Streamline Training & Documentation: Business Acumen XV: How Globalization Affects Productivity and Costs

Monday, May 07, 2007

Business Acumen XV: How Globalization Affects Productivity and Costs

The Federal Reserve Bank of Dallas has just published its 2006 annual report and included, along with the numbers at the back, a valuable essay on globalization.

Written by Michael Cox, the bank's chief economist, and Richard Alm, a senior economics writer at the bank, the essay spotlights the productivity and cost impacts of globalization. Cox and Alm list ten ways in which globalization raises productivity and reduces cost:

Lower communication and transportation costs — These lowered costs help consumers both directly and — through impacts on production costs — indirectly.

More flexibility in production — Labor, capital, and other resources are less constrained, thanks to cheaper communication and transportation.

Stronger competition — The more efficient firms are generally the ones that survive.

Greater specialization — People and nations are able to focus production on what they do best. Furthermore, specialization enables deepened expertise and faster innovation.

Larger market size — Larger markets offer the potential of expanded sales and profits — an enhanced incentive to entrepreneurs to take on the risks of investment and innovation.

Greater economies of scale — With larger markets, producers can spread fixed costs over a broader pool of customers. The upshot is lower prices.

Broader capital markets — Entrepreneurs can shift assets to wherever they are likely to earn the highest return.

Markets that are more contestable — With markets more open to competition, the incidence of monopolization, with its attendant excessive prices, is reduced.

Greater knowledge spillovers — As the knowledge economy becomes more globalized, general information and research cross borders more freely, contributing to increased production efficiency.

Spread of nonrivalrous consumption — Examples include TV, movies and use of the Internet. One person's consumption does not diminish another's, so cost per customer falls as the products in question flow around the globe.

There are, of course, issues of equity that need attention in conjunction with any assessment of the impacts of globalization. This is a subject that I will take up in a subsequent post.

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