Global Business: World Economic Development

Further, globalisation also presents a lucrative opportunity to the domestic businesses based in developed nations as these can now expand their markets to lucrative developing nations. For most of these businesses, the domestic market is also saturated and hence the presence in huge consumer markets of Asia with rich purchasing power is an exciting opportunity to deliver sustainable returns for their shareholders. This only has led to the increasing presence of MNC (Multinational Corporations) based out of developed countries.  Also, there are other businesses which set up their manufacturing bases in the developing nations and therefore leverage the local resources available (Redding, 2000).

Globalisation also brings significant gains on the table for businesses based in developing nations as these nations have limited availability of capital and technology but abundant supply of labour. As a result, most of the work processes are labour dominated and therefore the productivity is comparatively lower. Over a period of time, this inefficiency starts taking a toll on the businesses and hence these are not able to survive in the long run especially as competition enhances owing to the entry of foreign firms (Hamdi, 2013). With globalisation as an enabling force, the developing nations business tend to gain access to capital and latest technology and therefore witness economic progress (Berman & Machin, 2000). Further, owing to globalisation the business flow to businesses in the developing world tends to increase in the form of outsourced jobs. Besides, with the global companies shifting their manufacturing bases, a lucrative opportunity for expansion is presented to local businesses. Also, the local businesses can look to market their products to the western markets and hence grow their business (Hartungi, 2006).

 However, while globalisation is considered to a game changer but essentially it is a double edged sword as it has adverse implications also. In case of businesses based in developed countries, globalisation implies that the big companies have put in place a global supply chain based on significant outsourcing which has resulted in lowering product costs. However, for the small businesses, this is not a viable option and thus these are not able to compete with the MNC’s. This is also true for developing nations where as a result of globalisation, the MNC are leading to the shutting down of small businesses (Stiglitz, 2002). Hence, on one hand globalisation leads to efficiency gains and on the other it eliminates the inefficient businesses globally (Weiss, 2002).

The arguments above lead to the conclusion that there are potential negative impacts of globalisation but the positive impact on businesses tend to exceed the negative ones. Globalisation has enhanced the efficiency of various businesses globally by using that resource usage is decided in the global economy rather than national economy. In the developing world, the domestic businesses have reaped efficiency gains, rapid economic growth, export market and outsourcing contracts. In the developed world,  the domestic businesses have become more cost competitive and also gained access to new and lucrative markets. 

In the modern world, international trade is a critical activity which enables the nations to make up for any deficiency.  International trade plays an important role in ensuring that the scare resources are used in an efficient manner.  The theoretical framework of international trade was laid more than couple of centuries ago in the form of theory of absolute advantage and theory of competitive advantage. These theories provided the basis for indulging in international trade and have been since modified so as to reflect the modern norms (Mankiw, 2012). In this backdrop, the essay aims to highlight the difference between these along with limitations.

It is noteworthy that international trade is advocated since the various nations have differential access to factors of production and therefore their efficiency in production of goods tends to be different. The primary difference between the two theories is in the metric used for measurement of efficiency. Adam Smith gave the theory of absolute advantage, As per this, the advantage with regards to production of good is determined by the production cost and hence the nation which produces a given good at a lower cost would tend to have absolute advantage with regards to that particular good. For efficiency gains, this theory advocates that only the nation having absolute advantage must produce the good and export to the other country where it is expensive to produce the same good (Dombusch, Fischer & Startz, 2012).

The absolute advantage theory does have some limitations. It assumed that there would be no currency fluctuations and hence the exchange rates would continue to remain constant which does not happen in the real world. Besides, it simply ignores the transportation costs involved in export which needs to be added to the production cost before comparing with cost in the importing nation. Another, simplistic assumption in the theory is the use of labour for production of different goods with the same amount of efficiency. This would be incorrect especially in modern businesses where level of specialisation has increased only (Krugman & Wells, 2012).

The usage of absolute advantage theory also presents a confusing situation when a given nation possesses absolute advantage over the other nation in production of all products and therefore it is not clear as to what the importing nation should do with its resources (McConnell, Brue & Flynn, 2014). The theory of comparative advantage given by Ricardo provides viable solution to the given situation. Unlike absolute advantage, Ricardo advocates that the economic efficiency in production should not be measured by the underlying production cost but by the opportunity cost incurred for production.  Hence, in case of nation which manufactures all goods with absolute advantage, opportunity cost must be computed and compared with the other nation. Therefore, usually this would result that both countries tend to utilise their resources in the best possible manner and through trading reap gains (Mankiw, 2012).

Even though the theory of comparative advantage is considered better than corresponding theory of absolute advantage, but it does have some flaws which has resulted in this being modified over the years. It simply ignores the transportation costs involved in export which needs to be added to the production cost before comparing with cost in the importing nation. Further, due to increase specialisation caused due to comparative advantage may lead to inefficiency in the form of diseconomies of scale (Dombusch, Fischer & Startz, 2012). Besides, no consideration during the theory is given to the presence of various government restrictions in the form of various trade barriers (both tariff and non-tariff) which tend to play a critical role in modern international trade. Also, the model looks at advantage in a static manner and is not open to the possibility of alterations in the comparative advantage due to developments in factors of production (Krugman & Wells, 2012).

The discussion conducted above in wake of the arguments clearly indicates that the main point separating the two theories is the fact that absolute advantage is based on lower cost of production unlike comparative advantage which is derived from lower opportunity cost. These theories have limited direct utility in the modern world due to their simplistic assumptions with regards to nonexistence of transportation cost, government barriers in trade, alterations in factors of production along with currency fluctuations. Despite the above shortcomings, these two theories were pioneers in international trade theories and hence most of the modern day theories tend to derive their conceptual source from one of these theories only.

References

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Hamdi, FM 2013, ‘The Impact of Globalization in the Developing Countries’, Development Country Studies, Vol. 3 No. 11, pp.141-143

Hartungi, B 2006, ‘Could developing countries take the benefit of globalisation?’, International Journal of Social Economics, Vol. 33 No. 11, pp.728 – 743

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Mankiw, G 2012. Principles of Macroeconomics, Cengage Learning, London

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Weiss, J 2002, Industrialisation and Globalisation: Theory and Evidence from Developing Countries, Routledge, London.