Chap001

Globalization and Globalization and International LinkagesInternational Linkages

chapter one

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

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Chapter 1: Globalization and Chapter 1: Globalization and International LinkagesInternational Linkages

• The specific objectives of this chapter are:The specific objectives of this chapter are: 1. 1. ASSESS ASSESS the implications of globalization forthe implications of globalization for countries, industries, firms, and communities.countries, industries, firms, and communities. 2. 2. REVIEWREVIEW the major trends in global and the major trends in global and regional integration.regional integration. 3. 3. EXAMINEEXAMINE the changing balance of global the changing balance of global economic power and trade and investmenteconomic power and trade and investment flows among countries.flows among countries. 4. 4. ANALYZEANALYZE the major economic systems and recent the major economic systems and recent developments among countries that reflect thosedevelopments among countries that reflect those systems.systems.

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International ManagementInternational Management

• International managementInternational management process: process:– Applying management concepts and techniques in Applying management concepts and techniques in

a multinational environment;a multinational environment;– Adapting management practices to different Adapting management practices to different

economic, political, and cultural environments.economic, political, and cultural environments.

• Multinational corporationMultinational corporation (MNC): (MNC):– Operations in more than one countryOperations in more than one country– International salesInternational sales– Nationality mix of managers and ownersNationality mix of managers and owners

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The World’s Top Nonfinancial MNCs from Developed The World’s Top Nonfinancial MNCs from Developed CountriesCountries

(ranked by foreign assets, 2004)(ranked by foreign assets, 2004)

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The World’s Top Nonfinancial MNCs from Developing The World’s Top Nonfinancial MNCs from Developing CountriesCountries

(ranked by foreign assets, 2004)(ranked by foreign assets, 2004)

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Globalization and InternationalizationGlobalization and Internationalization

• GlobalizationGlobalization: the process of integration : the process of integration among countries around the world with a among countries around the world with a vision of a single market entity:vision of a single market entity:

SSocial ocial EEconomic conomic PPolitical olitical TTechnological echnological CCultural ultural

• Worldwide trend of the economies of the world becoming borderless and interlinked.

• Not all economies are participating or benefiting equally in the process.

• Important forces are driving globalization.• It is also important to look at classifications of the world’s

economies.

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Globalization and InternationalizationGlobalization and Internationalization

• InternationalizationInternationalization: the process of a : the process of a

business crossing national and cultural business crossing national and cultural borders.borders.

• International Business: – An organization operating in more than one

country. – Organizations from different countries

trading across national boundaries.

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Transnational business:

– A business conducting its activities in a large range of countries across national boundaries,

– with varying degrees of co-ordination, integration and

– local differentiation of strategy and operations, depending on market and business conditions.

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Globalization: Pros and ConsGlobalization: Pros and Cons

• Benefits of Globalization:Benefits of Globalization: wealth, jobs, technology, lower prices.wealth, jobs, technology, lower prices.

• Criticisms of Globalization:Criticisms of Globalization: off-shoring of business service jobs to lower-off-shoring of business service jobs to lower-

wage countries;wage countries; growing trade deficits;growing trade deficits; slow wage growth;slow wage growth; environmental and social impacts.environmental and social impacts.

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Global and Regional Integration:Global and Regional Integration:

• GlobalGlobal Agreements Agreements:: World Trade Organization (WTO)World Trade Organization (WTO) (General Agreement on Tariffs and Trade(General Agreement on Tariffs and Trade (GATT))(GATT))• Regional Regional AgreementsAgreements:: North American Free Trade Agreement (NAFTA)North American Free Trade Agreement (NAFTA) U.S.-Central American Free Trade Agreement U.S.-Central American Free Trade Agreement

(CAFTA)(CAFTA) European Union (EU)European Union (EU) Association of Southeast Asian Nations (ASEAN) Association of Southeast Asian Nations (ASEAN) Free Trade Agreement of the Americas (FTAA) Free Trade Agreement of the Americas (FTAA)

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International Economic Power in International Economic Power in the Global Economy:the Global Economy:

Shifting landscape due to:Shifting landscape due to:

• Economic integration Economic integration

• Economic potential of emerging Economic potential of emerging marketsmarkets

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The World’s Largest Economies 2005 and 2020 (Projected) Measured The World’s Largest Economies 2005 and 2020 (Projected) Measured by GDP at Market Exchange Rates:by GDP at Market Exchange Rates:

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The World’s Largest Economies 2005 and 2020 (Projected) Measured The World’s Largest Economies 2005 and 2020 (Projected) Measured by GDP at Purchasing Power Parity (ppp)by GDP at Purchasing Power Parity (ppp)

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Most Populous Countries in 1980, 2000, Most Populous Countries in 1980, 2000, and 2050 (Projected):and 2050 (Projected):

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Trends in International Trends in International Investments and Trade:Investments and Trade:

• International Investments:International Investments: 80% from developed countries 80% from developed countries Foreign direct investment (FDI) Foreign direct investment (FDI) Growing at healthy rate Growing at healthy rate Outpacing domestic growth in most countriesOutpacing domestic growth in most countries

• International Trade: International Trade: Over ½ of world trade accounted for by United Over ½ of world trade accounted for by United

States, European Union and JapanStates, European Union and Japan Increased substantially over last two decadesIncreased substantially over last two decades

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Trade Flows Among World Regions, 2005 (in billions of dollars or Trade Flows Among World Regions, 2005 (in billions of dollars or percent)percent)

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World Foreign Direct Investment Inflows World Foreign Direct Investment Inflows (in millions of dollars):(in millions of dollars):

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World Foreign Direct Investment Outflows World Foreign Direct Investment Outflows (in millions of dollars): (in millions of dollars):

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Economic Systems of the World:Economic Systems of the World:

• Market Economy Market Economy

• Command EconomyCommand Economy

• Mixed EconomyMixed Economy

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• Market Economy – Private enterprise reserve the right to own

property and decide on what and how much to produce.

– Contains the least restriction in the allocation of resources

– A general balance between supply and demand– Competition is encouraged– Government may limit monopolies, or unfair

practices.

Economic Systems of the world

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• Command Economy – Compared to Monopoly where the government has

explicit control over the price and supply.– The control is based on theoretical need of the

population and might be distorted– Businesses are owned by the state to ensure

investment in the best interests of the society.– Government subsidies provide security to organizations.– Common in communists countries

–What are some of the issues with this system?

Economic Systems of the world

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• Mixed Economy – Combination of market and command economy.– Some sectors are private while others are

controlled and owned by the government.– Allow for competition while enable to provide

assistance to individuals or companies– Nationalization of major resources.

–What are some of the issues with this system?

Economic Systems of the world

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Economic Performance Economic Performance by Major World Region:by Major World Region:

• North AmericaNorth America• South AmericaSouth America• Europe (EU, Central and Eastern Europe)Europe (EU, Central and Eastern Europe)• Asia (Japan, China, emerging markets of Asia (Japan, China, emerging markets of

Asia)Asia)• Other developing and emerging countries Other developing and emerging countries

(India, Middle East, Central Asia, Africa) (India, Middle East, Central Asia, Africa)

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Economic Performance:Economic Performance:North AmericaNorth America

• North AmericaNorth America::– Free market base economy in regionFree market base economy in region– Combined purchasing power of U.S., Canada and Mexico Combined purchasing power of U.S., Canada and Mexico

approaches $12 trillion in purchasing powerapproaches $12 trillion in purchasing power– Foreign MNC’s find U.S. to be a lucrative marketForeign MNC’s find U.S. to be a lucrative market

• United StatesUnited States::• Foreign MNC’s find U.S. a lucrative expansion marketForeign MNC’s find U.S. a lucrative expansion market• Foreign firms welcomed as investors in U.S. marketForeign firms welcomed as investors in U.S. market• U.S. firms hold market dominance in many European U.S. firms hold market dominance in many European

markets; gaining market share in Asia markets; gaining market share in Asia

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Economic Performance:Economic Performance:North AmericaNorth America (continued): (continued):

CanadaCanada::• U.S.’s largest trading partnerU.S.’s largest trading partner• Most of the largest foreign-owned Canadian Most of the largest foreign-owned Canadian

companies are totally or heavily U.S.-ownedcompanies are totally or heavily U.S.-owned• Legal and business environment in Canada is Legal and business environment in Canada is

similar to that in U.S.similar to that in U.S.

MexicoMexico::• Strongest Latin American economy Strongest Latin American economy • Very strong Very strong maquiladoramaquiladora industry industry • Trade with both Europe and Asia has increasedTrade with both Europe and Asia has increased• Now competitive with Asia for the U.S. market Now competitive with Asia for the U.S. market

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Economic Performance:Economic Performance:South AmericaSouth America

• South American countries have South American countries have accumulated heavy foreign debt and accumulated heavy foreign debt and experienced severe inflation experienced severe inflation

• Major development is inter-country trade, Major development is inter-country trade, including free market policies among including free market policies among South American countriesSouth American countries

• South American countries increasingly South American countries increasingly looking to do business with U.S. looking to do business with U.S.

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Economic Performance:Economic Performance:European UnionEuropean Union

– Privatization of traditionally nationalized Privatization of traditionally nationalized industriesindustries

– Emergence of the EU as an operational Emergence of the EU as an operational economic union economic union

– Economic linkages between the EU and newly Economic linkages between the EU and newly emerging Central and Eastern European emerging Central and Eastern European countriescountries

– Challenge is to absorb former communist bloc Challenge is to absorb former communist bloc countriescountries

– Foreign MNCs gain foothold in EU by:Foreign MNCs gain foothold in EU by:• Acquisitions, Alliances, Cooperative R&D effortsAcquisitions, Alliances, Cooperative R&D efforts

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Economic Performance:Economic Performance:Central and Eastern EuropeCentral and Eastern Europe

• Russia, Czech Republic, Hungary, Poland:Russia, Czech Republic, Hungary, Poland:– Dismantling of Russian price controlsDismantling of Russian price controls– Perestroika—economic and political Perestroika—economic and political

restructuringrestructuring– PrivatizationPrivatization– InflationInflation– CrimeCrime– Membership in International Monetary Fund Membership in International Monetary Fund

(IMF)(IMF)– Political uncertainty Political uncertainty

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Economic Performance:Economic Performance:AsiaAsia

• JapanJapan

– Phenomenal economic success in 1970s and 1980sPhenomenal economic success in 1970s and 1980s

– Ministry of International Trade and Industry (MITI)Ministry of International Trade and Industry (MITI)

– KeiretsusKeiretsus

• Vertically integrated industriesVertically integrated industries• Holdings provide assistance needed in providing goods Holdings provide assistance needed in providing goods

and services to end usersand services to end users– Decade long recession in 1990sDecade long recession in 1990s

• Bank loans backed by real estate or projected revenuesBank loans backed by real estate or projected revenues• By 2000, most major banks had billions of dollars in By 2000, most major banks had billions of dollars in

uncollectible loansuncollectible loans• International competition has increasedInternational competition has increased

–

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Economic Performance:Economic Performance:AsiaAsia

• ChinaChina– Annual real economic growth of 10 percent Annual real economic growth of 10 percent

during the 1980’s and early 1990’sduring the 1980’s and early 1990’s– More recent growth of 8 percent or higherMore recent growth of 8 percent or higher– Healthy and growing economyHealthy and growing economy– GDP growth of 11.1 percent in 1GDP growth of 11.1 percent in 1stst ¼ of 2007 ¼ of 2007– Attractive to foreign investors despite major Attractive to foreign investors despite major

political riskpolitical risk– Product pirating is a major problemProduct pirating is a major problem– Complicated and high-risk ventureComplicated and high-risk venture

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Economic Performance:Economic Performance:AsiaAsia

– The Four TigersThe Four Tigers• South KoreaSouth Korea

– Chaebols (large family-held Korean Chaebols (large family-held Korean conglomerates)conglomerates)

– Affected by declining economies of Southeast Asia Affected by declining economies of Southeast Asia in 1990’sin 1990’s

• Hong KongHong Kong– Now part of People’s Republic of ChinaNow part of People’s Republic of China– Uncertainty about the role the Chinese government Uncertainty about the role the Chinese government

intends to play in local governanceintends to play in local governance

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Economic Performance:Economic Performance:AsiaAsia

• The Four Tigers (continued)The Four Tigers (continued)– Singapore Singapore

• Least hurt by economic downturn of 1990’sLeast hurt by economic downturn of 1990’s

– TaiwanTaiwan• Progression from labor-intensive economy to Progression from labor-intensive economy to

one dominated by technologically one dominated by technologically sophisticated industries (banking, electricity sophisticated industries (banking, electricity generation, petroleum refining and generation, petroleum refining and computers)computers)

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Economic Performance:Economic Performance:Southeast AsiaSoutheast Asia

• The Baby Tigers (Thailand, Malaysia, The Baby Tigers (Thailand, Malaysia, Indonesia):Indonesia):– Large population baseLarge population base– Inexpensive laborInexpensive labor– Considerable natural resourcesConsiderable natural resources– Attractive to outside investorsAttractive to outside investors

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Economic Performance:Economic Performance:Developing and Emerging CountriesDeveloping and Emerging Countries

• IndiaIndia– Low per capital GDPLow per capital GDP– Recent trend of locating software and high Recent trend of locating software and high

value-added services to this countryvalue-added services to this country– Attractive to U.S. and British investors (well Attractive to U.S. and British investors (well

educated, English speaking, technologically educated, English speaking, technologically sophisticated workerssophisticated workers))

• Middle East and Central AsiaMiddle East and Central Asia– Large oil reservesLarge oil reserves– Highly unstable geopolitical and religious forcesHighly unstable geopolitical and religious forces– Plagued by continuing economic problemsPlagued by continuing economic problems

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Economic Performance:Economic Performance:Developing and Emerging CountriesDeveloping and Emerging Countries

• AfricaAfrica– Considerable natural resourcesConsiderable natural resources– African nations remain very poor and undevelopedAfrican nations remain very poor and undeveloped– International trade is not a major sources of incomeInternational trade is not a major sources of income– Populace divided into 3,000 tribes that speak 1,000 Populace divided into 3,000 tribes that speak 1,000

languages and dialectslanguages and dialects– Major political instabilityMajor political instability– Poverty, starvation, illiteracy, corruption, Poverty, starvation, illiteracy, corruption,

overcrowding among many social problems overcrowding among many social problems negatively affecting economic sectornegatively affecting economic sector

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World’s Most World’s Most Competitive Nations, 2006Competitive Nations, 2006

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Market Potential Indicators Ranking for Emerging Market Potential Indicators Ranking for Emerging Markets, 2007Markets, 2007

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Review and Discuss

1. How has globalization affected different world regions? What are some of the benefits and costs of globalization for different sectors of society?

2. How has NAFTA affected the economies of North America and the EU affected Europe? What importance do these economic pacts have for international managers in North America, Europe and Asia?

3. Why would MNCs be interested in South America, India, the Middle East, Central Asia, and Africa, the less developed and emerging countries of the world?