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CHAPTER 1 GLOBALIZATION What is globalization?

Globalization is a shift towards more integrated and independent world economy. Two notions trigger globalization; Integrated and Independent. Inde enden!e" Independently India has IT trained workforce but they do not have the capital to establish giant firms like Microsoft. Again independently U A has capital but they lack cheap IT trained workforce. Integ#ation" U A invests in India and thus ensures capital flow in India. India ensures supply of cheap IT trained workforce which is needed to produce software. o! " " #ountries have independent economic and political system$ however! individually they are incomplete. Integrated they can succeed.

Globalization combines two things " " Globalization of markets Globalization of productions

Globalization o$ %a#&ets" The globalization of market refers to the merging of historically distinct and separate national markets into one huge marketplace. #oca"#ola and %epsi#o$ General Motors and Toyota$ #aterpillar and &omatsu in earthmoving e'uipment$ ony! (intendo and Microsoft in games these all are global companies. )or these companies it*s no longer worthwhile to talk about +the ,apanese market-! +the American market-! for them there is only one global market. The reasons for globalization of markets are$ " " )alling barriers to cross"border trade have made it easier to sell internationally. Tastes and preferences of consumers in different nations are beginning to converge on some global norms! thereby helping to create a global market. ..g. #oca"cola! Mc/onalds and ony all sell standardized products.

0owever! there are differences in! " " " #onsumers* tastes and preferences. ..g. Mc/onalds and beef patty in India /istribution channels. ..g. ,apanese distribution system #ulturally embedded value systems! business systems and legal regulations. ..g. #hina and Guan1i.

Globalization o$ #od'!tion" Globalization of production refers to the sourcing of goods and services from different locations around the globe. This helps to " " Gain cost advantage by producing in locations where cost of production factors is low. And2or Gain 'uality factors of production and thus differentiate products.

..g. The outsourcing pattern of 3izio in case of manufacturing of )lat T3.


(#i)e#s o$ globalization
(e!lining t#ade and in)est%ent ba##ie#s

International trade occurs when a firm e1ports goods or services to consumers in another country. )oreign /irect Investment 4)/I5 occurs when a firm invests resources in business activities outside its home country. %reviously there were! " " 0igh tariff rate on each others goods and services to protect domestic industries from foreign competition. 0igh tariff lead to high price of foreign goods which prevent these goods to compete with local goods. Governments used to provide subsidies to important local industries. This reduced the cost of production of domestic goods. #onse'uently! foreign products could not compete.

/ue to lack of international business activities! countries which were poor became poorer. uch strategies are called 67eggar thy neighbor policy*. Moreover! high tariff on foreign goods depressed the world demand and contributed to the Great /epression of the 89:;s. After <orld <ar II! formation of General Agreement on Tariffs and Trade 4GATT5 contributed towards the reduction of barriers and ensured free flow of goods between nations. .ight rounds of negotiations among the 8=> nations have worked to lower the barriers. Uruguay ?ound! held in 899:! further reduced trade barriers. /oha round in late @;;8 also contributed for reduction of barriers and subsidies! particularly in agricultural sector. /uring 898: to @;;A tariff rates reduced to :.9B.

All these changes have increased the volume of world trade and production since 89A; to @;;A. Figure 1.1: Tariff on Manufactured Products ! of "alue#



The #ole o$ te!hnologi!al !hange

The lowering of trade barriers made globalization of markets and production a theoretical possibility. Technological change has made it a tangible reality. ince <<II the world has seen maCor improvement in information processing and transportation. Microprocessor and telecommunications: The single most important innovation has been the development of microprocessor which enabled the e1plosive growth of " " " high power! low cost computing recent advances in telecommunication technology! satellite! optical fiber! wireless technology! world wide web and internet. telecommunication cost between Dondon and (ew Eork has reduced from F@==.>A to F:.:@ during 89:; to 899;.

Internet and World Wide Web: In 899;! fewer than 8 million users were connected to the Internet. 7y the year @;;A! forecasts suggest that the Internet may have over 8.8@ billion users which are about 8GB of the world population. /evelopment in Internet increased the scope of e"business. mall e1port oriented firms can easily communicate with the buyers. Transportation technology: The advent of commercial Cet travel! by reducing the time needed to get from one location to another! has effectively shrunk the globe.

%reviously! it was difficult to move goods from one mode of transport to another. (ow containerization has made the Cob easier and fast. 7etween 89@; and 899;! the average ocean freight and port charges2ton in U A reduced from F9A to F@9. Implication All these recent advancements have lead to globalization of production and market. Implication for globalization of productionH " " As transportation costs associated with the globalization of production declined! companies can now select geographically separate locations which are more economical. These developments make it possible for a firm to create and then manage a globally dispersed production system.

..g. /ell computer*s global production network. 4pg. 8A5 Implication for the globalization of marketsH " " " " Dow"cost transportation made it more economical to ship products around the world! thereby helping to create global markets. Dow"cost global communications network such as <<< are helping to create electronic global market places. Dow cost of transportation has increased movement of people between countries which reduced the cultural distance among people and created convergence of taste and preferences. Global communication network and global media like! #((! MT3 etc. also contributed for the convergence.

The !hanging de%og#a hi!s o$ the global e!ono%.

Figure 1.$: %hanging pattern of world output 1&'(#

Figure 1.(: %hanging pattern of world output $))$#

Figure 1.*: F+I inflow 1&,)-$)).

/ource: 01%T2+3 4orld In"estment 5eport3 $))' Figure 1..: 1umber of worlds largest multinationals b6 countr6 of origin

The changing world order " " " In country after country throughout .astern .urope and eventually in the oviet Union itself #ommunist governments collapsed. #hina continues to move progressively toward greater free market reforms. <ith 8.: billion people #hina represents a huge and largely untapped market. )or decades! most Datin American countries were ruled by dictators! many of whom seemed to view <estern international businesses as instruments of imperialist domination. Throughout most Datin American countries! debt and inflation are down$ governments are selling state"owned enterprises. These changes have increased the attractiveness of Datin America both as a market for e1ports and )/I.

All these changes have generated enormous opportunity for international business.


The Globalization (ebate

Anti/globalization #otests"


Anti globalization groups protest because globalization creates! " " " " ,ob losses /ownward pressure on the wage rates of unskilled workers .nvironmental degradation The cultural imperialism of global media and multinational enterprises

In eattle! the <TI was meeting to try to launch a new round of talks to cut barriers to cross"border trade and investment. There was violent protest by the anti globalization groups. In @;;8! =;;;; protesters marched against globalization at the .U summit in weden. Positive: " Globalization improves the living standard. International chains like Mc/onalds and tarbucks are now available almost at every location. +* Globalization0 1obs and in!o%e

1egati"e: " " M(#s shifted their production to low cost locations where wage rate is low. As a result! the demand of labor reduced in the U A. This resulted in Cob losses and reduction of wage rate in U A. Advanced economies are becoming technology"oriented. o the demand of unskilled workers is reducing in advanced economies creating an e1cess supply of unskilled labor. Thus! growing income ine'uality is a result of the wages for skilled workers being bid up by the labor market and the wage of unskilled workers being discounted.

Positi"e: " 0owever! benefits outweigh cost of globalization. <hen M(#s go to D/#! they improve the living standards of the people of host country creating employment and supplying world class products. As a result of such economic growth! host country buys other products from the home country. ..g. U A and #hina 4Medicine and te1tile5. Globalization encourages countries to specialize in products which they can produce most efficiently. This improves the world output and overall economic condition of the world. upporters of globalization argue that during 89GJ"899= the income gap actually reduced by A.AB. Globalization0 labo# oli!ies and the en)i#on%ent

" " 2*

1egati"e: " " D/#s lack ade'uate regulations to protect labor and the environment from abuse by the unscrupulous. )ree trade leads to an increase in pollution and result in firms from advanced nations e1ploiting the labor of less developed nations. upporters of anti"globalization argued that (A)TA might stimulate U manufacturing firms moving to Me1ico and then pollute the environment! employ child labor and ignore workplace safety.

Positi"e: " The supporters of free trade argue that tougher environmental regulations and stricter labor standards go hand in hand with economic progress. o free trade enables developing countries to increase their economic growth and become richer which in turn strengthen the regulations. International free trade agreements protect countries from e1ploitation. ..g. (A)TA protects Me1ico from being e1ploited by the U firms.



Globalization and national so)e#eignt.

1egati"e: " <orld Trade Irganization 4<TI5! the .uropean Union and the United (ationsKthese supranational organizations impose policies on the democratically elected governments of the nation"states. Thus the independent economies are transferring their economic power away from national governments towards these organizations. <TI monitor the trade policies and activities of its 8=> member states who are signatory to the GATT. The arbitration panel can issue a ruling instructing a member state to change trade policies that violate GATT regulations. This is regarded as interference by the protesters of globalization.


Positi"e: " upporters say that <TI and such other organizations generate collective decision which reflects the opinion of all the member states. If these bodies fail to serve the collective interest of member states! those states will withdraw their support and the supranational organization will collapse. In this view! the real power still resides with individual nationL states. Globalization and the 4o#ld5s oo#


1egati"e: " /ue to globalization the gap between the rich and poor nations of the world has gotten wider. In 8GJ;! the average income per capita in the world*s 8J richest nations was @.= times that of all other countries. In 899;! the same group was =.A times as rich as the rest.

Positi"e: " " /ue to globalization some world*s poorer nations are now observing economic growth like! outh &orea! Thailand and Malaysia. 0owever! some states are still poor and the reasons for their poverty are purely internal like! " /ictator government

" " "

.conomic policies that destroy wealth cant protection of property rights <ar! political unrest.

..g. African nations.