# Globalization in Business: History, Advantages, and Challenges

## What Is Globalization?

Globalization is the increasing interconnection of national economies, enabling the free movement of products, investment, technology, and jobs across borders and cultures. Economically, it signifies the interdependence of nations facilitated by [free trade](https://www.investopedia.com/terms/f/free-trade.asp) agreements, which play a crucial role in fostering international commerce. This phenomenon allows corporations to achieve competitive advantages by reducing operating costs, accessing new consumer markets, and benefiting from the removal of trade barriers such as tariffs.

### Key Takeaways

*   Globalization involves the interconnectedness of national economies, facilitating the movement of goods, services, and capital across borders, thus creating economic opportunities and challenges. 
*   Corporations benefit from globalization through cost reductions and access to larger consumer markets, but it can negatively impact specific industries and societies within certain countries.
*   Though globalization promotes economic growth and higher living standards, it also leads to cultural homogenization and can exacerbate wealth inequality.
*   Historical milestones in globalization include the Industrial Revolution and trade agreements like NAFTA, which have shaped current global trade dynamics.
*   While globalization has contributed to a decline in global poverty and increased availability of products, it has also been criticized for its environmental impact and its role in increasing competition for domestic industries.

![Globalization](https://www.investopedia.com/thmb/xZZQmRd3Zxh07ac-zEXPScLuMQ8=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/globalization-7a32d360eee84693ae791eb15d0b2620.png)

*— Alex Dos Diaz / Investopedia*

## How Globalization Shapes Modern Business

Corporations benefit from globalization through lower manufacturing costs abroad, cheaper raw materials due to reduced tariffs, and access to new consumer markets.

### The Impact of Globalization Across Various Sectors

Globalization is a social, cultural, political, and legal phenomenon. 

*   Socially, it leads to greater interaction among various populations.
*   Culturally, globalization represents the exchange of ideas, values, and artistic expression among cultures.
*   Globalization also represents a trend toward the development of a single world culture. 
*   Politically, globalization has shifted attention to intergovernmental organizations like the [United Nations (UN)](https://www.investopedia.com/terms/u/united-nations-un.asp) and the [World Trade Organization (WTO)](https://www.investopedia.com/terms/w/wto.asp).
*   Legally, globalization has altered how international law is created and enforced.

Globalization creates jobs and economic growth through cross-border trade, but this growth is uneven across different industries and countries. On the other hand, this growth and job creation are not distributed evenly across industries or countries.

Some industries, like U.S. textile manufacturing or Mexican corn farming, have collapsed due to international competition.

While globalization can be idealistic and opportunistic, it mainly benefits large Western corporations. Its impact remains mixed for workers, cultures, and small businesses around the globe, in both developed and [emerging nations](https://www.investopedia.com/terms/e/emergingmarketeconomy.asp).

> **Important**
>
> Globalization has surged due to changes in public policy and advances in communications technology.

## Tracing the Evolution of Globalization Through History

Globalization isn't new. Ancient traders traveled long distances to buy rare [commodities](https://www.investopedia.com/terms/c/commodity.asp) to sell at home. The Industrial Revolution brought advances in transportation and communication in the 19th century that eased trade across borders.

According to the Peterson Institute for International Economics, globalization stalled after World War I as nations turned to [protectionism](https://www.investopedia.com/terms/p/protectionism.asp) with import taxes. This trend lasted through the Great Depression and World War II until the U.S. played a key role in reviving [international trade](https://www.investopedia.com/insights/what-is-international-trade/).

A key step in globalization was the 1993 [North American Free Trade Agreement (NAFTA)](https://www.investopedia.com/terms/n/nafta.asp). One of NAFTA's many effects was to give American auto manufacturers the incentive to relocate a portion of their manufacturing to Mexico where they could save on the costs of labor. NAFTA was replaced in 2020 by the [United States-Mexico-Canada Agreement (USMC)](https://www.investopedia.com/usmca-4582387).

Governments worldwide have integrated a [free market](https://www.investopedia.com/terms/f/freemarket.asp) economic system through [fiscal policies](https://www.investopedia.com/terms/f/fiscalpolicy.asp) and trade agreements in the 20th century. Most trade agreements focus on reducing or removing tariffs.

This evolution of economic systems has increased industrialization and financial opportunities in many nations. Governments now focus on removing barriers to trade and promoting international commerce.

## Weighing the Benefits and Challenges of Globalization

### Pros

*   Proponents of globalization believe it allows developing countries to catch up to industrialized nations through increased manufacturing, diversification, economic expansion, and improvements in [standards of living](https://www.investopedia.com/terms/s/standard-of-living.asp).
*   [Outsourcing](https://www.investopedia.com/terms/o/outsourcing.asp) by companies brings jobs and technology to developing countries, which helps them to grow their economies. Trade initiatives increase cross-border trading by removing supply-side and trade-related constraints.
*   Globalization has advanced [social justice](https://www.investopedia.com/terms/s/social-justice.asp) on an international scale as well, and advocates report that it has focused attention on human rights worldwide that might have otherwise been ignored on a large scale.

### Cons

*   One clear result of globalization is that an economic downturn in one country can have a domino effect on its trade partners. For example, [the 2008 financial crisis](https://www.investopedia.com/articles/economics/09/financial-crisis-review.asp) had a severe impact on Portugal, Ireland, Italy, Greece, and Spain. All of these countries were members of the [European Union](https://www.investopedia.com/terms/e/europeanunion.asp), which had to bail out debt-laden nations, which were thereafter known by the acronym [PIIGS](https://www.investopedia.com/terms/p/piigs.asp).
*   Globalization detractors argue that it has created a concentration of wealth and power in the hands of a small corporate elite that can gobble up smaller competitors around the globe.
*   Globalization has become a polarizing issue in the U.S. with the disappearance of entire industries to new locations abroad. It's seen as a major factor in the economic squeeze on the [middle class](https://www.investopedia.com/financial-edge/0912/which-income-class-are-you.aspx).
*   For better or worse, globalization can reduce the cultural and social aspects unique to people and geographic areas around the world and increase product homogeneity. Starbucks, Nike, and Gap dominate commercial space in many nations. The sheer size and reach of the U.S. have made the cultural exchange among nations largely a one-sided affair.

Pros

*   A larger market for goods and services
    
*   Cheaper consumer prices
    
*   Outsourcing can benefit domestic firms and foreign labor
    
*   Increased standard of living
    

Cons

*   Concentrates wealth in richer countries  
    
*   Some poorer countries can be left behind
    
*   Labor and the physical and intellectual resources of poorer countries can be exploited
    
*   Regions and cultures lose their uniqueness and products available around the world can become homogeneous
    

## Why Is Globalization Important?

Globalization is important as it increases the size of the global market, and allows more and different goods to be produced and sold for cheaper prices. It is also important because it is one of the most powerful forces affecting the modern world, so much so that it can be difficult to make sense of the world without understanding globalization.

For example, many of the largest and most successful corporations in the world are in effect truly multinational organizations, with offices and supply chains stretched right across the world. These companies would not be able to exist if not for the complex network of trade routes, international legal agreements, and telecommunications infrastructure that were made possible through globalization. Important political developments, such as the ongoing trade conflict between the U.S. and China, are also directly related to globalization.

## Is Globalization Good or Bad?

It depends. Proponents of globalization will point to the dramatic decline in poverty throughout the world for more than two decades after around year 2000, which many economists attribute in part to increased trade and investment between nations. Similarly, they will argue that globalization has allowed products and services such as cellphones, airplanes, and information technology to be spread far more widely throughout the world.

On the other hand, critics of globalization will point to the negative impact it has had on specific nations’ industries, which might face increased competition from international firms. Globalization can also have negative environmental impacts due to economic development, industrialization, and international travel.

## How Does Globalization Impact Society?

Globalization has had a large impact on societies around the world, leading to massive migrations from rural to industrial or urban areas and to the rapid growth of cities and trade hubs. While this has meant an overall increase in incomes and a higher standard of living in general, it has also led to problems such as crime, domestic violence, homelessness, and poverty. Concepts of national identity, national or regional culture, and consumption patterns also change as goods from around the world become increasingly available and at low prices. The competitiveness of global capitalism may also lead to more individualistic ideals that contradict the cultural orientations of certain, more collectivist societies.  

## What Is an Example of Globalization?

A simple example of globalization would be a car manufactured in the U.S. that sources parts from China, Japan, South Korea, Sri Lanka, and South Africa. The car is then exported to Europe, where it is sold to a driver who fills the car's gas tank with gasoline refined from Saudi oil.

## The Bottom Line

Globalization refers to the ongoing trend of increased interconnectivity of nations across the globe, as enabled by advancements in transportation and information technology, among others.

Globalization is facilitated economically by free trade agreements, which permit barrier-free imports and exports across borders. While globalization brings many advantages—including lower prices and higher standards of living to some—it also has drawbacks, including wealth concentration and cultural homogeneity.

> **Article Sources**
>
> 1.  Peterson Institute for International Economics. "[What Is Globalization?](https://www.piie.com/microsites/globalization/what-is-globalization)"
>     
> 2.  Congressional Research Service. "[The North American Free Trade Agreement](https://fas.org/sgp/crs/row/R42965.pdf)," Page 1.
>     
> 3.  Congressional Research Service. "[The North American Free Trade Agreement](https://fas.org/sgp/crs/row/R42965.pdf)." Pages 16-17.
>     
> 4.  Office of the United States Trade Representative. "[United States-Mexico-Canada Agreement](https://ustr.gov/trade-agreements/free-trade-agreements/united-states-mexico-canada-agreement)."
>     
> 5.  FasterCapital. “[Financial Bailout: PIIGS and Financial Bailouts: Lessons From the Crisis](https://fastercapital.com/content/Financial-Bailout--PIIGS-and-Financial-Bailouts--Lessons-from-the-Crisis.html).”
>     
> 6.  Macrotrends. “[World Poverty Rate 1981-2024](https://www.macrotrends.net/countries/WLD/world/poverty-rate).”