AP

SC

450

Econom

icG

lobalizationand

ItsC

onsequences

PR

OF.

WE

RN

ER

AN

TW

EIL

ER

Facultyof

Com

merce

andB

usinessA

dministration

http://pacific.comm

erce.ubc.ca/antweiler/apsc450/

1.D

efinition:W

hatisG

lobalization?

2.T

heC

asefor

Globalization

3.E

vidence:Is

itReally

Happening?

4.W

hatarethe

Driving

Forcesof

Globalization?

5.Strategic

Responses

ofB

usinesses

6.PoliticalG

lobalization

Globalization

/Introduction1

AP

SC

450

Defining

Globalization

Globalization

isthe

processby

which

nationalityand

geographiclocation

become

increasinglyirrelevantfor

economic

activities.

Whatexactly

doesthatm

ean?W

hatisthe

evidenceof

thisprocess?

Which

factorsdrive

thisprocess?

How

shouldbusinesses

respondto

it?

Globalization

/Definition

2

AP

SC

450

Types

ofG

lobalization�

Econom

icG

lobalization:the

processadvancing

theintegration

ofthe

world

economy

throughtrade

andinvestm

ent.

How

doesitw

ork?

�

CulturalG

lobalization:the

processby

which

tastesand

preferencesof

individualsbecom

em

oresim

ilaracross

countries

(e.g.,Nintendo?

Hollyw

oodm

ovies?M

cDonald’s?

orSushi?).

Shouldw

ecare

aboutit?Is

thisdesirable

ornot?

�

PoliticalG

lobalization:countries

careabouttheir

neighbours’

actionsbecause

of(negative)

spillovereffects.

Globalization

/Definition

3

AP

SC

450 Types

ofE

conomic

Globalization

�

Globalization

ofconsumption:

thenation

inw

hicha

product

was

made

becomes

independentofthe

nationalityof

the

consumer.InternationalT

rade

�

Globalization

ofproductionand

ownership:

thenationality

of

theow

nerand

controllerof

productiveassets

isindependentof

thenation

housingthem

.

Foreign

Direct

Investment

Globalization

/Definition

4

AP

SC

450 Globalization

ofC

onsumption

Peoplehave

apreference

forvariety.

Ifeach

nationproduces

anum

berof

varietiesof

goods

proportionaltoits

size,aC

anadianconsum

esforeign

productsin

proportionto

theeconom

icsize

ofthe

originatingcountry.

Since

Canada’s

sharein

world

outputisonly

about3%,only

3%of

goods

consumed

inC

anadaw

ouldbe

domestically

produced.

Ina

fully“globalized”

world,consum

ptionpatterns

willnot

dependon

similarity

inculture,language,or

institutions,andthey

willalso

notdependon

geographicproxim

ityor

traderelations.

Globalization

/Definition

5

AP

SC

450

Globalization

ofProduction

andO

wnership

Location

choicedepends

oncom

parativeadvantage

(lower

per-unit

productioncost)

ina

givenlocation.

Countries

tendto

specializein

activities.International“outsourcing”

ofproduction

allows

companies

toreap

thefullbenefits

ofan

integratedw

orldeconom

y.

Ifthere

isno

“home

bias”in

ownership,C

anada’sassets

would

be

owned

byforeigners

atthesam

eproportion

asforeigners

own

all

world

assets.C

onsequently,onlyabout3%

ofC

anadianassets

would

beow

nedby

Canadians,and

Canadian

firms

would

haveroughly

97%of

theirtotalassets

overseas.

Globalization

/Definition

6

AP

SC

450

The

Gains

fromT

rade

Trade

Leads

toSpecialization

ofC

ountries

�

TechnologicalDifferences:

Some

countriesare

more

productivethan

others.D

iffusionof

newtechnology

isslow

.R

icardo’sT

heoryof

Com

parativeA

dvantageim

pliesthatcountries

will

tradeeven

when

onecountry

hashigher

productivityin

allindustries.

�

Factor

Endow

ments:

Countries

aredifferently

endowed

with

capital,differenttypesof

labour,land,andnaturalresources.

�

IncreasingR

eturnsto

Scale:Per-unitcosts

may

fallwith

outputor

cumulative

output.C

ompanies

may

benefitfromagglom

erationeffects

andother

positive“spillovers.”

Concentration

andspecialization

ofproduction

willbe

beneficial.

Globalization

/Definition

7

AP

SC

450 Gains

fromF

oreignInvestm

ent

Why

doM

ultinationalEnterprises

exist?

Because

MN

Es

internalizeow

nershipadvantages.

�

TechnologicalAdvantage:

protectionof

intellectualproperty.

�

Consum

erR

ecognitionA

dvantage:brand

names,com

pany

recognition,positive“source

effect”.

�

Market/L

ocationA

dvantage:localknow

ledge,delivery

logistics.

�

Input/SourcingA

dvantage:superior

abilityto

sourceinputs.

Globalization

/Definition

8

AP

SC

450

Liberty,M

arkets,andM

arketFailure

�

Peopleand

companies

tradew

itheach

otheracross

borders

becausethis

istheir

choiceand

itisto

theiradvantage.

Interferingin

traderelations

limits

freedom.

�

Com

paniesw

hichcom

petew

ithrivals

forcustomers

andw

orkers

worry

abouttheirreputation

forquality

andsocialresponsibility.

Functioningm

arketsexpress

consumerpreferences,notcom

pany

preferences.G

lobalizationgenerally

increasescom

petition.

�

When

markets

fail,governments

havean

obligationto

intervene

(e.g.,bysetting

environmentalstandards).

Globalization

/Myths

andT

ruths9

AP

SC

450

Does

globalizationharm

thepoor?

Accusations:

1.G

lobalizationdisplaces

low-paid

workers

athome

anddrives

down

wages

byraising

unemploym

ent.

2.G

lobalizationshifts

jobsto

poorcountries

where

workers

are

paidm

uchless

thanthe

displacedw

orkersin

richcountries.

Responses:

1.Freertrade

raisesliving

standardsin

bothrich

andpoor

countries.

2.W

orkersin

poorcountries

arebetter

offbecause

theyhave

chosento

work

fora

(usuallybetter-paying)

foreigncom

pany

ratherthan

a(low

er-paying)dom

esticcom

pany.

Globalization

/Myths

andT

ruths10

AP

SC

450

3.W

hiledisplaced

rich-countryw

orkersare

initiallyw

orseoff,

mostof

themw

illeventuallym

oveto

otherjobs.

4.U

nemploym

entratesare

neitherhigher

norlow

erin

anopen

economy

compared

toa

closedeconom

y.

5.B

ecauseim

portsand

exportsm

ustbalancein

thelong

run,“m

ovingjobs

abroad”in

oneindustry

mustbe

matched

byan

increasein

productionin

anotherindustry

athome.

New

jobsat

home

areoften

high-skilledjobs.

6.E

mpirically,investm

entabroaddoes

notdisplaceexports

(and

jobs).Production

abroadoften

requiresinputs

fromthe

home

country,andincreases

tradeam

ongaffiliates

ofm

ultinationals.

As

aresult,exports

tendto

increasealong

with

foreigninvestm

ent.

Globalization

/Myths

andT

ruths11

AP

SC

450

But

whataboutchild

labour?O

rthe

environment?

�

Stoppingim

portsfrom

countriesw

ithchild

labourm

aydo

more

harmthan

good.L

esstrade

means

lessgrow

thand

more

poverty.T

radebarriers

may

simply

drivechildren

fromproducing

forexportto

producinggoods

fordom

esticconsum

ption;theystill

may

notgoto

schoolinstead.In

thelong

run,thebestw

ayto

combatchild

labouris

tocom

batitssource:

poverty.

�

With

increasedFD

I,willenvironm

entalpollutersm

ovefrom

richhigh-standard

countriesto

poorlow

-standardcountries,resulting

ina

“raceto

thebottom

”?Is

freetrade

goodor

badfor

theenvironm

ent?E

vidence:open

economies

growfaster

thanclosed

economies,and

richercountries

implem

enthigherenvironm

entalstandards.

Globalization

/Myths

andT

ruths12

AP

SC

450

Does

globalizationw

idenincom

einequality

athom

e?�

Increasedtrade

doesindeed

seemto

raiseincom

einequality

somew

hat.W

agesfor

low-skilled

jobshave

stagnated,butwages

forhigh-skilled

workers

haveincreased

significantly.

�

How

ever,theeffectfrom

increasedtrade

isovershadow

ed

dramatically

bythe

inequality-raisingeffectfrom

skill-biased

technologicalchange.

�

The

negativeeffects

fromtrade

andtechnology

arecom

pensated

bybetter

educationof

neww

orkersand

retrainingof

low-skilled

workers.

Globalization

/Myths

andT

ruths13

AP

SC

450

Does

globalizationw

identhe

income

gapbetw

eenrich

countriesand

poorcountries?

�

Em

piricalfact:trade

isgood

foreconom

icgrow

th,andw

ithfew

exceptionsincreases

inper-capita

income

ofthe

poorhas

not

fallenbehind

overallincreasesin

per-capitaincom

ein

developingcountries.

�

Povertyis

worstw

heregrow

this

low(A

frica)and

ism

uch

reducedw

heregrow

this

high(E

astAsia).

Betw

een1975

and1995,the

per-capitaincom

egap

between

theU

.S.andC

hinahas

fallenfrom

19to

6;however,A

frica’sincom

egap

hasincreased

from12

to19.

�

Wage

differentialsalso

reflectdifferencesin

productivity.

Globalization

/Myths

andT

ruths14

AP

SC

450

Ifnotglobalization,then

who

orw

hatisresponsible

forthe

scandalouslevelofpoverty

inthis

world?

�

Rich

countries:

�

traderules

excludegoods

frompoor

countries

(e.g.,textiles,agriculturalproducts)

�

protectionof

intellectual

propertyrights

may

excludepoor

countriesfrom

accessing

technology(e.g.,cheap

genericdrugs

tocom

batHIV

)

�

over-protectionof

banksencourages

recklesslending

andthus

contributesto

financialcrisesin

poorcountries

�

Poor

countries:m

anyproblem

sare

indeedhom

e-made

�

corruption

�

incompetence

andpatronage

�

lackof

legal

protectionof

peopleand

property

�

lackof

wom

en’srights

�

tribalwarfare

�

non-democratic

politicalsystems

Globalization

/Myths

andT

ruths15

AP

SC

450

Globalization

Exam

ple:T

heG

ML

eMans

design:G

ermany

components:

Japan,Taiwan,Singapore

assembly:

Korea

advertisingcam

paign:B

ritain

Globalization

/Evidence

16

AP

SC

450

Em

piricalEvidence:

InternationalTrade

1.W

orldexports

haveconsistently

grown

more

thanw

orldG

DP

(output)during

thePost-w

arperiod.

During

thelast45

years

world

merchandise

outputmultiplied

bya

factorof

5.5w

hile

tradem

ultipliedby

afactor

of14.

2.T

radein

manufactured

goodsstillaccounts

forabouthalf

ofall

tradeand

itgrewrapidly

inthe

1990’s.

3.T

radein

services(softw

are,insurance,banking,etc.)is

increasingits

sharein

totaltradeand

isbecom

ingincreasingly

important.

Globalization

/Evidence

17

AP

SC

450

Em

piricalEvidence:

Foreign

DirectInvestm

ent

1.FD

Ihas

increaseddram

atically.B

etween

1984and

1998,total

flowof

FDI

fromallcountries

increasedby

900%,w

hilew

orld

tradegrew

by121%

,andw

orldoutputby

34%.

2.B

y1998,the

globalFDI

stockhas

exceededU

S$4.0trillion

(more

than1/2

thesize

ofthe

U.S.econom

y)

3.45,000

parentcompanies

had280,000

foreignaffiliates.

4.A

bout80%of

world

FDI

isbetw

eendeveloped

countries.

5.A

bout80%of

FDI

intoC

anadacom

esfrom

theU

.S.,and

another10%

fromthe

UK

.

Globalization

/Evidence

18

AP

SC

450

Counter

Evidence:

Isthe

World

aG

lobalVillage?

Nations

andgeography

stillmatter.

Consider

theleading

multinationals.

With

fewexceptions

(Nestle),they

havea

home-country

biasin

boththeir

assetsand

sales(sales

athome

area

higher%

oftotalsales

thanhom

eG

DP

asa

%of

world

GD

P).

Consider

thelarge

automobile-M

NE

sin

theU

S.Deborah

Swenson

hasanalyzed

dataon

thepercentage

ofinputs

originatingin

theU

Sand

thepercentage

ofshipm

entsrem

aining

inthe

US.For

the‘B

ig3’,95%

ofinputs

aredom

esticand

92%

ofshipm

entsrem

ainin

theU

S.Forforeign

assemblers,67%

of

inputsand

88%of

shipments

aredom

estic.

Globalization

/Evidence

19

AP

SC

450

Counter

Evidence

(II)�

FDI

outsideof

thehom

ecountry

isregionally

clustered

(especiallytaking

intoaccounteconom

ysizes):

Japanis

the

principalinvestorin

Korea

andother

Asia-Pacific

areas.

Germ

anydom

inatesinvestm

entinE

asternE

urope.T

heU

nited

Statesdom

inateinvestm

entinthe

restofthe

Am

ericas.

�

Affiliates

ofU

SM

NE

sin

Europe

sellmostof

theirproducts

(on

average60%

)in

thecountry

inw

hichthe

affiliateis

located.

Globalization

/Evidence

20

AP

SC

450 Driving

Forces

ofG

lobalization

1.A

dvancesin

Transportation

Technology:the

“shrinking

globe”;airtravel;container

shipsand

tankers;more

roads.

2.Im

provementin

Com

munication

Technology:coordination

of

activitiesaround

thew

orldis

gettingeasier;the

Internet.

3.L

ower

Barriers

toT

rade:N

AFTA

,GA

TT

andthe

WT

O;the

Most-Favoured

Nation

(MFN

)Principle.

4.L

ower

Barriers

toInvestm

ent:T

heN

ationalTreatm

ent(NT

)

Principleensures

non-discrimination

againstforeigncom

panies

5.Integration

ofFinancialM

arkets:H

ighlevelof

international

capitalmobility;increased

markettransparency.

Globalization

/Driving

Forces

21

AP

SC

450

Driving

Forces

ofGlobalization

(continued)

6.C

onvergencein

Tastes:A

sper

capitaincom

eshave

converged

among

theO

EC

Dnations

(Europe,N

orthA

merica,Japan),this

hasprom

otedm

oresim

ilarbuying

patterns,making

goods

producedabroad

more

attractivethan

theyw

erebefore.

Greater

similarity

inbuying

patternsm

ayalso

emerge

fromincreased

travel,migration,and

internationalmedia.

Forexam

ple:W

ith

theexposure

tonew

cuisines,Am

ericansare

sprinklingan

average3.1

poundsof

spicesonto

foodannually,nearly

apound

more

thana

decadeago.

Globalization

/Driving

Forces

22

AP

SC

450 How

ShouldB

usinessesR

espondto

theC

hallengeof

Globalization?

�

Rationalization:

thereorganization

ofproduction

byproductor

processin

differentcountriesto

exploitlocationadvantages

(see:gains

fromtrade).

–C

onsolidation:shutting

down

ofinefficientproduction

linesin

some

plantsand

boostingof

productioncapacity

ofefficientproduction

linesin

otherplants

–Specialization:

dedicationof

productionplants

toindividual

productsor

processes.

�

Fragm

entation:D

uplicationof

productionlines

indifferent

geographiclocations

toaddress

localdifferencesin

consumer

behaviouror

exploitproximity

advantages.

Globalization

/StrategicR

esponses23

AP

SC

450

Globalization:

StrategicR

esponses

GlobalStrategy:

Inresponse

tohigh

costpressures,centralize

productionand

functionsin

them

ostsuitablelocation(s)

inorder

toexploiteconom

iesof

scale.Sella

“globalproduct”.

Multidom

esticStrategy:

Inresponse

tohigh

demand

pressures,

establishself-reliantoperations

inm

anycountries

with

little

globalintegration.Sella

“localproduct”.

InternationalStrategy:A

mixture

ofthe

previoustw

o

strategiesw

itha

strongheadquarter

(e.g.,forR

&D

),strong

globalintegration,butsome

duplicationof

functionsin

individualcountriesor

regions.

Globalization

/StrategicR

esponses24

AP

SC

450

Globalization:

OperationalM

odes�

Exporting

�

Licensing

andF

ranchising

�

Subsidiary

–B

uyingan

existing“brow

nfield”operation.

–E

stablishinga

new“greenfield”

operation.

�

JointVentures

�

StrategicA

lliances

Globalization

/StrategicR

esponses25

AP

SC

450

Globalization:

PracticalC

hallenges�

Different

Legaland

TaxE

nvironments:

ownership

rulestax

rates,doubletaxation,governm

entincentives

�

InternationalFinance:

differentcurrencies,exchangerates,

hedgingagainstcurrency

risk.

�

InternationalMarketing:

consumers

havedifferent

preferences,differentlevelsof

sophisticationand

purchasing

power,differentsocialcontext.

�

OrganizationalIntegration:

differentlanguages,different

businessculture.

Globalization

/StrategicR

esponses26

AP

SC

450

PoliticalG

lobalizationA

ndT

heW

estphalianP

rinciple�

The

17th-centuryPeace

ofW

estphalia,which

endedthe

30-Years

War,established

therule

thatstatesm

aydo

whatever

theylike

(suchas

imposing

thesovereign’s

religion)w

ithintheir

borders—only

externalrelationsare

theproper

concernof

the

internationalcomm

unity.

�

Under

which

conditionsare

we

willing

tointerfere

inthe

internal

affairsof

asovereign

state?In

reality,theW

estphalianPrinciple

iseroding.

Globalization

/PoliticalG

lobalization27

AP

SC

450 The

Westphalian

Principle

(II)�

Whataboutspillover

effects?V

iolationsof

human

rights

generaterefugee

streams.

Violations

ofenvironm

entalstandards

spillacrossborders

throughpollution

(e.g.,acidrain,global

warm

ing).

�

How

strongis

the(econom

icand/or

political)rationale

for

harmonizing

standardssuch

aslabour

laws,environm

ental

protection,orhum

anrights?

�

Whatcan

we

doto

coordinateactivities

andprotectstandards?

�

Isolationismis

notanoption.

Globalization

isa

reality.

Globalization

/PoliticalG

lobalization28