Lecture 2

International Trade and Finance in

the era of globalization
 Globalization
What are we seeing today
Products manufactured somewhere being used here
Products manufactured here being used elsewhere
Inputs coming from somewhere/design/assembly
Example : i-phone in China, Levis jeans in Thailand/India/Lesotho;
Cars getting assembled in India,
Many other factories/ goods
What does it imply
That national economies are getting more and more integrated and
interdependent towards world economy
This shift towards integration and interdependence of world
economy is called globalization
Globalization refers to the shift toward a more integrated and
interdependent world economy
Globalization refers to the trend towards a more integrated global
economic system
From when America sneezes Europe catches the cold TO Quantitave
Easing affecting the world economy
In the world economy today, we see
From a shift away from self-contained national economies with high
barriers to cross-border trade and investment
To a move toward a more integrated global economic system with lower
barriers to trade and investment
Shift from control to free market
After Depression and WWII
Reduced barriers
Economy opening because of perceived advantages
No longer closed door policy : China, India, Soviet/SEZs
The effects of this trend can be seen
in the cars people drive
in the food people eat
in the jobs where people work
in the clothes people wear
in many other ways

Establishment of international institutions

 Declining Trade
and Investment Barriers
This has led to an acceleration in the volume of world
trade and investment since the early 1980s
Growth in World Merchandise Trade and Production,
1950 - 2006
 About $5.1 trillion in foreign exchange transactions taking place everyday in April 2016
Over $36 trillion of goods and some $9 trillion of services being sold across national borders in 2013
Trade :Volume of goods, services, investment moving across international
borders, expanding faster than world output
World GDP: 4%, 2.5%, 2.0% in 2010,11,12
World Merchandise Exports :14%,5.5%,2.5%
World Merchandise Imports : 5%in 2011,2% in 2012
Commercial Services : Exports 1.87% in 2011 to 4.3% in2012/ Imports : 1.6%
to 4.1%
For businesses, this process has produced many challenges and
opportunities
Challenges: increased competition from foreign companies, earlier
protection, now better products/driving down prices. EX: Ambassador,
Fiat, Toyota in USA impacting GM and others, Nokia
If not keeping up with productivity and efficiency then outcompete- other
examples- AC, TV, Fridge
Competition in services also
Many services need not be performed where they are delivered . EX:
Outsourcing in India, tax returns prepared in India for USA,
 Opportunities-
Larger market - Increase revenue by selling
around the world Ex: China, India( Nuclear Deal)
Quality products-Reduce costs by producing in
nations where key inputs including labor is cheap.
Ex : Levis(Thailand), i-phone(China-export figs
USA)
Locational advantage-Increasing wages in China,
production shifting elsewhere like Bangladesh,
Vietnam, missing opportunities for India
 Impact-
Composition of world output by origin changing/
Manufacturing in China, E7, N11/ Services India
Services : BPOs/KPOs
Large number of Engineers
English
Cheap labor
Time Zone- 24 hrs working
MNCs by origin and dominance changing
FDI
Exports
New Markets
World Flat-Acquisition abroad by developing countries, Jaguar,
Corus(Anglo-Dutch by TATA)/Arcelor by Mittal
Global Institutions
Two key facets of globalization are:
Globalization of markets
Globalization of production
That is manifestation in markets and production
The globalization of markets refers to the merging of
historically distinct and separate national markets into
one huge global marketplace
In many markets today, the tastes and preferences of
consumers in different nations are converging upon some
global norm
Examples of this trend include Coca Cola, Starbucks, Sony PlayStation, and
McDonalds hamburgers
The globalization of production refers to the 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
(labor, energy, land, and capital)
The goal for companies is to lower their overall cost structure or improve
the quality or functionality of their product and gain competitive
advantage
 Globalization of Markets
Merging of distinct national markets into one huge global market place
How : Reduced barriers
Customizing and converging of tastes and preferences, ex: coke,
McDonalds, Starbucks
Increasing number of industries no longer meaningful to talk about
American market, Japanese market
More common in industrial goods and those that serve common need
like microprocessors, jet engines, financial assets like treasury bills
Need not be MNCs to cater and benefit from globalization of markets-
Germany : 98% of small and mid-size companies have exposure
through exports or international production
Rivalry common: soft drinks, boeing and airbus
So even if mgr of small cos, still can benefit, moreso if non consumer
goods cos
However, national markets still exist in terms of tastes and preferences
(McAloo,McPaneer)
Calling for customizing marketing strategies, product features, etc to
match conditions in a particular economy
 Globalization of Production
Sourcing of goods and services from locations where inputs cheap and
better quality/ SEZ in China
Cheap labor: locate production there; ex :Thailand, Lesotho,
Bangladesh, Vietnam, China/India case of missing opportunities
Quality - Boeing: many spare parts made in Japan(doors, fuselage,
wings, etc), Singapore, Italy (wing flaps)/ Vizio of America flat panel
TVs with components from South Korea and assembling in Mexico and
selling in US/ because these suppliers are the best in the world
Because of Internet, services being outsourced to low-cost producers
in other nations
Services: MRI scans in India, Tax returns, Maintenance of software in
India by IBM, BPO, taking advantage of time difference/Medical
Tourism- huge potential for India
However still formal and informal barriers to trade and FDI- ex: no
outsourcing of MRI scans to developing nations where radiologists are
cheaper/ But increasing trend towards globalization of markets and
production
 With increasing globalization came Global institutions to manage and
regulate the global market place
Global Institutions
-help manage, regulate, and police the global market place
promote the establishment of multinational treaties to govern the global
business system
Created by voluntary agreement between individual nation states, and
functions through international treaties
GATT/WTO/IMF/WB/UN
WTO- for monitoring the world trading system and to ensure that nation
states adhere to rules laid down in trade treaties signed by WTO members
164 nations (july 2016) accounting for 97% of world trade and output were
members of the WTO
Promoted lowering of barriers its role subject of debate
IMF- created in 1944 by 44 nations that met at Bretton Woods
To maintain order in the international monetary system- seen as lender of last
resort, with strings attached, often controversial
World Bank: focus on soft loans to poor nations for infrastructure
development , etc
UN- for international peace, co-operation and promoting human rights
 Drivers of Globalization
Decline in barriers to trade
Technological change in
communication,
information processing
and transportation technologies
 Declining Trade and Investment Barriers
Lower trade barriers enable companies to view the world as a single
market and establish production activities in optimal locations around
the globe
Earlier high tariffs to protect domestic industries/ retaliatory
measures leading to raising of trade barriers against each other
Policy leading to beggar thy neighbour
Shrinking demand /Great depression
Post WWII towards free trade/GATT to cover both goods and
services/WTO also focusing on phasing out subsidies in agriculture
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
Removing restrictions on FDI India also as one way of attracting
investments
Reduced barriers imply firms can view world as a single and not
fragmented market
As manager look at a larger market not confined to domestic
market only
 Locate production where cheapest
Design product in one country, source inputs from
another, assemble somewhere else, export to some
other country
Economies becoming more intertwined
Nations becoming increasingly dependent on one
another- contagion- East Asia, Financial Meltdown
Trade increased at a faster rate than growth in world
output
Also leading to more competition- Samsung, LG,
Consequently clamor for more protection
 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
Lowering of trade barrier could not have led to such increasing trade without
advances in communication, information processing, and transportation
technology, including Internet
Microprocessors, Moores Law-The development of the microprocessor has
lowered the cost of global communication and therefore the cost of coordinating
and controlling a global organization
Optical fiber, undersea broadband, Satellite.
MRI scans, software testers in India to debug code written in USA
Commercial jet, containerization- lowering turn around time, loading and
unloading which was earlier labor intensive, leading to reduction in transportation
costs helping movement of goods and globalization of markets- Sports goods from
India
Having dispersed locations became more economical, leading to globally dispersed
production system and allow firms to better respond to international customer
demands
Low costs of transportation meant widening of market- roses from Ecuador to US,
markets for consumer products like McDonalds, Gap jeans, etc
Manager could oversee the globally dispersed production system because of speed
and economy in travelling
 Impact
IT and Finance in era of globalization lead to
Decreasing share of developed economy in GDP , including USA
Rising share of developing economies, especially the E7, etc
Rise of China and India
BRICS
E7 :India, China, Brazil, Russia, Turkey, Mexico, Indonesia
predicted to have larger economy than G7 by 2020: US, Japan,
Ger, FR, UK, Italy, Canada
N11: the next 11 again name given by Jim o Neill having high
potential along with BRIC to become worlds largest ecoy in 21st
century
Bang, Egy, Indonesia, Iran, Mex, Nig, Pak, Phill, Tur, S Kor, Viet
 The Changing World Output
and World Trade Picture
In the early 1960s, the U.S. was the world's dominant
industrial power accounting for about 40.3% of world
manufacturing output
By 2007, the U.S. accounted for only 20.7%
Other developed nations experienced a similar decline
Rapid economic growth is now being experienced by
countries such as China, Thailand, and Malaysia
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
So companies may find both new markets and new
competitors in the developing regions of the world
 The Changing World Output and World Trade
Picture
The Changing Demographics of World GDP and Trade
 The Changing Demographics
of the Global Economy
In the 1960s:
U.S. dominated the world economy and the world
trade picture
World 86 trn $(PPP-2013), US 16.7, China 13.3
Share of world exports : World 17.7trn$; Chin 2.2, US
1.5, India o.31
U.S. dominated world FDI
U.S. multinationals dominated the international
business scene
 US dominance in exports also declined/ in FDI/ MNCs
Rise of non-USA in FDI/ MNCs
China: China National Petroleum Corpn, Sinopec Group {oil
and gas}, State Grid Cor of China
Brazil (Petrobras), Samsung, LG, India (Tata Gr), Japan
(Toyota, Japan Post Holdings), Mexico (Pemex)/rise of
small MNCs
Changing World order- China towards market
economy/free economy in socialist bloc/India opening
up
About half the world-- the centrally planned economies of the
communist world-- was off limits to Western international business
Today, much of this has changed.
Huge market in China/ India- flow of FDIs
 The Changing Nature of
the Multinational Enterprise
A multinational enterprise is any business that has productive activities in
two or more countries
Since the 1960s,
there has been a rise in non-U.S. multinationals
there has been a rise in mini-multinationals
The globalization of the world economy has resulted in a decline in the dominance of
U.S. firms in the global marketplace
In 1973, 48.5 % of the worlds 260 largest MNEs were U.S. firms
By 2006, just 24 of the worlds 100 largest non-financial MNEs were from the U.S.,
13 were from France, 12 from Germany, 12 were from Britain, and 9 were from
Japan, and 7 of the worlds largest 100 MNEs were from developing economies
While most international trade and investment is conducted by large
MNEs, many small and medium-size firms are expanding internationally
The Internet has made it easier for many smaller companies to build
international sales
 The Changing World Order
Today, many markets that had been closed to Western firms
are open
The collapse of communism in Eastern Europe has created
a host of export and investment opportunities
Economic development in China has created huge
opportunities despite continued Communist control
Free market reforms and democracy in Latin America have
created opportunities for new markets and new sources of
materials and production
 The Changing Foreign
Direct Investment Picture
The share of world output generated by developing
countries has been steadily increasing since the 1960s
The stock of foreign direct investment (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 largest recipient of FDI has been China
Stock of FDI at home--- US 2.8 trn $, China 1.3 trn $,
UK 1.5, HK 1.3 trn$
FDI Flow: China 295b$, India 23b$, Brazil 76 b$,
HK 74b$, Rus 50b$, Singa 61b$, US 203 b$,
 The Changing Foreign
Direct Investment Picture
Percentage Share of Total FDI Stock, 1980 - 2006
 The Changing Foreign
Direct Investment Picture
FDI Inflows, 1988 - 2007
 Lessons for Managers
Rapid change in global economy
Reduced barriers of goods and services
Increase in cross-border trade and investment
Economy becoming more closely integrated into single,
interdependent economic system
More nations joining rank of developed nations like Taiwan, S Korea
In countries increasing trend towards privatization, deregulation,
opening markets to more competition
World moving towards economic system more favorable to
international business
Downside- contagion, ex South Asian crisis
 The Globalization Debate
Question: Is the shift toward a more integrated
and interdependent global economy a good
thing?
Is globalization good or bad
For
lower prices of goods and services
increasing economic growth
raising income
more jobs in all countries that participate in global
trading system
 Against
destroying culture/health issues
Antiglobalization Protests
Protests against McDonalds in France, KFC in Bangalore
Job losses in industries under attack from foreign
competitors ,
in manufacturing because in countries where wage rates are low
such as China , India, Thailand-
Outsourcing of services by IBM, Dell ,etc- exporting jobs to lower
cost foreign suppliers unemployment and lower standards in
developed countries
Downward pressure on wage rates of unskilled workers
Harwood industries in textiles, moved to Honduras where paid 48
cents against $9 in USA leading to fall in wage rate in America
Environmental degradation
Shifting of manufacturing jobs to bypass labor regulation in
advanced economy and environment abuse child labor ex Apple
in China, un-hygienic conditions in China / against NAFTA that USA
will employ child labor , abuse environment
 On balance
Efficiency- Producing those goods in which more efficient
Why produce textiles in USA when can be imported cheaper from China,
Thailand
Consumers benefit from lower prices, real income increases, can spend
more on other items also
More jobs
China more income so more imports from USA, more jobs in USA
Same argument for outsourcing of services- Dell to India/cheaper PCs/ more
on other products/ more income in India/ more demand from USA, leading to
more jobs
Share of labor in national income of developed countries has fallen
because of shifting of jobs abroad
But total pie has increased leading to better living standards
Also share of skilled labor has increased
OECD- real income increased, including income of poorest segments
Decline in real wages of unskilled workers also due to technology induced shift
within advanced economy/surplus of unskilled and shortage of skilled workers
So more due to impact of technology rather than due to globalization
Invest more on education to upgrade the skills of workers
Gap also closing in wages in developing and developed countries like China, so
ultimately jobs will come back
 Regulations of environment and labor improve with growth
Econometric study hump shaped between income and pollution
levels ($8000), but not for carbon dioxide
Improve regulation rather than curb trade, NAFTA only after tougher
laws
Globalization and supra nationals like WTO
WTO can arbitrate to change trade policies that violate regulations, if
refuses may allow other states to impose sanctions
Bureaucrat over elected bodies, but not so because WTO limited to
only that which countries agree to grant
Supporters of globalization argue that the power of these organizations is limited to what nation-
states collectively agree to grant
The organizations must be able to persuade members states to follow certain
actions
Without the support of members, the organizations have no power
Globalization has increased inequality between average PCI
developed and developing countries
But several factors and cannot be attributed to free trade only
Economic policy, dictatorship, corruption, war , increasing population,
debt in highly indebted poor countries, physical and social
infrastructure( give debt relief and reduce tariffs specially in
agriculture)
 Managing in the Global Marketplace

Question: What does the shift toward a global economy

mean for managers within an international business?
Managing an international business (any firm that
engages in international trade or investment) differs from
managing a domestic business in four key ways
1. Countries differences require companies to vary their
practices country by country
2. Managers face a greater and more complex range of
problems
3. International companies must work within the limits
imposed by governmental intervention and the global
trading system
4. International transactions require converting funds and
being susceptible to exchange rate changes
 Critical Discussion Question
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?
 Critical Discussion Question
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.
 Critical Discussion Question
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?
 Critical Discussion Question
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.
 Critical Discussion Question
5. How might the Internet and the associated World
Wide Web affect international business activity and
the globalization of the world economy?
 Critical Discussion Question
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.
 Critical Discussion Question
7. Read the Country Focus Outsourcing American Healthcare, then answer the
following questions:
a) A decade ago the idea that medical procedures might move offshore was
unthinkable. Today it is a reality. What trends have facilitated this process?
b) Is the globalization of health care good or bad for patients?
c) Is the globalization of health care good or bad for the American economy?
d) Who might benefit from the globalization of health care? Who might lose?
e) Do you think that the U.S. government should restrict the outsourcing of medical
work to developing nations? What if physicians in those countries are certified by
U.S. medical institutions?