The term globalization has become one of the most widely used terms in both social and economic circles. The phenomenon has been the most important part of economics since its inception in the late 1980s and is technically an integration of world production through advanced technologies and the creation of magnificent multi-national corporations (Bromley, Mackintosh, Brown, and Wuyts, 2004, p. 47). But the fact is that globalization as a topic dominates almost all economic debate with the emphasis being put on its causes, agents, and consequences. If viewpoints of critics are looked into one would find that almost every economic, social and cultural upheaval is the result of the rampant globalization practiced in the late 20th and beginning of the 21st century. It has been blamed for everything right from ecological degradation, global warming to ills affecting poor nations and the economic recession in several capitalist nations. Many anti-globalization activists have claimed that this globalization has been the reason behind negative social consequences resulting from the creation of extremely greedy multinational corporations who have invaded local economies. The net outcome has been nothing but the demise of several local cultural and business practices while the market economy has written several stories of success (Bromley, Mackintosh, Brown, and Wuyts, 2004).
Globalization and its spread across the world is very much a successful understanding of the theory of competitive advantage there by making the theory of comparative advantage the most important concept in international trade and a major reason behind the existence of WTO and its worldwide success. The theory in the context of international trade explains the benefits of trade between two countries without any barrier even if one is more efficient at producing goods or services needed and produced by the other. (Bromley, Mackintosh, Brown, and Wuyts, 2004, p. 47).
Trade Flows and Foreign Direct Investment
The developing countries have shown substantial progress if the economy is looked upon with trade perspective. The last decade of 20th century shown great results with share of trade rising i.e., the sum of import and export as percentage of GDP rising from 34.6 percent in 1990 to 51.6 percent in 2000. If compared with the results of developed countries where the share of trade in GDP showed marginal improvement from 32 percent to 37.1 percent in the same period, the level of trade as well as its growth in developing nations has shown better results. The most remarkable aspect of this trade is that even the least developed countries have seen very high growth rate in the total percentage of GDP, this trade flow occupies. The percentage of trade in GDP has increased from 26.7 percent to 41.3 percent in the above considered period of ten years (Loungani & Razin, 2001). The Foreign Direct Investment in these developing countries in the period of above mentioned ten years has also seen upward trend with this FDI occupying 3.5 percent of total GDP in 2000 but here this is much lesser if the same is compared to that of developed nations. In developed countries the FDI was found to be around ten percent of GDP in the year 2000. The FDI normally come under two categories. (Panelver, 2002).
Foreign Direct Investment and development
The foreign direct investment (FDI) has been reason behind which the developing nations started making rounds of economic reforms to attract foreign investment with a sole purpose of giving the economy a much needed boost for sustainable economic growth. The FDI inflows in many countries surged to higher levels with large multinationals called as multinational corporations (MNCs) bringing capital in form of superior technology oiled with ultimate management skill. The transfer of cleaner technology would also bring better environmental performance. With MNCs’ better management of inventory and technology, the developing nations would get infused with standards normally prevailed in western world (Blomstrom and Kokko, 1994). The investment had been expected to bring more employment and higher per capita income and will make ways for cleaner consumer goods. The countries observed two basic practices. First to attract more FDI and for that the policy to get more was made central character in every national development strategies. The second one is to have investment agreements which can have global, regional or bilateral scope (Malampally & Karl, 1999).
The reforms of 1990s caused massive inflow of FDI in developing nations and in the last decade of the century was around 4 percent of global GDP. This miniscule amount of money formed a major portion of the GDP of some of the developing nations; 26 percent of GDP in Thailand and as a whole, the share of FDI in the total GDP got raised to 3.5 percent by the end of 2000 (Gallaghar & Zarsky, 2006). These developing nations saw a chain of privatizations. Many government companies in those nations were acquired by MNCs despite wide spread criticism and resistance especially when companies being privatized were meant providing basic utilities like water. FDI based privatization also changed the way it has been utilized. Service sector got a big boost with the money coming into the nations in form of FDI and this sector accounted for almost 200 percent growth in the total FDI inflows in the period ranging from 1988 to 1999 (Gallaghar & Zarsky, 2006).
FDI and the crisis
The crisis of late 1990s in East Asia showed a very different business approach of MNCs. The companies were found to be putting great amount of money through FDI channel in Korea and other South East Asian countries. But this time the company went into large scale buying of local firms. These local firms were found to be facing financial crisis causing great fall in the total value of the firm with equities available at throw away prices. The Foreign Institutional Investors and investors in government’s securities taking their money out of the country but the same financial crisis created an investment opportunity for MNCs. A number of companies changed hands with a number of MNCs from US and Europe buying controlling stakes in different South Asian firms. This sort of FDI investment pattern is more of crisis driven rather than opportunity driven. Even the governments were found to shell out its stake in PSUs to foreign investors to get over the ongoing financial crisis. The fall in the value of currency and big debts diminishes the market cap of the domestic firms and then they are for sale on a platter at a throw away price to foreign players. The sudden fall in the value of the assets attracts the investors to buy those sick firms with a belief that once the crisis gets over these firms under the new management will turn out to be a golden goose (Aguiar & Gopinath, 2004).
If we look into what every major financial organization like the IMF; the World Bank; and any of the OECD states, the most common thing is that all of them have suggested that this FDI is very much similar to a doctor’s prescription which is for the improvement of ailing industrial sectors. The transfer of cleaner technology and better management as well as socially responsible corporate policies helps in improving environmental and social conditions by enormous amount (Gallaghar & Zarsky, 2006). The presence of foreign firms have given positive results in the productivity of domestic firms has been true up to some extent but that’s the case of developed nation only (Lim, 2001).
But the negatives associated with the globalization are also there. MNCs have been found as causing more distortion to the local traditional business structure rather than the maintaining its sanctity. Even applying the management policy of a different nation model to the workers of the new region is not going to help and will cause more harm to efficiency rather then improving it. Business and work ethics are very much dependent on local culture and traditions. Anything that will undermine the importance of these issues harms the work culture of the nation (Gallaghar & Zarsky, 2006).
Aguiar, M. & Gopinath, G. (2004), ‘Fire-Sale FDI and Liquidity Crisis’, The Review of Economics & Statistics, Vol. 87, No. 3, Pages 439-452
Bromley, S, Mackintosh, M., Brown, W. & Wuyts, M. (2004). Making the International: Economic Interdependence and political Order. Pluto Press
Gallaghakrugr, K. V., Zarsky, L. (2006), ‘Rethinking Foreign Investment for Development’, Boston University and Businesses for Social Responsibility, USA
Kokko, Ari (1994), ‘Technology, Market Characteristics, and Spillovers’, Journal of Development Economics, Vol. 43, pp. 279-293.
Lim, Ewe-Ghee (2001), ‘Determinants of and the Relation between Foreign Direct Investment and Growth: A Summary of the Recent Literature’, Working Paper 01/75, IMF.
Loungani, P & Razin, A. (2001), ‘How beneficial is foreign direct investment for developing countries?’ Finance & development.
Malampally, P. & Karl, P. S. (1999),.’Foreign Direct Investment in Developing Countries’, Finance and Development 36 (1).