Chap1 Globalization

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Chapter 1Globalization


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Introduction

In the world economy today, we see

fewer self-contained national economies with highbarriers to cross-border trade and investment

a more integrated global economic system with lowerbarriers to trade and investment

over $4 trillion in foreign exchange transactions daily

over $12 million of goods and $3.3 trillion of services

being sold across national bordersthe establishment of international institutions


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What Is Globalization?

Question: What is globalization?

Answer:

Globalization refers to the trend towards a moreintegrated global economic system

Two key facets of globalization are:

the globalization of markets

the globalization of production


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The Globalization of Markets

Globalization of markets - the merging ofhistorically distinct and separate national marketsinto one huge global marketplace

In many markets today, the tastes andpreferences of consumers in different nations areconverging upon some global norm

Coca Cola, Starbucks, Sony PlayStation, andMcDonalds hamburgers, IKEA furniture


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The Globalization of Production

Globalization of production - the sourcing ofgoods and services from locations around theglobe to take advantage of national differences

in the cost and quality of factors of production(labor energy, land, and capital)

Goal: lower overall cost structure or improve thequality or functionality of their product and gain

competitive advantage

Boeing and Vizio


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The Emergence of Global Institutions

Global institutions

manage, regulate, and police the global market place

promote the establishment of multinational treaties togovern the global business system

the World Trade Organization (WTO) - polices worldtrading system and ensures nations adhere to the rulesestablished in WTO treaties

In 2010, its 154 members accounted for 97% of world

tradethe International Monetary Fund (IMF) - maintains order

in the international monetary system


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The Emergence of Global Institutions

the World Bank - promotes economic development the United Nations (UN) - maintains international peace

and security, develops friendly relations among nations,cooperates in solving international problems andpromotes respect for human rights, and is a center forharmonizing the actions of nations


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Drivers of Globalization

Question: What is driving the move toward greaterglobalization?

Answer:1. declining trade and investment barriers

2. technological change


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Declining Trade and Investment Barriers

International tradeoccurs when a firm exports goods orservices to consumers in another country

Foreign direct investment (FDI)occurs when a firminvests resources in business activities outside its home

countryDuring the 1920s and 1930s, many nations erected

barriers to international trade and FDI to protect domesticindustries from foreign competition


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After WWII, advanced Western countries beganremoving trade and investment barriers

Under GATT (the forerunner of the WTO), over 100nations negotiated further decreases in tariffs and madesignificant progress on a number of non-tariff issues

Under the WTO, a mechanism now exists for disputeresolution and the enforcement of trade laws, and thereis a push to cut tariffs on industrial goods, services, and

agricultural products


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Lower trade barriers help companies view the world as asingle market and establish production activities inoptimal locations around the globe

This has led to an acceleration in the volume of worldtrade and investment since the early 1980s


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Figure1.1: Growth in World Merchandise Trade andProduction, 1950 - 2008


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The Role of Technological Change

Since World War II, there have been major advances incommunication, information processing, andtransportation

The microprocessor - lowered the cost of globalcommunication and the cost of coordinating andcontrolling a global organization

U.S. web-based transactions - $133 billion in 2008

1.6 billion Internet users in 2009

Commercial jet aircraft and super freighters and theintroduction of containerization - simplify trans-shipment from one mode of transport to another


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Question: What are the implications of technologicalchange for the globalization of production?

Answer: Lower transportation costs make ageographically dispersed production system moreeconomical and allow firms to better respond tointernational customer demands


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Question: What are the implications of technological

change for the globalization of markets?

Answer:Low cost communications networks help create

electronic global marketplaces

Low cost transportation enable firms to create global

markets, and facilitate the movement of people fromcountry to country promoting a convergence of consumertastes and preferences


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Changing Demographics of the Global Economy

In the 1960s:the U.S. dominated the world economy and world trade

and world FDIU.S. multinationals dominated the international business

sceneabout half the world-- the centrally planned economies ofthe communist world-- was off limits to Westerninternational business

Today, much of this has changed.


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Changing World Output and World Trade Picture

In the early 1960s:U.S. - dominant industrial power accounting for about

40.3% of world manufacturing outputBy 2008:

U.S. accounted for only 20.7%Other developed nations experienced a similar

declineRapid economic growth now in countries like China,

India, and Brazil

Further relative decline by the U.S. is likelySo companies may find both new markets and new

competitors in the developing regions of the world


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Changing World Output and World Trade Picture

Table 1.2: The Changing Demographics of World GDP

and Trade


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Changing Foreign Direct Investment Picture

The share of world output generated by developingcountries has been steadily increasing since the 1960sThe stockof foreign direct investment (total cumulativevalue of foreign investments) generated by rich industrialcountries is decliningCross-border flows of foreign direct investment are risingThe largest recipient of FDI is China


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Figure 1.2: Percentage Share of Total FDI Stock,1980 - 2008


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Figure 1.3: FDI Inflows, 1988 - 2008


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The Changing Multinational Enterprise

A multinational enterprise is any business that hasproductive activities in two or more countries

Since the 1960s:

there has been a rise in non-U.S. multinationalsthere has been a rise in mini-multinationals


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The Changing Multinational Enterprise

Globalization has resulted in a decline in the dominanceof U.S. firms in the global marketplace

In 1973, 48.5 % of the worlds 260 largest MNEs were

U.S. firms

By 2008, just 19 of the worlds 100 largest non-financial MNEs were from the U.S., 13 were fromFrance, 13 from Germany, 14 were from Britain, and10 were from Japan

Small and medium-size firms are now expandinginternationally

easier to build international sales via the Internet


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The Changing World Order

The collapse of communism in Eastern Europe

export and investment opportunities

Economic development in China

huge opportunities despite continued Communistcontrol

Free market reforms and democracy in Latin America

new markets and new sources of materials andproduction


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The Global Economy in the 21st Century

A more integrated global economy

new opportunities for firms

but, political and economic disruptions can throwplans into disarray


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The Globalization Debate

Question: Is the shift toward a more integrated andinterdependent global economy a good thing?

Answer:Many experts believe that globalization is promoting

greater prosperity in the global economy, more jobs, andlower prices for goods and servicesOthers feel that globalization is not beneficial


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Antiglobalization Protests

Question: What are the concerns of critics ofglobalization?

Answer:

Anti-globalization protesters now turn up at almost everymajor meeting of a global institution

Protesters fear that globalization is forever changing theworld in a negative way


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Globalization, Jobs, and Income

Critics claim jobs in advanced economies are being lostto low-wage nations

Supporters claim while some jobs may be lost, theeconomy as a whole is better off

free trade will result in countries specializing in theproduction of those goods and services that they canproduce most efficiently, while importing goods andservices that they cannot produce as efficiently, andthat in doing so, allcountries will gain


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Globalization, Labor Policies, and the Environment

Critics argue free trade encourages firms fromadvanced nations to move manufacturing facilitiesoffshore to less developed countries with laxenvironmental and labor regulations

Supporters claim tougher environmental regulationand stricter labor standards reflect economic progress

as countries get richer as a result of globalization,they raise their environmental and labor standards

free trade does not lead to more pollution and laborexploitation, it leads to less


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Globalization and National Sovereignty

Critics worry economic power is shifting away fromnational governments and toward supranationalorganizations such as the WTO, the European Union(EU), and the UN

Supporters argue that the power of these organizations islimited to what nation-states collectively agree to grant

the organizations must be able to persuade membersstates to follow certain actions

without the support of members, the organizationshave no power


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Globalization and the Worlds Poor

Critics argue the gap between rich and poor has gottenwider and the benefits of globalization have not beenshared equally

Supporters suggest that the actions of governments

have made limited economic improvement in manycountries

many of the worlds poorest nations are undertotalitarian regimes, suffer from endemic corruption,have few property rights, are involved in war, and are

burdened by high debt


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Managing in the Global Marketplace

Question: What does the shift toward a global economymean for managers within an international business?

Answer:

Managing an international business (any firm thatengages in international trade or investment) differs frommanaging a domestic business in four key ways


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Managing in the Global Marketplace

1. Countries differences require companies to vary theirpractices country by country

2. Managers face a greater and more complex range ofproblems

3. International companies must work within the limitsimposed by governmental intervention and the globaltrading system

4. International transactions require converting funds andbeing susceptible to exchange rate changes


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Classroom Performance System

The trend away from distinct national economic units andtoward one huge global market is known as

a) Internationalization

b) Economic integration

c) Globalization

d) Privatization


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Which of the following is not an example of a globalinstitution?

a)The Federal Reserve

b)The International Monetary Fund

c)The World Bank

d)The World Trade Organization


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Coca-Cola, Sony Playstations, and McDonaldshamburgers are all examples of

a) American products

b) Global products

c) Industrial products

d) National products


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Which organization provides a mechanism for disputeresolution and the enforcement of trade laws?

a) The UN

b) The IMF

c) The WTO

d) The World Bank


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Which of the following statements is true?

a)The U.S. has been accounting for an increasing share ofworld trade in recent years

b)The U.S. has been accounting for an increasing share of

world foreign direct investment in recent yearsc)The U.S. has been accounting for an increasing share ofworld output in recent years

d)The share of world trade accounted for by China has

been increasing in recent years

Chap1 Globalization

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