Chapter 1: Summary

LO1. Understand what is meant by the term globalization.

Globalization

Over the past three decades, we have witnessed the globalization of
markets and production.
World moving towards interdependent, integrated global economic
system
Globalization refers to the shift toward a more integrated and
interdependent world economy including 2 facets:
o Globalization of markets
o Globalization of production
Globalization of Markets

Merging of historically distinct and separate national markets into one
global marketplace.
Falling barriers to cross-border trade easier to sell internationally.
Argued consumer taste is converging internationally, aiding the global
market.
Firms e.g. McDonalds, Coca-Cola, Sony PlayStation are both
benefactors and facilitators of trend same product worldwide
global market.

Globalization of Production

The globalization of production implies that firms are basing individual
productive activities at the optimal world locations for the particular
activities. As a consequence, it is increasingly irrelevant to talk about
American products, Japanese products, or German products, since
these are being replaced by "global" products.
Sourcing of goods and services globally to take advantage of national
differences in the cost and quality of factors of production (labour,
energy, land, capital)
Lowers overall cost structure and/or improves quality/functionality
more competitive



Global Institutions

As markets globalize, institutions needed to
o Help manage, regulate and police the global marketplace;
o Promote the establishment of multinational treaties to govern the
global business system.
Organizations created by voluntary agreement between nation-states
o General Agreement on Tariffs and Trade (GATT)
o World Trade Organization (WTO)
o International Monetary Fund (IMF)
o World Bank
o United Nations (UN)

WTO (like predecessor GATT)
Primarily responsible for policing world trading system
Makes sure nation-states adhere to rules laid down in trade treaties
signed by WTO member states.
Responsible for facilitating establishment of additional multinational
agreements between member states.
Promotes lower barriers to cross-border trade and investment
members try to create an open global business system.
2011 153 nations that accounted for 97% world trade were members
large influence

IMF (1944 by 44 nations)
Maintains order in the international monetary system.

World Bank (1944 by 44 nations)
Purpose: to promote economic development, focusing on making low-
interest loans in poor nations.

United Nations (1945 by 51 nations)
Members accept UN Charter 4 main principles:
o Maintain international peace and security;
o Develop friendly relations among nations;
o Cooperate in solving international problems and in promoting
respect for human rights;
o Be a centre for harmonizing the actions of nations.





LO2. Recognize the main drivers of globalization.

Two macro factors underlie the trend towards greater globalization

1. Declining Trade and Investment Barriers
Since 1950, average tariffs have fallen significantly and are now about
4%
Countries have opened their markets to FDI

2. Technological Change
Microprocessors and telecommunications
The Internet and WWW
Transportation technology
The development of the microprocessor and related developments in
communications and information processing technology have helped
firms link their worldwide operations into sophisticated information
networks. Jet air travel, by shrinking travel time, has also helped to link
the worldwide operations of international businesses. These changes
have enabled firms to achieve tight coordination of their worldwide
operations and to view the world as a single market.

Implications for Business

Lower barriers to trade & investment mean firms can
View the world as their market
Base production in the optimal location for that activity.

Technological change means
Lower transportation costs helps create global markets
Lower information and communication costs
Low-cost global communications networks helps create an
electronic global marketplace
Global communications networks and global media creates a
worldwide culture, and global market for consumer products









LO3. Describe the changing nature of the global economy.

Changing Demographics of the Global Economy

In the 1960s, the US economy was dominant in the world, US firms
accounted for most of the foreign direct investment in the world
economy, US firms dominated the list of large multinationals, and
roughly half the world-the centrally planned economies of the
communist world-was closed to Western businesses.
Dramatic change in demographics of the world economy in the last 30
years.
Four trends important:
o Changing World output and World Trade Picture
o Changing FDI Picture
o Changing Nature of MNE
o Changing World Order

Changing World Output and World Trade Picture
As a consequence of the globalization of production and markets, in
the last decade, world trade has grown faster than world output, foreign
direct investment has surged, imports have penetrated more deeply
into the world's industrial nations, and competitive pressures have
increased in industry after industry.
By the mid-1990s, the US share of world output had been cut in half,
with major shares now being accounted for by Western European and
Southeast Asian economies. The US share of worldwide foreign direct
investment had also fallen, by about two-thirds. US multinationals were
now facing competition from a large number of Japanese and
European multinationals. In addition, the emergence of mini-
multinationals was noted.
In 1960, the US accounted for over 40% of world economic activity; by
2008, accounted for just over 20%
o Similar trend occurred in other developed countries
The share of world output accounted for by developing nations is rising
and is expected to account for more than 60% of world economic
activity by 2020
o From 1963 to 2008, Chinas share of world GDP increased to
11.2%





Changing FDI Picture
In the 1960s, US firms accounted for about two-thirds of worldwide FDI
flows; today, US accounts for less than one-fifth of worldwide FDI flows
o Other developed countries followed similar pattern
In contrast, share of FDI accounted for by developing countries has
risen
Developing countries, especially China, have also become popular
destinations for FDI.

Changing Nature of Multinational Enterprise
MNE is any business that has productive activities in two+ countries.
Since the 1960s, two notable trends in the demographics of the MNE:
o The rise of non-US multinationals a relative decline in the
dominance of US firms in the global marketplace
o The growth of mini-multinationals international business is
conducted not just by large firms but also medium-size and
small enterprises
Changing World Order
One of the most dramatic developments of the past 20 years has been
the collapse of communism in Eastern Europe, which has created
enormous long-run opportunities for international businesses. In
addition, the move toward free market economies in China and Latin
America is creating opportunities (and threats) for Western
international businesses
Many former Communist nations in Europe and Asia are now
committed to democratic politics and free market economies new
opportunities for international business
China and Latin America also moving toward greater free market
reforms
o Between 1983 and 2008, FDI in China increased from less than
$2 billion to $90 billion annually
o But China also has many new strong companies that could
threaten Western firms

Global Economy of the 21
st
Century
World moving towards a more global economic system
Globalization is not inevitable
o Signs of retreat from liberal economic ideology in Russia
Globalization brings risks
o Financial crisis that swept through Southeast Asia in the late
1990s
o The recent financial crisis that started in the US in 2008, and
moved around the world.
LO4. Explain the main arguments in the debate over the impact of
globalization.

Globalization Debate

The benefits and costs of the emerging global economy are being hotly
debated among business people, economists, and politicians. The
debate focuses on the impact of globalization on jobs, wages, the
environment, working conditions and national sovereignty.
Argued that falling barriers to international trade and investment will
drive the global economy to prosperity.
Supporters believe increased trade and cross-border investment will:
o Lower prices for goods and services
o Result in greater economic growth (stimulus)
o Will raise incomes of consumers
o Help create jobs in countries that participate in global trade
system
Critics worry globalization will cause
o Job losses
o The cultural imperialism of global media and MNEs seen to be
dominated by the interests and values of the US.
o Downward pressure on the wage rates of unskilled workers
o Environmental degradation
Anti-globalization protestors now regularly show up at most major
meetings of global institutions, after the failure to reach agreement at a
WTO meeting in Seattle.

Globalization, Jobs and Income

Critics argue that falling barriers to international trade destroy
manufacturing jobs in wealthy advanced economies (US, Europe)
Supporters of globalisation contend that the benefits of this trend
outweigh the costs.
o Countries will specialize and produce what they can most
efficiently, and import what they cant.








Globalization, Labour Policies, and the Environment

Critics argue that firms avoid costly efforts to adhere to labour and
environmental regulations, that would otherwise put them at a
competitive disadvantage, by moving production to countries where
these regulations dont exist or arent enforced.
Supporters argue tougher environmental regulations and stricter labour
standards come with economic progress.
o As countries get richer from free trade, they implement tougher
environmental and labour regulations.

Globalization and National Sovereignty
Global economy shifts power away from national governments toward
supranational organizations (WTO, EU, UN)
Critics argue that unelected bureaucrats have the power to impose
policies on the democratically elected governments of nation-states
Supporters claim that the power of these organizations is limited to
what nation-states agree to grant
o The power of the organizations lies in their ability to get
countries to agree to follow certain actions

Globalization and the Worlds Poor
Critics argue that despite benefits of free trade and investment, the gap
between rich and poor has increased.
Critics believe that if globalization was beneficial there shouldnt be a
divergence between rich and poor nations
Supporters claim that the best way for the poor nations to improve their
situation is to
o Reduce barriers to trade and investment
o Implement economic policies based on free market economies
o Receive debt forgiveness for debts incurred under totalitarian
regimes











LO5. Understand how the process of globalization is creating
opportunities and challenges for business managers.

Managing an international business differs from managing a domestic
business because:
Countries are different culture, political systems, economic systems,
legal, economic development.
Range of problems confronted in an international business is wider and
the problems more complex than in a domestic business. E.g. where
in the world to produce activities to minimize cost and maximize value
added, if its ethical to adhere to lower labour and environmental
standards etc.
Firms must find ways to work within the limits imposed by government
intervention in the international trade and investment system.
Governments often intervene to regulate cross-border trade and
investment must develop strategies and policies for these
interventions.
International transactions involve converting money into different
currencies. Exchange rates vary with economic conditions, so must
develop policies to deal with exchange rate movements.