One of the benefits of globalization is that, partly to attract foreign capital, financial markets around the world have been improving regulatory practices, transparency,
and ease of access. Another benefit is that strong economic growth in one part of the world can stimulate growth in other regions. That can be good for you as an investor and good for the economies where the markets operate.
But one of the potentially negative consequences of globalization is the ripple effect that problems in one nation's economy may have on the economies of other nations. Although the biggest factor in any nation's economic health is its own internal situation, at the same time a downswing in a major world economy, such as the U.S., Japan, or Western Europe, puts pressure on economies around the world. Similarly, economic or political problems in a smaller market can have an unsettling impact worldwide, as they did in the late 1990's.
Furthermore, fluctuations in currency exchange rates also affect world trade, specifically the profits and operating costs of companies that have business abroad. In fact, the greater a firm's dependence on exports or imports for its revenues, the more currency fluctuations will influence the bottom line.
A brief refresher
When the U.S. dollar is strong relative to another currency, it makes U.S. goods more expensive for consumers purchasing them in their home currency. That curtails exports but makes imported goods cheaper for U.S. consumers. And when the U.S. dollar is weak relative to another currency, it lowers the prices of U.S. exports for consumers abroad, but it raises the price of imported goods in the U.S. In fact, since a peak in 2001, the dollar has fallen versus most major currencies.
Jeffrey Rosensweig, Goizueta Business School, Emory University
Dr. Jeffrey Rosensweig of the Goizueta Business School of Emory University talks about the economic effects of globalization.
Globalization is one of the most contentious issues of our time. Many groups, representing different points of view, protest its social effects. But, most serious economic studies show that when nations open their borders to international trade and investment, they experience stronger economic growth than countries that remain isolated. In China, for example, rapid growth spurred by international trade has resulted in a massive reduction in poverty.
For U.S. investors and corporations, globalization produces many positive results, such as the opportunity to tap into demand for consumer goods in developing countries. But it also has some negative ones, such as the growing number of people whose jobs are outsourced to other countries.
Jeffrey Rosensweig, Goizueta Business School, Emory University 