EMBA 7162008

Chapter 1Globalization

• Why the world is flat?• What does “globalization” mean?• Developing economies• Measuring globalization• Trends to watch• The great globalization debate

Outline

Knowledge

“Knowledge is of two kinds. We know a subject ourselves, or we know where we can find information on it.”

Samuel Johnson

Why the World is Flat?

• Collapse of Berlin Wall, Nov 9, 1989• Netscape, Aug. 9, 1995• Workflow software applications• Outsourcing• Offshoring• Open sourcing – Linux, Wikipedia, blogs• Insourcing – UPS’s employees perform services

beyond shipping for another company• Supply chaining – Wal-Mart• Informing – Google, Yahoo, MSN Search• “Steroids” – Personal digital devices, mobile phones,

wireless access, VOIP(The World is Flat, Thomas Friedman)

Globalization

• “Globalization” refers to the shift toward a more integrated & interdependent world economy.

• Two facets of globalization: 1) markets, and 2) sourcing/ production

• Distinct/separate markets merging into a huge global marketplace– Tastes and preferences of consumers converging (??)– Coke/Pepsi, McDonald’s, Starbucks, SONY, IKEA

• Global sourcing and production of goods & services• Developing a global web of suppliers as a source of

competitive advantage• Decides “where to produce” depending on a

country’s factors of production– Labor, land, capital, energy, expertise

McGraw-Hill/Irwin, Global Business Today, 5/e ©

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

Globalization

• “Globalization is changing the nature of competition and value creation in ways more subtle and fundamental than simply cost. By incubating scores of new business models that can unseat established companies, globalization is creating opportunities for new value creation and highly profitable growth at the two ends of the value chain––new customer connections at one end and new models of innovation at the other.”

Adrian Slywotzky, Peter Baumgartner, Larry Alberts, and Hanna Moukanas

Mercer Management Consulting

(Are you enjoying globalization yet?” http://www2.oliverwyman.com/de/pdf_files/MMJ20_Enjoying_Globalization.pdf)

Emergence of Global Institutions

• These institutions define the “rules” of international economic activity

• World Trade Organization (WTO) (succeeded GATT in 1995 ) is “an organization for liberalizing trade. It’s a forum for governments to negotiate trade agreements. It’s a place for them to settle trade disputes. It operates a system of trade rules.”

• International Monetary Fund (IMF) “was established to promote international monetary cooperation, exchange stability, and orderly exchange arrangements; to foster economic growth and high levels of employment; and to provide temporary financial assistance to countries to help ease balance of payments adjustment. ”

(http://www.wto.org/; http://www.imf.org/external/)

Emergence of Global Institutions

• The World Bank is a “vital source of financial and technical assistance to developing countries around the world.” It provides “low-interest loans, interest-free credit and grants to developing countries for education, health, infrastructure, communications and many other purposes.” Today, the Bank's mission is to reduce poverty.

• The purposes of the United Nations “are to maintain international peace and security; to develop friendly relations among nations; to cooperate in solving international economic, social, cultural and humanitarian problems and in promoting respect for human rights and fundamental freedoms; and to be a centre for harmonizing the actions of nations in attaining these ends.”

(http://www.worldbank.org/; http://www.un.org/aboutun/)

Real GDP Growth

(http://siteresources.worldbank.org/INTGEP2008/Resources/complete-report.pdf)

Developing Economies

(http://siteresources.worldbank.org/DATASTATISTICS/Resources/WDI08_section4_intro.pdf)

The Globalization Index

• The index provides “an assessment of how much, or how little, countries are opening themselves up and connecting with others.” [At Kearney & Foreign Policy]

• Four key components of global integration 1. Economic integration combines data on trade and

foreign direct investment (FDI) inflows and outflows.

2. Personal contact tracks international travel and tourism, international telephone calls, and cross- border remittances and personal transfers (including worker remittances, compensation to employees, and other person-to-person and nongovernmental transfers).

(Source: “The Globalization Index 2007,” Foreign Policy, Nov/Dec 2007)

The Globalization Index

3. Technological connectivity counts the number of Internet users, Internet hosts, and secure servers through which encrypted transactions are carried out.

4. Finally, political engagement includes each country’s memberships in a variety of representative international organizations, personnel and financial contributions to U.N. peacekeeping missions, ratification of selected multilateral treaties, and amounts of governmental transfer payments and receipts.

(Source: “The Globalization Index 2007,” Foreign Policy, Nov/Dec 2007)

The Global Top 10

(Source: “The Globalization Index 2007,” Foreign Policy, Nov/Dec 2007)

The Winners’ Circle

• For the fourth time in seven years, Singapore tops the list as the most globalized country in the world.

• A new addition was Hong Kong, which debuted in 2nd place & distinguished itself with the highest scores in both the economic and personal contact dimensions.

• “The Netherlands made its way back into the top three for the first time since 2001, mostly due to the merger of the Royal Dutch Petroleum Company and Britain’s Shell Transport and Trading Company. Worth about $100 billion, the deal helped to increase foreign direct investment outflows for the Netherlands by more than 590 percent over the previous year.”

• Meanwhile, the United States slipped in the overall rankings from third to seventh.

(Source: “The Globalization Index 2007,” Foreign Policy, Nov/Dec 2007)

Top Ranking Countries

• The 72 countries ranked in the 2007 Globalization Index account for 97 percent of the world’s gross domestic product (GDP) and 88 percent of the world’s population.

• “Eight of the index’s top 10 countries have land areas smaller than the U.S. state of Indiana; and 7 have fewer than 8 million citizens. Canada and the US are the only large countries that consistently rank in the top 10.”

• “All 8 rank in the top 11 on the economic dimension of globalization, which incorporates trade & foreign direct investment. Hong Kong and Singapore, the top two performers in this category, leave other economies in the dust.”

(Source: “The Globalization Index 2007,” Foreign Policy, Nov/Dec 2007)

Small, but Powerful

(http://www.foreignpolicy.com/story/cms.php?story_id=3995&print=1)

Trafficking in Information

(Source: “The Globalization Index 2007,” Foreign Policy, Nov/Dec 2007)

Urban Outfitted

(Source: “The Globalization Index 2007,” Foreign Policy, Nov/Dec 2007)

Standing Still

(Source: “The Globalization Index 2007,” Foreign Policy, Nov/Dec 2007)

Baltic Tiger – Estonia – No. 10

• Estonia’s “government has moved aggressively to open itself up to the outside world. For all practical purposes, Estonia has no corporate income tax, and shareholder dividends are subject to a simple flat tax. Bureaucracy isn’t a problem, either; the government just steps aside to let investors do their thing. The World Bank ranks Estonia 17th among 175 economies in ease of doing business, and sixth in ease of trading across borders. Additionally, the government places no restrictions on foreign ownership of real estate, which has fueled a property investment boom among overseas buyers.”

(Source: “The Globalization Index 2007,” Foreign Policy, Nov/Dec 2007)

2008 Global Trends

• Faster, more frequent bubbles defined as “a state in which asset prices are inflated beyond the support of underlying cash flow.”

• Rising cost of energy, raw materials, commodities• Participative risk (insurance, healthcare, retirement)• Strategic sourcing• Excellence as a differentiator (cost pressure,

labor/talent scarcity)• Green technology as “new Y2K” (greenhouse effect)• IT’s relevance renaissance (improved productivity)• Digital marketing imperative (increasing online

consumer activity)

(http://www.boozallen.com/media/file/2008_Trends_and_Prospects.pdf)

Rising Costs

(http://siteresources.worldbank.org/DATASTATISTICS/Resources/WDI08_section4_intro.pdf)

The Great Globalization Debate

• What are the challenges of globalization?• Some have blamed globalization for the

growing gulf between rich and poor. Do you agree with the statement? Why or why not?

• What are the causes and consequences of inequality?

• Overall, is globalization a good thing? Please explain.