MSc in Finance and International Business Author: Pawel Lukasz Jelinski
Academic Supervisor: Jens Kaalhauge Nielsen
How Internet has changed globalization
Aarhus School of Business
August 2010
Problem statement
Introduction
1. Defining
2. Reviewed history of Globalization
2.1. Before fifteenth century
2.2. Fifteenth to late eighteenth century
2.3. Nineteenth to twentieth century
2.4. Twentieth century
3. Technologies which powered Communication Revolutions
4. Changes caused by Internet – an introduction
4.1. New Economy, a comparison with previous economies
4.2. New Economy changes in numbers
4.3. What’s new in business area?
4.3.1. Wider, quicker and easier globalization
4.3.2. Costs reduction for companies
4.3.3. Robust competition
4.3.4. Diminishing government barriers to globalization
4.3.5. Need of global market participation
4.3.6. New or re-engineered products and services
4.3.7. Deduplication of physical presence
4.3.8. Internet Effects on global marketing
4.4. Computer aided human network
4.4.1. New distribution of power
4.4.2. Difficulties in legislature system
4.4.3. Unrealized prophecies in politics
4.4.4. Social structure is not very different
4.4.5. Culture
Summary
Literature
Problem statement
The aim of this paper is to explore how Internet has changed globalization. What are the areas where it reinforced the process of convergence, which changes are seen positive and which negative from the society and business point of view. The secondary goal is to compare ‘Internet Economy’ with ‘Older Economies’.
Introduction
Internet is still underestimated in today’s economy and treated as a secondary medium. While running little consulting company I have surveyedmany different CEOs and marketing directors trying to sell them a new website. For some of them possessing a professional website was useless. Actually the only use of ICT for themwas e-mail. However, for many other companies Internet is a crucial tool for obtaining suppliers and customers, and for some of them, it is the only channel of distribution and introduction of products (born globals). I started to realize Internet, stopped to be a toy or just an academic experiment. I wondered how many changes were caused by Internet, which I did not know about.
On the other hand I have heard many myths about Internet’s influence on economy and society. It was hard to conclude on arguments ripped out of a context whether Internet changes us positively or not. I wanted to research which changes caused were good or bad, and which were true or false. In this paper I examine many fields of globalization, trying to find out how they were changed by Internet. The task is not that easy, as changes are complex and go deep into social structure. No one can foresee how Internet is going to develop and what is going to happen in the future. There is no limit to what people can do, if they have tools and a freedom to use them. That is why Web 2.0 emerged so quickly, people started to co-create and explore completely new areas where Internet can be used. I will guide you through my findings chapter by chapter, touching different areas of globalization.
The first chapter is a user guide to globalization, called ‘defining’. I discuss there what globalization really is (for me). Is it a convergence of pure economical factors or social ones? Authors explain the concept of globalization on many different ways. For some of them it is one or two field convergence (economy and politics for example), but in fact to understand the problem right, you need to look at globalization as broad mix of different areas, as I try to do it in this paper.
The second chapter is a brief summary of globalization history. The main reason I decided to put it in my paper, was to show you which changes were influencing global forces mostly. For example declining costs of transportationboosted globalization like nothing else. It was possible thanks to explorations of new sea routes and developing newer and faster transport technologies. I would like you to pay attention how raising barriers, which were results of wars and conflicts, destroyed flows of goods and people. Keeping in mind the historical framework of biggest milestones of globalization, can help better understand how Internet is revolutionary in overcoming similar barriers nowadays.
Third chapter is about revolutions in communications, namely technology of communications, which has directly influence on Internet and today’s global forces. The flow of information, which is essential to ‘New Economy’ emerged from such primitive inventions like cave signs and papyrus. These were the first carriers of data, doing the same job as our CDs and DVDs today. I finish this section with discussing the newest revolution, linked with Internet directly.
The fourth chapter is an actual research on changes caused by Internet. I have read and reviewed many theoreticians to write this part. I found both supporters and opponents of such changes. After reflections on their arguments I put them all in this chapter, starting with introduction, after that I try to compare ‘New Economy’ with older ones on theoretical basis. I try to find out if we really can use the term of ‘New Economy’. Next section gives some statistical evidence, an insight whether we had a shift to newer economy or not, comparing numerical data. I go then deeper into changes caused by Internet splitting material into two parts – business and social. In business field, among many I discuss such problems like Internet triggered changes in competition, government barriers to globalization, global marketing, cost reduction etc. In social part I discuss redistribution of power, legislature system, politics, social structure and culture.
1. Defining
I would like to begin my paper by explaining how I understand globalization.
Surely, for many it is a western culture coming to our homes by TV, newspapers and Internet. By United Nations (2004) it is a mix of migration, flows of goods and capital. Is this only these characteristics? Winstein (2005) stated that in general, globalization is a process – an evolution of closer economic integration, by increased trade, foreign investment and immigration, and a very high degree of interconnectedness of world economies. The term of globalization and its common usage made an impression that it is possible for ordinary people and economic actors to get in touch, interact and do business with other people and communities worldwide – Ietto-Gillies (2001). I agree that globalization is a process, as it is very hard to find a starting point and perhaps there will never be the end of it. Nevertheless, for sure globalization lasted for long centuries, so we can surely call it a process. The second part of definition is incomplete as it deals only with economic sphere, forgetting about social structure, culture or politics as well.
Here is another definition – the term globalization applies to a set of social processes that change our present social condition of weakening nationality into one of globality. In its core then globalization is about shifting forms of human contacts (Steger 2009). This definition deals with changes in social structure (which is good), but forgetting about economic area and suggesting that social contacts shift from nationality to globality, which I later will prove is false. Another view presents Khiabany (2003) - globalization has become a buzzword - term used by academics, policymakers, politicians, and journalists. Like many other buzzwords, there is no one meaning of this “process”, “epoch” or “ideology”. Does it mean we will never find a clear definition of globalization? Maybe it is really just a made up with no exact meaning? Actually it is not that bad.
There are hundreds of explanations and definitions of word “globalization” but all of them which are narrowing the term to only one field of integration – economy or social structure, are mistaken. You will understand this mistake reading Keping (2008). He is closest to the truth in my opinion, connecting all the dots, linking all the areas of globalization into one definition.He argues that the primary embodiment of globalization is economic integration, but this process will make a big influence, and inevitably start the globalization of social structures, culture and politics. I now agree that social area, political and economic should come with one definition of globalization. I also agree that the most important factor was economy, triggering globalization of all the other fields. I am aware this is a classical problem, what was first - the egg or a chicken. I was confused for a long time, with this topic, and I really think money rules the world. People always wanted to trade with other cultures, they were curious of different nations, but curiosity was not the most powerful force but economy. Of course pure economical motives will be insufficient, without proper technology or eagerness to explore which are social characteristics. Cartwright (2002) also thinks “true” globalization begun with searches of new markets by first fifteenth century corporations. Economists generally agree that trade promotes growth for exporters and importers, busting globalization. Ietto-Gillies (2001) and Van Dijk (2005) also argue that economy was the dominant trigger in globalization. In fact Ietto-Gillies stress only two triggers for globalization - transnational companies, and information/communications technologies. Van Dijk says economy was always the main driver for development, creation and use of networks in communication and transport. As documented, no society that closed itself off to trade managed to generate higher living standards over the last several decades of twentieth century (see Winstein 2005).Economical factor was truly the most powerful in pushing world to unity. As cited in Lopez (2004) Kapferer explains - in all managerial and consulting circles, and in most business reviews, global brands are the only one that count, and the process of global branding the only thing worth spending resources on. The above reflections were some kind of an explanation of mistakes made by many authors, giving the economy as the only motive for globalization. I deal with this problem this way, that I take economy as the first and most important factor, but not the only one.
Aside of elaboration on what started globalization, which is not a topic of my paper, I would like to summarize, that in my opinion globalization is a process of changing world economies, cultures, politics, law and social structures. This is how I constructed my paper further on, explaining all of those fields directly.
2. Reviewed history of Globalization
To understand how globalization changed over time, since very beginning of civilization, but mostly since fifteenth century and time of ‘great voyages’, it is crucial to go back with history on this field. The understanding of shortcomings of technologies and political system in the past will help to get a clear view on how Internet can reinforce us nowadays. As history is supposed to be objective and because this is only a review of most important events back in time, writing this chapter I used three main publications Bordo et al. (2003), Taylor (2002) and Cartwright (2002). The history of globalization is detached from history of technology in communications media (Chapter 3) as the later is directly connected with the development of the Internet, and consists a little bit more technical terms.
2.1. Before fifteenth century
I would like to start with period before year 1500 of world history because Columbus and Vasco da Gamma were not the first who established roots of international trade or different - global trade. They ease globalization, they did more than anyone before for unity, but – “various scholars in the world history school posit a very early start date for globalization,circa 1000. According to this view, overland and Mediterranean trade flourished in thisperiod, with caravans and coastal shipping linking Asian and European markets, and thisis enough to prove the existence of a world economy.” (Taylor 2002, p.8). Columbus and da Gama were forced to search for new paths because of already existing monopoly on spice trade of Egypt and Italy, more specific cities of Venice and Genoa and this monopoly existed far before Columbus. This Egypt-Italy exchange was not the only example of global trade before year 1500. We need to keep in mind that China and India traded with Southeast Asia, Eastern Europe, Mediterranean area and Islamic world. There was international trade within the Baltic area too. More than a thousand years ago there was an international trade between different continents. Among goods transferred was: wool from Spain and England, cloths from Italy, gold from West Africa or textiles and pepper from India.
Shortly summarizing above paragraph, one can tell globalization started around year 1500, when great voyages of Columbus or da Gama began. There is some truth in that, but there is no such thing as “starting point” of globalization. It was always a process and actually it is still running. The only reasons to think about 1500 as breaking point in globalization history is that new sea routes were found, sea travel and transportation were getting more popular and save. The second reason is that spice monopoly was broken and a new route to Asia was found. That indeed speeded up the process of internationalization. However, Europe was not the dominant continent when it came to trade. The leaders of agriculture and trade were Islamic world and China.
Interesting statement for discussion I have found in Bordo (2003) - “Black Death” which was caused by the migration at that time, also played a big role in international economy. It killed over one third of population of the world and caused an increase in income per capita. The same amount of money and property stayed in hands of less people. Because supply of workforce was smaller wages went up and demand for luxury goods from Asia grew rapidly. However in my opinion these happenings could cause nothing more but inflation and stagnation instead of galloping economy. Nevertheless, more silver was needed to pay for goods and more goods were demanded at the same time. Finally this caused globalization effect – Europeans went after a new way to Asia. Because there was only continental route or traditional Red Sea route controlled by Egyptians and Venetians, big incentives emerged, to find different route. This is when Columbus and da Gama changed economy and global trade. Because of their voyages, it was possible to transport goods from Asia via new Cape of Good Hope route destroying the strength of spice monopoly. Columbus discovered Americas making it possible to import unknown goods and to trade black slaves. Very important was also a new source of gold and silver for Europe, which was needed to trade with Asia and China as a payment mean.
2.2. Fifteenth to late eighteenth century
Following Flynn and Giráldez one of the most important moments in globalization was creating harbor city Manila (1571) and standardization of Chinese monetary and fiscal systems into silver. This directly linked trade of Europe, Asia, Africa and Americas. There was standardized currency and shipping harbor from now on, much more convenient for every party. We can of course search for globalization milestones earlier, when first journey across Pacific was made or around the globe. However this city allowed many nations to trade on one common market, bringing distant nations together into one place. Possession of foreign goods, gold or impressive fleet of ships could mean nothing without access to buyers and sellers.
As we go along the time axis, transport changes. The more modern and popular were the means of transportation, the faster and wider was the globalization. The most common products transported between continents were expensive goods with high price to weight ratio, for example: spices, tea, coffee, sugar, silk, silver and slaves. These goods were the most demanded and expensive those days, so during era of high transportation costs, it was profitable trading and moving them between continents. It is important to mention that during period of discovery voyages, only goods with no substitutes where transported, otherwise it would not be worth to send them across the ocean.
As mentioned before, monopoly of Italian cities was broken, but they were not eliminated from the global trade completely. The Iberian voyages led to a shift from Italian and Egyptian dominance in transportation. This time the Antwerp was the main core of trade of “new Iberian order”. It attracted many industries: woolen clothes from England, silver, copper and financial capital from Southern Germany. The city grew very fast up to 100000 citizens in 1560, but there was no strategy for developing businesses and attracting new investors, so Portuguese moments of glory were short lived. Soon the Dutch with Amsterdam took the big stake of the transport market. They were able to do this because they made improvements in shipping technology and sub service for traders like packing or storing. After all the old spice monopoly fought back and managed to take some share of the market, and a new player followed- England. We can now deduct that imports and exports was some kind of a split between Venice and Egypt, Amsterdam, England and Portuguese.
When it comes to payments, silver was the most important since sixteenth century. Amounts of goods shipped between continents were so enormous, that some standardized mean of payment had to be found. Silver was shipped to Europe from Americas and it was paid for with goods from Asia, silver was then resold to China or India at much higher rate and so arbitrage profit was earned. We cannot forget that in such a big economy and with growing trade volume, there was higher inflation and so interventions of government were necessary. Duties and taxes is one form of it. However fiscal policy in sixteenth century was rather in business of individuals than of public. Duties and taxes were not embedded to goods competitive but it was rather something that can bring bigger profit to rulers, example can be price inelastic tea and coffee. High duties on products are the reason why black market existed together with smugglers. Government’s actions were not limited to overgrown duties. During this period they were also promoting positive trade balances, by creating chartered monopolies and by acquisition of overseas colonies as markets for goods produced in mother country.