true; globalization is needed by both the poor and the rich nations in order to move into the next dimension of international business.

Question b: What are the implications of globalization for international business enterprises based in Australia?

2.0 Introduction

Australia provides a very good example as to a nation who has benefited tremendously from globalization. In 1986 it unilaterally lowered its tariffs. As a result, exports have soared, particularly in newly competitive industries such as manufacturing. It is noteworthy that wages in the new export sectors of manufacturing a 25% higher on average than those that simply service the domestic market. Manufacturing has doubled its share of Australia’s exports over the last 20 years. Australia has a strong vested interest in further trade liberalization, particularly in agriculture. Australia has made common cause with developing countries such as Brazil and Argentina to press for agricultural liberalization, as this would have the benefit of opening American and particularly European markets. It is estimated that if protection levels around the world were reduced by 50%, the benefit to Australia would be more than $7 billion a year. Australian companies investing abroad are helping to create employment and wealth in those countries, in the same way that foreign investment helps to create wealth here. For every dollar invested in Australia, 96 cents remains, including 50 cents in wages, according to the Australian Government Department of Foreign Affairs and Trade.

2.1 Implications of Globalization for International Business Enterprises based in Australia

Australia has embraced globalization and has been removing its trade barriers to accommodate international trade and higher levels of foreign direct investment. This has naturally caused a certain number of implications for international business enterprises based in Australia. Since the early 20th century, multinational enterprises have dominated the Australian economy. Most of the multinational enterprises that operate in Australia produce their goods and services to be consumed domestically and not to be exported abroad.

The main foreign investors in Australia comprises of American, British and Japanese enterprises. As Australia reduces its tariffs and removes its trade barriers, these main foreign investors find it more attractive to undertake foreign direct investment in Australia. By setting up their companies and production facilities in Australia, Australia has gained a lot. This includes a stronger industrial base, higher productivity, better access to international markets and new technologies, and more competitive manufactured and services exports.

Australia subscribes to the 1976 Declaration of the Organization for Economic Cooperation and Development (OECD) concerning International Investment and Multinational Enterprises. According to the Australian Company Commercial Guide 1998, like the U.S., Australia provides no direct federal tax incentives for investment in the country. Those incentives which are available apply equally to foreign and domestic investors. Australia traditionally has accorded a uniform 5 percent tariff preference to developing countries. In addition, it maintains a preferential arrangement with South Pacific Forum nations, and has bilateral trade agreements with Papua New Guinea, New Zealand, Malaysia and Canada. The developing country rate for all but the least developed countries, including the South Pacific Island Territories, is being phased out and will be brought in line with other tariffs in conjunction with Australia's overall program of tariff reduction. These tariff reductions and anti-discrimination between investing nations shows that Australia is embracing globalization and is striving to work towards better integration of globalization into its financial and economic system.

A closer look into New Zealand companies operating in Australia will help us determine the implications that globalization has cause for foreign based enterprises in Australia. New Zealand and Australia has very close ties and its Closer Economic Relations Agreement (CER) is acknowledged by the World Trade Organization to be one of the most successful and comprehensible free trade agreements in the world. According to Mark Vaile’s speech on August 2003, the objectives of the agreement are to expand free trade by eliminating barriers to trade and promoting fair competition. It actually, achieved its objective of removing tariffs and quantitative restrictions from trans-Tasman trade in goods by 1990, which is five years ahead of schedule,and since 1988, it has covered trade in services as well as commodities. Bilateral trade alone between Australia and New Zealand has expanded five-fold since the signing of the original agreement in 1983, to over $16.2 billion in 2001/02. New Zealand is now Australia’s fifth largest export market, and Australia is New Zealand’s principal trading partner. Trade has grown at approximately 9 percent per annum over the past decade. Australia is now the largest foreign investor in New Zealand, with investments worth more than $21 billion, while New Zealand has over $12 billion invested in Australia, making it the ninth largest source of investment in this country.The CER has brought two economies together into what is virtually a single market.Australians and New Zealanders are banking at the same banks, driving the same cars, buying the same white goods, and even eating the same foods. In addition to underpinning bilateral trade and investment, CER is a framework for economic integration across a spectrum of activities.

This agreement has helped many New Zealand companies take advantage of new markets in Australia caused by the removal of trade and investment barriers. For example, Fisher & Paykel is a New Zealand based international company that produces mainly household appliances such as washing machines and refrigerators. In 1990, Fisher & Paykel expanded its operations into Australia when its production plant opened in Cleveland, Queensland. Originally employing 78 people, Cleveland now employs more than 400 people. Products from Cleveland are part of Fisher & Paykel's successful export push into the United States, the UK and other markets. Australia is Fisher & Paykel Appliances' strongest individual market, where it is positioned at the high end of the mass market. The market accounted for 48% of the company's total appliance sales for 2002. An important sales milestone was also achieved in 2002 with 512,000 units, according to the case study in Trans-Tasman Business.

Another very good example of a New Zealand company that benefited from the Closer Economic Relations Agreement (CER) between New Zealand and Australia would be Ullrich Aluminium Company Unlimited. Ullrich Aluminium, an Auckland-based manufacturer of aluminium building products and extrusions, has expanded its business by opening an Australian operation and using it to expand to other markets. After first exporting to Australia, Ullrich Aluminium opened an Australian operation in 1987, which is now the base for its exports to the Indian Ocean, Papua New Guinea, East Timor, Guam and Micronesial; these findings being based on the case study in Trans-Tasman Business.

Australia is involved in many trade agreements such as the CER agreement even though some may not be as succesful as some of the others. Australia have trade agreements multilaterally through the World Trade Organization (WTO), regionally through Asia Pacific Economic Cooperation (APEC), and bilaterally by negotiations on free trade agreements with countries such as Singapore, United States of America, Thailand, Japan and China. These agreements will clearly benefit foreign enterprises from these respective countries the same way free trade has benefitted those New Zealand companies that were reviewed earlier. This goes to show that globalization has induced higher levels of foreign direct investment into Australia, encouraging new foreign enterprises to invest in Australia and also the pre-existing foreign enterprises in Australia to experience growth.

2.2 Conclusion

Australia in the past decade or so, has been taking steps toward reducing trade and financial barriers, in other words Australia has embraced the concept of globalization. Australia seems to be a popular place for foreign direct investment due to its nation’s vast amount of natural resources and also its extremely sound infrastructure in telecommunications and information technology. Foreign companies whom have undertaken its operations in Australia have experienced growth and success due to Australia’s reduced trade policies and lowered tariffs. Thus it can be said in general that globalization has had an overall positive impact on foreign enterprises based in Australia and this will encourage more foreign direct investment and new foreign enterprises to emerge in Australia.

3.0 Reference List

Wild, John. J., Wild, Kenneth.J., Han, Jerry. C.Y., 2003, International Business, Prentice Hall, New Jersey.
Nicholas, S., Sammartino, A., Maitland, E., 2003, “Do Multinational Enterprises Benefit Australia”, Available from: < <
McMillan, M., Pandolfi, S., Salinger, B. Lynn., 1999, “Promoting Foreign Direct Investment in Labor-Intensive, Manufacturing Exports in Developing Countries”, Available from:
Trade Compliance Center, 1998, Australia Country Commercial Guide, Available from:
Department of Foreign Affairs and Trade, 2003, A celebration of Trans-Tasman Relations – 20 Years of Closer Economic Relations between Australia and New Zealand, Available from:
Vaile, M. 2003, Teltra’s Trans-Tasman Business Breakfast, Available from:
U.S.Embassy Canberra, 1996, FY 1997 Country Commercial Guide: Australia, Available from:
Moore, M., 2000, Trade, Poverty, and the Human Face of Globalisation, Available from:
World Trade Organisation, 1996, Trade and Foreign Direct Investment, Available from:
Moore, M., 2000, Globalisation and the Social Market Economy, Available from:
Moore, M., 2002, Making Globalisation Work, Available from:
Moore, M., 2000, Reflections on the Global Trading System, Available from:
Moore, M., 2001, The Multilateral Trading System: Where Are We Headed?, Available from:

What is meant by "globalization" and how has it affected international trade and foreign direct investment?

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