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The Global Economy
Global Economy – The world-wide exploitation of resources, and the world-wide production and marketing of goods & services
Globalisation – The growth of the global economy. Refers to any process of change operating at a world-wide scale and having world-wide effects. The whole planet is incorporated into the capitalist system of production. There is also an increasingly free flow of capital.
Economic globalisation – More correct term for globalisation. It causes economies of the world to move closer together, but has impacts that vary from place to place.
Main Global Economic groupings
- MEDC – More economically developed country
- NIC – Newly industrialised countries. Developed industry in the 1960s
- OPEC – Oil and petroleum exporting countries
- FCC – Former Communist Countries
- LEDC – Less economically developed country
- LLEDC – Least economically developed countries
It is often difficult to distinguish which group countries are in and depends on the area that you are looking at.
3 major divisions have been recognised:
- First world – Those countries where a capitalist system prevails. E.g. Western Europe, N America & Australasia. Described as free market economies although there may be some government intervention.
- Second World – Socialist & Communist countries where government economic control is paramount. Mix of MEDCs & LEDCs. The break up of the USSR & collapse of communism means there are only a small number of second world countries e.g. N Korea, China.
- Third World – Relatively poor countries (LEDCs & LLEDCs) in Asia, Africa & S America. Many have recently achieved independence so are being drawn into the global economy.
Multinational Corporations
A multinational corporation (MNC) is an organisation that has operations in a large number of countries. They are large companies that are managed by professionals who do not own the company.
Core areas – Research & Development and decision making occur in developed countries
Peripheral Regions – Assembly & production in developing countries.
MNCs are very important as they have a lot of influence & can provide many advantages.
Advantages:
- Employment
- Education & New Skills
- Investment in Country
- Development of industry in the country.
- Equipment & Capital for the host country.
Multinational companies have a large impact on the economy.
- Some companies e.g. General Motors have sales as large as many country’s GNP.
- A lot of industrial trade is actually between branches of an MNC. This also provides money through taxes.
- MNCs employ huge number of people around the world and so are crucial to the global economy. (over 50 mlln employed)
- Multinational companies have political power by deciding where they locate, although they can get blocked e.g. Japan promotes its own countries by blocking trade with other MNCs.
Changes in MNCs
In recent times MNCs have become more global by setting up in more countries. However MNCs have to change in response to the economy.
- Rationalisation – slimming down of workforce to replace with machines.
- Reorganisation – Improvements in production, administration etc. e.g. subcontracting. Also there is integration of plants to form hierarchies.
- Diversification – Development of new products so they are less vulnerable to economic collapse e.g. provide financial services.
Therefore MNCs have become more financially orientated with better integration & more subcontractors. They need to maintain profitability for shareholders & so are constantly searching for cheaper production methods & location.
Locational Decision Making for TNCs
TNCs have a large choice when choosing location. Governments influence decisions with quotas, tariffs etc.
TNCs may either:
- Serve foreign markets through international trade.
- Have direct overseas investment.
Between Countries
Hinges on political factors as want investment for jobs. It boosts exports to help a country’s trade balance. TNCs often trade countries off against each other.
However, there are often performance requirements for TNCs so that local suppliers are used to make the product. Also there must be a minimum number of exports. Often they want R&D to make sure the plant is kept open in an economic crisis.
Political processes have an important effect and government action may be through direct or indirect influence. Incentives & tax breaks are direct while the development of new motorways & bridges are indirect.
Within Countries
The final location is decided only after detailed analysis of costs at several sites.
4 main features affect site selection:
- Communication
- Availability of Labour
- Costs of Land/buildings
- Level of government subsidies
Occasionally affected by other factors e.g. behavioural factors.
Location of Toyota Car Plant, Derby
Spatial Organisation of Multi-plant firms
Location of ICI
ICI is distributed around the world with plants in all major continents.
There is a high concentration of plants in the UK as this is the home country of ICI and so 40% of its workforce is there. It is beneficial to have the HQ in the home country as it can benefit from ties with national government. This may be tax breaks, links to education and training, use of infrastructure or political favours. There is a high concentration in NW England as there is good communication along the M6 and several major ports. Also it may be attracted by government subsidies. There are quite a lot of factories in Europe to take advantage of EU free trade.
There is a large amount of R&D in MEDCs such as the UK and particularly the USA, as these are the core areas. R&D is important to the power of TNCs and so is kept secret by locating in core areas. There are high skilled technicians, which ICI needs in these countries but which are more difficult to find elsewhere. There are also managers so they can locate their HQ there.
There is very little R&D in periphery areas. These are almost entirely manufacturing areas in LEDCs such as S America and Africa. Manufacturing needs only semi-skilled or unskilled workers and the lower wages mean lower production costs and so the company is more competitive.
There is a very low concentration of factories in SE Asia, probably due to the large amount of competition from Japanese hi-tech firms. Also Japan tries to block companies setting up there.
Also See
Other ‘Economics Systems’ revision notes at A Level:
Comments
These notes were originally written by F1_fanatic and posted here on TSR Forums. They are suitable for people studying for geography at A Level.
