Thursday, 21 June 2018

Investopedia/Sean Ross: How do economies of scale work with globalization?

How do economies of scale work with globalization? By Sean Ross

Globalization – the integration of factors of production and inclusion of consumer groups from different markets around the world – facilitates unprecedented achievements of economies of scale for producers. Access to increased numbers of laborers, investors, markets, resources, technologies and business models through globalization can theoretically maximize productive efficiency to a level consistent with the size of the world's population.
Economies of Scale

Economies of scale refers to the phenomenon of diminishing marginal costs associated with each additional unit of output. A company experiences economies of scale as it specializes and is able to produce extra goods with fewer and fewer input costs.

According to economic theory, economies of scale are the natural consequence of specialization and the division of labor. It is one of the chief drivers of economic growth. However, firms do not realize economies of scale in perpetuity; there is a maximum level of efficient output for any given inputs, and operations may sometimes extend too far and cause diseconomies of scale.

With access to new inputs and potentially more profitable markets, globalization can increase specialization and operational efficiency. The practical consequences of globalization include lower costs to consumers, access to capital for wealthy countries, access to jobs for poorer countries, increased competition and higher global productivity.

As globalization spreads the division of labor to a global scale, countries are able to export labor and production processes that they are relatively less profitable at and instead specialize in labor that is relatively more profitable. This result can be seen in factory jobs being driven out of the United States, which frees up capital for highly technical, highly productive fields such as IT. Companies are able to pursue higher degrees of efficiency and increase their economies of scale.

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