Globalization

Globalization refers to the trend towards a more integrated global economic system. Two key facets of
globalization are;

 The globalization of markets - Refers to the merging of historically distinct and separate
national markets into one huge global marketplace. E.g. Coca Cola, Sony. They are also
facilitators of it. By offering a standardized product worldwide they help to create a global
market. The most global markets currently are not markets for consumer products-Where
national differences in tastes and preferences. But for industrial goods and materials that serve
a universal need the world wide. E.g. Aluminum, Oil, Wheat.
 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). E.g. Boeing Company’s jet airliner 777 - 8 Japanese
suppliers make parts for the fuselage, doors and wings, A supplier in Singapore makes the doors
for the nose landing gear, Three suppliers in Italy manufacture wing flaps

What is good about globalisation?

 It delivers higher living standards to more people.
 The more people specialize and trade the higher average incomes will be.
 It spreads best practice and new ideas rapidly.
 It allows many to enjoy global brands.
 Large companies can put more money into research, innovation, sales and service.
 It allows more people to live the Hollywood dream.
 Creates the potential for footballers, pop and film stars and others to become fabulously rich.
 Richer is cleaner – it is good for the environment.
 It allows poorer countries to develop and cuts poverty.
 Instant news and communications exposes tyrants and bad governments to more international
pressure.
 If you do not like the products of global companies you do not have to buy them.

What is bad about globalisation?

 It is a new form of imperialism led by the United States of America.
 It damages the environment.
 It accentuates the gap between rich and poor.
 It leads to exploitation of cheap labor and of developing countries.
 It substitutes material values for more spiritual ones.
Barriers to International Trade

1. Social and Cultural Differences

 Language: Potential problems include mistranslation, inappropriate messaging, lack of
understanding of local customs and differences in taste.
 Values and Religious Attitudes: Differing values about business efficiency, employment
levels, importance of regional differences, and religious practices, holidays, and values about
issues such as interest-bearing loans.
2. Economic Differences
 Infrastructure: Basic systems of communication, transportation, energy facilities, and
financial systems.
 Currency Conversion and Shifts: Fluctuating values can make pricing in local currencies
difficult and affect decisions about market desirability and investment opportunities.
3. Political and Legal Barriers
 Political Climate - Stability is a key consideration.
 Legal Environment
o U.S. law
o International regulations
o Country’s law
 Climate of corruption. Foreign Corrupt Practices Act forbids U.S. companies from bribing
foreign officials, candidates, or government representatives.
 International Regulations
o Treaties between U.S. and other nations.
o Tariffs are taxes charged on imported goods.
o Enforcement problems, as with piracy
The Emergence of Global Institutions
 Several global institutions have emerged to
o Help manage, regulate, and police the global market place
o Promote the establishment of multinational treaties to govern the global business
system
 Notable global institutions include
o The World Trade Organization (WTO)
o The International Monetary Fund (IMF)
o The World Bank
o The United Nations (UN)

Drivers of Globalization
There are two macro factors underlying the trend toward greater globalization,

1. Declining trade and investment barriers.

2. Technological change.

International trade occurs when a firm exports goods or services to consumers in another country

Foreign direct investment (FDI) occurs when a firm invests resources in business activities outside its
home country

The Changing Demographics of the Global Economy

In the 1960s:

 The U.S. dominated the world economy and the world trade picture
 The U.S. dominated world FDI
 U.S. multinationals dominated the international business scene
 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.

 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.
 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

 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

 A more integrated global economy presents new opportunities for firms, but it can also result in
political and economic disruptions that may throw plans into disarray

The Globalization Debate

Question: Is the shift toward a more integrated and interdependent global economy a good thing?

 Many experts believe that globalization is promoting greater prosperity in the global economy,
more jobs, and lower prices for goods and services.
 Others feel that globalization is not beneficial.

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.

Managing in the Global Marketplace

 Countries differences require companies to vary their practices country by country.
 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.
 International transactions require converting funds and being susceptible to exchange rate
changes.