Multinational firms benefit directly from the globalization of markets and the globalization of production. The decline in barriers to the free flow of goods, services and capital contribute to this globalization of markets and production. There has been a general decline in tariffs, quotas and administrative barriers to trade. The General Agreement of Tariffs and Trade (GATT) has been instrumental in lowering of many of these barriers. In addition there has been a number of regional agreements that lower or remove barriers between blocks of countries: NAFTA, European Union, MERCOSUR, etc.

Major advances in communications, information processing and transportation technology also contributes to this globalization. The advances in communications and information processing make it possible to manage globally in real time. The advent of jet travel has reduced the time it takes to get from one location to another. It facilitates global travel of personnel. It also makes it practical to manufacture high value components globally and use them in the manufacture of higher level items without adding excessive delays and inventory costs due to transportation time. The development of containerization has resulted in significant costs saving in the handling of goods shipped by water.

With regard to globalization of production, firms are increasingly dispersing parts of their production process to various locations around the globe to take advantage of national differences in the cost and quality of production factors. The firms are often able to lower costs of land labor materials and capital. They also have an opportunity to lower transportation costs by moving production closer to markets.

Firms are also dispersing research, development and design activities and marketing activities in order to take advantage of national differences in skills, education, and utilization of technology. This not only can reduce the cost of these activities but also can lead to new products and product variations that would not have evolved in the firmís home country.

As to globalization of markets, we are moving away from a system in which national markets are distinct entities, isolated from each other by trade barriers and barriers of distance, time and culture, and toward a system in which national markets are merging into one huge global marketplace. The tastes and preferences of consumer in different nations are beginning to converge on some global norm. Firms that successfully compete in one nation will often have the ability to develop new markets in other countries resulting in significant increases in revenues and profits due to larger markets and economies of scale. The reductions in trade barriers encourage further penetration of existing international markets.

Web site and publication by Howard Woodward Jr.
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Revised: 29 Mar 2001 22:24:57 -0500 .