2 management - School of International Business and ...

147 The Puzzle of Globalization
economic globalization and cultural homogenization is the basic message of the World Culture The-
ory; increasing uniformity of cultures is an integral part of globalization. With the development of the
new information and communication theories in the last decades of the twentieth century the market
forces got an additional boost by the globalizing information network society [Castells, 1996].
The following analysis simplifies globalization processes by using a basic market/country model
that allows determining international transactions by introducing differences between economic
conditions of countries. Assets (e.g. endowment with labor and capital), behavior (e.g. consumer
preferences) and policy (e.g. tariff barriers) are especially suitable for differentiating countries.
The resulting international transactions are trade, migration and capital flows. The combination of
these transactions makes one of the most important global actors visible, namely the multination-
al company (MNC) respectively the transnational corporation (TNC). 2
As these models ignore the monetary side of the international economy, a rudimentary introduction
to the functioning of foreign exchange markets and the implications for countries’ balance of pay-
ments will close this chapter. At the beginning the theories will be classified according to the scheme
of the balance of payments that systemizes cross-border flows of goods and capital markets.
3.1 SYSTEMIZING CROSS-BORDER TRANSACTIONS
AND RELATED THEORIES
Theories in international economics are aiming to deliver explanations for the reasons and effects
of cross-border transactions by using micro- and macroeconomic models. In contrast to many
other theories there is a strong interplay with the reality thanks to the internationally standardized
balance of payments. This national account records a huge set of data that are basically system-
ized into goods/services and capital transactions. The current account delivers data on the value,
structure (by using the Scheme of International Trade Classification – SITC) and direction of ex-
ports/imports of goods and services as well as on investment income and transfers. Cross-border
capital transactions are structured into long-term investment (foreign direct investment), portfolio
investment, short-term banking flows and government borrowing. It is to be expected that the
incoming money from all cross-border transactions within a period of time (e.g. one year) differs
from the outgoing money. Surplus or deficit is also a part of the capital account; it shows the
change of the official currency reserves of the central bank. Theoretically current account and
capital account are always balanced. Empirically data collection faces many difficulties in tracking
all flows resulting in including a position called »errors and omissions«.
A monetary surplus or deficit of total cross-border transactions has significant micro- and mac-
2 Models of migration, capital flows and MNCs are not explicitely dealt with.