- What a multinational corporation (MNC) is, and the different ways it spreads and controls production across countries
- How foreign trade connects markets, and how the Chinese-toys example shows what happens when trade opens up
- What globalisation actually means, and the three factors that made today’s globalisation possible
- What liberalisation and trade barriers are, and why India changed its trade policy around 1991
- What the World Trade Organisation (WTO) does, and why developing countries call some of its outcomes unfair
- How globalisation has affected Indian consumers, big companies, small producers and workers differently
1Production Across Countries
Until the middle of the twentieth century, production was organised mostly within a country’s own borders. What crossed the border were raw materials, food stuff and finished goods. Colonies such as India exported raw materials and food and imported finished products, and trade was the main link between distant countries. This was the world before large companies called multinational corporations existed.
A multinational corporation (MNC) is a company that owns or controls production in more than one nation.
MNCs set up offices and factories where they can get cheap labour and other resources, because that keeps the cost of production low and lets them earn bigger profits. Consider how one MNC actually does this.
A large MNC making industrial equipment designs its products in a research centre in the United States. The parts are manufactured in China, shipped to Mexico and Eastern Europe for assembly, and the finished product is sold all over the world. Meanwhile the company’s customer care is run through call centres in India.
Each location is chosen for a reason: China is a cheap manufacturing base; Mexico and Eastern Europe sit close to the US and European markets; India has highly skilled engineers and educated, English-speaking youth for customer care. All this probably means 50-60 per cent cost savings for the MNC.
In this example the MNC is not only selling its finished products globally: its goods and services are also produced globally. The one company’s work is spread across the US (design), China (components), Mexico and Eastern Europe (assembly) and India (customer care).
1.1 Investment, and Two More Ways MNCs Control Production
In general, MNCs set up production where it is close to the markets; where skilled and unskilled labour is available at low cost; and where the availability of other factors of production is assured. In addition, MNCs might look for government policies that look after their interests.
Sometimes MNCs set up production jointly with a local company. This benefits the local partner two ways: the MNC brings money for fresh investment (for example, new machines), and it may bring the latest production technology.
Investment is money spent to buy assets such as land, building, machines and other equipment, in the hope that these assets will earn profits. Investment made by MNCs in another country is called foreign investment.
But the most common route for MNC investments is to buy up local companies and then to expand production. MNCs with huge wealth can quite easily do so. In fact, many of the top MNCs have wealth exceeding the entire budgets of the developing country governments.
Cargill Foods, a very large American MNC, bought over the smaller Indian company Parakh Foods. Parakh Foods had built a large marketing network across India and owned four oil refineries, and control of all of it passed to Cargill. Cargill is now the largest producer of edible oil in India, with the capacity to make 5 million pouches a day.
There is a third way MNCs control production without owning a single factory: large MNCs simply place orders for production with small, independent producers. Garments, footwear and sports items are classic examples: women working at home in Ludhiana making footballs for large MNCs is one real case, and jeans made in developing countries are sold in the USA for Rs 6500 ($145). The producers supply the goods, the MNC sells them under its own brand, and the MNC ends up with tremendous power to decide the price, the quality, the delivery date and even the labour conditions of these distant, unseen producers.
Joint production
MNC partners with a local company, bringing investment money and new technology.
Buying local companies
The most common route: MNC buys an existing company outright and expands it (e.g. Cargill-Parakh).
Placing orders
MNC does not own the factory at all, it just orders from small producers and sells under its own brand.
Ford Motors, an American company, is one of the world’s largest automobile manufacturers, with production spread over 26 countries. Ford came to India in 1995 and spent Rs 1,700 crore to build a large plant near Chennai, in collaboration with Mahindra and Mahindra. By 2017, Ford was selling 88,000 cars in the Indian markets, while another 1,81,000 cars were exported from India to South Africa, Mexico, Brazil and the United States. In more recent years, Ford stopped making cars for sale within India but still exports cars and car engines on a small scale.
Through partnerships, through using local companies for supplies, and through closely competing with (or simply buying) local companies, MNCs are exerting a strong influence on production in far-apart locations, and as a result, production across the world is becoming increasingly interlinked.
2Foreign Trade and Integration of Markets
For a long time, foreign trade has been the main channel connecting countries. You have read in history about the old trade routes linking India and South Asia to markets in the East and West, and about how trading interests brought companies such as the East India Company to India.
Foreign trade creates an opportunity for producers to reach beyond their own domestic market. For buyers, importing goods from another country expands their choice beyond what is made at home.
Chinese manufacturers spotted an opportunity: toys were selling at a high price in India, so they began exporting cheap plastic toys here. Because of the lower price and newer designs, Chinese toys became more popular. Within a year, 70 to 80 per cent of the toy shops had replaced Indian toys with Chinese ones, and toys in Indian markets became cheaper than before.
Indian buyers gained: more choice, lower prices. Chinese toy makers gained a new market to expand into. Indian toy makers lost out: their toys sold much less, and they suffered losses.
This is what foreign trade generally does: goods travel from one market to another, choice rises, and the price of a similar good in two markets tends to become equal, and producers separated by thousands of miles now compete with each other directly. This connecting-up of markets across countries is called integration of markets.
3What Is Globalisation?
Over the past two to three decades, more and more MNCs have gone looking for locations that are cheap for production, and at the same time foreign trade between countries has grown rapidly, and a large part of that trade is itself controlled by MNCs (Ford’s Indian plant, for example, both sells to India and exports cars and components elsewhere). The result of greater foreign investment and greater foreign trade has been greater integration of production and markets across countries.
Globalisation is the process of rapid integration or interconnection between countries, brought about by greater foreign trade and greater foreign investment. MNCs play a major role in this process.
Besides goods, services, investment and technology, there is one more way countries could connect: the movement of people between countries, usually in search of better income, jobs or education. But unlike the other flows, movement of people between countries has not increased much in recent decades, because of the many restrictions countries place on it.
4Factors That Have Enabled Globalisation
Globalisation has been facilitated by several factors. Three of these are highlighted:
4.1 Technology
Rapid improvement in transport technology, such as goods being loaded into standard containers that fit straight onto ships, railways, planes and trucks, has cut port-handling costs and made faster, cheaper delivery possible over long distances. Air transport has also become cheaper, letting far larger volumes of goods travel by air.
Even more remarkable has been the growth of information and communication technology (IT): telecommunications, computers and the internet let people everywhere contact one another instantly, access information, and communicate from remote places, and send e-mail or make voice calls at almost no cost.
A news magazine is meant for readers in London, but it is designed and printed in Delhi. The text is sent to the Delhi office over the internet; the Delhi designers get their instructions from the London office using telecom links; the design work itself is done on a computer; after printing, the magazines are flown to London, and even the payment for the work moves from a London bank to a Delhi bank instantly over the internet (e-banking).
4.2 Liberalisation of Foreign Trade and Investment Policy
Go back to the Chinese-toys example. If the Indian government put a tax on toy imports, buyers would have to pay more for Chinese toys, imports would fall automatically, and Indian toy-makers would prosper.
A trade barrier is a restriction set up by the government on foreign trade, for example a tax on imports. Governments use trade barriers to increase or decrease (regulate) foreign trade, and to decide what kinds of goods, and how much of each, should enter the country.
A tax on imports is one kind of trade barrier. A quota, a government-set limit on the quantity of a good that may be imported, is another kind; the book introduces quotas in one of its “Let’s Work These Out” questions.
After Independence, the Indian government put up barriers to foreign trade and investment, to protect the country’s own producers from foreign competition while industries were “just coming up” in the 1950s and 1960s. Only essential imports (machinery, fertilisers, petroleum) were allowed. (Note that all developed countries, during the early stages of development, have given protection to domestic producers through a variety of means.)
The 1991 decision was supported by powerful international organisations. These organisations say that all barriers to foreign trade and investment are harmful, and that trade between countries should be “free”.
Liberalisation is the process of removing the barriers or restrictions set by the government. With liberalisation, businesses are free to decide what they wish to import or export, and the government controls them less than before.
4.3 The World Trade Organisation (WTO)
The World Trade Organisation (WTO) is an organisation, started at the initiative of the developed countries, whose aim is to liberalise international trade. It establishes rules for international trade and checks that they are followed. About 160 countries are currently members.
Though the WTO is supposed to allow free trade for all, in practice developed countries have unfairly retained trade barriers, while WTO rules have forced developing countries to remove theirs. An example of this is the current debate on trade in agricultural products.
In the United States, agriculture provides only about 1% of GDP and a tiny 0.5% of total employment, yet US farmers receive massive government support for production and export. This lets them sell farm produce at abnormally low prices, and the surplus is then sold in other countries’ markets at low prices too, hurting farmers there. Developing countries argue: “We have reduced trade barriers as per WTO rules. But you have ignored the rules of WTO and have continued to pay your farmers vast sums of money. You have asked our governments to stop supporting our farmers, but you are doing so yourselves. Is this free and fair trade?”
5Impact of Globalisation in India
Over the last twenty years, globalisation of the Indian economy has come a long way, but its effects have not landed on everyone the same way.
Who has gained
- Well-off, urban consumers: greater choice, better quality, lower prices, higher living standards
- MNCs investing in India: cell phones, cars, electronics, soft drinks, fast food, banking
- Top Indian companies: invested in new technology, some became MNCs themselves
Who has struggled
- Small producers: batteries, capacitors, plastics, toys, tyres, dairy, vegetable oil hit hard by cheaper imports
- Workers: pushed from permanent into “flexible”, insecure jobs
- Many people simply not sharing in the new opportunities at all
5.1 Consumers and New Investment
Greater competition among local and foreign producers has benefited consumers, especially well-off, urban buyers, who now enjoy better quality and lower prices, and so a higher standard of living than before.
Over the past 20 years, MNCs have increased their investment in India in industries such as cell phones, automobiles, electronics, soft drinks, fast food, and services like banking, all aimed at buyers with money to spend. New jobs were created in these industries, and local companies supplying them with raw materials also prospered.
To attract more foreign investment, India’s central and state governments have set up Special Economic Zones: industrial areas with world-class facilities, electricity, water, roads, transport, storage, and recreational and educational facilities. Companies setting up production in an SEZ pay no tax for an initial period of five years.
To attract this investment further, the government has also allowed companies more flexibility in following labour laws. Instead of hiring workers on a regular basis, companies increasingly hire them “flexibly”, for short periods only, whenever work pressure is high. This cuts the company’s labour costs. Foreign companies, still not satisfied, keep demanding even more flexibility in labour laws.
Several top Indian companies benefited from the rise in competition too: they invested in newer technology and production methods, raised their own standards, and some gained from successful collaborations with foreign partners. Globalisation has even let a few large Indian companies grow into multinationals themselves:
Globalisation has also opened new opportunities for Indian companies providing services, particularly IT services. Besides call centres and magazine-design work like the London/Delhi example above, work such as data entry, accounting, administrative tasks and engineering is now done cheaply in countries such as India and exported to developed countries.
5.2 Small Producers: Compete or Perish
For a very large number of small producers and workers, globalisation has instead meant a serious struggle.
Ravi took a bank loan in 1992 to start a company producing capacitors (used in tube lights, televisions and other electronic goods) in Hosur, an industrial town in Tamil Nadu. Within three years he had expanded to 20 workers. His troubles began when the government, under its WTO agreement, removed restrictions on capacitor imports in 2001: his main clients were television companies, but competition from MNC brands forced the Indian television companies to move into assembling activities for MNCs, and even when some of them bought capacitors, they preferred imports, because the imported item cost half the price Ravi charged. Ravi now makes less than half the capacitors he made in the year 2000, and only 7 workers still work for him. Many of his friends running similar businesses in Hyderabad and Chennai have shut their units altogether.
Batteries, capacitors, plastics, toys, tyres, dairy products and vegetable oil are some of the industries where small manufacturers have been hit hard due to competition. Several of the units have shut down, rendering many workers jobless. This matters at a large scale: small and medium industries employ 11 crore workers in India: the largest number of workers in the country after agriculture itself.
Recent studies point out that small producers in India need three things to compete better in the market:
- better roads, power, water, raw materials, marketing and information network;
- improvements and modernisation of technology;
- timely availability of credit at reasonable interest rates.
5.3 Competition and Uncertain Employment
Globalisation and competition have changed the lives of workers too, most employers now prefer to hire “flexibly”, which means a worker’s job is no longer secure.
35-year-old Sushila has spent many years as a worker in Delhi’s garment export industry. As a “permanent worker” she was once entitled to health insurance, provident fund and double pay for overtime. Her factory closed in the late 1990s; after six months without a job, she found one 30 km from home. Even after several years there, she remains a “temporary” worker earning less than half of what she used to earn. She leaves home at 7:30 a.m. and returns at 10 p.m., seven days a week, with no benefits, no pay for a day off, and factories near her home have such unpredictable orders that they pay even less.
Large MNCs in the garment industry in Europe and America order their products from Indian exporters, and look for the cheapest goods in order to maximise their profits. Since raw-material costs can’t be cut, exporters cut labour costs instead: employing workers only temporarily instead of permanently, demanding long hours and night shifts in peak season, and paying low wages, so that workers are forced to work overtime just to make ends meet. The MNCs’ profits rise; the workers’ fair share does not follow.
The book notes that most workers today are employed in the unorganised sector, and, worryingly, conditions in the organised sector are increasingly starting to resemble the unorganised sector too, with organised-sector workers like Sushila losing protections they once had.
6The Struggle for a Fair Globalisation
Not everyone has benefited from globalisation. People with education, skill and wealth have made the best use of the new opportunities that opened up; many others have not shared the benefits. Since globalisation is now a reality, the real question is how to make it more fair: creating opportunities for everyone, and making sure globalisation’s benefits are shared better.
✓ What the government can do
- Make sure labour laws are properly enforced and workers get their rights
- Support small producers until they are strong enough to compete
- Use trade and investment barriers if necessary
- Negotiate at the WTO for “fairer rules”
- Join with other developing countries against the domination of developed countries at the WTO
✗ What has gone wrong so far
- Developing countries forced to remove barriers while developed countries keep theirs
- Farm subsidies in rich countries undercut poorer countries’ farmers
- Flexible hiring has left many workers without security or benefits
People’s organisations have also played a real part: in recent years, massive campaigns and representations by such organisations have influenced important WTO decisions on trade and investment, proof that ordinary people, too, can shape the struggle for a fairer globalisation.
- MNC = company that owns/controls production in more than one country; three routes to control production: joint venture, buying local companies (most common), or just placing orders
- Investment = money spent on assets like land/machines; foreign investment = investment made by MNCs
- Foreign trade lets producers reach beyond the domestic market and integrates markets across countries (Chinese-toys example)
- Globalisation = rapid integration between countries through foreign trade and investment, with MNCs playing a major role; movement of people has NOT risen much
- Three enabling factors: technology (transport + IT), liberalisation, and pressure from the WTO
- Trade barrier = a government restriction on trade (tax, quota); liberalisation = removing such barriers; from around 1991 India removed its barriers to a large extent
- WTO: started by developed countries, ~160 members, meant to free up trade; in practice developed countries keep unfair barriers (farm subsidies) while pushing developing countries to remove theirs
- Impact is uneven: well-off consumers and top companies gained; many small producers (Ravi) and workers (Sushila) have suffered from rising competition and insecure “flexible” jobs
- Fair globalisation needs active government policy AND people’s own organised pressure
- Can I define an MNC and name the three ways it can control production abroad?
- Can I explain the Cargill-Parakh and Ford Motors examples in my own words?
- Can I define trade barrier, liberalisation and globalisation without looking?
- Can I explain why developing countries call some WTO outcomes unfair, using the US agriculture numbers?
- Can I explain, using Ravi and Sushila, why globalisation’s impact “has not been uniform”?