FAMG 1003 (BH) — Chapter 2: Industrial Revolution: Economic Impact

Multinational and Globalisation

• (a) The Industrial Revolution, starting in Britain, made it the world's leading manufacturing nation by 1800. British manufactured textiles which flooded global markets, disrupting traditional industries in China and India.
• (b) External circumstances favoured the growth of trade, like the end of the prolonged period of warfare between 1719, and the defeat of Napoleon in 1815, fostered global trade growth, despite the major regional conflicts including the American Civil War (1861 – 1865).
• International trade was boosted by liberalisation policies, and declining transport costs.
• (c) Significant increase in cross-border capital flows occurred due to the widespread adoption of the Gold Standard.
• Britain was the central figure in the international monetary system, a major exporter of capital, and London was a global financial hub.
• Sterling, fully convertible into gold, became the world's strongest currency.
• The Bank of England, Britain's quasi-central bank, oversaw the functioning of the Gold Standard.
• (d) Rapid increase in international labor mobility. Over 60 million Europeans migrated to the Americas in the 19th century.
• By 1900, 14% of the US population was foreign-born, surging from five million in 1800 to 76 million citizens.
• There were few restrictions on immigration. Passports were unnecessary for international travel. Work visas did not exist.
• Falling steerage costs facilitated large-scale migration.
• The income gaps between rich and poor countries converged. Real wage dispersion declined by over a quarter between 1870 and 1910.
• (e) Slavery (forced labour movements) continued in the United States until the 1860s and in Brazil until 1888.
• Growth of indentured labor from regions of Asia, working as labourers in plantations in the Caribbean, Africa, and elsewhere, as well as many infrastructure projects undertaken.
• Between the 1830s to World War I, the forced movement of around four million Indian, Malays, Chinese, and other ethnicities, mainly for infrastructure and plantations work.
• Japan initially closed its borders to foreigners, but opened it after the arrival of an American naval force in 1853. By 1914, Japan had undergone rapid modernisation and economic growth, and thus colonised Korea and Taiwan.
• US occupied Cuba and Philippines after a war with Spain.
• Although British Empire lost its North American colonies in July 4, 1776 (US Declaration of Independence), the borders of their empire continue to spread over large parts of Asia and Africa in the 19th century due to the growth of cross-border movements of indentured labour. By 1913, Britain whose population was 45 million, had a worldwide empire of 400 million inhabitants.
• Other European powers (France, Belgium, Portugal, and Germany) also extended their empires in Africa and Southeast Asia. However, The British Empire controlled vast territories worldwide.
• The Asian colonies of France included the modern states of Vietnam, Laos, and Cambodia.
• In Southeast Asia, the Dutch East Indies (Indonesian) was a colonial possession of the Netherlands.

Growth of Multinational Firms

• Firms and entrepreneurs created the first global economy in scale and durability.
• Merchants and bankers established international networks and deployed representatives across borders in the 19th century.
• Cross-border investments grew.
• Businesses used existing infrastructure (e.g. steamships and railroads) and international communications development.
• Significant increase in the use of natural resources and food production globally.
• Creation of multinational manufacturing operations in many different products.
• Businesses employed various strategies. By the late 19th century, there was a proliferation of "free-standing" companies that focused on conducting business abroad.
• These "free-standing" businesses were predominantly located in natural resource and service sectors.
• Many British freestanding firms conducted business in the US.

Policy Environment

• Reduced risks of cross-border business due to the absence of major international wars.
• International property laws ensured protection of property rights worldwide in 17th and 19th centuries.
• Governments used bilateral commercial treaties to ensure protection of alien property.
• Uncompensated seizures of foreign assets were condemned as robbery.
• Unilateral force in international disputes was challenged and considered illegitimate.
• European governments were key in providing enforcement worldwide.
• Key principles had already been established and were strengthened during this period.

The Drivers of Growth

• Accelerating search for raw materials and food sources for manufacturing.
• Industrialized countries were consuming large amounts of resources, driving international trade.
• Rapid growth and technological advancement spurred demand for many new manufactured products.
• Rise of new industries like automobiles, driven by fossil fuels (petroleum).

Liberal Economic Policies

• Governments were less involved in economic activities.
• Many governments were treating foreign-owned firms similarly to domestic firms.
• The rise of trade protectionism in the latter part of the 19th century was a challenge to liberal economic models.

Wave of Globalisation

• The period following WWI saw a contraction of global trade and finance.
• Many countries, starting in the early 1900s, began returning to trade protectionism.
• There was a backlash against immigration in several countries.
• Trade protectionism increased and the international trading system collapsed.
• The 1930s saw widespread economic instability, including the Great Depression.

Foreign Direct Investment (FDI)

• In 1914 Western Europe was a dominant source of FDI (foreign direct investment).
• FDI was widely dispersed.
• Latin America and Asia were also important FDI destinations.
• Half of FDI was invested in natural resources, and a third in services.

Organisational Diversity

• Entrepreneurs started engaging in value-added activities in their home countries before expanding internationally.
• The development in managerial and technological skills helped sustain cross-border investments.
• Firms employed diverse organisational forms internationally, without necessarily requiring established domestic presence.

Development of New Companies

• In the 19th century, many companies were small, family-owned entities without significant international reach.
• 19th-century legal changes permitted companies to operate internationally.
• The emergence of limited liability increased the ability of firms to raise capital as their growth prospects expanded.

Emergence of the Modern Industrial Enterprise

• The modern industrial enterprise became central to creating technologically advanced and rapidly growing manufacturing industries.
• Changes in technology and markets were significant forces in the evolution of firms from single owner/managers to modern corporations.
• The growth of new technologies like railroads and communications (telegraph, steamships, cables) facilitated mass production and marketing.

Globalisation's Challenges and Reversals (1914-1950)

• The beginning of WWI marked the start of the decline of the first global economy.
• Countries moved away from free trade.
• Backlashes against immigration were widespread, such as US and Australia policies.
• The global economy was severely disrupted by the rise of protectionism, including tariffs and trade restrictions.
• The Great Depression in the 1930s affected most industrialised nations.
• Declining primary commodity prices harmed producer countries (Latin America, Asia, Africa, and Australia).
• Widespread economic instability and the demise of the Gold Standard meant further international disruptions.

Backlash Against the Global Economy

• The nationality of firms became an issue during WWI as governments seized assets of enemy-owned companies.
• The Russian Revolution in 1917 triggered the seizure of foreign property.
• The rise of xenophobia and political nationalism in the 1920s and 1930s led to more restrictions on foreign companies.
• Many countries questioned foreign control over their natural resources and nationalised companies (e.g., Mexico's nationalisation of oil companies).

Trade Protectionism

• Trade protectionism increased after WWI, raising tariffs to unprecedented levels (e.g., Fordney-McCumber Tariff in the US).
• Australia, India, and some Latin American countries used the Fordney-McCumber Tariff to import quotas and other trade barriers were used to protect domestic industries and manufacturing.
• The Smoot-Hawley Tariff Act of June in 1930 triggered a global trade war, exacerbating the Great Depression.
• Tariffs and other protectionist trade policies restricted world trade.

Backlashes Against Global Migration

• Passports for international entry were increased post WWI, as well as immigration restrictions.
• Work restrictions and visa requirements for foreign nationals rose.
• Immigration legislation reduced annual immigration quotas.