What is Globalization
Globalization is a term used to describe the collective growth of technological progress and advancement in the cooperation between nation states and companies internationally. It also reflects the broadly increased level of connectedness and cooperation between them marked by an increase in trade and commerce. The term primarily grew in popularity in the early 1990s with the end of the Cold War. This happened in parallel to an increase in the trade agreements between countries and the use of the internet. Internet has enabling smoother technological and financial transportation. Globalization and outsourcing drive all industries and domains today promoting free trade and commerce between different countries.
Reasons for Globalization
Pooling of resources resulting from trade has led to efficient production, growth in economies, and lower pricing of goods and services. The term used commonly is called comparative advantage where each country provides the resources it has in surplus. This process has allowed businesses to scale up more quickly, spurred innovation, and promoted worker migration for jobs. It also contributes to the reduction in warfare, as countries recognize the economic loss that could result from conflict between strong trade partners. Additionally, it has also helped reduce inequality using differing tax and welfare structures.
Despite its advantages, globalization also has downsides, such as the increased transmission and difficulty in mitigating diseases, as evidenced by the recent COVID-19 pandemic. Profit-driven incentives have also led to a greed-based economy in some countries. For example, the increase in deforestation in the Amazon basins of Brazil to raise cattle farms for the meat industry.
Different Types of Globalization
Globalization in essence describes the free trade of ideas, knowledge, and labor between different countries in an already interconnected world. It is undertaken by markets, institutions, and governments alike for optimal profits.
Based on the agenda, the three main forms of globalization are:
- Political globalization: Global organizations such as the UN Security Council, and UNESCO, and financial organizations such as the World Trade Organization, and World Bank, as well as free trade treaties between different countries are some examples of political globalization institutions.
- Economic globalization: Mainly driven by corporates, economic globalization includes international free trade agreements and trade of goods and services between companies based in different countries. A car manufacturer located in the US may import spare parts from China and innovative, patented ideas from Germany. Stock markets today are also highly interconnected. A fall in NASDAQ may influence the stock markets in different countries, such as the NSE index in India and the NiKKEI index in Japan. This happens because of the strong correlation between different currencies.
- Cultural globalization: A more abstract form of globalization, cultural globalization is reflective of the mixing of ideas between different countries. Social media today plays an important role in bringing news and awareness about the events and trends happening throughout the world. A protest in Bangladesh is visible almost concurrently to a citizen in Brazil. This may influence the behavior of the country with an otherwise different demeanor. Sports, movies, and the environment influence everyone in the world, and citizens of different countries are all deeply interconnected.
Globalized Supply Chain
With the ease of the internet and a smoother supply chain, the world overall is far better connected than it was one hundred years ago. Additionally, there are flight and sea routes between most countries. There are also several companies that act as intermediaries to facilitate convenient trade resulting in a globalized supply chain. Apple Inc., a company based in the US, now plans to manufacture the latest iPhone in India, after shifting the initial factories in China. This is primarily done to reduce manufacturing costs, in terms of both material and labor. Third-world countries even today can offer better returns on outsourcing compared to their developed counterparts.
What is Outsourcing
Outsourcing is the practice in business where a client or main company hires a third-party or company to provide services or goods that were traditionally managed or obtained in-house by the company. This is primarily done as a measure to cut costs and in turn, drive profits. As a result, this practice has promoted sourcing and resource allocation, provided a comparative advantage in different markets, and fostered cooperation between international companies, thereby promoting the free-market economy.
Advantages of Outsourcing
Outsourcing helps reduce costs in labor and services and also a reduction in the provision of additional expenses involving equipment and technology that need a specific skillset or resource through the distribution of work. Companies establish requirements, terms, and agreements, and create plans to ensure a smooth transition when they decide to outsource.
In addition to the costs, it also helps reduce the planning required for the main company to learn and managing some aspects of business. The company can then instead focus on its core aspect. For example, a company may be manufacturing some technological device but has outsourced the customer service provisions to another company in some other country that provides a cheaper alternative. While there are several advantages of outsourcing, there are often geopolitical challenges that companies may face when having a multinational company. As an alternative, outsourcing focuses solely on importing services and goods rather than setting up subsidiaries in different countries.
Types of Outsourcing: Onshoring, Offshoring, Nearshoring
The term outsourcing, though used generically to describe business involving third-party suppliers, is primarily meant to refer to business between companies from different countries. Similarly, there are other terms such as onshoring, offshoring, and nearshoring. There primarily describe the nature of business based on the geographical proximity between the companies involved. In addition to the types mentioned, with the emergence of Social Media, Crowdsourcing has also emerged as another form of outsourcing that primarily is undertaken over the internet.
According to a report by Outsourced Accelerator, the US had the highest percentage of outsourced jobs in the world, amounting to almost 68% as of 2022. Research by another company, Zippia, found that at least 66% of companies in the US outsource at least one segment of their business.
