In the past, goods and services were produced by small businesses in one country and sold only locally. Nowadays, products are produced by a business in one country and then sold to customers in other countries all over the world. This increase in international trade has led to globalization.
STEP 1: Growth in international trade
The increase in international trade was possible thanks to mainly three factors:
A. Better technological tools. More effective information technology systems providing new methods of communication have helped to break down geographical and language barriers to make international trading easier for many companies, including small and medium size businesses.
Example 1: By 2020, around 40% of the online retail market worldwide has been through online marketplaces. eBay connects millions of buyers and sellers around the world. There are almost 200 million eBay buyers worldwide.
B. Freedom of trading. The development of free trade agreements between countries has empowered business operations by improving economic cooperation. Improvements in technology allowing to trade online as well as availability and speed of international transportation networks have enabled companies to deliver any product to any location in the world within just few days.
Example 2: FedEx is the world’s biggest express transport company shipping to more than 200 countries worldwide and linking sectors that account for more than 99% of the global Gross Domestic Product (GDP). FedEx delivers over 6.5 million parcels and 29 million pounds of cargo each working day.
C. People moving around. Easier migration has helped people to move from one place on Earth to another within several hours. Freedom to move around the world faster and more freely also increased the pace of globalization.
Example 3: It is not unusual for many business managers being based in Europe to fly to the US or Japan for a short business meeting. And, then to fly back to Europe the next day.
STEP 2: Creation of international business environment
In principle, countries that trade with each other contribute to the process of globalization. According to The Gravity Model of Trade, the closer the two countries are to one another both geographically and culturally, the more trade there will be between these two countries.
To stimulate international trade, many governments around the world, have reduced or removed trade barriers such as tariffs, quotas and embargoes making it easier to move stuff from one country to another. With larger international trade, there has been greater movement of products, services, people and capital (money and technology) across borders.
Countries which want to trade with each other often form a free trade bloc without any trade barriers within. Free trade agreements are a way of opening up foreign markets. They not only create favorable trade and investment policies for the member countries, but also improve economic, legal and technological cooperation.
Example 4: Examples of free trade blocks include the UE (European Union), NAFTA (North American Free Trade Association) or ASEAN (Association of South East Asian Nations).
STEP 3: Operating in many countries. Birth of multinational companies
Many governments have realized the importance of international trade to the growth of their economies. After so, they have changed their economic policies to allow foreign companies to set up operations in their countries.
This has helped some large companies to grow into ‘multinationals’. A multinational company is a business with its headquarters in one country, and branches and factories in other countries around the world.
Multinational companies such as The Coca-Cola Company, McDonald’s or Apple design and produce standardized products such as a bottle of Coke, a BigMac hamburger or an iPhone as they sell to a worldwide audience, literally to everybody in the world. It is because it is believed that consumers around the world have similar tastes for their products – everybody drinks soda water, everybody eats a bum with a piece of meat in it and everybody uses a phone to make phone calls and browse the Internet.
The higher global recognition of brands is a sign of the growth of a business internationally.
STEP 4: Integration into one global economy
With greater social, technological, economic, environmental, political, legal and ethical interactions between countries, fewer barriers to trade, and greater exchange of goods and services, the world has become a single market.
The modern international business environment greatly influences business activity in each country becausethe economies of different countries are being dependent upon each other. Nowadays, political decisions taken in one region of the world will immediately have economic effects in other parts of the world too.
Example 5: Changes in interest rates in Japan by Japan’s Central Bank will impact or impact American investors who invest in Japanese companies on the Japanese stock exchange Japan Exchange Group (JPX).
Therefore, globalization can be defined as the growing integration and interdependence of the world’s economies into one single global economy, where consumers have similar habits.
Hence, brands become recognized globally and standardized products and services are easily accessible anywhere in the world.
STEP 5: International expansion as growth strategy
Due to better technology, more trading activities between countries and more freedom for people to move around, the world has become smaller. This is making international expansion much easier for companies.
As a result, global expansion into international markets has become an important business growth strategy for many large companies.
Example 6: The Coca-Cola brand is the most recognizable brand in the world with brand recognition around 95% all over the world. It is estimated that 2 billion servings of a Coke brand are sold every day in about 200 countries. Each year, about 110 billion coke plastic bottles are produced. This kind of scale is absolutely incredible!
America’s largest companies such as The Coca-Cola Company, McDonald’s or Apple are exploiting global marketing strategies and internal economies of scale as they evolve to become even bigger.
