Drivers and Consequences of Globalization

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The purpose of this paper is to analyze three drivers of globalization and how these drivers impact organizations, describe the risks associated with global investing and explain the importance of cultural sensitivity and ethics in global finance.

Global Finance Environment

Globalization is the increasing interconnectedness of economies, markets, and people

across nations. Increasing globalization creates additional competition from around the world,

which then affects both local jobs and company profits. Globalization also has the potential to

raise standard of living by allowing greater access to a wider range of products and

services at more competitive prices (Crum, Brigham, Houston, 2005).
One driver of globalization is globalization of markets. It refers to the merging of

national markets into one huge global marketplace. Now selling internationally is easier due to

falling barriers to cross-border trade. A company doesn’t have to be the size of these

giants to facilitate and benefit from the globalization of markets. It is important to offer a

standard product worldwide. But very significant differences still exist between national

markets like consumer tastes, preferences, legal regulations, cultural systems. These differences

require marketing strategies in order to match the conditions in a country. To illustrate,

Wal-Mart may still need to vary their product from country depending on local tastes and

Another driver of globalization is globalization of production. It refers to the sourcing of goods and services from locations around the world to take advantage of national differences in the cost and quality of factors of production. The idea is to compete more effectively offering a

product with good quality and low cost. For example, Nike is considerated one of the leading

marketers of athletic shoes and apparel on the world. The company has some overseas factories

which has achieved a super production with low cost. Unfortunately Nike has been a target of

protest and persistent accusations that its products are made in sweatshops with poor working

conditions. The company has signaled a commitment to improving working conditions, but in spite of the fact, the attacks continue.
A third driver of globalization is falling barriers to trade and investment. The falling of barriers to international trade enables firms to view the world as their market. The lowering of barrier to trade and investments also allows firms to base production at the optimal location for that activity. Thus, a firm might design a product in one country, produce component parts in two other countries, assemble the product in another country and then export the finished product around the world. The lowering of trade barriers has facilitated the globalization of production. The evidence also suggests that foreign direct investment is playing an increasing role in the global economy. Two risks associated with global investing are economic risk and political risk. Economic risk refers to a country's ability to pay back its debts. A country with stable finances

and a stronger economy should provide more reliable investments than a country with weaker

finances or an unsound economy. Political risk refers to the political decisions made within a

country that might result in an unanticipated loss to investors. While economic risk is often

referred to as a country's ability to pay back its debts, political risk is sometimes referred to as

the willingness of a country to pay debts or maintain a hospitable climate for outside investment.

Even if a country's economy is strong, if the political climate is unfriendly, or becomes

unfriendly, to outside investors, the country may not be a good candidate for investment

(Investopedia, 2011).

Cultural issues play a key role in the formation of global finance. Companies must...
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