CHRIST THE KING COLLEGE

College of Accountancy
Calbayog City, Western Samar

LEARNING OUTCOMES
In this chapter, students will learn about:
1. Why globalization is not a new phenomenon
2. An organizing framework for market globalization
3. Dimensions of market globalization
4. Drivers of market globalization
5. Technological advances as a driver of market globalization
6. Societal consequences of market globalization
7. Firm-level consequences of market globalization: internationalization of
the firm’s value chain

LEARNING CONTENTS

As we discussed in Chapter 1, globalization of markets refers to the gradual

integration and growing interdependence of national economies. Globalization
allows firms to view the world as an integrated marketplace. Initially, scholars
used the term market globalization to refer to the emergence of global markets for
standardized products and services and the growth of world-scale companies that
serve those markets. However, the term has a broader meaning, and also refers to
the interconnectedness of national economies and the growing interdependence of
buyers, producers, suppliers, and governments in different countries. Market
globalization is manifested by the production and marketing of branded products
and services worldwide. Declining trade barriers, and the ease with which
international business transactions take place due to the Internet and other
technologies, are contributing to a gradual integration of most national economies
into a unified market.

Ongoing technological advances characterize the other megatrend that has

transformed contemporary business. Developments in information, manufacturing,
and transportation technologies, as well as the emergence of the Internet, have
facilitated rapid and early internationalization of countless firms, such as Neogen
(www.neogen.com). The firm’s founders developed diagnostic kits to test for food
safety. Compared to test kits then available from other firms, Neogen’s products
were more accurate, more efficient, and easier to use. As word spread about the
superiority of the products Neogen was able to internationalize quickly, and
acquired a worldwide clientele. Farmers use Neogen test kits to test for pesticide
residue; veterinarians use them for pharmaceuticals, vaccines, and topicals; and the
USDA’s Food Safety Inspection Service has used Neogen’s rapid test for E. coli.
Today, Neogen is a highly successful international firm.

Modern technology is promoting a higher level of international business

activity than ever before. For example, many companies in software, gaming, or
entertainment maintain a presence only on the Web. Advances in transportation
and communication technologies have greatly aided express delivery service
providers such as DHL, UPS, and FedEx to serve clients around the world.

The twin trends of market globalization and technological advances now

permit firms to more readily engage in both marketing and procurement activities
on a global scale. Companies increasingly sell their offerings throughout the world.
More firms source raw materials, parts, components, and service inputs from
suppliers located around the globe. These trends also serve to transform national
economies. Growing world trade and foreign direct investment, coupled with the
spread of technology, provide consumers and industrial buyers with a much greater
choice of products and services. The competitive and innovative activities of
internationally active firms are helping to reduce the prices that consumers and
firms pay for products and services. Job creation by internationally active firms is
contributing to higher living standards for people around the world. At the same
time, preferences for some consumer products appear to be converging across
markets, exemplified by the universal popularity of certain music, entertainment,
consumer electronics, and food. Globalization is helping to disseminate values
from liberalized economies about free trade and respect for intellectual property
rights to an ever-widening international audience.

Globalization Is Not a New Phenomenon

Advanced technologies, such as the Internet and modern transportation

systems, have accelerated the pace of globalization. However, globalization is not
a new phenomenon; it has simply accelerated and gained complex character in
recent decades. Early civilizations in the Mediterranean, Middle East, Asia, Africa,
and Europe have all contributed to the growth of cross-border trade over time.
Globalization evolved out of a common, shared international heritage of all
civilizations, no matter where they developed, to reach out and touch one another.
It is a culmination of the wonders of difference and discovery that people
recognized thousands of years ago. Exchange with others gave societies the
opportunity to expand and grow. Trade through the ages fostered civilization;
without it, we would be a world of warring tribes bent on getting what we need
through combat. Cross-border trading opened the world to innovations and
progress.
Phases of Globalization

Since the 1800s, we can identify four distinct phases in the evolution of
market globalization. Each phase is accompanied by revolutionary technological
developments and international trends. These are illustrated in Exhibit 2.1. Let’s
briefly review these stages.

The first phase of globalization began about 1830 and peaked around 1880.7
International business became widespread during this period due to the growth of
railroads, efficient ocean transport, and the rise of large manufacturing and trading
companies. Invention of the telegraph and telephone in the late 1800s facilitated
information flows between and within nations, and greatly aided early efforts to
manage companies’ supply chains.

The second phase of globalization began around 1900 and was associated
with the rise of electricity and steel production. The phase reached its height just
before the Great Depression, a worldwide economic downturn that began in 1929.
In 1900, Western Europe was the most industrialized region in the world. Europe’s
colonization of countries in Asia, Africa, the Middle East, and beyond led to the
establishment of some of the earliest subsidiaries of multinational firms. European
companies such as BASF, British Petroleum, Nestlé, Shell, and Siemens had
established foreign manufacturing plants by 1900.8 In the years before World War
I (pre-1914), many firms were already operating globally. The Italian manufacturer
Fiat supplied vehicles to nations on both sides of the war.

The third phase of globalization began after World War II. At war’s end, in
1945, substantial pent-up demand existed for consumer products, as well as for
input goods to rebuild Europe and Japan. The United States was least harmed by
the war and became the world’s dominant economy. Substantial government aid
helped stimulate economic activity in Europe. Before the war, tariffs and other
trade barriers had been high, and there had been strict controls on currency and
capital movements. Several industrialized countries, including Australia, Britain,
and the United States, systematically sought to reduce barriers to international
trade. The result of this effort was the General Agreement on Tariffs and Trade
(GATT). Emerging from the Bretton Woods Conference of 23 nations in 1947, the
GATT served as a global negotiating forum for liberalizing trade barriers.

The GATT marked the beginning of a series of annual negotiating meetings

aimed at reducing barriers to international trade and investment. Participating
governments recognized that liberalized trade would stimulate industrialization,
modernization, and better living standards. The GATT eventually transformed into
the World Trade Organization (WTO) as more countries joined this multinational
agency. The World Trade Organization is a multilateral governing body
empowered to regulate international trade and investment. The WTO aims to
ensure fairness and efficiency in international transactions. Some 149 nations are
now members of the WTO. Additional global cooperation in the post-war era gave
birth to other international organizations such as the International Monetary Fund
and the World Bank.
 Early multinationals from this third phase of globalization originated from
the United States, Western Europe, and Japan. The Europeans often expanded into
former colonies. Firms like Unilever, Philips, Royal Dutch-Shell, British
Petroleum, and Bayer organized their businesses by establishing independent
subsidiaries in each of the foreign countries where they did business. Numerous
companies developed internationally recognized trade names, including Nestlé,
Kraft, John Deere, Kellogg, Lockheed, Caterpillar, Coca-Cola, Chrysler, Pepsi-
Cola, Singer (sewing machines), and Levi’s. American multinationals such as
IBM, Boeing, Texas Instruments, Xerox, and McDonnell Douglas spread out
across the globe on the strength of technological and competitive advantages.
Gillette, Kodak, and Kellogg succeeded by offering unique products.

The fourth and current phase of globalization began in the early 1980s. This
period witnessed enormous growth in cross-border trade and investment. The
current phase was triggered by key trends, including the commercialization of the
personal computer, the development of the Internet and the Web browser, advances
in communication and manufacturing technologies, the collapse of the Soviet
Union and ensuing market liberalization in central and Eastern Europe, and the
industrialization and modernization efforts of East Asian economies, including
China.

In the contemporary era, countless firms configure and coordinate trade and
investment activities in a giant global marketplace. In their own way, globalization
and technological advances are resulting in the “death of distance.” That is, the
geographic and, to some extent, cultural distances that separate nations are
shrinking.
Exhibit 2.2 The Death of Distance
SOURCE: Adapted from P. Dicken (1992), Global Shift. New York: Guilford, p. 104.

An Organizing Framework for Market Globalization

 Exhibit 2.3 presents an organizing framework for examining market
globalization. The exhibit makes a distinction between the: (1) drivers or causes of
globalization; (2) many dimensions or manifestations of globalization; (3a) societal
consequences of globalization; and (3b) firm-level consequences of globalization
—factors compelling companies to proactively internationalize. The exhibit’s
double arrows point to the interactive nature of the relationship between market
globalization and its consequences. For example, as market globalization
intensifies, individual business enterprises are compelled to respond to challenges
and exploit new advantages. Keep in mind, however, that firms do not pursue
internationalization strategies solely as a reaction to market globalization. As we
discussed in Chapter 1, firms seek internationalization proactively also as a result
of various internal forces (e.g., pursuit of growth, customers, or to minimize
dependence on the domestic market through geographic diversification). Often
adverse conditions in the home market, such as regulation or declining industry
sales, compel firms to proactively seek international expansion.

Given the intensity of global competition, many firms proactively pursue

internationalization as a strategic move. That is, they display a more aggressive
attitude toward identifying foreign market opportunities, seeking partnerships with
foreign firms, and building organizational capabilities to enhance their competitive
advantage. Firms with such a proactive stance tend to be more successful in global
competition than those firms that engage in international business as a reactive
move.

Dimensions of Market Globalization

As a broad phenomenon, globalization has been investigated from the

perspective of various disciplines, including economics, history, anthropology,
political science, sociology, and technology. In terms of international business,
market globalization can be viewed simultaneously as a: (1) consequence of
economic, technological, and government policy trends; (2) driver of economic,
political, and social phenomena; and (3) driver and consequence of firm-level
internationalization. Globalization of markets is a multifaceted phenomenon, with
five major dimensions:

1. Integration and interdependence of national economies.

Internationally active firms devise multicountry operations through trade,
investment, geographic dispersal of company resources, and integration and
coordination of value chain activities—the sequence of value-adding activities
performed by the firm in the process of developing, producing, marketing, and
servicing a product. The aggregate activities of these firms give rise to economic
integration. Governments contribute to this integration by various means. First,
they gradually lower barriers to international trade and investment (for example, by
negotiating trade agreements). Second, they increasingly harmonize their monetary
and fiscal policies within regional economic integration blocs (also known as
trade blocs), such as the European Union. Third, they devise and supervise
supranational institutions— such as the World Bank, International Monetary Fund,
and the World Trade Organization—that seek further reductions in trade and
investment barriers.

2. Rise of regional economic integration blocs. Closely related to the

previous trend is the emergence since the 1950s of regional economic integration
blocs. Examples include the North American Free Trade Agreement area
(NAFTA), the Asia Pacific Economic Cooperation zone (APEC), and Mercosur in
Latin America. These regional economic blocs incorporate groups of countries
within which trade and investment flows are facilitated through the reduction of
trade and investment barriers. In more advanced arrangements, such as the
“common market,” barriers to the cross-border flow of factors of production
(mostly labor and capital) are removed. The European Union, in addition to
adopting free trade among its members, is harmonizing fiscal and monetary
policies and adopting common business regulations.

3. Growth of global investment and financial flows. In the process of

conducting international transactions, firms and governments buy and sell large
volumes of national currencies (such as dollars, euros, and yen). The free
movement of capital around the world— the globalization of capital— extends
economic activities across the globe and is fostering interconnectedness among
world economies. Commercial and investment banking is a global industry. The
bond market has gained worldwide scope, with foreign bonds representing a major
source of debt financing for governments and firms. Information and
communications networks facilitate heavy volumes of financial transactions every
day, integrating national markets. Nevertheless, widespread integration can have
negative effects. For example, when Thailand and Malaysia experienced a
monetary crisis in 1997, it quickly spread to South Korea, Indonesia, and the
Philippines, causing prolonged recession in most East Asian economies.

4. Convergence of consumer lifestyles and preferences. Around the

world, many consumers are increasingly similar in how they spend their money
and time. Lifestyles and preferences are converging. Consumers in Tokyo, New
York, and Paris demand similar household goods, clothing, automobiles, and
electronics. Teenagers everywhere are attracted to iPods, Nokia cell phones, and
Levi’s jeans. Major brands have gained a worldwide following. The trend is
encouraged by greater international travel, movies, global media, and the Internet,
which expose people to products, services, and living patterns from around the
world. Hollywood films such as Kill Billand Lord of the Rings receive much
attention from a global audience. Convergence of preferences is also occurring in
industrial markets, where professional buyers source raw materials, parts, and
components that are increasingly standardized—that is, very similar in design and
structure. Yet, while converging tastes facilitate the marketing of highly
standardized products and services to buyers worldwide, they also promote the loss
of traditional lifestyles and values in individual countries.

5. Globalization of production. Intense global competition is forcing firms

to reduce the cost of production and marketing. Companies strive to drive down
prices through economies of scale and by standardizing what they sell. They seek
economies in manufacturing and procurement by shifting these activities to foreign
locations in order to take advantage of national differences in the cost and quality
of factor inputs. Firms in the auto and textile industries, for example, have
relocated their manufacturing to low labor-cost locations such as China, Mexico,
and Eastern Europe. Production on a global basis is occurring in the service sector
as well, in such industries as retailing, banking, insurance, and data processing. As
an example, the real estate firm RE/MAX has established more than 5,000 offices
in over 50 countries. The French firm Accor operates hundreds of hotels
worldwide.

Drivers of Market Globalization

Various trends have converged in recent years as causes of market

globalization. Five drivers are particularly notable:

1. Worldwide reduction of barriers to trade and investment. The

tendency of national governments to reduce trade and investment barriers has
accelerated global economic integration. For example, tariffs on the import of
automobiles, industrial machinery, and countless other products have declined
nearly to zero in many countries, encouraging freer international exchange of
goods and services. Reduction in trade barriers is greatly aided by the WTO. China
joined the WTO in 2001 and has committed to making its market more accessible
to foreign companies. Reduction of trade barriers is also associated with the
emergence of regional economic integration blocs, a key dimension of market
globalization.

2. Market liberalization and adoption of free markets. Built in 1961, the

Berlin Wall separated the communist East Berlin from the democratic West Berlin.
The collapse of the Soviet Union’s economy in 1989, the tearing down of the
Berlin Wall that same year, and China’s free-market reforms all signaled the end of
the 50-year Cold War between autocratic communist regimes and democracy, and
smoothed the integration of former command economies into the global economy.
Numerous East Asian economies, stretching from South Korea to Malaysia and
Indonesia, had already embarked on ambitious market-based reforms. India joined
the trend in 1991. These events opened roughly one-third of the world to freer
international trade and investment. China, India, and Eastern Europe have become
some of the most cost-effective locations for producing goods and services of GNI
worldwide. Privatization of previously state-owned industries in these countries
encouraged economic efficiency and attracted massive foreign capital into their
national economies.

3. Industrialization, economic development, and modernization.

Industrialization implies that emerging markets—rapidly developing economies in
Asia, Latin America, and Eastern Europe—are moving from being low value-
adding commodity producers, dependent on low-cost labor, to sophisticated
competitive producers and exporters of premium products such as electronics,
computers, and aircraft. For example, Brazil has become a leading producer of
private aircraft, and the Czech Republic now excels in the production of
automobiles. As highlighted in the opening vignette, India is now a leading
supplier of computer software. Economic development is enhancing standards of
living and discretionary income in emerging markets. Perhaps the most important
measure of economic development is Gross National Income (GNI) per head.

Africa is home to the lowest-income countries, along with India and a few
other countries in Asia and Nicaragua. These areas are also characterized by low
levels of market globalization. The adoption of modern technologies, improvement
of living standards, and adoption of modern legal and banking practices are
increasing the attractiveness of emerging markets as investment targets and
facilitating the spread of ideas, products, and services across the globe.

4. Integration of world financial markets. Integration of world financial

markets makes it possible for internationally active firms to raise capital, borrow
funds, and engage in foreign currency transactions. Financial services firms follow
their customers to foreign markets. Cross-border transactions are made easier
partly as a result of the ease with which funds can be transferred between buyers
and sellers, through a network of international commercial banks. For example, as
an individual you can transfer funds to a friend in another country using the
Society for Worldwide Interbank Financial Telecommunication (SWIFT) network.
Connecting over 7,800 financial institutions in some 200 countries, SWIFT
facilitates the exchange of financial transactions. The globalization of finance
contributes to firms’ ability to develop and operate world-scale production and
marketing operations. It enables companies to pay suppliers and collect payments
from customers worldwide.

5. Advances in technology. Technological advances are a remarkable

facilitator of cross-border trade and investment. Let’s elaborate on this important
driver of globalization and company internationalization in greater detail.
worldwide. Privatization of previously state-owned industries in these countries
encouraged economic efficiency and attracted massive foreign capital into their
national economies.

Technological Advances as a Driver of Market Globalization

Perhaps the most important drivers of market globalization since the 1980s
have been technological advances in communications, information, manufacturing,
and transportation. While globalization makes internationalization an imperative,
technological advances provide the means for internationalization. Initially,
technological advances have greatly eased the management of international
operations. Firms now interact more efficiently with foreign partners and value-
chain members than ever before. Firms transmit all variety of data, information,
and vital communications that help ensure the smooth running of their operations
worldwide. In addition, companies use information technology to improve the
productivity of their operations, which provides substantial competitive
advantages. For example, information technology allows firms to more efficiently
adapt products for international markets, or produce goods in smaller lots to target
international niche markets. In addition, technological advances have made the
cost of international operations affordable for all types of firms, explaining why so
many small- and medium-sized enterprises (SMEs) have internationalized during
the past two decades.
The most important activity underlying technological advances is innovation.
Societies and organizations innovate in various ways, including new product
designs, new production processes, new approaches to marketing, and new ways of
organizing or training. Innovation results primarily from research and
development. Today, more scientists and engineers are engaged in research and
product development (R&D) activities worldwide than ever before. For example,
the Japanese introduced quartz technology in clock making. The technology
allowed greater accuracy and significantly lowered production costs, allowing
Japanese manufacturers to establish their leadership in the clock-making industry
within a few years. Among the industries most dependent on technological
innovation are biotechnology, information technology, new materials,
pharmaceuticals, robotics, medical equipment and devices, lasers and fiber optics,
and various electronics-based industries. Technological advances had the greatest
impact in several key areas: information technology, communications,
manufacturing, and transportation.

Information Technology

The effect of information technology (IT) on business has been nothing short
of revolutionary. IT is the science and process of creating and using information
resources. The remarkable performance of the U.S. economy in the 1990s was due
in large part to aggressive integration of IT into firms’ value-chain activities, which
accounted for 45 percent of total business investments at the time. IT alters
industry structure and, in so doing, changes the rules of competition. By giving
companies new ways to outperform rivals, IT creates competitive advantage. For
example, geographically distant country subsidiaries of a multinational company
can be interconnected via intranets, facilitating the instant sharing of data,
information, and experience across the firm’s operations worldwide. MNEs also
use collaboration software that connects global product development teams
scattered around the world, enabling them to work together. IT provides benefits
for smaller firms as well, allowing them to design and produce customized
products they can target to narrow, cross-national niches. IT has spawned new
products, such as cell phones, and new processes, such as automated factory
controls. Online search engines such as Google and Yahoo allow anyone access to
unlimited data in order to research markets, customers, competitors, and countries’
economic conditions. At a higher level, IT supports managerial decision making—
such as selection of qualified foreign business partners—based on accessing key
information and intelligence.

Communications

It took five months for Spain’s Queen Isabella to learn about Columbus’
voyage in 1492; two weeks for Europe to learn of President Lincoln’s assassination
in 1865; and only seconds for the world to witness the collapse of New York’s
World Trade Center towers in 2001.

The most profound technological advances have occurred in

communications, especially telecommunications, satellites, optical fiber, wireless
technology, and the Internet. At one time, people and companies used expensive
phone calls, slow postal service, and clunky telex machines to communicate with
foreign suppliers. In 1930, a 3-minute phone call between New York and London
cost $3,000. By 1980, the cost had fallen to $6. Today, the call costs only a few
cents. Scanners and fax machines send documents worldwide practically for free.
Banking transactions are relatively costly when performed via ATM machines or
telephones, but are virtually free when handled via the Internet. The Internet, and
Internet-dependent communications systems such as intranets, extranets, and e-
mail, connect millions of people across the globe. The dot-com boom of the 1990s
led to massive investment in fiber optic telecommunications. Today, the widest
range of products and services—from auto parts to bank loans—is marketed
online. Transmitting voices, data, and images is essentially costless, making
Boston, Bangalore, and Beijing next door neighbors, instantly. South Korea, where
Internet access is nearly 100 percent, is leading the way. South Korea’s broadband
networks for home are among the fastest in the world. Korean schoolchildren use
their cell phones to get homework from their teachers and play games online with
gamers worldwide. Adults use their phones to pay bills, do banking, buy lottery
tickets, and check traffic conditions. Widespread availability of the Internet and e-
mail makes company internationalization cost-effective.

For instance, Amdahl, a manufacturer of large-scale computers, uses the

Internet to order circuit boards from factories in Asia and to arrange international
shipments of parts and components via firms like DHL and Federal Express.
Search engines, databases, reference guides, and countless government and private
support systems assist managers to maximize knowledge and skills for
international business success.

The Internet opens up the global marketplace to companies that would

normally not have the resources to do international business, including countless
SMEs. By establishing a presence on the Web, even tiny enterprises take the first
step in becoming multinational firms. Thanks to the Internet, services as diverse as
designing an engine, monitoring a security camera, selling insurance, or secretarial
work have become easier to export than car parts or refrigerators. The Global
Trend feature highlights the emergence of e-commerce and its effect on
international company operations and performance. The Internet is stimulating
economic development and a massive global migration of jobs, particularly in the
services sector. As Netscape cofounder Marc Andreesson observed, “A 14-year-
old in Romania or Bangalore or Vietnam has all the information, all the tools, all
the software easily available to apply knowledge however they want.
Communications and information technology are now in the process of connecting
all of the knowledge pools in the world together.” In the not-too-distant future,
much of what has ever been written and recorded on paper, tape, or film will be
accessible online.

Manufacturing

Computer-aided design (CAD) of products, robotics, and production lines

managed and monitored by microprocessor-based controls are transforming
manufacturing, mainly by reducing the costs of production. Revolutionary
developments now permit low-scale and low-cost manufacturing. Firms can
produce products in short production runs cost effectively. These developments
benefit international business by allowing firms to more efficiently adapt products
to individual foreign markets, profitably target small national markets, and
compete more effectively with foreign competitors who already have cost
advantages.

Transportation

Managers consider the costs of transporting raw materials, components, and

finished products when deciding to either export or manufacture abroad. For
example, if transportation costs to an important market are high, management may
decide to manufacture its merchandise in the market by building a factory there.
Beginning in the 1960s, technological advances led to the development of fuel-
efficient jumbo jets, giant ocean-going freighters, and containerized shipping, often
through the use of high-tech composites and smaller components that are less
bulky and lightweight. As a result, the cost of transportation as a proportion of the
value of products shipped internationally has declined substantially. Lower freight
costs have spurred rapid growth in cross-border trade. Technological advances
have also reduced the costs of international travel. Until 1960, it was common to
travel by ship. With the development of air travel, managers quickly travel the
world.

Societal Consequences of Market Globalization

Our discussion so far has highlighted the far-reaching, positive outcomes of market
globalization. Nevertheless, globalization has produced some harmful
consequences as well. While major advances in living standards have been
achieved in virtually all countries that have opened their borders to increased trade
and investment, the transition to an increasingly single, global marketplace poses
challenges to individuals, organizations, and governments. Low-income countries
have not been able to integrate with the global economy as rapidly as others.
Poverty is especially notable in Africa and in populous nations such as Brazil,
China, and India. Let’s now turn to some of the unintended consequences of
globalization.

Loss of National Sovereignty

Sovereignty is the ability of a nation to govern its own affairs. One country’s
laws cannot be applied or enforced in another country. The sovereignty of nations
is a fundamental principle that governs global relations. Globalization can threaten
national sovereignty in various ways. MNE activities can interfere with the
sovereign ability of governments to control their own economies, social structures,
and political systems. Some corporations are bigger than the economies of many
nations. Indeed, Wal-Mart’s internal economy—its total revenues—is larger than
the GDP of most of the world’s nations, including Israel, Greece, and Poland.
Large multinationals can exert considerable influence on governments through
lobbying or campaign contributions. It is not unusual for large corporations to
lobby their government, say, for devaluation of the home currency, which gives
them greater price competitiveness in export markets. MNEs can also influence the
legislative process and extract special favors from government agencies.

At the same time, even the largest firms are constrained by market forces. In
countries with many competing companies, one company cannot force customers
to buy its products or force suppliers to supply it with raw materials and inputs.
The resources that customers and suppliers control are the result of free choices
made in the marketplace. Company performance depends on the firm’s skill at
winning customers, working with suppliers, and dealing with competitors.
Corporate dominance of individual markets is rare. In reality, market forces
dominate companies. Indeed, gradual integration of the global economy and
increased global competition, combined with privatization of industries in various
nations, are making some companies less powerful within their national markets.
For instance, Ford, Chrysler, and General Motors once completely dominated the
U.S. auto market. Today many more firms compete in the United States, including
Toyota, Honda, Hyundai, Kia, Nissan, and BMW. Indeed, in annual sales, Toyota
now rivals General Motors in GM’s home market.

Today, globalization creates incentives for governments to pursue sound

economic policies and for managers to manage their firms more effectively. To
minimize globalization’s harm and reap its benefits, governments should strive for
an open and liberalized economic regime: freedom to enter and compete in
markets; protection of persons and intellectual property; rule of law; and voluntary
exchange imposed by markets rather than through political processes.
Transparency in the affairs of businesses and regulatory agencies is critical.

Occasionally, governments need to scrutinize corporate activities. An

example from the United States is the Sarbanes-Oxley Act of 2002 (also known as
the Public Company Accounting Reform and Investor Protection Act of 2002). The
legislation resulted from a decline in public trust of financial reporting practices in
the wake of a series of corporate and accounting scandals involving firms such as
Enron, Tyco International, and WorldCom. The legislation introduced new or
enhanced standards for all U.S. public company boards, management, and public
accounting firms.

Offshoring and the Flight of Jobs

Globalization has created countless new jobs and opportunities around the
world, but it has also cost many people their jobs. For example, Ford, General
Motors, and Volkswagen all have transferred thousands of jobs from their factories
in Germany to countries in Eastern Europe. This occurred partially because
mandated shorter working hours (often just 35 hours per week) and generous
benefits made Germany less competitive, while Eastern Europe offers abundant
low-wage workers. Recognizing this, the German government is loosening
Germany’s labor laws to conform to global realities. But these changes have
disrupted the lives of tens of thousands of German citizens. General Motors and
Ford have also laid off thousands of workers in the United States, partly the result
of competitive pressures posed by carmakers from Europe, Japan, and South
Korea.

Offshoring is the relocation of manufacturing and other value-chain

activities to cost-effective locations abroad. For example, the global accounting
firm Ernst & Young has much of its support work done by accountants in the
Philippines. Massachusetts General Hospital has its CT scans and X-rays
interpreted by radiologists in India. Many IT support services for customers in
Germany are based in the Czech Republic and Romania.

Offshoring has resulted in job losses in numerous mature economies. The

first wave of offshoring began in the 1960s and 1970s with the shift of U.S. and
European manufacturing of cars, shoes, electronics, textiles, and toys to cheap-
labor locations such as Mexico and Southeast Asia. The next wave began in the
1990s with the exodus of service sector jobs in credit card processing, software
code writing, accounting, health care, and banking services. High-profile plant
closures and relocation of manufacturing facilities to low-cost countries have
received ample media attention in recent years. Critics have labeled many MNEs
as “runaway” or “footloose” corporations—quick to relocate production to
countries that offer more favorable access to inputs. For example, Electrolux, a
Swedish manufacturer of home appliances, moved its Greenville, Michigan,
refrigerator plant to Mexico in 2005. Electrolux had provided 2,700 jobs in this
western Michigan community of 8,000. Despite repeated appeals by the local
community, the labor union, and the state of Michigan, Electrolux went with its
decision to shift manufacturing to Mexico. One can imagine the devastation to the
economic livelihood of this community.

Effect on the Poor

Multinational firms are often criticized for paying low wages, exploiting
workers, and employing child labor. Child labor is particularly troubling because it
denies children educational opportunities. The International Labor Organization
(www.ilo.org) estimates there are as many as 250 million children at work around
the world, many working full time.

Labor exploitation and sweatshop conditions are genuine concerns in many

developing economies. Nevertheless, consideration must be given to the other
choices available to people in those countries. Finding work in a low-paying job
may be better than finding no work at all. Recent studies suggest that banning
products made using child labor may produce negative, unintended consequences.
Eliminating child labor can worsen living standards for children. Legislation that
reduces child labor in the formal economic sector (the sector regulated and
monitored by public authorities), may have little effect on jobs in the informal
economic sector (sometimes called the underground economy). In the face of
unrelenting poverty, abolishing formal sector jobs does not ensure that children
leave the workforce and go to school.
 Critics insist that such workers be provided a decent wage. However,
legislation to increase minimum wage levels can also reduce the number of
available jobs. That is, countries that attract investment due to low-cost labor
gradually lose their attractiveness as wages rise. More broadly, the evidence
suggests that globalization is associated with higher wage growth over time.

Governments are responsible for ensuring that the fruits of economic

progress are shared fairly, and that all citizens have access to improved welfare,
living standards, and higher-value-adding, higher-paying jobs. Developing
countries can engage in a number of proactive measures to reduce poverty. They
can improve conditions for investment and saving, liberalize markets and promote
trade and investment, build strong institutions and government to foster good
governance, and invest in education and training to promote productivity and
ensure worker upward mobility. Advanced economies can play a role in reducing
poverty by making their markets more accessible to low-income countries,
facilitating the flows of direct investment, other private capital, and technology
into low-income countries, and providing debt relief to heavily indebted nations.

Effect on the Natural Environment

Globalization can harm the environment by promoting increased

manufacturing and economic activity that result in pollution, habitat destruction,
and deterioration of the ozone layer. The construction of factories, infrastructure,
and modern housing can spoil previously pristine environments. As an example,
growing industrial demand for electricity led to construction of the Three Gorges
Dam, which flooded agricultural lands and permanently altered the natural
landscape in Eastern China.

While it is generally true that globalization-induced industrialization

produces considerable environmental harm, the harm tends to decline over time.
The evidence suggests that environmental destruction diminishes as economies
develop, at least in the long run. To the extent that globalization stimulates rising
living standards, people focus increasingly on improving their environment. Over
time, governments pass legislation that promotes improved environmental
conditions. For example, Japan endured polluted rivers and smoggy cities in the
early decades of its economic development following World War II. But as Japan’s
economy grew, the Japanese passed tough environmental standards aimed at
restoring natural environments.

Evolving company values and concern for corporate reputations also lead
most firms to reduce or eliminate practices that harm the environment. For
example, with rising affluence in Mexico, big American automakers like Ford and
GM have gradually improved their environmental standards. Benetton in Italy
(clothing), Alcan in Canada (aluminum), and Kirin in Japan (beverages), are
examples of firms that embrace practices that protect the environment, often at the
expense of profits. Conservation Coffee Alliance, a consortium of companies, has
committed approximately $2 million to environmentally friendly coffee cultivation
in Central America, Peru, and Colombia.
 Effect on National Culture

Globalization exerts strong pressures on national culture. Market

liberalization leaves the door open to foreign companies, global brands, unfamiliar
products, and new values. Consumers increasingly wear similar clothing, drive
similar cars, and listen to the same recording stars. Advertising leads to the
emergence of societal values modelled on Western countries, especially the United
States. Hollywood dominates the global entertainment industry. In this way,
globalization can alter people’s norms, values, and behaviors, which tend to
homogenize over time.

Critics call these trends the “McDonald-ization” or the “Coca-Colonization”

of the world. To combat such trends, governments try to block cultural imperialism
and prevent the erosion of local traditions. In Canada, France, and Germany, the
public sector attempts to prevent U.S. ideals from diluting local traditions.
Hollywood, McDonald’s, and Disneyland are seen as Trojan horses that
permanently alter food preferences, lifestyles, and other aspects of traditional life.
In a globalizing world, for better or worse, such trends appear to be inevitable.

Information and communications technologies promote the homogenization

of world cultures. People worldwide are exposed to movies, television, the
Internet, and other information sources that promote lifestyles of people in the
United States and other advanced economies. Appetites grow for “Western”
products and services, which are seen to signal higher living standards. Global
media have a pervasive effect on local culture, gradually shifting it toward a
universal norm.

At the same time, the flow of cultural influence often goes both ways. For
instance, Advanced Fresh Concepts is a Japanese food company that is
transforming fast food by selling sushi and other Japanese favorites in
supermarkets throughout the United States. It sells some $250 million worth of
sushi to U.S. buyers every year. As the influence of the Chinese economy grows
over time, Western countries will likely adopt cultural norms from China as well.
Chinese restaurants and some Chinese traditions are already a way of life in much
of the world outside China. Similar influences can be seen from Latin America and
other areas in the developing world.

In addition, cultural anthropologists note that cultural values change at a

glacial pace. Even if people from different nations appear similar on the surface,
they usually hold traditional attitudes, values, and beliefs rooted in the history and
culture of the country where they live. Although some tangibles are becoming
more universal, people’s behavior and mindsets remain stable over time. Religious
differences are as strong as ever. Language differences are steadfast across national
borders. While a degree of cultural imperialism may be at work, it is offset by the
countertrend of nationalism. As globalization standardizes superficial aspects of
life across national cultures, people are resisting these forces by insisting on their
national identity and taking steps to protect it. This is evident, for example, in
Belgium, Canada, and France, where laws were passed to protect national language
and culture.
Firm-Level Consequences of Market Globalization: Internationalization of
the Firm’s Value Chain

The globalization of markets has opened up countless new business

opportunities for internationalizing firms. At the same time, globalization implies
that firms must accommodate new risks and intense rivalry from foreign
competitors. Globalization results in buyers who are more demanding and who
shop for the best deals from suppliers worldwide. A purely domestic focus is no
longer viable for firms in most industries. Companies need to proactively
internationalize their value chain in order to profit from new opportunities and
reduce the harm of potential threats. Managers must increasingly adopt a
worldwide orientation rather than a local focus. Internationalization may take the
form of global sourcing, exporting, or investment in key markets abroad. The more
proactive firms seek a simultaneous presence in all major trading regions,
especially Asia, Europe, and North America. They concentrate their activities in
those countries where they can achieve and sustain competitive advantage.

The most direct implication of market globalization is on the firm’s value

chain. Market globalization compels firms to organize their sourcing,
manufacturing, marketing, and other value-adding activities on a global scale. As
noted earlier, a value chain is the sequence of value-adding activities performed by
the firm in the process of developing, producing, marketing, and servicing a
product. In a typical value chain, the firm conducts research and product
development (R&D), purchases production inputs, and assembles or manufactures
a product or service. Next, the firm performs marketing activities such as pricing,
promotion, and selling, followed by distribution of the product in targeted markets
and after-sales service. Value chains vary in complexity and across industries and
product categories. The value chain concept is useful in international business
because it helps clarify what activities are performed where in the world. For
instance, exporting firms perform most “upstream” value-chain activities (R&D
and production) in the home market and most “downstream” activities (marketing
and after-sales service) abroad.
 Exhibit 2.8 illustrates a typical international firm’s value chain. Each value
adding activity is subject to internationalization; that is, it can be performed abroad
instead of at home. As the examples in Exhibit 2.8 suggest, companies have
considerable latitude regarding where in the world they locate or configure key
value-adding activities. The most typical reasons for locating value-chain activities
in particular countries are to reduce the costs of R&D and production or to gain
closer access to customers. The practice of internationalizing the value chain is
often referred to as offshoring, where the firm relocates a major value-chain
activity by establishing a factory or other subsidiary abroad. A related trend is
global sourcing, in which the firm delegates’ performance of the value-adding
activity to an external supplier or contractor located abroad.

LEARNING TASKS

1. Discuss the concept of Value Chain Activities.

2. What are the advantages and drawbacks of Value Chain Activities?

3. What is the importance of understanding and considering the organizing

framework for market globalization in international business and trade?

4. What are the roles played of supranational institutions such as the World
Bank, International Monetary Fund, and the World Trade Organization in
International Business and Trade?

5. Enumerate at least three (3) Societal Consequences of Market

Globalization and provide remedies or solutions on this matter.

LEARNING REFERENCES/RESOURCES

International Business: Strategy, Management, and the New Realities / S. Tamer

Cavusgil, Gary Knight, John R. Riesenberger.2012