What Is Globalization of Business? – Definition, Impact & Effects – Video & Lesson Transcript | Study.com

Impact of Globalization

Imagine for a moment that you run a business that produces digital cameras. How would globalization impact your company?

The impact of globalization on business can be placed into two broad categories: market globalization and production globalization.

Market globalization is the decline in barriers to selling in countries other than the home country. This change will make it easier for your company to begin selling products internationally, since lower tariffs keep consumer prices lower and fewer restrictions when crossing borders makes it easier for a company to enter a foreign market. It also means that companies must consider other cultures when developing their business strategies and potentially adjust the product and marketing messages if they aren’t appropriate in the target country. This may not be an issue in the camera industry, but a hamburger company entering India would definitely need to revisit their product and strategies to be successful!

Production globalization is the sourcing of materials and services from other countries to gain advantage from price differences in different nations. For example, you might purchase materials and components for your cameras from multiple countries and then assemble the product in yet another international location to reduce your costs of production. This change should lead to lower prices for consumers since products cost less to produce. It also impacts jobs, since production may shift from one country to another, usually from more developed countries to less developed countries with lower average wage rates.

Effects of Globalization

The primary effects of globalization include:

• Distributed operations: Companies may locate facilities in multiple countries. There are many reasons to spread out operations, including:
  • Reduced labor or production costs in the country where a plant is located.
  • Reduced distribution costs due to locating a plant nearer to the customers. For example, a company with sales in Europe may build a production facility in Europe as well so that goods do not have to be shipped over the ocean from the U.S. or Asia.
• Changes in location: Companies may locate their firms in new places, both to reduce labor and production costs and to take advantage of free trade zones. In a free trade zone, goods can travel freely between countries and no tariffs are charged when crossing borders. This helps keep prices lower than if the goods were shipped in from another area.
• Increasing complexity: Although multiple locations and distributed operations may lead to reductions in cost, it also causes increasing complexity in management of the interactions between the facilities.

In addition, although a free trade area has fewer hurdles for moving goods within the region, companies may still have to adjust their marketing strategies for regional economies. For example, advertising in France still needs to be translated into French, even though a German company may send their goods there without dealing with border restrictions.

Lesson Summary

Globalization of business is a movement toward operating in multiple countries, both to reach new markets and to reduce costs of production. The primary effects of globalization on a specific firm may include more widely distributed operations, changes in the location of business functions, and increasing complexity in managing the operation.

Learning Outcomes

Once you are done with this lesson you should be able to:

• Define globalization of business
• Discuss the two impacts of globalization on business: market globalization and production globalization
• Explain the effects of globalization