chapter Globalization McGraw-Hill/Irwin Global Business Today, 5e © 2008 The McGraw-Hill Companies,...

chapter

Globalization

McGraw-Hill/IrwinGlobal Business Today, 5e

© 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.

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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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Classroom Performance System

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

a) Internationalization

b) Economic integration

c) Globalization

d) Privatization

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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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Which of the following is not an example of a global institution?

a) The Federal Reserve

b) The International Monetary Fund

c) The World Bank

d) The World Trade Organization

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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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Coca-Cola, Sony Playstations, and McDonald’s hamburgers are all examples of

a) American products

b) Global products

c) Industrial products

d) National products

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

a) The UN

b) The IMF

c) The WTO

d) The World Bank

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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 World Output and the Changing World Trade Picture

• In the early 1960s, the U.S. was the world's dominant industrial power accounting for about 40.3 percent of world manufacturing output • By 2005 the United States accounted for only 20.1 percent• Rapid economic growth is now being experienced by countries such as China, Thailand, and Indonesia• Further relative decline in the U.S. share of world output and world exports seems likely• Forecasts predict a rapid rise in the share of world output accounted for by developing nations such as China, India, Indonesia, Thailand, and South Korea, and a decline in the share by industrialized countries such as Britain, Japan, and the United States

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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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Which of the following statements is true?

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

b) The U.S. has been accounting for an increasing share of world foreign direct investment in recent years

c) The U.S. has been accounting for an increasing share of world output in recent years

d) The share of world trade accounted for by China has been increasing in recent years

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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

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CRITICAL DISCUSSION QUESTIONS

1. Describe the shifts in the world economy over the last 30 years. What are the implications of these shifts for international businesses based in Great Britain? North America? Hong Kong?

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2. "The study of international business is fine if you are going to work in a large multinational enterprise, but it has no relevance for individuals who are going to work in smaller firms." Evaluate this statement.

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3. How have changes in technology contributed to the globalization of markets and of production? Would the globalization of production and markets have been possible without these technological changes?

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4. "Ultimately, the study of international business is no different from the study of domestic business. Thus, there is no point in having a separate course on international business." Evaluate this statement.

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5. How might the Internet and the associated World Wide Web impact international business activity and the globalization of the world economy?

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6. If current trends continue, China may emerge as the world's largest economy by 2020. Discuss the possible implications of such a development for:• The world trading system.• The world monetary system.• The business strategy of today's European and U.S. based global corporations.• Global commodity prices.

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7. Read the Country Focus in this chapter on the Ecuadorian rose industry, the answer the following questions: a) How has participation in the international rose trade helped Ecuador’s economy and its people? How has the rise of Ecuador as a center for rose growing benefited consumers in developed nations who purchase the roses? What do the answers to these questions tell you about the benefits of international trade?b) Why do you think that Ecuador’s rose industry only began to take of 20 years ago? Why do you think it has grown so rapidly? c) To what extent can the alleged health problems among workers in Ecuador’s rose industry be laid at the feet of consumers in the developed world and their desire for perfect Valentine’s Day roses?d) Do you think governments in the developed world should place trade sanctions on Ecuador roses if reports of health issues among Ecuadorian rose workers are verified? What else might they do to improve the situation in Ecuador?

chapter Globalization McGraw-Hill/Irwin Global Business Today, 5e © 2008 The McGraw-Hill Companies,...

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