As technology has improved and people are able to communicate more quickly, the world is effectively shrinking. By this, we mean that it’s getting easier and easier to conduct business around the globe. Think about it:
● Taking a trip around the world (something that was almost impossible just a hundred years ago) can now be achieved in a matter of hours by anyone with a middle-class income
● Anyone with access to the Internet or a cell phone is able to communicate instantly with anyone in the world
● People can order products online from companies across the planet and receive these goods in days
Through this article, we will examine what globalization is and what it means for investors.
What Is Globalization?
Globalization is defined as the process by which businesses or other organizations develop international influence or start operating on an international scale. One of the easiest ways to visualize this is to imagine the Internet connecting practically every human on Earth. Anyone with an Internet connection can log into Facebook, WhatsApp, or Instagram and check their accounts as well as communicate with people on the other side of the world.
If you’ve grown up after the late 90s, it’s a little easy to take something like the Internet for granted. However, if you were born a little bit earlier in the 1900s, then you get a better scope for just how far the world has come in quite a short time. Additionally, if someone from the 1700s or 1800s was alive today, the world would hardly even be recognizable.
It’s not just tech and Internet companies. Businesses like Nike or Apple (which both sell physical goods) rely heavily on other countries to help manufacture, produce, ship and market their merchandise.
Globalization is not new. It’s a slow but steady process that has really been going on since the beginning of human civilization. As human colonies got bigger and bigger, they slowly spread to interact with other groups of humans. Imagine colonizers from Europe first stepping foot on American soil and trading with Native Americans. That was globalization in the works!
However, the main reason that globalization seems much more pronounced today is represented by the rate of acceleration at which it happens. For example, according to the SUNY Levin Institute, the volume of international trade increased twenty-seven fold from $296 billion in 1950 to $8 trillion just 55 years later, in 2005. This is astronomical growth that would’ve been unprecedented at any other point in human history.
This growth of international trade between countries has been fueled in recent years by the introduction of new technologies.
Let’s take a look at some of the more recent technologies that have created the perfect climate for globalization to increase at the rate that it has.
New Technologies and Services
Here’s a quick look at just a few of the new technologies and services that have lead to a rapid increase in globalization. We’re sure you’ll see quite a few familiar faces on the list:
- Google – The Internet has completely revolutionized the world and Google is one of the top players when it comes to cataloging and organizing the Internet. Not to mention the free services they offer (Google Maps, Gmail, etc.) that help people connect every day
- Facebook – Facebook has 2.6 billion users. The company also owns Instagram (1 billion users) and WhatsApp (2 billion users). Although there may be overlap in users, that’s over 5 billion people that connect through Facebook’s family of apps. Reminder: the world population is just under 8 billion
- Amazon – Amazon commands 50% of the eCommerce market. Not only that, but they offer services like Amazon FBA to allow other companies to list products for sale on their site. All these goods wouldn’t be moving and exchanging hands without Amazon
- PayPal – Only about 8% of the world’s currency is represented by physical currency. The rest exists only on computers. PayPal is a major player with respect to helping this digital cash exchange hands
- Alibaba – Alibaba is one of the leading eCommerce companies in China (currently the world’s second-largest economy). Not only that but they play a major role in connecting manufacturers and suppliers with B2C business owners
It’s hard to dispute that globalization is taking place. However, a more pressing question might be: is even good? Let’s examine…
The Good of Globalization
One of the main advantages of international trade is that consumers enjoy a wider selection of products than they wouldn’t have access to if they could only get domestic products. Also, the ability to utilize the workforces and resources of other countries generally means that companies can produce their goods at a much cheaper rate. This means that consumers are not only getting better goods, they’re also getting them for a cheaper price.
Additionally, the growth of international trade has created tremendous economic growth across the globe. As a whole, incomes have risen, there are more jobs, lower prices, and workers have more earning power. One of the best recent examples of this is China.
China has been on an economic tear recently, becoming a hub of global trade. Foreign companies want to use China to produce goods as well as trade with China. As a result, their economy has doubled almost every 8 years since the 1980s and China’s citizens have been better off for it. China’s middle class has risen to make up about 58% of their population (up from 19% in the 1980s)
The Bad of Globalization
However, now that the global economy is so interconnected, there can be worldwide repercussions when a large economy suffers a recession. When trade decreases, jobs and businesses are lost. Even though everyone prospers when things are going well, everyone also feels the effects when things start going south. The best recent example of this is represented by the coronavirus pandemic.
Before the pandemic even left China (the country where it originated), it was having effects on countries such as the United States, which lean on China for their supply chains. Investors started to panic amid all of the uncertainty and the stock market went through a significant drop. This is a good example of how savvy investors could’ve used knowledge related to globalization to their advantage.
How to Use It to Your Advantage?
Investors who understand globalization will be better positioned to make it work in their favor. For example, if you had the foresight to realize that a pandemic in China could have drastic effects on the U.S. economy even before it had reached U.S. soil, then you could’ve gotten out of the market in time to avoid the drop (or hedged yourself in other ways). Another potential use revolves around understanding which countries economies are growing and which are in decline. Although it’s easy to lose perspective on a shorter day-to-day timeline, countries are constantly in flux.
One of the best ways to use globalization to your advantage is simply to just stay on top of new developments, policy changes and data. This article in the Harvard Business Review puts good advice on the table. They recommended reading the most up-to-date news and statistics but avoiding portfolio changes which compensate for each development. Instead, make an assessment as to whether the companies you’re investing in will still be thriving 10-20 years from now and focus your attention on long-term trends.
Here are a few other ways to adapt your mindset when investing:
- Know which companies operate in which countries and stay on top of the news (business, economic and investment) pertaining to foreign countries
- Consider investing in other countries to take advantage of growth outside of the United States. The best country to start with is (of course) China and if you have more specific questions, feel free to send us an email or message directly!
- One of the easiest ways to invest in other countries is simply to incorporate stocks from foreign countries into your portfolio
- Look for companies to start leading the way with changes that were usually reserved for government action. This is already starting to happen with the spats between social media and the U.S. government. We wouldn’t be surprised if companies wielded just as much power as governments in the future
The future is going to be incredibly exciting, as countries continue to increase the capacity in which they work with each other. We predict that there will continue to be a rise in globalization (countries working together) as well as a rise in companies starting to work more and more with foreign governments to help boost global commerce. Just make sure that as an investor you’re poised to take advantage of them and be prepared to whether the occasional powerful storm (with the 2020 situation representing an example to that effect)!
We hope that you’ve found this article valuable when it comes to understanding what globalization is and how you can use it to your advantage as an investor. If you’re interested in reading more, follow our blog and/or visit the “New Here” section of ChinaFund.com.