Globalization is the shift towards a more integrated and inter-dependent world economy (Hill, 2009). Due to falling barriers to cross-border trade and investment companies are able to move goods, services, and investments faster and more consistent to consumers located in many parts of the world.
International Trade Theories
Some of the traditional international theories that support the concept of globalization are the Absolute Advantage Theory and the Comparative Theory. The Absolute Advantage Theory was created by Adam Smith in 1776 (Hill, 2009) and stated that a country that produces a product efficiently has an absolute advantage over other countries and should trade the product. Smith also argued a country that can purchase a product at a lower cost should never produce at home.
According to Hill (2009), the Comparative Advantage Theory was developed by David Ricardo in 1817. However, Ricardo expanded on Smith’s theory of comparative advantage and suggests that although a country is efficient in producing a good or services, it will be cost effective to purchase the same goods/services from another country at lower opportunity cost. The theory also suggested that unrestrictive free trade increases world production.
Drivers of Globalization
The two macro factors that are major drivers of globalization are declining trade barriers and changes in communication, information, and transportation technologies. Falling trade barriers make it easier for companies to sell their products internationally such as the Coca-Cola Company selling its beverage products. The company has opened a juice testing laboratory in China and is able to send juices in bulk without a huge cost in tariffs.
According to Hill (2009), lowering of trade barriers made globalization of markets and production possible and technology has made it a tangible reality....