Lecture 3:

Globalization:
Drivers for globalization
 Contents

I. Influencing forces for globalization

II. Key drivers for globalization

 Influencing forces
for globalization
1. Increasing international economic integration

a) Explaining the concept:

• Economic integration is a new reality in the
international business market.
• Business and governments have created a range of
institutions, treaties, and agreements that help to:
― Overcome trade differences
― Boost the free movement of trade, investment, and
services across national boundaries
 Influencing forces
for globalization
1. Increasing international economic integration

a) Explaining the concept (cont.):

• Economic integration is concerned with:
― The removal of trade barriers or impediments between at least
two participating nations
― The establishment of cooperation and coordination between
them
• Integration creates high levels of globalization and
regionalization.
 Influencing forces
for globalization
1. Increasing international economic integration
 Influencing forces
for globalization
1. Increasing international economic integration
International economic integration progress of Vietnam

Source: Ministry of Industry and Trade of Vietnam, 2014

 Influencing forces
for globalization
1. Increasing international economic integration
b) Increasing international economic integration after WWII:
After WWII, advanced countries made a commitment to lower barriers to trade
and investment. Since 1950, average trade tariffs have fallen significantly.

Table: Average Tariffs Rates on Manufactured Products as Percentage of Value

(Source: Adamchik, 2015)
 Influencing forces
for globalization
1. Increasing international economic integration
b) Increasing international economic integration after WWII:
Declining trade barriers has resulted in international business and trade

Figure: Tariff removal has been sin increasing trade

(Source: World Bank, 2012)
 Influencing forces
for globalization
1. Increasing international economic integration
b) Increasing international economic integration after WWII:
Chart: Merchandise exports and imports by level of development

Source: WTO Secretariat

Note: Data for 2015Q3 and 2015Q4 are forecasts and indicated by broken lines
 Influencing forces
for globalization
1. Increasing international economic integration
c) Global trends in FDI
• Foreign direct investment (FDI) often involves the establishment
of production facilities abroad.
– Greenfield investment involves building new facilities from the ground
up
– Cross-border acquisition involves the purchase of an existing business.
• Both the flow and stock of FDI in the world economy have increased
over the last 20 years.
• FDI has grown more rapidly than world trade and world output
because:
– Firms still fear the threat of protectionism
– The general shift towards democratic political institutions and free
market economies has encouraged FDI
– The globalization of the world economy is prompting firms to undertake
FDI to ensure they have a significant presence in many regions of the
world.
 Influencing forces
for globalization
1. Increasing international economic integration
c) Global trends in FDI
 Influencing forces
for globalization
2. The role of technical change

• Technical change has made the globalization of markets

a reality. Important advances have occurred in:
– Microprocessors and telecommunication
– The Internet and World Wide Web
– Transportation technology
Watch the video “Past n Present: Technology then and now”:
https://www.youtube.com/watch?v=DENG7Q7VRgo
 Influencing forces
for globalization
2. The role of technical change
• Waves of innovation:

Source: The Natural Edge Project, Australia (2006)

 Influencing forces
for globalization
2. The role of technical change

• Implications of technological change for the

globalization of production include:
– Lower transportation costs that enable firms to
disperse production to economical, geographically
separate locations
– Lower information processing and communication
costs that enable firms to create and manage globally
dispersed production systems
 Influencing forces
for globalization
2. The role of technical change

• Implications of technological change for the

globalization of markets include:
– Low cost global communications networks help create
electronic global marketplace
– Low cost transportation help create global markets
– Global communication networks and global media are
creating a worldwide culture, and a global market for
consumer products.
 Influencing forces
for globalization
3. Policy changes
• The speed of globalization process is closely related to the ability of
the state to supply the conditions of a successful market economy.
Globalization appears as the new ideology of capitalism.
• Newly empowered neo-liberal and neo-conservative regimes in the
advanced capitalist world championed a new discourse of free trade,
deregulation, marketization, and privatization.
• These governments pushed to (re)negotiate regional and global
trade agreements (e.g. NAFTA, GATT, EEC) and gave new life and
power to international regulatory agencies (WTO) and transnational
economic institutions (The World Bank and the IMF).
 Key drivers for
globalization
• George S. Yip first developed the framework of
industry globalization drivers in his book Total
global strategy: Managing for worldwide
competitive advantage (1992).
• There are four factors that underlie conditions in
each industry that create the potential for that
industry to become more global and, as a
consequence, for the potential viability of a
global approach to strategy.
– Market
– Cost
– Competition
– Government/Environment
 Yip’s framework

Source: Research Gate Website, 2017

 Yip’s framework
1. Market drivers
• Assess the extent to which there are:
– Homogeneous customer needs
– Global customer needs
– Global channels
– Transferable marketing approaches
• This will determine which market characteristics
are global or local
 Yip’s framework
2. Cost drivers
• Assess the extent to which the cost factors push
towards industry globalization:
– Large-scale and large-scope economies
– Learning and experience
– Sourcing efficiencies
– Favorable logistics
– Arbitrage opportunities
– High research-and development (R&D) costs
 Yip’s framework
3. Competition drivers
• Assess the extent to which the cost factors push
towards industry globalization:
– Interdependent countries
– Global competitors
 Yip’s framework
4. Government drivers
• Assess the extent to which governments have:
– Favorable trade policies
– Common technological standards
– Common manufacturing and marketing regulations

Which push towards industry globalization?

 Application of
YIP’s framework

• The strength of the globalization drivers will determine

which aspects of a market and industry are global and
which are local.
• Global strategy must contain global and local features in
accordance with the strength of the drivers
 Application of
YIP’s framework
E.g: The consumer electronics industry

• Market drivers:
– Customer needs: common in all countries
– Lead countries: Japan
– Global brands and global marketing
– Distribution: NOT global networks
 The market is largely global BUT strategy must
take account of local distribution
 Application of
YIP’s framework
E.g: The consumer electronics industry

• Competitive drivers:
– There are global competitors: e.g. Sony,
Samsung, Panasonic, etc.
– Imports and exports are high
– Competition is interdependent
• Cost drivers:
– There are economies of scale in production
– Product development costs are high
– Transport costs are low
 Application of
YIP’s framework
E.g: The consumer electronics industry

• Government drivers:
– Trade barriers are reducing
– Technical standards are becoming uniform
 Global strategy in the consumer electronics
industry:
– Most aspects will be global
– Only distribution must be localized.