Globalization

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Globalization_ Overview

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Globalization
3What is globalization? 3Driving forces 3Measures 3Effects 3Response: Policies and Institutions
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What is Globalization ?
3The increased freedom and capacity of individuals and firms to:  undertake economic transactions with residents of other countries operate on a global scale [ all country and region specific considerations take back seat, so are others like culture, religion and other societal parameters] Either the country specific demand is not important, or that is taken care of
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Ricardo__ 1817__ Comparative advantage
 Trade brings mutual advantage even where one nation has

absolute advantage in both products.  Each country should specialise in the product it can produce more efficiently compared to other products it produces.  That is the product in which it has a comparative advantage.

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Comparative advantage
 England produces cloth with 100 units of labor and wine

with 120 units of labor.  Portugal produces cloth with 90 units of labor and wine with 80 units of labor.  If they trade, England gets wine for equivalent of 100 units of labor.  Portugal gets cloth for equivalent of 80 units of labor.
  Both are better off despite Portugal’s absolute advantage in

both products.

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Vernon’s Product Cycle Theory (1960s)
 Countries with vast financial capital and highly specialised

human capital enjoy comparative advantage in research and development stage of product innovation.
 For example, Japan and Holland with VCR.  Later, countries with lower manufacturing costs acquire

comparative advantage.  Stages___  Innovation __ Standardization __ mass production __ adoption by other countries as comparative advantage dictates
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Factor mobility
 Advances in communications and transportation increase

mobility of financial capital, technology, human capital, and people.  Specialization & comparative advantage influenced by savings rates, investment in human capital (education and R&D), public infrastructure (transportation and communication systems) and government policies on education, health care and taxes.  Government policy can shape comparative advantage.

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Driving Forces of Globalization
3A reduction in official obstacles/barriers for conducting business with foreigners 3Fast reduction and convergence of transaction costs associated with doing this business

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Globalization_ Overview

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Operations of Multinational Enterprise [ MNE]
 MNEs creating global marketplace?  MNEs’ foreign operations becoming more vulnerable to competition in

their home markets  Individual MNEs disperse different parts of their operations to narrow set of locations around the world because of:  National advantages in factors of production key to the “where to produce?” decision  Labor, land, capital, energy, expertise  Global web of suppliers  Stake of foreign governments in MNE operations

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MNE
 An international business is any firm that engages in

international trade or investment  An MNE engages in international investment over which it has managerial control  International business involves managing across:  Differences in cultures, political, legal and economic systems and levels of economic development  Such differences endure in spite of globalization trends  International managers confronted with a greater range of complexity

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Example__ Johnson & Johnson__ Position now
  

Founded in New Brunswick, New Jersey in 1886. Family owned until listed on NYSE in 1944. Products  Johnson’s Baby Powder in 1893.  Band-Aid in 1921

       

TODAY__ Approximately 110,600 employees, more than 50,000 in the United States More than 200 operating companies Operations in 57 countries Sells products in more than 175 countries. Worldwide Sales in 2003 were $41.9 billion. Net Earnings for 2003 were $7.2 billion. Sales have increased each year for 71 consecutive years. Johnson & Johnson Vision Care Inc., is the world leader in contact lenses.

Tylenol became a consumer product in 1960.

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Examples of price decline in transport and communication

3Between the early 1980's and 1996 real sea freight costs fell 70%. 3Real air freight costs have fallen 3-4% a year over a long period. 3Real costs of international phone calls fell 4% a year in the developing countries in the 1990's and 2% a year in the industrial countries.

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Globalization_ Overview

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Cost of a 3-Minute Telephone Call, New York to London (Constant 1990, U.S. $)
350 300 250 200 150 100 50 0
1930 1940 1950 1960 1970 1980 1990

$0.30

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Examples of Innovation Driving Improved Quality/ Lower Cost
Containerization
easier tracking less pilferage/losses faster port services easier tracking faster delivery (better scheduling) just-in-time inventory management Lower costs
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Electronic data interchange

Fiber optics
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Average Air Transport Revenue per Passengers Mile (in 1990 US dollars)
0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 1930
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1940

1950

1960

1970

1980

1990
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Globalization_ Overview

Average Tariffs in Industrial Countries

50 40 30 20 10 0 Post. War
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40%

15% 4.5%

1960's
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Now
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Average MFN Import Tariffs in Large Developing Countries

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24 14 1984-87
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1991-93
Globalization_ Overview

Uruguay Round Commitment

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Measures of Globalization

3Trade integration 3Financial integration 3Global production networks

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Trade to GDP Ratios Rose Dramatically over the Last Decade (Export plus import as a percentage of GDP)
percentage
55 50 45 40 35 30 25 20
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Developing countries

High-income OECD

1970

1975

1980

Globalization_ Overview

1985

1990

1995

2000

2005 19

Trade to PPP GDP, 1986 and 1996 (percent)
70 60 50 40 30 20 10 0
E.Asia ECA LAC MNA S.Asia SSA High income 20

1986

1996

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Globalization_ Overview

Net Private Flows to Developing Countries, 1990-96 (in billions of US$)
US$ billions
300 250 200 150

Official flows
100 50 0
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1990

1991

1992 1993 Globalization_ Overview

1994

1995

1996 21

Gross private capital flows as % of PPP GDP, 1986 and 1996
25 20 15 10 5 0
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1986

1996

E.Asia

ECA

LAC Globalization_ Overview S.Asia MNA

SSA

High income

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Ratio of FDI to GDP (%) 1970-95
2

Developing
1.5

1

World

0.5

OECD

0
80
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94
23

70

72

74

76

78

82

84

86

88

90

92

Developing Countries and Foreign Direct Investment: Filtering for low FDI to GDP ratios, 1990-94
Number of countries
45 FDI>1% of GDP 12 at war 37 not at war

49 FDI<1% of of which GDP

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high deficits or inflation

5<0% growth
4

9

FDI/GDP
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War

Macro instability
Globalization_ Overview

Per capita income
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Global Production Networks
MNEs •Proprietary Technology •Management Know-How •Global Brands •Global Distribution •Scale Local Firms •Low Labor Cost •Local Knowledge •Domestic Distribution

•Direct Ownership •Joint Venture •Licensing •Franchising •Supplier Agreement
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Special Characteristics of MNE

3Many

studies have shown that firms which engage in global production enjoy unique, difficult to replicate assets--usually technology or differentiation 3Many studies have also shown that foreign firms usually pay higher wages, have higher productivity, and greater export orientation--their difficult to replicate assets enable that 3Certain parts of the world have become magnets for GPN (global production network) in recent years--the Mexico-US. border; Guandong, adjoining Hong Kong; parts of Poland; parts of Malaysia; the Bombay and Bangalore region in India--this is where growth rates are often hitting 10% a year--and where the upgrading to higher value-added activities is occurring most rapidly

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Effects of Globalization
3Growth 3Adjustment costs and inequality

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Adam Smith (1776) Sachs & Warner (1995) Ben David (90s)

Openness and Growth
 

Coastal regions grew faster--cheaper to transport by water and engage in division of labor

After adjusting for PCI and other factors, open economies grew 2-5% faster than slow economies  About 7-8 papers on the issue of convergence and its relation to growth * In general, no convergence * Shows that, over 1929-84: PCI in 48 US states converged systematically to that in NY state * States that had half the average US income in 1929 grew 1% faster than the average. NY state (richest) grew about 1% slower than average, at 0.7% * EU early years--little K&L flows--saw systematic convergence; half-life of the income gap to the average country fell from 75 years in 1900-1933 to 13 years in 1959-68 Sebastian Edwards Using trade policy indicators in study of 93 countries (1998) finds that openness induces faster total factor Globalization_ Overview 04/02/08 productivity growth.

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Adjustment costs and inequality
 Workers in protected sectors of the economy may lose

their jobs as grade liberalization proceeds
 Wage inequality may increase as a result of diffusion of

more capital/science-based production that favor skilled over unskilled labor

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Financial Misery Index since July 2, 1997 (mean of changes in currency, stock market, interest rates)
Indonesia Philippines Thailand Brazil China Argentina Poland Hungary

Better off

Worse off

-20
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0

20
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40

60

80
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Response to Globalization: Policies

3Macroeconomic stability 3Liberalization of trade / prices / factor markets / FDI 3Privatization 3Orderly liberalization of capital flows 3Better access to international markets / technology / infrastructure 3Safety nets to ease adjustment costs

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Response to Globalization: Institutions

3Efficient public administration 3Promote and enhance competition 3Enforcement of rights / contracts 3Regulatory framework for private provision of infrastructures 3Institutions to facilitate the adoption of standards and norms 3Sound financial systems

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