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The effects of globalisation on business

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One need not look very far to see the massive effects that globalisation and technology are having on daily life. From day-to-day business transactions to in-home routines, the prevalence of modern tech continues to advance at a phenomenal rate. While there is much that’s being transformed due to these trends, perhaps the most important aspect is how it affects businesses.

Commerce, in particular, has increasingly become interconnected on a global scale, with every part of the supply chain being tied to the whims of a worldwide marketplace. This reality – often referred to as globalisation – would not be a possibility without the massive influence that technology is generating on daily life.

Globalisation itself is creating a transformative yet disruptive future for entrepreneurs and employees alike. To understand what the future has in store, looking to present-day impacts is necessary.

Here are the primary effects that globalisation currently is having on business.

Outsourcing

Arguably one of the most commonly recognised effects of globalisation, it is difficult to discuss the topic without mentions of outsourcing being present. Among many, this is considered the worst side-effect of an increasingly globalised business world, as employees may find themselves suddenly without jobs – while others far away benefit from this trend.

Businesses generally pursue outsourcing initiatives for multiple reasons, with the most common being:

  • Lower wages and salaries
  • Fewer workplace restrictions
  • More favourable tax environments

In the UK alone, the Business Services Association found that roughly 1 in 10 employees in the national workforce are employed in outsourcing, totalling more than 3 million jobs.

For businesses – and even the economy at-large in some respects – outsourcing does have benefits. The same data as above shows that gross domestic product (GDP) is growing roughly 0.4 points faster than it would have without the outsourcing initiatives of the past 30 years.

Outsourcing obviously offers real and tangible benefits to businesses seeking to minimise costs and improve productivity. However, and given an increasing amount of backlash among consumers against businesses that utilise foreign labour in lieu of domestic options, it can lead to less-than-sterling reputations among target audiences.

Increased competition

While it may often be framed as such by many when discussing the topic, globalisation does come with a variety of disadvantages for businesses. Perhaps the most obvious one is the level of competition that globalisation brings for businesses: companies that once competed locally or nationally now find themselves competing with a global marketplace.

While some businesses are relatively insulated from the direct effects of globalisation-fuelled competition (for example, local restaurants and grocery stores), there are still indirect effects that can be felt. However, and for businesses that compete for customers and clients online or throughout industries like retail, a surge in interconnectivity means shoppers can potentially find alternatives elsewhere.

While globalisation may be bringing additional competitors to the doors of businesses, the process can work both ways. Breaking into new markets remains a viable strategy for businesses that feel threatened by competition in their native markets, but the situation must be navigated carefully. Smart Business Online writes: “Be aware of the underlying trends driving the two sides of globalisation: the supply side and the demand side. You ultimately need to proactively place bets around the future you want. This means you’d better understand the fast-changing global trends well enough because the future of your business is at their mercy.”

Greater knowledge

Capital, people and trade are three highly important elements that businesses consider in day-to-day operations. They also happen to be major factors in globalisation, as the dynamic is driving increases in availability of all three on a global scale. However, it is the spreading of knowledge and information that is growing most rapidly thanks to globalisation.

Thanks largely to the internet, information can literally travel at the speed of light. The discrepancies between developing and developed nations in terms of access to education are increasingly disappearing, as evidenced by the prevalence of online education.

Take Aston University Online as one key example. Whereas in the past university students seeking to study from a top-tier UK school would have needed to borrow or spend thousands just to travel and settle in the country, students from all over the world now have the opportunity to study from a recognised institution without leaving their communities.

Universities such as Aston University are able to serve a global audience due to the spread of knowledge, the prevalence of technology and the effects that globalisation has brought to these developing nations.

Lower prices

Obviously every business wants to create as much profit as is humanly possible. In past decades, local competition was far less intense and businesses could offer higher prices on products and services with little external pressure. However, globalisation has completely transformed this dynamic.

How does the role of globalisation impact prices for businesses? Here are some examples:

  • Less room for price increases, meaning lower (nominal) profits for businesses
  • Greater selection of raw materials, with competition causing a reduction in costs for businesses
  • Greater volumes of products and materials being shipped, lowering shipping costs for businesses

In reality, the effect of lower prices caused by globalisation isn’t one-sided: businesses benefit at certain points throughout the supply chain, which may be offset partially or in its entirety later. Depending on the exact industry and niche, some businesses may actually enjoy greater profitability under globalisation and its trends, while others have suffered.

Ultimately, this effect of globalisation is the most variable one from business to business, making it quite difficult to render an absolute verdict on how each specific business will be impacted.

Improved efficiency

Given that technology was and is at the forefront of globalisation, it should not be surprising that improved efficiency is a major effect that businesses are feeling. While much of the discussion surrounding globalisation focuses on employment and profitability – two key indicators of efficiency and productivity in some sense – there are other factors that must be analysed.

Given the immense amount of trade and information sharing on a global scale, technology is now more advanced and affordable than ever. The ability for businesses to procure devices, machines and various forms of software to assist in day-to-day business activities has had an immense impact on profits and efficiency.

While outsourcing is often considered in discussions surrounding job loss, the efficiency gains – whether it be through automation or just simple improvements in worker efficiency – driven by improved technology are even more powerful. The rate at which this technology continues to evolve is largely rooted in a globalised, free-trade environment where raw materials, designs and information are shared seamlessly.

Increased demand with globalisation

While competition may be a major hurdle for most businesses in today’s globalised world, there are offsets. While the entire world may be competition for many businesses today, the entire world can also be a customer base.

While the ability for products to move more quickly across continents is responsible, in part, other factors have driven the increased global demand for products from specific businesses, which mostly focuses around payment: “The rise of new electronic payment systems, including e-Wallets, pre-pay and mobile pay, e-Invoices and mobile pay apps, also facilitate increased global trade.”

Since anybody can effectively buy anything from anywhere, businesses have a vested interest in targeting consumers in a variety of markets globally. The effects of competition coupled with demand are creating a dynamic in which most businesses simultaneously become less reliant upon their local markets and more reliant upon a global audience.

Free trade has also played a role in globalisation impacts on demand; as tariffs have generally receded, the cost of importing various items continues to decline in most situations. Which brings us to our final effect…

Tariffs

Last but not least, it’s vital to consider the role that globalisation has played in the world of tariffs. Businesses often must deal with vendors and customers from different countries, meaning various import costs have to be considered.

Historically, tariffs were a common tactic used by nations to protect their industries or to punish rivals. However, globalisation has made the use of tariffs increasingly difficult, due to:

  • The retaliatory effect from other nations doing the same
  • Multinational trade agreements and associations that prohibit the use of tariffs
  • The fact that the costs are passed onto consumers, potentially upsetting local markets

The end result is that the vast majority of nations, businesses and products are not subject to tariffs, lowering the price point of goods and entry into new markets. This is especially helpful for smaller businesses that sell online, as they can more effectively compete with larger domestic entities that would otherwise be able to corner the market due to tariffs increasing imported products’ prices.

As with most complex dynamics, globalisation is not an absolute positive or negative for businesses. Depending on the exact industry, niche and scale of operations, businesses may find net benefits or disadvantages with its presence. One thing is for sure, however: the effects of globalisation will continue to be felt and will likely continue to intensify, meaning businesses must adapt to a changing global economy.

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