Go Global ! Go Global ! Managerial Economics : Managerial Economics : The Global Economic The Global Economic Environment Environment By Stephen Ong Stephen Ong Visiting Fellow, Birmingham City Visiting Fellow, Birmingham City University University Visiting Professor, College of Management, Visiting Professor, College of Management, Shenzhen University Shenzhen University April 2013 April 2013
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Go Global !Go Global !Managerial Economics :Managerial Economics :The Global Economic The Global Economic EnvironmentEnvironment
By
Stephen OngStephen OngVisiting Fellow, Birmingham City UniversityVisiting Fellow, Birmingham City UniversityVisiting Professor, College of Management, Visiting Professor, College of Management,
2. Liberalization of cross-border trade and resource movements
3. Development of services that support international business
4. Growing consumer pressures5. Increased global competition6. Changing political situations7. Expanded cross-national cooperation
2. What is Globalization?
• The shift towards a more The shift towards a more integrated an interdependent integrated an interdependent world economyworld economy
• Two components:Two components:1.1.globalization of marketsglobalization of markets
2.2.globalization of productionglobalization of production
2.1 Globalization of Markets
The merging of distinctly separate national markets into a global marketplace– Consumer tastes and preferences are
converging into a global norm
– Firms that offer standardized products worldwide help create a global market
2.2 Globalization of Consumer Markets?
Significant differences still exist between national markets on many relevant dimensions:
Consumer tastes, preferences and values
Distribution channels and legal regulations
Business systems
These differences require that product features, marketing and operating strategies be customized (localized) to best match the conditions in a country
2.3 Globalization of Markets?
• Countries are significantly differentCountries are significantly different
• Range of problems are wider and Range of problems are wider and more complexmore complex
• Government intervention in trade Government intervention in trade and investment creates problemsand investment creates problems
• International investment is International investment is impacted by different currenciesimpacted by different currencies
2.4 Globalization of Production
• The sourcing of goods and services The sourcing of goods and services from locations around the world from locations around the world
• Takes advantage of differences in cost Takes advantage of differences in cost or quality of the factors of productionor quality of the factors of production
LabourLabour LandLand EnergyEnergy CapitalCapital
2.5 Impediments to Global Production
• Formal and informal trade barriers
• Restrictions on foreign direct investment
• Transportation costs
• Economic and political risk
2.5 Globalization of Services
• Historically, this has been primarily Historically, this has been primarily confined to manufacturing enterprisesconfined to manufacturing enterprises
• Increasingly, firms are taking Increasingly, firms are taking advantage of modern communications advantage of modern communications technology and the Internet to technology and the Internet to outsource service activities to low-outsource service activities to low-cost producers in other nationscost producers in other nations
• Trade in services currently accounts Trade in services currently accounts for 20% of all international tradefor 20% of all international trade
3. Emergence of Global Institutions
Globalization creates the need for institutions to help manage, regulate and police the global marketplace
– GATT– WTO– IMF– World Bank– United Nations
3.1 General Agreement on Tariffs & Trade
• GATT was established to: police the world trading system remove barriers to the free flow of trade,
services and capital between nations
• Uruguay round created the World Trade Organization
3.2 World Trade Organization
• 150 member nations (97% of world trade)
• assumed prior GATT agreements and extended GATT to include services and intellectual property (TRIPS)
• promotes lower trade and investment barriers
3.3 IMF and World Bank
International Monetary Fund (IMF) International Monetary Fund (IMF) and the World Bank were created in and the World Bank were created in 1944 by 44 nations that met at 1944 by 44 nations that met at Bretton Woods, New HampshireBretton Woods, New Hampshire
IMF was created to maintain order IMF was created to maintain order in the international monetary systemin the international monetary system
World Bank was created to promote World Bank was created to promote economic development through low-economic development through low-interest loansinterest loans
3.4 United Nations
• Established in 1945 by 51 nations committed to preserving peace through
international cooperation and collective security
• Membership is now at 191 countries
• Four main purposes Maintain international peace and security Develop friendly relations among nations Cooperate in solving international problems and in
promoting respect for human rights Serve as a centre for harmonizing the actions of
nations
4. Global Drivers
Two macro factors underlie the trend towards greater globalization
1.Decline in trade and investment barriers
2.Technological change
4.1 Global Drivers of Globalization – Decline in Trade and Investment Barriers
4.1.1 World Exports4.1.1 World Exports
GermanyUnited States
ChinaJapan
FranceNetherlands
United KingdomItaly
0 2 4 6 8 10 12
9.20
8.59
8.025.38
4.063.83
3.71
3.40
Source: World Trade Organization
Percentage Share of World Exports, Selected Nations, 2007
4.1.2 Average Tariff Rates
4.1.3 Average Tariff Rates on Manufactured Products as Percent of Value
4.1.2 Foreign Direct Investment
Firms investing in resources in business activities outside its
home country
4.1.3 Fewer FDI Restrictions
Nations recognize the increasing importance of FDI
Between 1992 and 2005
2,226 changes worldwide in laws governing FDI
94% created a more favorable investment climate
As of 2005
2,495 bilateral FDI treaties involved 160 nations
twelvefold increase from 181 treaties in 1980
4.1.4 Decline in Trade and Investment Barriers
Resulting in:
volume of world trade has grown faster than the world economy
flow of FDI has grown faster than the growth in world trade and world output
4.1.5 Volume of World Trade and Production 1950-2002
4.1.6 Growth of World Trade, Production & FDI 1992-2004
4.1.7 Decline in Trade and Investment Barriers
Globalization of markets and production and the integration of the world economy has resulted in the increasing:
– attacks by foreign competitors in domestic markets
– overall intensity of competition
Measuring GlobalizationMeasuring Globalization
Globalization can be difficult to Globalization can be difficult to measuremeasureThe A.T. Kearney/Foreign Policy The A.T. Kearney/Foreign Policy Globalization Index ranks countries Globalization Index ranks countries byby
– Economic dimensionsEconomic dimensions– Technological dimensionsTechnological dimensions– Personal contactPersonal contact– Political dimensionsPolitical dimensions
recently ranked Singapore and Hong recently ranked Singapore and Hong Kong as most globalized Kong as most globalized
4.2 Global Drivers of Globalization Global Drivers of Globalization – – Technological ChangeTechnological Change
50
4.2.1 Global Drivers of Globalization - Technological Change
1. Microprocessors and Telecommunications- lower the real costs in information processing
and communication and facilitate global dispersion
2. Transportation Technology- lower costs & transit times due to
containerization
3. Internet and World Wide Web- information backbone of the global
economy
4. Production, Packaging and distribution processes- Machines have increased speed, reliability,
energy efficiency, product shelf life
4.2.2 Implications of Technological Change
• Lower costs of transportation and information processing has facilitated the dispersion of production to geographically separate locations and the growth in international trade in services
• Technological innovations have facilitated the globalization of markets
4.2.3 Global Drivers of Globalization
A Word of Caution
One must not overemphasize these One must not overemphasize these trends!trends!
• Communication and transportation Communication and transportation technologies are creating a “global technologies are creating a “global village”village”
• But significant national differences But significant national differences remain in culture, consumer remain in culture, consumer preferences and business practicespreferences and business practices
4.3 Changing Demographics of the Global Economy
As late as the 1960’s• US dominated the world economy and
trade
• US dominated the global foreign direct investment
• Large, US multinationals dominated the scene
• Half the globe was Communist World and off limits
4.3.1 Changing Demographics of the Global Economy
US is a smaller player in the global economy as a producer and exporter source of and recipient of FDI
A similar trend occurred in other developed countries
The share of world output accounted for by developing nations is rising and is expected to exceed more than 60% of world economic activity by 2020
4.4 Changing Pattern of World Output and Trade
4.5 Percentage Share of Total FDI Stock 1980-2005
4.6 FDI Inflows 1988-2006
4.7 Changing Demographics of the Global Economy
Changing nature of multinationals
– Mini-multinationals grow in importance
– Non-US multinationals play greater role
4.8 Changing Demographics of the Global Economy
• Collapse of the USSR and Collapse of the USSR and Communist nationsCommunist nations
• Emergence of “BRIC’s”Emergence of “BRIC’s” BrazilBrazil RussiaRussia IndiaIndia ChinaChina
4.9 Global Economy of the 21st Century?
• Recently, we have seen the : changing demographics of the global economy removal of trade and investment barriers
• Resulting in national economies integrating into a more interdependent, global economy
• However, it is hazardous to use current trends to predict the future
• The world may be moving towards a The world may be moving towards a more global economic system, but more global economic system, but globalization in not inevitableglobalization in not inevitable
5. The Globalization Debate
Is the shift toward a more integrated and interdependent global economy a
good thing?
5.1 Globalization Debate: The Pro’s
• Improves the efficiency of production
• Lowers the prices for goods and services
• Stimulates economic growth and job creation
• Raises consumer income and prosperity levels
• Rising income levels lead to demands for greater environmental protection (Grossman & Kruger)
5.1.1 Environmental Pollution and Income Levels
Fig 1.6
5.2 Globalization Debate:The Con’s
Limits national sovereignty
Facilitates cultural imperialism
Destroys manufacturing jobs in wealthy countries
Lowers wage rates of unskilled workers in wealthy, advanced countries
Shifts manufacturing to countries with fewer labor and environmental regulations
Costs of GlobalizationCosts of Globalization
• Threats to national sovereigntyThreats to national sovereignty– lose freedom to “act locally”lose freedom to “act locally”
• Economic growth and environmental Economic growth and environmental stressstress– growth consumes nonrenewable natural growth consumes nonrenewable natural
resources and increases environmental resources and increases environmental damagedamage
• Growing income inequality and Growing income inequality and personal stresspersonal stress– promotes global superstars at the promotes global superstars at the
expense of othersexpense of others
Costs of GlobalizationCosts of Globalization
Offshoring involves the transferring of production abroad
– it can be beneficial because it reduces costs
– but, it also means that jobs move abroad Yet, offshoring may also create new, better jobs at home
5.3 Globalization and the World’s Poor
Critics argue that Critics argue that globalization has not helped globalization has not helped poorpoor
1870: per capita income of 17 richest nations was 2.4x that of all other countries
1990: it was 4.5x larger
Other factors may have influenced the gapTotalitarian governmentsEconomic policies that destroyed wealth creationCorruption little protection of property rights Expanding populationsCivil unrest and war
To expand salesTo expand sales– pursuing international sales increases the
potential market and potential profitsTo acquire resourcesTo acquire resources
– may give companies lower costs, new and better products, and additional operating knowledge
To diversify or reduce risksTo diversify or reduce risks– international operations may reduce
operating risk by smoothing sales and profits, preventing competitors from gaining advantage
Global External Environment Global External Environment AnalysisAnalysis
The external environment affects a company’s international operationsManagers must understand social science disciplines and how they affect functional business fieldsConsider
Physical and Social FactorsPhysical and Social Factors
Geographic influences– natural conditions influence production
locations
Political policies– determines where and how business occurs
Legal policies– influence how a company operates
Behavioural factors– may require changes in operations
Economic forces – explain differences in costs, currency values,
market size
The Competitive EnvironmentThe Competitive Environment
Competitive strategy for products– Cost strategy– Differentiation strategy– Focus strategy
Company resources and experience– market leaders have more resources for
international operations
Competitors faced in each market– local or international
The Competitive EnvironmentThe Competitive Environment
So, a company’s competitive strategy influences how and where it can best operateIts competitive situation may differ from country to country in terms of its relative strength and which competitors it faces
Looking to the FutureLooking to the FutureThree major perspectives on the future of international business and globalization
1.1. Further globalization is inevitableFurther globalization is inevitable
2.2. International business will grow International business will grow primarily along regional rather primarily along regional rather than global linesthan global lines
3.3. Forces working against further Forces working against further globalization and international globalization and international business will slow down both business will slow down both trendstrends
Casestudy : Casestudy : The Global Pharmaceutical industryThe Global Pharmaceutical industry
1.1. Read and prepare the Read and prepare the Casestudy on The Global Casestudy on The Global Pharmaceutical Industry Pharmaceutical Industry (Johnson, Whittington & (Johnson, Whittington & Scholes (2011)) for Scholes (2011)) for discussion and discussion and presentation next week. presentation next week.
2.2. Identify and evaluate the Identify and evaluate the challenges facing global challenges facing global pharmaceutical firms the pharmaceutical firms the External Environment External Environment and Industry analysis – and Industry analysis – PESTEL and Five Forces.PESTEL and Five Forces.
ConclusionConclusion
►““A powerful force drives the world A powerful force drives the world toward a converging commonality, toward a converging commonality, and that force is technology. The and that force is technology. The result is a new commercial reality result is a new commercial reality – the emergence of global markets – the emergence of global markets for standardized consumer for standardized consumer products on a previously products on a previously unimagined scale of magnitude.” unimagined scale of magnitude.” Theodore Levitt
Core ReadingCore Reading
• Keat, Paul G. and Young, Philip KY (2009) Managerial Economics, 6th edition, Pearson
• Samuelson, William F. and Marks, Stephen G.(2010) Managerial Economics, 6th edition, John Wiley
• Pindyck, Robert S. and Rubinfeld, Daniel L.(2013) Microeconomics, 8th edition, Pearson
• Johnson, Gerry, Whittington, Richard & Scholes, Kevan (2011) Exploring Strategy, 9th edition, FT Prentice Hall/Pearson UK.
• Porter, M.E., (2008). On Competition, Harvard Business Press.
Questions?Questions?
Evaluating a Firm’sEvaluating a Firm’sExternal EnvironmentExternal Environment
Appendix I : Appendix I : Case Analysis MethodsCase Analysis Methods
Why External Analysis?
External analysis allows firms to:
• discover threats and opportunities
• see if above normal profits are likely in an industry
• better understand the nature of competition inan industry