2.Globalization of markets and the Internationalization
of the firm FM : FM : Anis Gunawan, MBA,MM,SP Copyright 2014 Pearson Education Copyright 2014 Pearson Education Inc. International business
5. Functional Area excellence 4. Entering and operating in International Markets. 3.Strategy and opportunity assessment 2. The environment of International Business 2.Globalization of markets and the Internationalization of the firm Foundation concepts of International business International Business: Strategy, Management, and the New Realities Overview on Globalization of Markets
Globalization and technological advances have altered the international business landscape more than any other trends. In this class, globalization refers to the interconnectedness of national economies andthe growing interdependence of buyers, producers, suppliers, and governments around the world. Globalization allows firms to view the world asone large marketplace for goods, services, capital, labor, and knowledge. Globalization of markets refers to the gradual integration and growing interdependence of national economies. Globalization allows firms to view the world as an integrated marketplace that includes buyers, producers, suppliers, and governments in different countries. Market globalization is manifested by the production and marketing of branded products and services worldwide. Declining trade barriers and the ease with which international business transactions take place due to the Internet and other technologies are contributing to a gradual integration of most national economies into a unified global marketplace. WD Copyright 2014 Pearson Education Phases of Globalization
The first phase of globalization began about 1830 and peaked around International business became widespread due to the growth of railroads, efficient ocean transport, and the rise of large manufacturing and trading firms. Invention of the telegraph and telephone in the late 1800s facilitated information flows between and within nations and greatly aided early efforts to manage companies supply chains. The second phase of globalization began around 1900 and was associated with the rise of electricity and steel production. This phase reached its height just before the Great Depression, a worldwide economic downturn that began in In 1900, Western Europe was the most industrialized world region. Europes colonization of countries in Asia, Africa, and the Middle East led to establishment of some of the earliest subsidiaries of multinational enterprises (MNEs). European companies such as BASF, Nestl, Shell, Siemens, and British Petroleum had established foreign manufacturing plants by In the years before World War I (pre-1914), many firms were already operating globally. The Italian manufacturer Fiat supplied vehicles to nations on both sides of the war. The third phase of globalization began after World War II. At wars end in 1945, substantial pent-up demand existed for consumer products, as well as for input goods to rebuild Europe and Japan. The United States was least harmed by the war and became the worlds dominant economy. Substantial government aid helped stimulate economic activity in Europe. The pre-war years had been characterized by high tariffs and strict controls on currency and capital movements. After the war, leading industrialized countries, including Australia, Britain, and the United States, sought to reduce international trade barriers. Invention of the telegraph and telephone in the late 1800s facilitated information flows between and within nations and greatly aided early efforts to manage companies supply chains. The fourth phase of globalization began in the early 1980s, which saw enormous growth in cross-border trade and investment. The phase was triggered by the development of personal computers, the Internet, and Web browsers; the collapse of the Soviet Union and ensuing market liberalization in Central and Eastern Europe; and industrialization and modernization in East Asian economies, including China. Copyright 2014 Pearson Education
The Death of Distance Copyright 2014 Pearson Education The Drivers of Market Globalization
Future Drivers of Market Globalization 1. Worldwide reduction of barriers to trade and investment 2.Market liberalization and adoption of free markets 3.Industrialization, economic development, and modernization 4.Integration of world financial markets 5.Advances in technology The exhibit presents an organizing framework for examining market globalization. The exhibit makes a distinction between: (1) drivers or causes of globalization; (2) dimensions or manifestations of globalization; (3a) societal consequences of globalization; and (3b) firm level consequences of globalization. In the exhibit, the double arrows illustrate the interactive nature of the relationship between market globalization and its consequences. As market globalization intensifies, individual firms respond to the challenges and new advantages that it brings. However, keep in mind that firms do not expand abroad solely as a reaction to market globalization. They also internationalize proactively in order to pursue new markets, find lower-cost inputs, or obtain other advantages. Often, adverse conditions in the home market, such as regulation or declining industry sales, push firms to boldly venture abroad. Firms that do so tend to be more successful in global competition than those that engage in international business as a reactive move. Copyright 2014 Pearson Education HiTech The Drivers and Dimensions of Market Globalization
Drivers of Market Globalization 2. Dimensions of Market Globalization 1.Integration and interdependence of national economies 2.Rise of regional economic integration blocs 3.Growth of global investment and financial flows 4.Convergence of buyer lifestyles and preferences 5.Globalization of production activities 6.Globalization of services Copyright 2014 Pearson Education The Drivers, Dimensions, and Consequences of Market Globalization
1. Drivers of Market Globalization 2. Dimensions of Market Globalization 3b. Firm-level Consequences of MarketGlobalization: Internationalization of the Firms Value Chain Countless new business opportunities forinternationalizing firms New risks and intense rivalry from foreign competitors More demanding buyers who source fromsuppliers worldwide Greater emphasis on proactive internationalization Internationalization of the firms value chain 3a. Societal Consequences of Market Globalization Contagion: Rapid spread offinancial or monetary crises from one country to another Loss of national sovereignty Offshoring and the flight of jobs Effect on the poor Effect on the naturalenvironment Effect on national culture Dubai Fedex Dimensions of Market Globalization
Integration and interdependence of national economies.Results from firms collective international activities.Governments contribute by lowering trade and investment barriers. Rise of regional economic integration blocs.Free trade areas are formed by two or more countries to reduce or eliminatebarriers to trade and investment,such as the EU, NAFTA, and MERCOSUR. Integration and interdependence of national economies. Internationally active firms devise multicountry operations through trade, investment, geographic dispersal of company resources, and integration and coordination of value-chain activities. A value chain is the sequence of value-adding activities performed by the firm in the course of developing, producing, marketing, and servicing a product. The aggregate activities of such firms give rise to economic integration. Governments have facilitated this integration by lowering barriers to international trade and investment, harmonizing their monetary and fiscal policies within regional economic integration blocs (also known as trade blocs), and developing supranational institutionsthe World Bank, International Monetary Fund, World Trade Organization, and othersthat seek further reductions in trade and investment barriers. Rise of regional economic integration blocs. Closely related to the first trend is the emergence since the 1950s of regional economic integration blocs. Examples include the North American Free Trade Agreement area (NAFTA), the Asia Pacific Economic Cooperation zone (APEC), and Mercosur in Latin America. These blocs consist of groups of countries within which trade and investment flows are facilitated through reduced trade and investment barriers. In more advanced arrangements, such as the common market, barriers to the cross-border flow of factors of production (mostly labor and capital) are removed. For example, the European Union (www.europa.eu), in addition to adopting free trade among its member countries, is harmonizing fiscal and monetary policies and adopting common business regulations. Copyright 2014 Pearson Education Dimensions of Market Globalization (contd)
Growth of global investment and financial flows.Associated with rapid growthin foreign direct investment(FDI), currency trading, andglobal capital markets. Convergence of buyerlifestylesand preferences. Facilitated by global media, which emphasize lifestyles found in the U.S., Europe, or elsewhere. Firms market standardized products. Growth of global investment and financial flows. In the process of conducting international transactions, firms and governments buy and sell large volumes of national currencies (such as dollars, euros, and yen). The free movement of capital around the worldthe globalization of capital extends economic activities across the globe and fosters interconnectedness among world economies. Commercial and investment banking is a global industry. The bond market has gained worldwide scope, with foreign bonds representing a major source of debt financing for governments and firms. Information and communications networks facilitate heavy volumes of financial transactions every day, integrating national markets. Nevertheless, widespread integration can have negative effects. For example, when the United States experienced a banking crisis in 2008, the crisis quickly spread to Europe, Japan, and emerging markets, triggering a global recession. Convergence of consumer lifestyles and preferences. Around the world, consumers spend their money and time in increasingly similar ways. Lifestyles and preferences are converging. Shoppers in Tokyo, New York, and Paris demand similar household goods, clothing, automobiles, and electronics. Teenagers everywhere are attracted to iPods, Levis jeans, and BlackBerry cell phones. Major brands have gained a global following, encouraged by greater international travel, movies, global media, and the Internet, which expose people to products, services, and living patterns from around the world. Movies such as The Lord of the Rings and Slumdog Millionaire receive much attention from a global audience. Convergence of preferences is also occurring in industrial markets, where professional buyers source raw materials, parts, and components that are increasingly standardizedthat is, very similar in design and structure. Yet, even as converging tastes facilitate the marketing of highly standardized products and services to buyers worldwide, they also promote the loss of traditional lifestyles and values in individual countries. Copyright 2014 Pearson Education Dimensions of Market Globalization (contd)
Globalization of production. To cut costs, firms manufacture in low labor-cost locations such as Mexico and Eastern Europe.Firms also source services from abroad. Globalization of services. Banking, hospitality, retailing, and other service industries are rapidly internationalizing. Firms outsource business processes and other services in the value chain to vendors overseas. And, in a new trend, many people go abroad to take advantage of low-cost services. Globalization of production. Intense global competition is forcing firms to reduce their costs of production and marketing. Companies strive to drive down prices through economies of scale, by standardizing what they sell, and by shifting manufacturing and procurement to foreign locations with inexpensive labor. For example, companies in the auto and textile industries have relocated their manufacturing to low labor-cost locations such as China, Mexico, and Eastern Europe. Globalization of services. The services sector is undergoing widespread internationalization. First, banking, hospitality, retailing, and other service industries are rapidly expanding abroad. The real estate firm REMAX has established more than 5,000 offices in over fifty countries. Second, as noted in the opening vignette, firms increasingly outsource business processes and other services in the value chain to vendors located abroad. Finally, in a relatively new trend, many people go abroad to take advantage of low-cost services. For example, many U.S. consumers regularly travel to India, Latin America, and other international destinations to undergo medical procedures like cataract and knee surgeries. Several U.S. health insurance companies view international medical tourism as a means to reduce costs. Copyright 2014 Pearson Education Drivers of Market Globalization
Worldwide reduction of barriers to trade and investment.Over time, national governmentshave greatly reduced trade and investment barriers.The trend is partly facilitated by the World Trade Organization (WTO), an organization of some 150 member nations. Market liberalization and adoption of free markets.The launch of free market reforms in China and the former Soviet Union marked the opening of roughly 1/3 of the world to free trade. Worldwide reduction of barriers to trade and investment. The tendency of national governments to reduce trade and investment barriers has accelerated global economic integration. For example, tariffs on the import of automobiles, industrial machinery, and countless other products have declined nearly to zero in many countries, encouraging freer international exchange of goods and services. Falling trade barriers are facilitated by the WTO. After joining the WTO in 2001, China made its market more accessible to foreign firms. Reduction of trade barriers is also associated with the emergence of regional economic integration blocs, a key dimension of market globalization. Market liberalization and adoption of free markets. Built in 1961, the Berlin Wall separated the communist East Berlin from the democratic West Berlin. The collapse of the Soviet Unions economy in 1989, demolition of the Berlin Wall that same year, and Chinas free-market reforms all signaled the end of the 50-year Cold War and smoothed the integration of former command economies into the global economy. Numerous East Asian economies, stretching from South Korea to Malaysia and Indonesia, had already embarked on ambitious market-based reforms. India joined the trend in These events opened roughly one-third of the world to freer international trade and investment. China, India, and Eastern Europe have become some of the most cost-effective locations for producing goods and services worldwide. Privatization of previously state-owned industries in these countries has encouraged economic efficiency and attracted massive foreign capital into their national economies. Copyright 2014 Pearson Education Drivers of Market Globalization (contd)
Industrialization, economic development, and modernization.These trends transformed many developing economies from producers of low-value to higher-value goods, such as electronics and computers. Simultaneously, rising living standards have made such countries more attractive as target markets for sales and investment. Industrialization, economic development, and modernization. Industrialization implies that emerging marketsrapidly developing economies in Asia, Latin America, and Eastern Europeare moving from being low value-adding commodity producers, dependent on low-cost labor, to sophisticated competitive producers and exporters of premium products such as electronics, computers, and aircraft. For example, Brazil is now a leading producer of private aircraft, and the Czech Republic excels in the manufacture of automobiles. As highlighted in the opening vignette, India has become a leading supplier of computer software. Economic development is enhancing standards of living and discretionary income in emerging markets. Copyright 2014 Pearson Education Copyright 2014 Pearson Education Drivers of Market Globalization (contd)
Integration of world financial markets.Enables firms to raise capital, borrow funds, and engage in foreign currency transactions wherever theygo.Banks now provide arange of services thatfacilitate global transactions. Advances in technology. Reduces the cost of doing business internationally by allowing firms to interact cheaply with suppliers, distributors, and customers worldwide.Facilitates the internationalization of companies, including countless small firms. Integration of world financial markets. Integration of world financial markets makes it possible for internationally active firms to raise capital, borrow funds, and engage in foreign currency transactions. Financial services firms follow their customers to foreign markets. Cross-border transactions are made easier partly as a result of the ease with which funds can be transferred between buyers and sellers through a network of international commercial banks. For example, as an individual you can transfer funds to a friend in another country using the SWIFT network. Connecting more than 7,800 financial institutions in some 200 countries, the network facilitates global financial transactions. The globalization of finance contributes to firms abilities to develop and operate world-scale production and marketing operations. It enables companies to pay suppliers and collect payments from customers worldwide. Ongoing advances in information, manufacturing, and transportation technologies, as well as the emergence of the Internet, have facilitated rapid and early internationalization of countless firms, such as Neogen (www.neogen .com). The firms founders developed diagnostic kits to test for food safety. Compared to test kits available from other firms, Neogens products were more accurate, more efficient, and easier to use. As word spread about the superiority of its products, Neogen was able to internationalize quickly and acquire a worldwide clientele. Farmers use Neogen test kits to test for pesticide residue; veterinarians use them for pharmaceuticals, vaccines, and topicals; government agencies use them to test for E. coli. Today, Neogen is a highly successful international firm. Modern technology is promoting a higher level of international business activity than ever before. For example, many companies in software, gaming, and entertainment maintain a presence only on the Web. Copyright 2014 Pearson Education Information and Communications Technology (ICT)
Profound advances have occurred in computers, digital technologies, telephony, and the Internet. MNEs leverage ICTs to optimize their performance, managing operations around the world. ICTs opened the global marketplace to firmsthat historically lacked the resources tointernationalize. Technology greatly eases management of international operations. Now firms interact more efficiently with foreign partners and value-chain members than ever before. They transmit all kinds of data, information, and vital communications that help ensure the smooth running of their operations worldwide. They use information technology to improve the productivity of their operations, which provides substantial competitive advantages. For example, information technology allows firms to more efficiently adapt products for international markets or produce goods in smaller lots to target international niche markets. In addition, technological advances have made international operations affordable for all types of firms, explaining why so many SMEs have internationalized during the past two decades. Managers use the latest technologies to manage international operations: iPads that combine laptop functionality with smartphone convenience; BlackBerry phones with crossnational Wi-Fi capability that can take phone calls from anywhere on Earth; iPods for listening to audio books or mini Sony Playstations for that ride home on the train after work. Technological advances have spurred the development of new products and services that appeal to a global audience. Leading examples include the Wii and iPhone. Emerging markets and developing economies also benefit from technological advances, partly due to technological leapfrogging. For example, Hungary and Poland went directly from old-style analog telecommunications (with rotary dial telephones) to cell phone technology, bypassing much of the early digital technology (push-button telephones) that characterized advanced economy telephone systems. China and India are the new beachheads for technological advances. India has become a focus of global Internet- and knowledge-based industries. Top management at Intel and Motorola, two leading technology companies, agree that China is the place to be when it comes to technological progress. Both firms generate substantial sales there. Management predicts double-digit increases in demand for technology products in China far into the future. Intels CEO commented, I come back from visiting China and feel as if Ive visited the fountain of youth of computing. Copyright 2014 Pearson Education Manufacturing and Transportation Technologies
Revolutionary developments permit manufacturing that is low-scale and low cost, via computer-aided-design of products (CAD), robotics, and IT-managed production lines. In transportation, key advances include fuel-efficient jumbo jets, giant ocean-going freighters, and containerized shipping.The cost of international transportation has declined substantially, spurring rapid growth in global trade. Collectively, technological advances have greatly reduced the costs of doing business internationally. Violin Computer-aided design (CAD) of products, robotics, and production lines managed and monitored by microprocessor-based controls are transforming manufacturing, mainly by reducing the costs of production. Firms can make products cost effectively even in short production runs. These developments benefit international business by allowing firms to more efficiently adapt products to individual foreign markets, profitably target small national markets, and compete more effectively with foreign competitors that already have cost advantages. Beginning in the 1960s, technological advances led to the development of fuel-efficient jumbo jets, giant oceangoing freighters, and containerized shipping, often through the use of high-tech composites and smaller components that are less bulky and lightweight. In the 20-year period through 2008, the number of container-carrying ships quadrupled to over 4,000 vessels. Increasing availability of cell phones in Africa has helped spur economic growth there. Some farmers use cell phones to monitor crop prices in various local markets where they can sell their harvests. In the 20-year period through 2012, the number of containers transported internationally increased by nearly five times to about 175 million twenty foot equivalent units. Containers are the big boxes, usually 40 feet long (about 12 meters), loaded on top of ships, trucks, and rail cars that carry the worlds cargo. Today, the typical ocean-going container ship holds more than 2,300 containers, double the average of the 1980s.18 As a result, the cost of transportation, as a proportion of the value of products shipped internationally, has declined dramatically. Lower freight costs have spurred rapid growth in cross-border trade. Technological advances have also reduced the costs of international travel. Until 1960, it was common to travel by ship. With the development of air travel, managers quickly travel the world. Copyright 2014 Pearson Education Societal Consequences of Market Globalization
Contagion: Rapid Spread of Monetary or Financial Crises. Beginning in late 2008, the world economy experienced a severe financial crisis and global recession, the worst in decades. The crisis emerged when pricing bubbles occurred in housing and commodities markets worldwide.As bubbles in real estate markets burst, home values crashed and many homeowners could not repay their debts. Meanwhile, thousands of mortgages had been securitized, and their values plunged or became uncertain. Contagion: Rapid Spread of Monetary or Financial Crises Beginning in late 2008, the world economy experienced a severe financial crisis and global recession, the worst in decades.1 The crisis was precipitated by pricing bubbles (excessively high prices) in housing and commodities markets around the world. For example, by mid-2008, oil prices climbed to an all-time high of nearly $150 a barrel, and gasoline prices reached record levels in many countries. High commodity prices resulted partly from rising demand, especially in emerging markets such as China and India. As bubbles in real estate markets burst, home values crashed, leaving owners with mortgage debts greater than the value of their homes. Many homeowners found themselves unable to repay their debts, a situation that worsened as people lost jobs or experienced pay cuts. Meanwhile, thousands of mortgages had been securitizedthat is, sold as investment vehicles on stock markets worldwide. As the value of these securities plunged or became uncertain, the stock markets crashed. A recession occurs when a national economy undergoes a prolonged period of negative growth. GDP growth in advanced, developing, and emerging economies varies over time. It declined substantially in recent years, due to the global recession and the financial crisis. However, even following deep recessions, the global economy has always returned to net GDP growth. The exhibit show how GDP growth in advanced, developing, and emerging economies varies over time. It declined substantially during the global recession and financial crisis. One lesson of the exhibit is that even following deep recessions, the global economy has always returned to net GDP growth. The crisis began in the United States and, like a contagious disease, spread around the world. In international economics, contagion refers to the tendency for a financial or monetary crisis in one country to spread rapidly to other countries, due to the ongoing integration of national economies. Dubai Copyright 2014 Pearson Education Example: Nikes Foreign Factories
Nike has 100s of factories in Asia, Latin America, and elsewhere Nike has been criticized for paying low wages and operating sweatshop conditions. Labor exploitation and sweatshop conditions are genuine concerns in many developing economies. However, consideration must be given to the other choices available to people in those countries. Nike and numerous other MNEs are making efforts to improve working conditions in their foreign plants. Copyright 2014 Pearson Education Global Financial Crisis
Contagion.The rapid spread of a financial or monetary crisis from one country to another, as seen during the recent global financial crisis. The financial crisis originated with pricing bubblesin housing and commodities markets. Thousands of mortgages had been securitized -- sold as investments on stock markets worldwide.As they lost value, stock markets declined substantially. World economies experienced recession -- negative growth. Beginning in late 2008, the world economy experienced a severe financial crisis and global recession, the worst in decades. The crisis was precipitated by pricing bubbles (excessively high prices) in housing and commodities markets around the world. For example, by mid-2008, oil prices climbed to an all-time high of nearly $150 a barrel, and gasoline prices reached record levels in many countries. High commodity prices resulted partly from rising demand, especially in emerging markets such as China and India. As bubbles in real estate markets burst, home values crashed, leaving owners with mortgage debts greater than the value of their homes. Many homeowners found themselves unable to repay their debts, a situation that worsened as people lost jobs or experienced pay cuts. Meanwhile, thousands of mortgages had been securitizedthat is, sold as investment vehicles on stock markets worldwide. As the value of these securities plunged or became uncertain, the stock markets crashed. Copyright 2014 Pearson Education Globalization, Economic Freedom, and National Prosperity
Economic freedom is the extent of government interference in business, strictness of the nations regulatory environment, and the ease with which economic activity can be carried out. National prosperity is strongly associated with -- participation in international trade and investment; -- the nations level of economic freedom. Thus, nations should emphasize economic freedom and participating in international trade and investment. Governments are responsible for ensuring the fruits of economic progress are shared fairly. Developing countries can undertake proactive measures to reduce poverty. They can improve conditions for investment and saving, liberalize markets and promote trade and investment, build strong institutions that ensure good governance, and invest in education and training to promote productivity and encourage upward mobility for workers. Advanced economies can help reduce global poverty by making their markets more accessible to low-income countries; providing debt relief to heavily indebted nations; and facilitating the flow of technology, private capital, and direct investment into poor countries. In the same month that German carmaker BMW launched a new factory in South Carolina, Jackson Mills, an aging textile plant a few miles away, closed its doors and shed thousands of workers. Globalization created a new reality for both these firms. By establishing operations in the United States, BMW found it could manufacture cars cost-effectively while more readily accessing the huge U.S. market. In the process, BMW created thousands of high-paying, better-quality jobs for U.S. workers. Simultaneously, Jackson Mills had discovered it could source textiles of comparable quality more cost-effectively from suppliers in Asia. Globalization drove these firms to relocate key value-adding activities to the most advantageous locations around the world. Copyright 2014 Pearson Education Copyright 2014 Pearson Education Company Internationalization and the Value Chain
The most significant implication of market globalization for companies is that a purely domestic focus is no longer viable in most cases. Market globalization compels firms to internationalize their value chain and access the benefits of international business. Value chain: The sequence of value-adding activities performed by the firm in the process of developing, producing, and marketing a product or a service. Globalization allows the firm to internationalize its value chain, leading to various advantages. The globalization of markets has opened up countless new business opportunities for internationalizing firms. At the same time, globalization means that firms must accommodate new risks and intense rivalry from foreign competitors. Globalization results in more demanding buyers who shop for the best deals worldwide. A purely domestic focus is no longer viable for firms in most industries. Managers should replace parochial attitudes with a more cosmopolitan orientation. Internationalization may take the form of global sourcing, exporting, or investing in key markets abroad. Proactive firms seek a simultaneous presence in major trading regions, especially Asia, Europe, and North America. The most direct implication of market globalization is on the firms value chain. Market globalization compels firms to organize their sourcing, manufacturing, marketing, and other value-adding activities on a global scale. In a typical value chain, the firm conducts research and product development (R&D), purchases production inputs, and assembles or manufactures a product or service. Next, the firm performs marketing activities such as pricing, promotion, and selling, followed by distribution of the product in targeted markets and after-sales service. The value-chain concept is useful in international business because it helps clarify what activities are performed where in the world. For instance, exporting firms perform most upstream value-chain activities (R&D and production) in the home market and most downstream activities (marketing and after-sales service) abroad. Each value-adding activity in the firms value chain is subject to internationalization; that is, it can be performed abroad instead of at home. Copyright 2014 Pearson Education Internationalization of the Firms Value Chain
Copyright 2014 Pearson Education Internationalization of the Firms Value Chain
The truly international firm configures itssourcing, manufacturing, marketing, andother value-adding activities on a global scale. Rationale: cost savings increase efficiency, productivity, and flexibility of value chain activities access customers, inputs, labor, or technology benefit from foreign partner capabilities. Copyright 2014 Pearson Education International business
5. Functional Area excellence 4. Entering and operating in International Markets. 3.Strategy and opportunity assessment 2. The environment of International Business 2.Globalization of markets and the Internationalization of the firm ? Foundation concepts of International business International Business: Strategy, Management, and the New Realities Societal Consequences of Market Globalization
Quiz Societal Consequences of Market Globalization Contagion : Rapid Spread of Monetary or . Crises. Beginning in late 2008, the world economy experienced a severe financial crisis and ..recession, the worst in decades. The crisis emerged when pricing bubbles occurred in housing and commodities markets worldwide.As bubbles in real estate markets burst, home values crashed and many homeowners could not repay their debts. Meanwhile, thousands of mortgages had been ., and their . plunged or became .. Contagion: Rapid Spread of Monetary or Financial Crises Beginning in late 2008, the world economy experienced a severe financial crisis and global recession, the worst in decades.1 The crisis was precipitated by pricing bubbles (excessively high prices) in housing and commodities markets around the world. For example, by mid-2008, oil prices climbed to an all-time high of nearly $150 a barrel, and gasoline prices reached record levels in many countries. High commodity prices resulted partly from rising demand, especially in emerging markets such as China and India. As bubbles in real estate markets burst, home values crashed, leaving owners with mortgage debts greater than the value of their homes. Many homeowners found themselves unable to repay their debts, a situation that worsened as people lost jobs or experienced pay cuts. Meanwhile, thousands of mortgages had been securitizedthat is, sold as investment vehicles on stock markets worldwide. As the value of these securities plunged or became uncertain, the stock markets crashed. A recession occurs when a national economy undergoes a prolonged period of negative growth. GDP growth in advanced, developing, and emerging economies varies over time. It declined substantially in recent years, due to the global recession and the financial crisis. However, even following deep recessions, the global economy has always returned to net GDP growth. The exhibit show how GDP growth in advanced, developing, and emerging economies varies over time. It declined substantially during the global recession and financial crisis. One lesson of the exhibit is that even following deep recessions, the global economy has always returned to net GDP growth. The crisis began in the United States and, like a contagious disease, spread around the world. In international economics, contagion refers to the tendency for a financial or monetary crisis in one country to spread rapidly to other countries, due to the ongoing integration of national economies. Copyright 2014 Pearson Education