Make three guesses:

What is the percent of foreign direct investment (FDI) over global fixed
capital formation?
What is the stock of long term international immigrants as a percentage of
population?
What is the amount of international tourists arrivals as % of total tourists
arrivals?

How global is the global world?

Globalization Note Series

!"#$%&'(

Pankaj Ghemawat

!"#$%&'$()*+,$

200

150

% ov e r/unde r v aluation re lativ e to U.S.

Standard deviation of absolute differentials

100

50

-50

-100
1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

Source: The Economist, various issues.

III. Resource Markets

-./*0'1$2&.3+14$&.+)51$16+$/)78$189+$/:$2&.3+1$16&1$2"#61$;+'/2+$2/.+$")1+#.&1+*$&'./44$;/.*+.4$
&4$ &$ .+4071$ /:$ #7/;&7"<&1"/)=$ 16+$ './44>;/.*+.$ ")1+#.&1"/)$ /:$ .+4/0.'+$ /.$ :&'1/.$ 2&.3+14$ /:$ ?&."/04$ 189+4$

$-"$1<)!-":((I,(&-($-20%,'()&-$3)(,%&8',(&8%"(+1-9)7($'")<)(#%&%(!"#!$%&'(&8%&(46J(-+(&8'(E:@:(0-0<1%&!-"(
9%)(+-,'!*"./-,"(%&(&8'(&<,"(-+(&8'($'"&<,>7($-20%,'#(&-(KJ(&-#%>:?=!!!(
E:@:(L22!*,%&!-"(M%&%(N4KOB.455PQ(

2,000,000

1.80

1,800,000

1.60

% of population

Number of immigrants

1,600,000

1.40

1,400,000

1.20
Number of Immigrants

1,200,000

0.80

800,000

0.60

600,000
400,000

0.40

200,000

0.20

0.00

1990

1980

1970

1960

1950

1940

1930

1920

1910

1900

1890

1880

1870

1860

1850

1840

1830

1820

1.00

1,000,000

Immigrants as percent of population

!"#$%&')'

story

1886 founded
1902 first move abroad (Cuba)
1929 sold in 76 countries
WWII supplier of the army. Builds 63 bottling plants around the world.
Colas destiny is to inherit the earth (R.Woodruff, President & Director
1923-1984)

but.. in those years continues to be multilocal: local operations are

managed locally
a network of over 1000 bottlers undertaking most activities performed by
the Coca Cola system...

1981-1997: enters Roberto Goizueta, from multilocal to global

core belief in similarities across the world...
At this point in time in the US, people consume more soft drinks than any
other liquid, including tap water. If we take full advantage of our
opportunities, some day, not too many years into our second century, we
will see the same wave catching on in market after market.

-> accent on non-US operations to foster growth

-> economies of scale
-> globalism: the labels international and domestic, which adequately
described our business structure in the past, no longer apply our
company is truly a global company
-> ubiquity: operating in 200 countries
-> centralization and standardization

* Edge Creative supervises consume research, advertising,


promotions allover the world
* anchor bottlers, operating across countries: direct involvment (taking
stakes 20-49%)
Value increases from $4billions to $140 billions in 16 years!

The Douglas Ivester era (1997-1999)

Aggressive pursuit of globalization.
Demand problems: economic downturn in key countries (e.g.Brazil and
Japan)
Global presence becomes global exposure. Sharp decline in stock
valuation (-70 billions!)
Refuses to cut growth expectations. Raises price of concentrate. Revolt of
bottlers. Ivester resigns.

Douglas Daft: going local (2000-2004)

Think local, act local
More flexibility?
Relocating decision making close to local markets
No more global advertisment!
Quality declines...marketing chaotic
Growth sags
2004: Daft retires

2004-2007 Neville Isdell; 2008- Muhtar Kent

Rebuilding headquarters capabilities

Re-centralizing marketing
Lower growth targets
Innovation (non carboanted beverages) vs scale as priority
Re-establishing distinct North America and International operations
Focusing on more profitable country opportunities
Balancing central and local authority

Read:
http://www.businessweek.com/magazine/content/06_32/b3996401.htm
on Coca Cola in Japan
See:
Coca Cola Kid on www.Veoh.com

Distance matters!

A simple gravitational model:

trade between two countries will be
directly related to their economic size
inversely related to distance between them (or directly related to
how close they are)
Generalizing distance..
being close= being similar
ex:
language
trading blocs
colony/colonizer
currency
common land border

A framework for analyzing distance:

Don't analyze countries as "standalone" entities - they are as nodes

embedded in a network at varying distance among them.

CAGE: Cultural, Administrative, Geographic, Economic

Cultural Distance
Country Pairs (Bilateral)

Different languages
Different ethnicities; lack of connective ethnic or social networks
Different religions
Lack of trust
Different values, norms, and dispositions

Countries (Unilateral / Multilateral)

Insularity
Traditionalism

Administrative Distance
Country Pairs (Bilateral)

Lack of colonial ties

Lack of shared regional trading bloc
Lack of common currency
Political hostility

Countries (Unilateral / Multilateral)

Nonmarket/closed economy (home bias vs. foreign bias)
Lack of membership in international organizations
Weak institutions, corruption


Geographic Distance
Country Pairs (Bilateral)
Physical distance
Lack of land border
Differences in time zones; Differences in climates / disease
environments
Countries (Unilateral / Multilateral)

Landlockedness
Lack of internal navigability
Geographic size
Geographic remoteness; Weak transportation or communication links

Economic Distance
Country Pairs (Bilateral)
Rich/poor differences
Other differences in cost or quality of natural resources, financial
resources, human resources, infrastructure, information or knowledge
Countries (Unilateral / Multilateral)
Economic size
Low per capita income

Exs:
Star TV satellite services in Asia (took 20 years to become profitable)

targeted on 5% top population of asian countries

ignoring preferences for local languages

ignoring political differences
Google in China?

2 issues:
adding value through internationalization
strategies for global value creation

Adding value through internationalization?

Cost effects:
are there cost economies compensating cost diseconomies (e.g.
transportation costs)?

Willingness to pay:
what factors increase willingness to pay? (lower per capita GDP implies
on average lower WTP)

Dual resource effects:

knowledge transfer mechanisms
cross-country learning/innovation
size-based political influence...

How Cemex created value through international expansion

Cement:
non differentiable...
diseconomies of scale..
high weight/value ratio..
why going international?

higher margins than its largest (Swiss!) competitor....

due to higher wtp! Prices on average 20% higher than Holcim!

scale is not international but only at the national level...

how internationalization drives cost down? cost of capital

risk diversification by intl expansion

international financing markets are cheaper than the mexican one
(ex tax deducibility of interest in Spain)

Differentiation?
brand (bag buyers)
delivery in 15 minutes (bulk buyers)

Controlling a network of maritime terminals worldwide

Large cement trading (divert low-price imports from your key markets;
gain experience in other markets before acquiring capacity)

Buying capacity in countries where:

it can reduce the number of competitors
get the largets market share

Risk
Pooling across markets with different construction cycles
st.dev. in quarterly cash flow margins from average 22% (1978-1992) to
12% (1992-1997)
buying capacity at low cost as local competitors are under presur eof
local business cycle (e.g. Asia in late 90s)