Globalization and Industrialization

Globalization:

1. Is defined as the growing integration of the world’s economy or the ability of large firms to produce any goods or services anywhere in the world using raw materials, components, capital and technology from anywhere, sell the resulting output anywhere and place the profits anywhere.

1. Its most likely causes include new communication technologies, trade liberalization, money and capital markets liberalization, increasing global income, increasing global population and consumers, desire to achieve economies of scale and minimum efficient scale of production, managers and shareholders of multinationals want larger profits generated from greater economies of scale created “if everyone in the world were to drive the same motorcar, eat the same hamburger or wear the same sport shoes”.

3. Advantages:

1. An increase of national income in several countries

1. Increase in investments

1. Increase in savings which could trigger investment

1. Economies of scale are achieved especially in the secondary sector

1. Improvement of supply-side bottlenecks

1. Improvement in transfer of technology

1. Investment in management and human skills

1. Improvement of infrastructure

1. Increase exports and therefore injections

1. Generates jobs

4. Disadvantages:

1. Increase of income and wealth inequalities and responsible for “duality” where globalization is responsible in some countries for a modern high wage urban sector next to a traditional low wage rural sector.

1. Globalization is responsible for marketing of multinationals of inappropriate and sophisticated products for elite groups and multinationals through advertisement create demand for these products.

1. Widens rural to urban divide encouraging rural to urban migration.

1. Through globalization and economies of scale multinationals use inappropriate technology because of their engineering bias for instance they use capital instead of labor intensive technologies in markets where there is a surplus of labor.

1. Globalizations is responsible for corruption especially in LDC’s through the power of multinationals.

1. Globalisation and intensification of economic activities is responsible for negative externalities like pollution and depletion of non-renewable resources.

Industrialisation (or industrialization) is the process of social and economic change that transforms a human group from a pre-industrial society into an industrial one. It is a part of a wider modernisation process, where social change and economic development are closely related with technological innovation, particularly with the development of large-scale energy and metallurgy production. It is the extensive organisation of an economy for the purpose of manufacturing.

There is considerable literature on the factors facilitating industrial modernisation and enterprise development. Key positive factors identified by researchers have ranged from favourable political-legal environments for industry and commerce, through abundant natural resources of various kinds, to plentiful supplies of relatively low-cost, skilled and adaptable labour..

Countries in Africa, Latin America, the Caribbean, and the Middle East and the rest of Asia in the late 20th century found that high levels of structural differentiation, functional specialisation, and autonomy of economic systems from government were likely to contribute greatly to industrial-commercial growth and prosperity. Amongst other things, relatively open trading systems with zero or low duties on goods imports tended to stimulate industrial cost-efficiency and innovation across the board. Free and flexible labour and other markets also helped raise general business-economic performance levels, as did rapid popular learning capabilities.

Positive work ethics in populations at large combined with skills in quickly utilising new technologies and scientific discoveries were likely to boost production and income levels – and as the latter rose, markets for consumer goods and services of all kinds tended to expand and provide a further stimulus to industrial investment and economic growth. By the end of the century, East Asia was one of the most economically successful regions of the world – with free market countries such as Hong Kong being widely seen as models for other, less developed countries around the world to emulate. The first country to industrialise was Great Britain during the Industrial Revolution.

Industrialisation: provides the context for the rise of modern business in historical perspective:

The key concept:  ‘industrial revolution’:-

Rooted in British experience as the first industrialiser

The broad definition:-

Key components

A)        technological innovation:-

Substitution of machines for human skill

Substitution of inanimate power for human nd animal force

Nb)      the flexibility of the term- 1st / 2nd / 3rd revolutions:-

In terms of technology and timing :-

1st =    late c18 early c19 – steam

2nd =   1890-1920 – electricity

3rd =   1960 – present – automation/it

Our concern today      :           the first industrial revolution

Not only technology, but also:-

B)        structural change

Transition from an agrarian, handicraft economy to one dominated by industry and machine manufacturing.

The first industial revolution embraced not only technological and industrial change, but also the rise of the service sector

•         Reduces prospects for growth and development of local enterprises

•         Rates of GDP growth/rising level of income per capita is closely associated with growth in value-added by industry.

•         Large countries can take advantage of scale economies--because of their large domestic market.

•         So, they industrialize faster than small countries.

•         However, manufacturing share of GDP does not grow indefinitely.

•         At very high income levels, the share declines: advanced countries move out of manufacturing into modern service industries (computers, telecommunications, banking, insurance, research).

•         Formula for direct backward linkage of industry j:

•         Lij =Σaij

•         Formula for direct backward linkage:

•         Lij =Σaij                                              (17-1)

•         In this formula, Lij  =the index backward linkage; aij  = input (i)-output/industry (j) coefficient.  :

•         This measure of backward linkage for any industry is simply the sum of its domestic input coefficients.

•         A high index indicates that expansion of the industry will stimulate production in other sectors of the economy.

Industrialization and Urbanization

•         Reasons for this association:

–         external economies benefit manufacturing firms in urban setting—supply of skilled workers and technicians.

–        Infrastructure provided by governments in the cities that reflect substantial scale economies.

–        Each firm benefit from the economies of agglomeration that results from the presence many other firms, because a wide range of necessary inputs and services becomes available.

–        Financial services.

–        Access to government offices;

–        Economy on distribution costs; low transport cost

Costs of Urbanisation

•         Urbanization has its costs—overcrowding, unsanitary conditions, slums, crime in urban areas impose costs on business and lower the quality of life, especially for migrant workers.

•         Nonetheless, urban life remains attractive to the rural poor.

•         Attention should be paid to rural development to stem the flow of rural migrants.

•         A complementary approach is to encourage the dispersal of new industries to smaller cities through provision of infrastructure, incentives, and control over location.

•         Spreading investments to more areas reduces congestion can also can reduce the cost of migration.

Decentralisation

•         Decentralization of industry has complementary benefits for agriculture—easier distribution of inputs and manufactured items.

•         But infrastructure cost may be high for connecting sparsely populated areas with urban centers.

•         Small city firms also incur higher cost for transportation, communications, and for financial services.

•         Therefore, the costs of dispersal need to be matched benefits of dispersal.

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Investment Choices in Industry

•         Factors of production can be substituted in production process.

•         Policies to make labor less expensive and capital more expensive could move producers toward investments that employ more labor and less capital for a given level of output. This would increase employment per unit of output.

•         Does such choice of technology actually (that is, in real life) exists –to help conserve capital and employ more labor?

•         The cumulative effect on economic efficiency of the choice of technology is thus heavily biased toward capital intensity and this bias can be considerable.

•         For example, in one experiment, $100 million invested in selected nine industries with capital-intensive technology, new job creation was 58,000 and GDP value- added $364 million.

•         However, if this same amount were invested using appropriate technology (which required more labor-intensive technology), employment creation will be 239,000 and GDP value-added will be $624 million. 

•         Why the bias, in developing countries, toward the use of more capital-intensive technology, despite much higher gain in terms of both the employment and value added if more labor-intensive technology was used?

•         Several possible explanations:

•         factor prices do not reflect factor scarcities.

•         More labor-intensive methods usually are involved in older models of machines, which may not be easily available.

•         Newer equipment may produce products of higher quality.

•         Managers may not be skilled at managing large labor force.

•         Different firms may face different factor prices. Like, the foreign firms may have access to cheaper capital than domestic firms, so their optimal chaotic eof technology is more capital intensive.

•         Investors may purchase inappropriate equipment (biased toward capital-intensive), because they and their managers have a strong bias towards most modern machinery and highest possible quality of output, with less emphasis on labor employment and profitability.

•         However, no such economic considerations (in making choice about technology) may  prevail in protected industries which may not need to be that much cost conscious.

•         For this reason, state-owned enterprises are particularly prone to inefficiencies of this type. That is they tend to use highly capital intensive technology even if labor intensive technology could more profitable and employ more labor.

Economies of Scale

•         In decisions about the choice of technology, economies of scale may be a crucial consideration.

•         Economy of scale is important consideration, since for many kinds of production, large facilities may yield lower cost of production.

•         Scale economies arise for a number of reasons:

•         Start-up cost (sunk-in cost) of production may be fixed over a wide range of output.

•         Capital use may rise with output but less than the rise in output.

•         The amount of inventory and other working capital does not rise proportionately to output.

•         Large production permits more specialization and higher productivity.

•         Larger production can lengthen the production cycle.

•         Large producers can obtain large discount on input purchase. 

•         Also, economic integration among developing economies may help achieve the economies of scale.

•          

Industry and Development Goals

•         Why industrialization is important for growth? Two main reasons:

•         It is easier to achieve productivity growth in industry than in other sectors (agriculture, services)

•         Manufacturing provides opportunities for efficient import substitution.

•         Export growth can be larger for manufactured products than for primary products.

•         Nonetheless, there is a need to balance out industrial and agricultures growth.

•         Industry can supply agriculture with, especially, fertilizer and simple farm equipment.

•         Also, urban growth provides a continuing stimulus to agricultural output, especially of food items.

•         In turn, agriculture can supply industry raw materials, provide market for consumer goods and, as noted, can meet urban food needs..

•         Efficient industrialization will require market reform, such as reduced controls and market prices closer to scarcity values.

•         This will arrest the tendency toward capital intensity and thus raise job creation in industry.

•         A renewed emphasis on development of small industries may also help.

•         Also, some innovative technology needs to be encouraged for capital goods production on small scale.

•         An efficient capital goods industry is an essential  part of development strategy.

•         Finally, industrialization is often pursued for reduced dependence on imports.

•         However, if a country needs the ability to do without imports, it must develop an integrated industrial structure and a productive agriculture.

•         Such policy shows a tendency towards self-sufficiency or autarky; this implies that a country must produce everything it needs.

•         This may reflect a hidden desire to industrialize--at any cost.

•         But this is not an efficient policy and ignores the benefits from trade.

•         Despite such knowledge, many governments continue to establish the most modern, capital-intensive industries available.

•         To the extent that modern industry is a goal in itself for many counties (that ignores efficiency and productivity), the best thing for the economists to point out is how much could be achieved/accomplished with alternative policies and measure the costs of industrialization in terms of other goals that remained to be achieved.