Chapter 1 Globalization

• What is globalization?
• Drivers of globalization
• The changing demographics
of the global economy
• The globalization debate

What Is Globalization?
• The world is moving away from self-
contained national economies toward an
interdependent, integrated global
economic system
• Globalization refers to the shift toward a
more integrated and interdependent world
economy
• Globalization has two facets:
1) the globalization of markets
2) the globalization of production 2

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 What Is The
Globalization of Markets?
• The globalization of markets refers to the
merging of historically distinct and
separate national markets into one huge
global marketplace
• In many industries, it is no longer
meaningful to talk about the “German
market” or the “American market”
• Instead, there is only the global market
• The emergence of the global marketplace
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What Is The
Globalization of Markets?
• Falling trade barriers make it easier to sell
internationally
• The tastes and preferences of consumers
are converging on some global norm
– More prevalent in the markets for raw
materials and industrial products, but NOT in
consumer product markets
• Firms help create the global market by
offering the same basic products
worldwide
– New business opportunities for MNCs
– MNCs around the world becoming more
vulnerable to competition in their home markets 4

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 What Is The
Globalization of Production?
• The globalization of production refers to the
sourcing of goods and services from locations
around the globe to capitalize on national
differences in the cost and quality of factors of
production like land, labor, and capital

• Companies can
– lower their overall cost structure
– improve the quality or functionality of their product
offering
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What Is The
Globalization of Production?
• Historically this has been primarily confined to
manufacturing enterprises

• Today, the movement towards the

globalization of production is increasingly
made by the companies in the service and
finance industries.
– Modern communications technology, and
particularly the Internet
– Example, call centers in India

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 Why Do We Need
Global Institutions?
• Institutions are needed to:
– help manage, regulate, and police the global
marketplace
– promote the establishment of multinational treaties
to govern the global business system
• Examples include:
– the General Agreement on Tariffs and Trade (GATT)
– the World Trade Organization (WTO)
– the International Monetary Fund (IMF)
– the World Bank
– the United Nations (UN)
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What Do Global Institutions Do?

• The World Trade Organization (like its
predecessor GATT) polices the world trading
system
– promotes lower barriers to trade and investment
• The International Monetary Fund (1944) maintains
order in the international monetary system
• The World Bank (1944) promotes economic
development
• The United Nations (1945) preserves Peace
through international cooperation and collective
security
• Group of Twenty (G20)
– Finance ministers and central bank governors of the 19
largest economies in the world, plus representatives
from the European Union and the European Central
Bank 8

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 What Is Driving Globalization?
• Two macro factors underlie the
trend toward greater globalization:
– the decline in barriers to the free flow of
goods, services, and capital that has
occurred since the end of World War II
– technological change

Drivers of Globalization
• Declining Trade And Investment barriers
– 1920s-30s: Barriers to international trade
and foreign direct investment
• High tariffs resulted in retaliatory trade policies
– GATT lowered barriers
• Uruguay Round
• Established World Trade Organization (WTO)

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 Drivers of Globalization
• Declining Trade And Investment barriers
– Between 1960 and 2018 the value of the world
economy increased 9.4 times, while the value
of international goods increased 22.4 times.
– Trade in goods and services and the value of
foreign direct investment have all been growing
faster than world output.
• More firms dispersing production process to different
locations around the globe.
• Economies of the world’s nation-states are becoming
more intertwined.
• World has become significantly wealthier in the past
two decades.
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Declining Trade And

Investment Barriers
Average Tariff Rates on Manufactured Products as Percent of Value

1913 1950 1990 2018

France 21% 18% 5.9% 1.9%
Germany 20 26 5.9 1.9
Italy 18 25 5.9 1.9
Japan 30 - 3.3 2.1
Netherlands 5 11 5.9 1.9
Sweden 20 9 5.9 1.9
Great Britain - 23 5.9 1.9
United States 44 14 5.7 3.0

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 Value of world merchandised trade and
world production 1960 to 2019

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Drivers of Globalization
• The Role Of Technological Change
– Technological change has made the
globalization of markets a reality
– Important advances have occurred in:
• microprocessors and telecommunications
• the Internet and World Wide Web
– The Internet is an equalizer
– The creation of e-market place (e-commerce)
• transportation technology
• Commercial jet aircraft, superfreights,
containerization
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 What Does Globalization
Mean For Firms?
• Implications for the Globalization of Production
– Locating production in geographically separate
locations has become more economical

• Implications for the Globalization of Markets

– Cultural distance has been reduced and has
brought some convergence of consumer tastes and
preferences

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The Changing Demographics

Of The Global Economy
• There has been a drastic change in the
demographics of the world economy in the
past decades
• Four trends are important:
– the Changing World Output and World
Trade Picture
– the Changing Foreign Direct Investment
Picture
– the Changing Nature of the Multinational
Enterprise
– the Changing World Order
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 How Has World Output And
World Trade Changed?
• U.S. has experienced a relative decline
reflecting the faster economic growth of
several other economies
– China and BRIC countries growing more
rapidly
– Developing nations may account for more than
60 percent of world economic activity by 2025
• Non-U.S. firms are increasingly investing
across national borders
– Desire to disperse production activities to
optimal locations and to build a direct
presence in major foreign markets
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How Has World Output And

World Trade Changed?
The Changing Demographics of World GDP and Trade

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 Share of FDI stock outward as a
percentage of GDP

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FDI inflows (in millions of dollars)

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 The Changing Nature of the
Multinational Enterprise
• A multinational enterprise (MNE) is any
business that has productive activities in
two or more countries
• Non-U.S. Multinationals
– In 2003, 38.8 percent of the world’s 2000
largest multinationals were U.S. firms
– By 2019, 28.8 percent of the top 2000 global
firms were U.S. multinationals, a drop of 201
firms
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National share of the largest 2,000

multinational corporations in 2019

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 The Changing Nature of the
Multinational Enterprise
• The Rise of Mini-Multinationals.
– Growth in the number of medium- and
small-sized businesses.
– Internet is lowering barriers that smaller
firms faced in international trade.

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The Changing World Order

• Former communist countries present
export and investment opportunities
• Signs of growing unrest and
totalitarianism
• China moving to industrial superpower
• Latin America debt and inflation are
down, more private investors,
expanding economies
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 Global Economy of the
Twenty-First Century
• Barriers to the free flow of goods,
services, and capital have been coming
down
• Strengthened by the widespread
adoption of liberal economic policies by
countries that had firmly opposed them
• Globalization is not inevitable
– Countries may pull back
– Risks are high
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Is An Interdependent Global
Economy A Good Thing?
• Supporters believe that increased trade and
cross-border investment mean
– lower prices for goods and services
– greater economic growth
– higher consumer income, and more jobs
• Critics worry that globalization will cause
– job losses
– environmental degradation
– the cultural imperialism of global media and MNEs
• Anti-globalization protesters now regularly
show up at most major meetings of global
institutions
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 How Does Globalization Affect
Jobs And Income?
• Critics argue that falling barriers to trade
are destroying manufacturing jobs in
advanced countries
– Services also being outsourced
• Supporters contend that the benefits of
this trend outweigh the costs
– countries will specialize in what they do
most efficiently and trade for other goods—
and all countries will benefit
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How Does Globalization Affect Labor

Policies And The Environment?
• Critics argue that firms avoid costly efforts to
adhere to labor and environmental
regulations by moving production to countries
where such regulations do not exist, or are
not enforced
• Supporters claim that tougher environmental
and labor standards are associated with
economic progress
– as countries get richer from free trade, they
implement tougher environmental and labor
regulations
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 Income Levels and
Environmental Pollution

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How Does Globalization Affect

National Sovereignty?
• Is today’s interdependent global economy
shifting economic power away from national
governments toward supranational
organizations like the WTO, the EU, and the
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
– the power of the organizations lies in their ability to
get countries to agree to follow certain actions
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 How Is Globalization
Affecting The World’s Poor?
• Is the gap between rich nations and poor
nations is getting wider?
• Critics believe that if globalization was
beneficial there should not be a divergence
between rich and poor nations
• Supporters claim that the best way for the
poor nations to improve their situation is to
– reduce barriers to trade and investment
– implement economic policies based on free
market economies
– receive debt forgiveness for debts incurred
under totalitarian regimes
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Percentage of the world’s population

living in poverty during 1981 to 2015

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 How Does The Global Marketplace
Affect Managers?
• Managing an international business differs
from managing a domestic business
because
– countries are different
– the range of problems confronted in an
international business is wider and the
problems more complex than those in a
domestic business
– firms have to find ways to work within the
limits imposed by government intervention in
the international trade and investment system
– international transactions involve converting
money into different currencies 33

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