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CHAPTER 1: GLOBALIZATION

What is Globalization?
A shift toward a more integrated and interdependent world economy
The Globalization of Markets
Historically distinct and separate national markets are merging
It is no longer make sense to talk about North American products, or German products
Instead, it is replaced by global products
- Falling trade barriers make it easier to sell globally
- Consumers tastes and preferences are converging on some global norm
- Firms are facilitating the trend by offering standardized products worldwide
Most global markets currently are not markets for consumer products where national
differences in taste and preferences are still often important enough to act as a brake on
globalization- but markets for industrial goods and materials that serve a universal need
the world over
The Globalization of Production
Sourcing of goods and services from locations around the globe to take advantage of
national differences in the cost and quality of factors of production
By doing this, companies hope to lower their overall cost structure and/or improve the
quality or functionality of their product offering, thereby allowing them to compete more
effectively.
The Emergence of Global Institutions
Institutions
- Help manage, regulate and police the global marketplace
- Promote the establishment of multinational treaties to govern the global business
system
General Agreement on Tariffs and Trade (GATT): Committed signatories to lowering
barriers to the free flow of goods across national border and led to the WTO
World Trade Organization (WTO)
- Polices the world trading system and making sure nation-states adhere to the
rules in trade treaties
- Facilitates the establishment of additional multinational agreement between WTO
member states
International Monetary Fund (IMF): Maintains order in the international monetary system
The IMF loans come with strings attached; in return for loans, the IMF requires nationstates to adopt specific policies aimed at returning their troubled economic to stability
and growth
World Bank: Promotes general economic development in the worlds poorer nations
- Focus on making low interest rate loans to cash-strapped governments in poor
nations that wish to undertake significant infrastructure investments (such as
building dams or road systems)
United Nations: To promote peace, security, and cooperation
- UNs four purposes: to maintain international peace and security to develop
friendly relations among nations to cooperate in solving international problems
and in promoting respect for human rights to be centre for harmonizing the
actions of nations
- UNs central mandates is the promotion of higher standards of living, full
employment and conditions of economics and social progress and development
Drivers of Globalization

Declining Trade and Investment Barriers


Since, end of WWII, International trade occurs when a firm exports goods/ services to
consumers in another country
- since 1950, average tariffs have fallen significantly and are now at 4 percent
Countries have opened their markets to Foreign Direct Investment (FDI): Direct
Investment in business operations in a foreign country
The Role of Technology Change
Microprocessors and Telecommunication
Microprocessors: Encodes, transmit and decode the vast amount of information that
flows along these electronic highways
Telecommunication development in satellite, optical fibre, wireless technologies, and
Internet and World Wide Web.
Moores Law: The power of microprocessor technology doubles and its cost of
production fall by half every 18 months
The costs of global communications are plummeting, which lowers the costs of
coordinating and controlling a global organization; example. Difference in phone calls of
1930 to 1990
The Internet and World Wide Web

E-commerce Web allows businesses to expand their global presence at a lower cost
than ever before
Transportation Technology
The most important are probably the development of commercial jet aircraft and super
freighters and the introduction of containerization, which simplifies transshipment from
one mode of transport to another
Containerization has revolutionized the transportation business, significantly lowering the
costs of shipping goods over long distances
Since end of WWII, declining trade and investment barrier and increase in communication, this
has facilitated the trend towards
The Globalization of Production - base production in the optimal location for that activity
Lower transportation cost - firms can disperse production to economical, geographically
separate locations
Lower information processing and communication costs - firms can create and manage
globally dispersed production systems; communication technologies have integrate its
globally dispersed operations and to reduce the time needed for developing new
products
Low cost global communications networks - help create an electronic global marketplace
The Globalization of Markets - view the world, rather than a single country, as their market
Low-cost transportation - more economical to ship products around the world, thereby
helping to create global markets
Travelling reduced the cultural distance between countries and is bringing about some
convergence of consumer tastes and preference
Global communication networks and global media - create a worldwide culture, and a
global market for consumer products; the media are primary conveyor of culture
The Changing Demographics of the Global Economy
The Changing World Output and World Trade Picture
In 1960, the United States accounted for over 40% of world economic activity because of
the Cold War, a significant portion of the world was off limits to the Western companies.

The share of world output accounted for by developing nations is rising and their
economies and role in global trade and investment increase.
Many of tomorrows economic opportunities may be found in the developing nations of
the world, and many of tomorrows most capable competitors will probably also emerge
from these regions
The Changing Foreign Direct Investment Picture
In the 1960s, U.S accounted for two-thirds and today, it accounts for less than one-fifth
of worldwide FDI flows
In contrast, the share of FDI accounted for by developing countries has risen - China,
have also become popular destinations for FDI

As barriers to the free flow of goods, services and capital fell and as other countries
increase their shares of world output, non-US firms increasingly began to invest across
national borders to disperse production activities to optimal locations and to build a
direct presence in major foreign market
The Changing Nature of Multinational Enterprise
A multinational enterprise is any business that has productive activities in two or more
countries.
Non- U.S. Multinationals
The globalization of the world economy together with Japans rise to the top of economic
power has resulted in a relative decline in the dominance of US firms in the global
marketplace
The Rise of Mini-Multinationals
Medium sized and small businesses are becoming increasingly involved in international
trade and investment
Thanks to advances in technology like the Internet, international sales can account for a
significant share of revenues for small companies, too.
The Changing World Over
Many former Communist nations in Europe and Asia are now committed to democratic
politics and free market economies
- Collapse of communism has brought about new opportunities in Eastern Europe
- Chinas economic development and enormous population presents huge
opportunities for companies.
but, there are signs of growing unrest and totalitarian tendencies in some
countries like Russia
Mexico and Latin America have also emerged both as new markets, and as source and
production locations - present tremendous new opportunities both as markets and
sources of materials and production
China and Latin America are also moving toward greater free market reforms
- between 1983 and 2008, FDI in China increased from less than $2 billion to $90
billion annually
- but, China also has many new strong companies that could threaten Western
firms
The Global Economy of the Twenty-First Century
The world is moving toward a more global economic system
But globalization is not inevitable
- there are signs of a retreat from liberal economic ideology in Russia
Globalization brings risks
- the financial crisis that swept through South East Asia in the late 1990s

- the recent financial crisis started in the U.S. 2008, and moved around the world
Normative prescriptions of liberal economic ideology: privatization of state-owned
businesses, widespread deregulation, markets being opened to more competition, and
increase commitment to removing barriers to cross-border trade and investment
The Globalization Debate
Is the shift toward a more integrated and interdependent global economy a good thing?
Supporters believe that increased trade and cross-border investment mean:
- lower prices for goods and services
- greater economic growth
- higher consumer income, and more jobs
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.
- Job losses in industries under attack from foreign competitors Downward
pressure on the wage rate of unskilled workers Environmental degradation
Cultural imperialism of global media and multinational enterprises
Globalization, Jobs, and Income
Critics: Worry that jobs are being lost to low-wage nations - that falling trade barriers are
allowing companies to move manufacturing jobs to countries where wage rates are low.
Supporters: 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.
Globalization, Labour Policies and the Environment
Critics: Argue that free trade encourages firms from advanced nations, where there are
costly environmental standards, to move manufacturing facilities offshore to less
developed countries with lax environmental and labor regulations - that firms avoid costly
efforts to adhere to labor and environmental regulations by moving production to
countries where such regulations do not exist, or are not enforced
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.
Globalization and National Sovereignty
Critics: 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.
Supporters: Contend that the power of these organizations is limited to what nationstates agree to grant, and that the power of the organizations lies in their ability to get
countries to agree to follow certain actions.
Globalization and the Worlds 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.
- reduce barriers to trade and investment
- implement economic policies based on free market economies
- receive debt forgiveness for debts incurred under totalitarian regimes
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, and international transactions require converting funds and being susceptible to
exchange rate changes.