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Chapter 1: Globalization
INTRODUCTION
Globalization: the trend towards a more integrated
global economic system.
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Effects of globalization can be seen everywhere:
• the cars people drive
• the food people eat
• the jobs where people work
• the clothes people wear
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WHAT IS GLOBALIZATION?
Globalization refers to the shift towards a more integrated and
interdependent world economy.
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The Globalization of Markets
Globalization of markets: the fact that in many industries
historically distinct and separate national markets are merging
into one huge global marketplace in which the tastes and
preferences of consumers in different nations are beginning to
converge upon some global norm.
Examples:
Sony Playstation Citicorp credit cards
Coca-Cola McDonald's hamburgers
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The Globalization of Production
Globalization of production: the tendency among many firms to
source goods and services from different locations around the
globe in an attempt to take advantage of national differences in
the cost and quality of factors of production (such as land, labor,
capital, and energy), thereby allowing them to compete more
effectively against their rivals.
Examples:
Boeing Lenovo
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THE EMERGENCE OF GLOBAL INSTITUTIONS
Global institutions:
• help manage, regulate, and police the global market place
• promote the establishment of multinational treaties to govern
the global business system
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Examples of Global Institutions:
• World Trade Organization (WTO): responsible for policing
the world trading system and ensuring that nations adhere to the
rules established in WTO treaties
• International Monetary Fund (IMF): maintains order in the
international monetary system
• World Bank: promotes economic development
• United Nations (UN): maintains international peace and
security, develops friendly relations among nations, cooperates in
solving international problems and promotes respect for human
rights, and is a center for harmonizing the actions of nations
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DRIVERS OF GLOBALIZATION
Two macro factors underlie the trend toward greater
globalization:
• Declining trade and investment barriers
• The role of technological change
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Declining Trade and Investment Barriers
• After WWII, the industrialized countries of the West began the
process of removing barriers to the free flow of goods, services,
and capital between nations
• Under GATT, over 100 nations negotiated further decreases in
tariffs and made significant progress on a number of non-tariff
issues
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• Under the WTO, a mechanism now exists for dispute resolution
and the enforcement of trade laws, and there is a push to cut
tariffs on industrial goods, services, and agricultural products
• Removal of barriers to trade has contributed to increased
international trade (the export of goods or services to
consumers in another country), world output, and foreign
direct investment (the investing of resources and business
activities outside a firm’s home country)
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The volume of world trade and investment has accelerated since
the early 1980s.
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The Role of Technological Change
The lowering of trade barriers made globalization of markets and
production a theoretical possibility, technological change made it
a tangible reality.
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• Microprocessors and Telecommunications: Major advances in
communications and information processing have lowered the cost of global
communication and therefore the cost of coordinating and controlling a global
organization
• The Internet and the World Wide Web: Web-based transactions have grown
from virtually zero in 1994 to nearly $7 trillion in 2004
• Transportation Technology: the most important developments are probably
development of commercial jet aircraft and super freighters and the
introduction of containerization, which greatly simplifies trans-shipment from
one mode of transport to another
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Implications for the Globalization of Production
• Improvements in transportation technology have enabled firms
to better respond to international customer demands
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Implications for the Globalization of Markets
• Managers today operate in an environment that offers more
opportunities, but is also more complex and competitive than that
of a generation ago
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THE CHANGING DEMOGRAPHICS OF THE GLOBAL
ECONOMY
In the 1960s:
• the U.S. dominated the world economy and the world trade
picture
• U.S. multinationals dominated the international business scene
• about half the world-- the centrally planned economies of the
communist world-- was off limits to Western international
business
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The changing picture of world output and trade can be seen in
Table 1.2.
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The Changing Foreign Direct Investment Picture
• The share of world output generated by developing countries
has been steadily increasing since the 1960s
• The stock (total cumulative value of foreign investments)
generated by rich industrial countries has been on a steady
decline
• There has been a sustained growth in cross-border flows of
foreign direct investment
• The flow of foreign direct investment (amounts invested across
national borders each year) has been directed at developing
nations especially China
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The stock of FDI by the world’s six most important national
sources is shown in Figure 1.2.
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The sustained growth in cross-border flows of FDI and the
emergence of developing nations as important destinations for
FDI can be seen in Figure 1.3.
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The Changing Nature of Multinational Enterprises
A multinational enterprise is any business that has productive
activities in two or more countries.
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Non-U.S. Multinationals
• Expect the growth of new multinational enterprises (any
business that has productive activities in two or more countries)
from the world's developing nations
The Rise of Mini-Multinationals
• The number of mini-multinationals (small and medium-sized
companies) is on the rise
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The Changing World Order
• The collapse of communism in Eastern Europe represents a host
of export and investment opportunities for Western businesses
• The economic development of China presents huge
opportunities and risks, in spite of its continued Communist
control
• Mexico and Latin America also present tremendous new
opportunities both as markets and sources of materials and
production
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The Global Economy of the 21st Century
• Firms must be aware that while the more integrated global
economy presents new opportunities, it also could result in
political and economic disruptions that may throw plans into
disarray
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THE GLOBALIZATION DEBATE
Is the shift toward a more integrated and interdependent global
economy a good thing?
Anti-globalization Protests
• Anti-globalization protesters now turn up at almost every major
meeting of a global institution
• Protesters fear that globalization is forever changing the world
in a negative way
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Globalization, Jobs, and Incomes
• Critics of globalization worry that jobs are being lost to low-
wage nations
• Supporters of globalization argue that free trade will result in
countries specializing in the production of those goods and
services that they can produce most efficiently, while importing
goods and services that they cannot produce as efficiently
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Globalization, Labor Policies, and the Environment
• Critics of globalization argue that that free trade encourages
firms from advanced nations to move manufacturing facilities
offshore to less developed countries with lax environmental and
labor regulations
• Supporters of free trade point out that tougher environmental
regulation and stricter labor standards go hand in hand with
economic progress and that foreign investment often helps a
country to raise its standards
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Globalization and National Sovereignty
• Critics of globalization worry that economic power is shifting
away from national governments and toward supranational
organizations such as the World Trade Organization (WTO), the
European Union (EU), and the United Nations
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Globalization and the World’s Poor
• Critics of globalization argue that the gap between rich and poor
has gotten wider and that the benefits of globalization have not
been shared equally
• Supporters of free trade suggest that the actions of governments
have made limited economic improvement in many countries
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MANAGING IN THE GLOBAL MARKETPLACE
Managing an international business (any firm that engages in
international trade or investment) is different from managing a
domestic business because:
• countries differ
• managers face a greater and more complex range of problems
• international companies must work within the limits imposed by
governmental intervention and the global trading system
• international transactions require converting funds and being
susceptible to exchange rate changes
