Globalization (the glory of the world)

Salman
Akram
Umair Arshad
M Mohsin
Iqbal
Israr Ahmad M Shahryar
Hailey college of commerce

GLOBALIZATION

GLOBALIZATION
the glory of the world
• “Processes by which goods, services,
capital, people, information, and ideas
flow across national borders.”
(Grewal/Levy)

 Globalization is a process of interaction and integration among the
people, companies, and governments of different nations, a process
driven by international trade and investment and aided by information
technology.
Age of Globalization

 Although ninety-third on the Fortune 500 list for the year 2000,
Coca-Cola brand has the highest name recognition in the world.
 Only 30 percent of the unit case volume of the company is sold in
North America. Twenty-six percent is sold in Latin America while
Europe (including Eurasia), Asia Pacific, and Africa/Middle East
account for 21, 16, and 7 percent, respectively. In 1999, Coca-Cola
acquired the beverage brands of U.K.-based Cadbury Schweppes
that sell in 155 countries.

 Its 2000 annual report states: "We have to maintain our special
place in local cultures, recognizing the differences between
countries and regions.“
 ." The company's famous slogan "think globally and act locally"
Continue…..

 Most of the telecommunication companies have gone global. For
some of these companies global operations are a key for success.
 Nokia is a global telecommunications company that is delivering
almost 30 percent annual compound growth in revenues during the
turn of the century while changing most of its product lines.
 Nokia had the highest margins in the cell phone industry, a negative
debt—equity ratio, the most recognized non US brand in the world.

 During the last part of the 20th century, telecommunications
national markets around the world were highly centralized.
 In most nations, there was a dominant telecommunications
provider ¬AT&T in the United States, British Telecom in
Britain, Deutsche Telekom in Germany, NTT in Japan, and
Telegrams in Brazil.
 The transformation by the turn of the century, most
telecommunications markets around the world had already
been de-regulated.
The Old Landscape

The New Landscape
 New wireless technologies have facilitated the emergence of new
competitors, such as Orange and Vodafone in Britain, which now
compete head-to-head with British Telecom, the former state
monopoly.
 . Much of this data traffic is being transmitted over new digital
networks that utilize fiber optics, Internet protocols, and digital
switches to send data around the world at the speed of light.
 Furthermore, in 1997, the World Trade Organization initiated an
agreement among almost 70 countries to open their
telecommunications markets to foreign competition and to abide by
common rules for fair competition in telecommunications.

The Globalized Landscape…
 A global market for telecommunications services is the current
reality.
 Telecommunications companies are starting to penetrate each other's
markets.
 As competition intensifies, national telecommunications companies
are entering into marketing alliances and joint ventures with each
other to offer multinational companies a single global
telecommunications provider for all their international voice and data
needs.

International and Global Business
As the opening case on
telecommunication indicates, the
effects of internationalization and
globalization are all around. These
effects pervade our lives as
individuals and professionals and
materialize in numerous instances.

AN AGE OF GLOBALIZATION
 "Globalization" has become one of the key buzzwords of
modern times. While globalization means different things to
different people, its manifestations are found all around us. You
can buy a Coke in almost every country of the world.
 Globalization is a fascinating spectacle that can be understood
as global systems of competition and connectivity. These man-
made systems provide transport, communication, governance,
and entertainment on a global scale. International crime
networks are outgrowths of the same systems.

• “Processes by which goods, services, capital,
people, information, and ideas flow across national
borders.” (Grewal/Levy)

Globalization came into existence after the
second world war. One of the main factors for
this was the plan by the world leaders to break
down the borders for fostering trade relations
between nations.

The Bretton Woods Conference was held in 1944 to
restore the economic activity which was shattered by the
World War II. International organizations such as the
World Bank, IMF and GATT were set up to revive the
global economy.

A trade pact and an organization, was founded in Geneva in 1948 to pursue
the objective of free trade in order to encourage the growth and development
of all member countries.
It sets out the world trade rules to ensure competition in commodity trade by
bringing down tariff levels.
The first seven GATT rounds sought to stimulate the international trade
through reduction in tariff levels
The eighth round of GATT was launched in Punta Del Este, Uruguay, in
September 1986 and it concluded in 1994

 Many influential
economists, politicians,
and business leaders
argue that falling
barriers to international
trade and investment
are the twin engines
driving the global
economy toward greater
prosperity.
 increased international
trade and investment
will result in lower
prices for goods and
services.

Advantages & disadvantages of globalization
Advantages of Globalization
 It opens the borders between the nations and increases the awareness about the differences
between us (racial, religious, traditions) and how they can be managed in our favor.
 It also provides poor countries, through infusions of foreign capital and technology, with the
chance to develop economically and by spreading prosperity..
 Free movement. This is a big advantage - people can travel and the labor force can move. Yet,
we can see immigration, culture clashes, and other negative sides of this.
Disadvantages of globalization
 Free trade simply kills competition by letting the developed countries surpass the poor ones. It
is namely the globalization which lead to an even wider discrepancy in wealth distribution.

To the consumer, globalization
means_
• more choices,
• lower prices,
• and an increasingly blurred
national identity for
products and services

DIMENSIONS OF GLOBALIZATION
ECONOMIC DEVELOPMENT NATURALLY DEPENDS UPON EFFICIENT
MANAGEMENT OF ECONOMIC FACTORS.
 Natural resources
For example: coal, gas gold copper iron etc.
 Adequate, trained, skilled and motivated human resources
For example : Qualified, well experienced & highly motivated workforce
 Adequate financial and real savings, capital and investment
 Entrepreneurial drive and innovations

Who Benefits from Globalization?
 Globalization has its winners and losers
 While globalization is higher among the G-7 nations than among the developing and
emerging economies
 Canada, France, Germany, Italy, Japan, United Kingdom, United States, European Union
In 2000, the share of developing countries in world merchandise trade rose to its highest
level in 50 years. The trade growth of the 49 least developed countries (LDCs) exceeded
the global average. many of the expression of globalization in wealthy nations end up
helping poorer economies.

WORLD TRADE ORGANIZATION (WTO)
 the world Trade Organization (WTO) whose officials are not elected by popular
vote, and because to some people, globalization simply means Americanization
and hence a threat to their identity and values. Related to this argument is the
complaint that globalization enhances the monopoly power of large multinational
corporations.
 The WTO may have assumed a conflict resolution role that was previously the
domain of bilateral negotiations, but international trade remains very much a
government-to-government domain

Globalization and Environment
 Globalization is altering the global
environment. Some perceive the net
ecological impact of globalization as
positive, as a force of progress and better
lives. It fosters economic growth and
cooperative institutions. Others see the net
impact as negative, i.e. ecological decay. It
is accelerating the destructive process of too
many people consuming too many natural
resources without any concern for equality or
justice.

Globalization: The Social Balance
Pros and Cons of Globalization
 Pro’s
 Now there is a worldwide market
for the companies and for the
people there is more access to
products of different countries.
 globalization is correlated with
higher overall economic growth.
 Con’s
 little support to an employee who
loses his job as a result of foreign
competition.
 Corporations are building up units
in other countries that causes
environment issues .

Globalization: The Social Balance
A balanced view
 It is best to understand globalization in a balanced light, recognizing
its positive and negative aspects, so as to focus attention on
constructive solutions to the foreign trade and investment debate.

Globalization challenges
Globalization poses the following two challenges:
 Free flow of imports and exports.
 Heavy competition and influx of new technology
In order to face successfully these two challenges
 organizations have to update their technology
 as well as face competitive challenge.

World Trade Organization
 Was formed in 1995 , with the General
Agreement on Trade and Tariffs
(GATT) as its basis
 WTO is the only global international
organization dealing with the rules of trade
between nations
 The objective is to help producers of goods
and services, exporters and importers
conduct their business

The eight arguments for WTO are:
1. The system helps promote peace.
2. Disputes are handled constructively.
3. Rules make life easier for all.
4. Freer trade cuts the costs of living.
5. It provides more choice of products and qualities.
6. Trade raises incomes.
7. Trade stimulates economic growth.
8. The basic principles make life more efficient

The eight criticisms against WTO are:
1. The WTO dictates policy.
2. The WTO is for free trade at any cost.
3. Commercial interests take priority over development.
4. Commercial interests take priority over the environment.
5. Commercial interests take priority over health and safety.
6. The WTO destroys jobs, worsens poverty.
7. Small countries are powerless in the WTO.
8. The WTO is the tool of powerful lobbies

International Business
 International business is defined as all business
activities, including the creation and transfer of
resources, goods, services, know-how, skills, and
information, which go beyond national
boundaries
 Their activities crossing national boundaries are
often called international transactions

International trade
&
International investment
International trade
 International trade occurs when a company exports goods or
services to buyers (importers) in another country
for example, IKEA (IKEA.com), the producer of household
furniture and fixtures. IKEA may purchase wood, kilned and
dried in Norway. It then produces furniture parts and assemblies
in Sweden, which may have been designed in Denmark.
Following shipping to the USA, it is put on display in the stores,
to be purchased and assembled by customers. Each of these
activities adds value to the final piece of furniture by IKEA and
constitutes part of international trade when it crosses
international boundaries.

 International investment occurs when the company invests
resources in business activities outside its home country
 Motorola has 1,100 facilities in 45 countries, employing 140,000
people worldwide. In 1999, 57 percent of its revenues came from
foreign operations
International investment

Risk in International Business
 Commercial Risk
Weak partner, operational problems
 Currency ( Financial ) Risk
Currency exposure, inflation, taxation
 Cross-cultural Risk
cultural differences, Ethical practices
 Country Risk
Govt. interventions, political instability, corruption, trade barriers.

 A MNE is any business that has productive activities in
two or more countries.
 Since the 1960s, two notable trends in the demographics
of the MNE:
 The rise of non-U.S multinational – a relative decline in
the dominance of U.S firms in the global marketplace.
 The growth of mini-multinational – international business
(IB) is conducted not just by large firms but also by
medium-size and small enterprises.
Multinational Enterprises

International versus Domestic Business
 Competition
More severe competition in international market than in
domestic market because of various similar products from different
countries
 Infrastructure
Financial, institutional and physical infrastructure
More important is physical infrastructure in the form of roads,
telecommunication, ports, etc.
 Technology
Opportunity for knowing and getting highly cost- effective,
technologies, especially for
developing countries

Differences ……..
 Difference in Currencies
 Difference in Natural and Geographical Conditions
 Mobility of Factors of Production
 Sovereign Political Entities
- Imposition of tariffs and customs duties on imports and exports;
- Quantitative restrictions like quotas;
- Exchange control;
- Imposition of more local taxes etc.
 Different Legal Systems

Why Do Firms Expand Internationally?
 Market Motives:
 To expand their sales
 Seize market opportunities in foreign countries through trade or
investment
 Economic motives:
 For higher returns (profitability) through higher revenues and/or
lower costs by obtaining cheap resources
 Achieving economies of scale
 Spreading R&D cost

Why Do Firms Expand Internationally?
 Strategic Motives:
 To capitalize on their distinctive resources or capabilities already developed at
home
- Technological leadership, brand image, customer loyalty, and
competitive position
 To take first mover advantage
 Vertical integration involving different countries
 To follow the major customer’s abroad (proximity to customer)

International Trade
o International trade is the exchange of capital, goods, and services
across international borders or territories. It is the exchange of goods
and services among nations of the world. In most countries, such trade
represents a significant share of gross domestic product (GDP).
o In the 21st century, China, the European Union and the United
States are the three largest trading markets in the world

The Banana Wars
A trade dispute about Bananas that was one of the most technically
complex, politically sensitive and commercially meaningful legal
disputes that has produced one of the longest trade discussions in
modern history.
Countries involved
European Union (EU)
Latin America
United States
Caribbean
Africa
Pacific States

Why do Nations Trade?
(i) Nations are different
- Unequal distribution of natural resources
- Difference in Technology
- Cost Advantages:
Cost of production for the same product differs among different locations
- Different Preferences:
Americans prefer Basmati rice grown in India
(taste differences)
Due to different income levels
(ii) To achieve economies of scale in production
- The New Trade Theory
SupplyconditionsDemand
conditions

Evolution of trade theories
 Early thinking: Theory of Mercantilism
 Adam Smith: The theory of absolute advantage, 1776
 Ricardo: The theory of comparative advantage, 1817
 Heckscher-Ohlin theory: 20th century
 “New” trade theory based on economies of scale
 Product Life Cycle theory
 Porter’s Competitive Advantage Theory

Theory of Mercantilism
 A trade theory prevailed during 16th to 19th centuries
 The wealth of a nation is measured based on its accumulated
wealth in terms of gold and silver
 Nations should accumulate wealth by encouraging exports and
discouraging imports
 Theory of mercantilism aims at creating trade surplus and in
turn accumulate nation’s wealth

Absolute Advantage Theory
Adam Smith FRSA was a Scottish
economist, philosopher, and author. He
was a moral philosopher, a pioneer of
political economy, and was a key figure
during the Scottish Enlightenment era. He
is best known for two classic works: The
Theory of Moral Sentiments (1759),
and An Inquiry into the Nature and
Causes of the Wealth of Nations (1776).
The latter, usually abbreviated as The
Wealth of Nations, is considered his
magnum opus and the first modern work
of economics.

 Adam Smith, ‘An Enquiry into the Nature and Causes of the
Wealth of Nations’, 1776
 There is international benefit from trade
Everyone better off without making anyone worse off
 When one country can produce a unit of good with less cost than
another country, the first country has an absolute (cost)
advantage in producing that good
 Cost is considered based on number of labor units used

Assumptions:
 Two countries (A&B), both producing two products (x&y)
 Labor is the only factor of production and its productivity remains the
same
 Perfect mobility of labor between the sectors within a country
 No mobility of labor between the countries
 Assumes perfect competition
No transportation cost
No restrictions on the movement of goods between the countries
(free trade)

Example…..
 Assume, two countries, country A and country B producing
only two commodities, x and y
 Suppose, A can produce x cheaper than B, and B can
produce y cheaper than A
 Means, A has an absolute advantage in the production of x
and B in the production of y
 Thus, A will be better off concentrating on the production
of x and B on the production of y
 A will export x to B, and B will export y to A

Theory of Absolute Advantage
Limitations
 Explains the causes of trade only when both the countries
enjoy absolute advantage in the production of at least one
product
 Assumes that transportation costs are either non-existent or
insignificant, which may not always hold good
 Assumes that prices are comparable across countries,
implying stability of exchange rate
 Perfect mobility of labor between sectors – labor may be
mobile but to an extent

Comparative Advantage Theory
 David Ricardo, ‘The Principles of
Political Economy & Taxation’, 1817.
 Nations can still gain from trade even
without an absolute advantage.
 Facilitator – Difference in opportunity
cost (the loss of other alternatives when one alternative
is chosen)
o A country has a Comparative Advantage in producing a good if
the opportunity cost of producing that good in terms of other
goods is lower in that country compared to other countries.

The Comparative Advantage Theory
 Even if countries do not have an absolute advantage, they can
gain from trade by allocating resources based on their
comparative advantage and trade with each other
 Assumptions:
 Mostly same as that of absolute advantage theory
 Cotton has comparative advantage in WTO regime

 Pakistan is one of the ancient homes of cultivated cotton,
4th largest producer of cotton , the 3rd largest exporter
of raw cotton and a leading exporter of yarn in the world.
Pakistan has signed the WTO and will enter in free trade
era with the dawn of year 2005.
cotton contributes nearly 10 per cent in the agriculture
GDP and a source of 60 per cent foreign exchange
earnings.
Example….

Globalization (the glory of the world)

Globalization (the glory of the world)

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