How has globalization affected companies?

Win-Win - Why companies and consumers benefit from globalization

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Globalization increases the output of Western economies

  1. Globalization enables companies to specialize. This increases the share of R&D, innovations and capital in the output.
  2. Thanks to globalization, new companies can better compete with established players.
  3. The trade sector is creating more and more jobs thanks to exports and imports.

Globalization increases household incomes

  1. Globalization has helped contain high inflation rates in the West. Consumers get more for their money.
  2. Globalization has increased real wages by lowering consumption costs.
  3. Many goods such as cell phones or sewing machines that only a few could afford in the past are now in most households.

Globalization opens up new opportunities for economies and people

  1. Globalization has accelerated the spread of new technologies. This makes economies more ecological and productive.
  2. Globalization helps reduce gender pay discrimination and offer women new opportunities.
  3. Globalization has improved the quality of corporate management and people's working conditions.

    ECIPE thanks Svenskt Näringsliv, the governing body of Swedish business, for helping us with this report


Businesses and consumers as well as Western economies have benefited from globalization. Yet we are currently witnessing globalization and all the benefits that trade liberalization has brought in recent decades to be challenged. In Western societies there is growing skepticism towards the earlier assessment that more free trade represents a win-win situation for all participating countries. Rather, it is assumed that free trade has made some states winners of globalization. Others - and by that the wealthier countries of the West in particular - were among the losers.

For example, US President Donald Trump takes the view that "other countries have taken advantage of America". The trigger for such resentments, which feed doubts about globalization and its benefits for the West, is often the development in China, whose economy has grown rapidly since the late 1990s. As a result, the standard of living in China and other emerging economies, according to a common argument, has risen. However, this was done at the expense of the workers in the West because China had undermined the manufacturing industry in Europe and North America. One consequence of this view is widespread dissatisfaction with the political system in the West, as reflected in the recent election results in Europe and the United States. The “losers of free trade” are taking revenge on the “globalization-friendly establishment”.

However, this interpretation of globalization ignores the fact that established facts and known economic patterns leave no doubt about the benefits of trade and cross-border investment. On the one hand, open economies have always been exposed to competition and structural changes that affect companies and jobs. On the other hand, it is precisely these economic processes that create many new jobs and business opportunities and thus ultimately lead to an improvement in the standard of living. The newly created jobs are usually better paid and their working conditions are better. Thanks to new technologies, innovative products are also often more environmentally friendly, which in turn benefits society as a whole.

This study examines how western economies have developed in the age of globalization. In addition to a wealth of economic evidence and research results, it presents specific examples that support the long-accepted consensus on the subject of free trade. The key conclusion is that the rapid rise in world trade in the three decades leading up to the financial crisis has significantly improved Western economies and the living standards of their citizens. Globalization has contributed significantly to the spread of new technologies and business opportunities in both emerging and developed countries. Contrary to popular belief, it helped to enhance human capital and allowed companies to retain the employees who are needed in international competition.

However, since the 2008 financial crisis, the globalization process has slowed down. Free world trade is suffering from increasing protectionism and poor overall economic performance in the West. Trade is no longer growing very strongly. For the West, but also for all other countries, this should be a cause for concern, not for joy.

The economic benefits of globalization

There are many ways to study how globalization has improved business conditions, the standard of living of the population and overall economic performance. But let's first take a quick look at how trade works and how economists define globalization.

The era of globalization, i.e. the years from 1980 to 2010, were unique because world trade grew very quickly. It did expand before 1980 and even in the years after 2010 we can observe a slight increase. But all of this is nothing compared to the years 1980 to 2010. The same can be said for foreign direct investment (Foreign direct investment FDI), which increased many times over in these three decades.

Figures 1 and 2 illustrate this. Figure 1 shows the development of exports worldwide from 1800 to 2014. In simple terms, it can be said that world trade grew only slightly over a period of 150 years. It rose for the first time in the 1950s and world trade increased tenfold from 1950 to 1980. The real boom, however, came between 1980 and 2010 when world trade increased almost 35 times. In recent years, however, as the figure also shows, the growth has been low. World trade collapsed after the 2008 financial crisis, recovered over the next two years, and then collapsed again. Since then it has stagnated.

Figure 1: World trade index 1800-2014Source: Federico, G. and Tena-Junguito, A., 2016, A Tale of Two Globalizations: Gains from Trade and Openness 1800-2010. Center for Economic Policy Research Working Paper 11128

Figure 2 shows the development of global FDI inflows from 1980 to 2016 [1]. They grew even faster than the trading volume, rising from $ 0.7 trillion to $ 25 trillion in that period.

Figure 2: Worldwide FDI (inflows, in millions of dollars at current prices)

Source: UNCTAD

What also makes the three decades from 1980 to 2010 unique is that international trade gradually became global. After World War II, world trade took place primarily between industrialized nations, more precisely between European countries and North America. In the late 1970s, other countries such as Japan were added. However, trade only became truly global in the 30 years we have called globalization.

More and more states dismantled their trade barriers. They carried out reforms that enabled the international movement of goods and services as well as contact with foreign companies (for example, by allowing currency exchange). As a result, investments by foreign companies flowed into these countries and their international trade grew faster than ever before.

The increasing importance of trade is also reflected in its ever larger share of the gross domestic product (GDP). This share grew worldwide from around 25 percent in 1960 to 58 percent in 2016 [2]. It was the largest in 2010 at 61 percent, and since then it has declined, as has the trading volume. Some countries have a significant trading sector in global comparison. In Sweden, for example, the trading sector comprised 85 percent of GDP, and in Germany it was the same.

Box 1: Jobs in export


The growth of the trading sector also means that more and more jobs are now dependent on exports. According to a study for the European Commission, the number of EU jobs created by exporting to countries has increased outside of the EU depend, estimated from 18.5 million in 1995 to 31 million in 2011. This corresponds to an increase of 67 percent. Above all, the number of highly qualified jobs increased. [3] In the EU, however, there are even more people working in trade other EU countries. They are not included in the study mentioned above. In Sweden, for example, it is estimated that around one million jobs depend on trade in goods with other EU countries. That is more than 20% of all jobs. [4]


There are three main reasons for the stagnation in international trade in recent years. On the one hand, the demand for globally traded products, above all industrial goods such as steel and machines, grew more slowly. At the same time, the demand for locally produced services, e.g. in health care, increased rapidly. This can partly be explained by a changed demand pattern and is overall less worrying than the second reason: protectionism. Since the financial crisis, governments around the world have taken protectionist measures that explicitly discriminate against foreign companies (see Box 2). Thirdly, the growing protectionism is also the result of the fact that the regulatory costs in trade (for example the administrative expenses for processing customs documents) have risen over a longer period of time.

As far as regulatory trade barriers are concerned, there was (see Figure 3) a clear trend break in the years after 2000 (the higher the index value, the greater the freedom of trade and the lower the trade barriers). Trade was liberalized more and more until 2000, after which it was regulated more and more. But that's not all. In the service sector in particular, new non-tariff barriers make cross-border exchange more difficult. For example, more and more professional standards are being applied that divide the global service market apart. In Europe’s service sector alone, there are 800 different professional standards; in the USA, a quarter of employees work under such standards. [5] Since these professional standards are rarely mutually recognized, in many cases they prevent the export of services.

Figure 3: Economic Freedom of Trade: An Index of Regulatory Trade Barriers

Source: Fraser Institute, Economic Freedom of the World Database

Note: Index values ​​refer to the sub-category “Regulatory Trade Barriers” in the overall index. This includes non-tariff trade barriers as well as import and export costs for compliance with legal regulations. The higher the index value, the greater the freedom of trade.

Box 2: Growing protectionism in the global economy


Protectionism in the world economy is increasing. Both industrialized and emerging countries have increasingly restricted global trade and competition over the past ten years. According to calculations by the Global Trade Alert initiative, between November 2008 and November 2017, governments around the world took 6,756 measures restricting freedom of trade. At the same time, they also adopted measures to liberalize trade. The restrictive measures outweighed however 2: 1. These are primarily the increase of important tariffs or subsidies that discriminate against foreign companies and distort competition. [6] These figures refer to trade in goods only, but the situation is similar in the service sector. Reference should be made here, for example, to the digitization policy and attempts there to enforce local data storage, which represents a serious intervention in the digital economy. The number of data localization measures increased tenfold between 1990 and 2016. [7]


Globalization creates new business opportunities

There are many reasons for the considerable expansion of trade during the globalization phase, but one of the most important is of course companies and their business development. An increase in exports means nothing more than that companies have sold more and more to foreign customers.

If world trade increased 35 times between 1980 and 2010, it means that the corporate sector increased its sales abroad by 35 times. We want to illustrate this development using the example of one country, namely Sweden: Swedish companies increased their export volume from around 200 billion SEK in 1980 to around 1500 billion SEK in 2010 [8]. In 2010, the telecom group Ericsson had export sales of 100 billion SEK. That's nominally more than twice as much as Ericsson's Total sales 1990. [9] Back then, in 1990, Asia accounted for around six percent of total sales; in 2010 it was 25 percent. [10]

In a kind of thought experiment, we can play out how companies would have developed if globalization had never happened. Of course, we don't know for sure, but such a counterfactual scenario helps us understand the different prerequisites for business opportunities. One thing is certain: if a company only has the domestic market as a customer (in the case of Ericsson that would be 10 million Swedes), it has to position itself differently than if it has access to the world market. Market size is an important factor, especially for companies that produce innovative, research or capital-intensive goods and services. When the potential customer base is small, each unit sold must recoup a larger proportion of the development and production costs. If, on the other hand, more and more customers are added abroad, companies can spread these costs over significantly more units sold.

Economists call this the The economies of scale of globalizationbased on fundamental economies of scale. The entire corporate sector benefits from them. Globalization allows companies to develop business ideas that assume they can sell many units to many different customers. If Ericsson's mobile market had been confined to Sweden, the company would never have developed GSM technology or the basics of 3G and 4G communications. The same applies to other areas with high development and production costs such as vehicles, chemicals, computers, electronics, pharmaceuticals and the like. It is therefore not surprising that the expansion of world trade during globalization took place primarily in precisely these sectors. [11]

A comparison of the globalized world with the scenario of a non-globalized world also shows that globalization is the prerequisite for a faster one specialization of production and enterprise created. Some may see this as a disadvantage. Gone are the days when a single company - often protected by trade barriers - was able to build up a company empire with a wide range of products. Take Volvo as an example. The company used to make trucks, buses, automobiles, pharmaceuticals, beverages, and frozen foods. Today even the automotive division is split up. One area produces cars, the other trucks, buses and heavy-duty vehicles. Or let's take a look at the Finnish Nokia. Thirty years ago the group was represented in many markets - televisions, household and stationery goods, rubber boots and electricity - and was preparing to conquer the GSM handset market. Today Nokia specializes in telecommunications technology.

Box 3: 100 billion individual parts for cell phone production


In the late 1980s, a cell phone was still being manufactured in Europe from one part to the last in a single factory. Today we are dealing with an entire supply chain. In the heyday of its cell phone products, Nokia handled more than 100 billion components a year. In 2006, Nokia factories produced around 900,000 cell phones. To do this, they used 275 million individual parts per day, most of which were manufactured by specialized companies in other countries and then imported. According to conservative estimates, half of all the components needed to build a cell phone crossed a national border. This development - from the production of all mobile phone parts in one place to an international supply chain with 100 billion individual parts - symbolizes the history of modern globalization. [12]


Specialization creates new business opportunities because even smaller companies can enter new markets without control over end users. Specialized markets are usually more open to new companies and allow them to compete successfully with innovative technology and attractive offers.A small company that specializes in engine parts does not have to produce a complete car and compete with giants like Volkswagen and Toyota for end customers. Rather, it can fully concentrate all its resources on becoming an even better competitor in the engine parts market. As a result, your own resources, such as personnel and technology investments, are also becoming more specialized.

Therefore, the increase in world trade is reflected in the phase of globalization purely functional reflects the fragmentation of large multinational corporations into various supply and value chains. [13] Large companies today cannot possibly manufacture all of the highly specialized components they need for their end products themselves. [14]

If companies in a non-globalized world had been able to operate exclusively on their home markets, they would never have been able to develop products in the way they have been in the last 30 years for reasons of cost. They would have had to choose manufacturing methods that would probably have compromised the quality of the products. Today it is easy to forget how many bad but expensive products there were in the time before globalization. This wasn't a coincidence, of course, but was because companies had limited business opportunities.

The workforce has also benefited significantly from the economies of scale and specialization created by globalization. In general, there is a clear pattern in the world economy, according to which open economic systems are better for those in work than less open ones (see Box 4). This is also because the newly created production in open economies is more dependent on human capital. Workers with better training and better problem-solving skills, in turn, have higher salaries and better working conditions.

Box 4: Workers benefit from new business opportunities


When business opportunities in an economy improve, workers benefit too. Companies that use trade advantages and expand and specialize their production create jobs that are more highly qualified and better paid. These advantages are more evident in open economic systems, i.e. those that are open to trade and investment, than in less open ones. According to the OECD, the wages of workers in manufacturing industries in more open economies rose three to nine times between 1970 and 2000 compared to those of workers in less open systems. In the US, for example, wages in exporting companies are nearly ten percent higher than those in non-exporting companies. [15] In Chile, also a developed economy, this difference is even more pronounced. A worker in an export sector earns 25 percent more than other workers.


After evaluating leading research studies, the OECD comes to the conclusion that Trade drives up wages. Even if outsourcing and offshoring of production steps can lead to the loss of jobs, this increases overall Wages and total employment. This is easy to explain. It is through trade that economies make better use of their human resources. When parts of production are outsourced, companies can specialize and invest more in their human capital. Globalization was, among other things, about using manpower appropriately: In developed economies, the proportion of people in employment who work in sectors with high added value is rising steadily. In this way, resources are used better and released for alternative uses. Unsurprisingly, open economies are in a much better position than less open economies in questions of employee rights, working conditions, working hours, the number of fatal accidents and life expectancy. [16] The newly created jobs are not only better paid, but also safer and often more stimulating.


Box 5: Globalization and equality


Gender equality has made significant strides over the past 50 years. Although discrimination against women is still a major problem in many countries, globalization has contributed to opening up new business opportunities for women, narrowing the gender pay gap and generally making it more difficult to give preference to men economically. Examples are women entrepreneurs in poor regions who were previously denied access to the formal financial sector and thus to loans and payment systems for various reasons. Internet and mobile technologies developed elsewhere in the world now enable them to use financial services and receive payments. With the help of global online platforms, they can reach customers who were previously inaccessible to them. Many know that Alibaba, for example, is one of the largest e-commerce platforms in the world. Their sales exceed those of Amazon and eBay combined. What is less well known, however, is that Alibaba's secret to success lies in connecting small businesses with new customers. Behind the brand name Alibaba are B2B and B2C trading venues for small producers, including many women who would otherwise not have the resources and the necessary size to reach customers.


Globalization has created similar opportunities in developed economies as well. Studies also show that the competitive situation that trade often brings with it reduces the wage gap between men and women. Discrimination is costly because resources are used ineffectively. Companies don't use their human capital to become more competitive. If competition increases, discriminatory companies will find it more and more expensive if they continue to pay too much to men and too little to women. Therefore, new import competition usually reduces the gender pay gap. According to a study examining wage developments in the manufacturing sector in the United States, wage discrimination against women was greater in concentrated sectors - that is, where a single company can determine prices thanks to its market power - than in highly competitive sectors. As trade competition intensified in the concentrated sectors, the gender wage gap decreased. [17]

Globalization lowers consumer prices

At least as importantly, the new business opportunities created by globalization have ultimately resulted in lower consumer prices. Much cheaper consumer goods and a radically improved standard of living are probably the most visible consequences of globalization for most people. Households in western economies now have a completely different standard of living than they did a few decades ago - and this is largely thanks to the rise in free world trade.

Even among opponents of globalization, this is undisputed. They too acknowledge that consumer goods are cheaper and better today than ever before. In economic terminology, it is said that globalization has contributed significantly to disinflation over the past 30 years. [18]

In the 1970s and 80s, most western countries had high inflation rates. Wages and salaries rose much faster than they do today. However, this did not lead to an improvement in the standard of living, as inflation ate up the wage increases. [19] Adjusted for inflation, wages and salaries stagnated over a long period of time or rose slowly. Globalization and the competition that goes with it in the western world helped lower inflation and that Real income to increase. [20] And, unsurprisingly, incomes rose faster in more open Western economies than in less open ones. [21]

Figure 4 shows the development of the real Hourly wages in the manufacturing industry in four European countries (France, Germany, Sweden and Great Britain) from 1970 until the start of the financial crisis in 2007 [22]. What all four states have in common is that they went through phases in which the Real wages rose only slightly due to inflation. Otherwise, however, they differ significantly. British and French workers, for example, more than doubled their real hourly wages between 1970 and 2007. For Swedish workers, the situation did not improve until the mid-1990s, after the country had experienced two decades of high inflation and macroeconomic problems. Between the mid-1970s and the mid-1990s, real hourly wages for Swedish workers did not rise at all. In France, on the other hand, they rose significantly from the late 1960s to the early 1980s. After that, the rise flattened out. In turn, Germany, which has always closely monitored its inflation, has seen real wages rise fairly steadily. In the mid-1980s, however, this was higher than in the 1990s and in previous years. For its part, the UK saw a rapid rise in the early 1980s and is, overall, the country where real incomes rose the fastest in our peer group.

Figure 4: Index of real hourly wages in the manufacturing industry (1969 = 100, Sweden 1971)

Source: OECD, Labor and Price database.

The rise in real incomes means, in simple terms, that consumers are getting more for their money today. In the phase of globalization, prices for many typical household products have not only increased more slowly, but have increased decreased while the quality increased at the same time. Let's take a look at the USA: In 1980, a consumer had to pay US $ 399.95 for a microwave with a volume of around 35 liters at the retailer Sears. Today he can purchase the same device for $ 57.13 from Walmart. [23] Today's microwave is also of a higher standard and significantly more functions, while at the same time its nominal price has fallen by 85 percent. The average US worker today has to work shorter hours to be able to afford a microwave. In 1980 it took 61 working hours, today three is enough. The same is true for other products that face more competitive today. In 1984, an average wage earner in the USA had to work 465 hours to buy a cell phone; today, four hours are enough.

Goods that were considered luxury products in 1980 and that few could afford can now be found in almost every US household. Since low-income households spend a larger proportion of their income on household goods, they have benefited from this development more than high-income households. [24] One study shows that inflation for US low-income households was six percentage points lower than that for very high-income households between 1994 and 2005. [25]

Box 6: The poor benefit from trade


An important lesson from the last few centuries, in which we have seen a steady increase in trade, is that the distributive effects of trade are very strong when one includes spending and consumption patterns. Households and people with relatively low incomes tend to spend a larger proportion of their income on essential products such as food and clothing. According to a study, there is a “pro-poor bias” for international trade in all countries, i.e. the poor benefit more than others. On average, the ten percent of the population with the lowest incomes had gains of 63 percent from opening up their country, while the ten percent with the highest incomes gained 28 percent. The lower the income, the higher the gain. [26]


The fact that microwaves have become so much cheaper in the US (and elsewhere) has not just to do with the expansion of world trade. [27] New technologies and changes in transport costs have also made a significant contribution to lowering production costs and enabling trade. The specialization accelerated by globalization led overall to a more effective use of resources and new demand patterns, which in turn made goods cheaper. However, the increase in trade and investment were key factors in price developments. The question therefore arises: To what extent is the higher standard of living that Western households experienced in the age of globalization a consequence of increased world trade?

Unfortunately, economic processes cannot be tried out in the laboratory. It is therefore difficult to examine what would have happened if certain factors had been different. Nevertheless, let us dare to do another thought experiment and investigate the question of how the price of a commodity would have developed if it had not been exposed to international trade and competition.

Table 1 gives an answer to this question and shows an example of the extent to which globalization has lowered the price of an average household product. [28] We calculated a hypothetical price for selected goods. This is the price that the respective product would have if its price had followed the general development of consumer prices in the respective country from 1970 to 2005. As can be seen in the first column, the is different actual price 2005 striking from hypothetical price. This is namely significantly higher than the actual price. The difference is particularly large with products such as refrigerators, washing machines and sewing machines. 40 years ago, households often had to take out loans to buy such “durable” consumer goods. Nowadays, very few households in the West have to borrow money to buy a vacuum cleaner, but in 1970 this was still the case for most.

A sewing machine was not a matter of course in a German household in the 1960s. It probably never would have been if its price had followed domestic rather than international conditions. Then a sewing machine in Germany would be seven times more expensive today. Such price developments have had a remarkable impact on consumers and their real income. Nowadays consumers simply get a lot more for their money.

Choice and product diversity have also improved, which also has significant economic benefits. [29] According to a study, the number of goods in the US doubled from 8,000 in 1972 to 16,000 in 2001. At the same time, the average number of countries from which the goods were imported rose from six to twelve. This greater variety of products alone increased US prosperity by an estimated 2.6 percent. [30]

Finally, it can be stated that the income effect from disinflation in western economies was strong overall, sometimes even stronger than the effect that the increase in nominal wages had. [31] International trade caused import prices to fall for consumers and companies that buy components for their own production abroad. Firms that tightened competition with international companies have to constantly find new ways to reduce the cost of their products, which in turn benefits consumers. [32] Globalization is also forcing companies to constantly increase their effectiveness. Highly efficient companies displace less efficient ones. [33] We want to take a closer look at this dynamic in the next section.

Globalization increases productivity

The subject of “economic efficiency” may sound dry, but the forces that are at work are anything but uninteresting. The economist John Maynard Keynes once rightly described the "animal spirits" in business competition as the surest way to improve a society's potential for prosperity. In order to be successful in the market and to be able to offer customers more for their money, companies must continuously work more effectively and productively. When economies increase their efficiency and make better use of resources such as capital and labor, productivity increases. In order for economies and the gross domestic product per capita to grow sustainably, productivity increases are essential. The increase in productivity ultimately determines the rate at which a society's prosperity develops.

Globalization has increased productivity in Western economies over a long period of time, even if this connection is not always clear at first glance, especially in recent times. [34] Various factors, of which international trade and foreign investment are only two, determine productivity growth. For some years now, a slow decrease in this increase has been observed in Europe and North America. The development of trade in general may explain this. However, there is evidence that tightly regulated labor markets and restricted trade in services are the main causes. [35] For example, productivity growth in the trading sector is still significantly higher than in sectors with non-tradable goods. [36]

Globalization contributed to productivity growth as trade and investment created new business opportunities. Economies of scale and specialization led to a significantly better use of resources.As a result, the standard indicator of productivity, namely labor productivity, has also risen. [37] Companies operate with fragmented value chains and cheaper imports of inputs drive productivity up. [38] It is not possible to measure exactly how large the share of globalization is in productivity growth in the West. Numerous studies have empirically proven this relationship, but the differences between individual countries and different time periods are very large. This has to do with trade and non-trade related factors such as the degree of freedom of trade, the size of the trade sector and the flexibility of the labor market. [39] It is also known that the variety of products brought about by globalization has improved productivity. This factor alone is estimated to be responsible for 15 percent of the total increase in productivity between 1994 and 2004. [40]

Table 1: Real and hypothetical prices in 1970 and 2005

Sources: Statistiska Centralbyrån, European Central Bank, Eurostat, OECD, central statistical offices in France, Germany and Great Britain.

We have not yet addressed a factor that is very important in the interplay between globalization and productivity. The question is to what extent trade to one faster diffusion of technology and innovations contributes. Just think how quickly the smartphone became an important part of everyday life in many parts of the world and imagine how this development would have happened without globalization. It took the phone 75 years to register one million users after it entered the market. It took the radio 38 years to do this and the television only half as long as the radio. The Internet, in turn, reached 50 million users within four years. There are many reasons why new goods and services are spreading faster and faster, but cross-border trade is clearly one of the most important.

Ultimately, with the faster spread of new technologies, companies and consumers will have faster and faster access to better production methods and products. If only the technology that was developed on the respective domestic market were available to consumers, the technical standard and even more the standard of living would be lower than today. Because the technology that is used in one industrialized country was usually developed in another country. Without foreign technology, a worker in the US would still have to work 465 hours - as was the case in 1984 - to be able to afford a cell phone - not four hours as it does today.

Box 7: How trade is making the economy greener)


It is often claimed that international trade pollutes the environment through carbon emissions from the transport of goods. That is why it is much better to buy local products. Indeed, trade causes carbon emissions - not only through the movement of goods, but also through increased output and economic growth. But the alternative would hardly be better. Even if people in Europe like to buy locally produced food for many reasons, this does not necessarily lead to a reduction in carbon emissions. As far as emissions are concerned, it is of course better to buy European apples in the autumn immediately after the harvest than apples from overseas. But much of the food we consume in Europe causes more emissions during production than food from the southern hemisphere during production and