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Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 12

This chapter:
Explains globalization in more depth.
Discusses its impact on culture, the growth of
trade agreements, the erosion of nation-state
sovereignty, and protectionism.
Describes corruption and efforts to combat
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McDonalds Corporation
Opening Case
More than half of McDonalds restaurants are outside of the
U.S., accounting for 62% of company revenues.
As a prominent global brand McDonalds symbolizes
perceived evils of globalization.
In developing nations, the arrival of a McDonalds is regarded
as a sign of modernization.
McDonalds does transfer cultural values and practices.
However, most of McDonalds international restaurants are
franchises, run as local businesses. The entrepreneurs who
run these businesses adapt them to local custom.

The story of McDonalds illustrates the complexity of

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What is Globalization?
Globalization occurs when networks of
economic, political, social, military,
scientific, or environmental
interdependence grow to span worldwide
Economic globalization refers to the
development of an increasingly integrated
commercial system based on free markets
in which nations are open to foreign trade
and investment.
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Major Forces in
Expanding Globalization

Multilateral organizations
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Pros of Globalization
Has lifted millions of people out of
Consumer benefits of more variety,
lower costs, and higher quality of
Improved working conditions for
millions of workers.
Human rights have improved.
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Flaws and Problems

in Globalization
In some countries the financial systems, laws,
ideas, and institutions did not keep pace with the
rapid spread of globalization.
Politicians and their constituents have become
increasingly protectionist.
Tens of millions of manufacturing jobs have been
lost in the U.S. and Europe because of global
The Western countries have pushed poor countries
to eliminate trade barriers, but kept up their own
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Expanding Trade Agreements

Rapid increase in the number of trade agreements
has been a major force in globalization.
Trade agreements have helped to increase global
competition and have accelerated world trade.
The largest of these in terms of population are:
European Union (EU)
North American Free Trade Agreement (NAFTA)
The Asia-Pacific Economic Cooperation (APEC)

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The European Union

On January 1, 1993, the EU became a unified regional
market and by 2007 there were 27 member states.
On January 1, 1999, the EU adopted the euro.
A milestone was reached in 2004 when leaders of the 25
European nations then in the Union signed the 50-article EU
Many businesses in newly joined nations face serious
problems in complying with the rules and requirements found
in some 80,000 pages of EU laws.
Many individuals in the Union are unhappy; a survey said 44
percent believe life has become worse since their nation
joined the EU.

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The North American Free Trade

Created a free trade block consisting of the
United States, Canada, and Mexico.
Labor unions in the U.S. opposed NAFTA from
its beginning.
Workers on both sides of the border have
seen individual losses and gains.
Expanding trade has opened new
Important problems have arisen in the
operation of NAFTA.
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Other Trade Agreements

Mercado Comun del Sur (Mercosur)
Asia-Pacific Economic Cooperation
Association of South East Asian
Nations (ASEAN)

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Globalization and the

Erosion of State Sovereignty
Disagreement exists regarding whether globalization has
eroded the sovereignty of nations.
Nation-state sovereignty has been eroded
Market forces overwhelm the economic powers of nationstates to determine economic, political, cultural, and
social affairs.
The competitiveness imperative amounts to an
infringement on state authority.
Nation-state sovereignty has not been seriously eroded
All nations have the authority and power to block the
entrance of a large global company or to deny demands
of an MNC for concessions.

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Erosion of Cultures
The rapid and explosive spread of American
culture throughout the world is one significant trend
within globalization.
Throughout the world there is resentment about
the transmission of certain Western cultural values.
Majorities of people in Europe like American music,
television, and films and technology but dislike the
spread of American ideas.
Economic forces of globalization have encouraged
massive migrations of peoples.

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Why Free Trade?

Some nations have an advantage over others in
the production of particular goods.
Resources will be used most efficiently when each
country produces that for which it enjoys a cost
The law of comparative advantage.
It is argued that free trade will stimulate
competition, reward individual initiative, increase
productivity, and improve national well-being.
Job opportunities, and a wider variety of goods and
services at minimum prices and with higher quality.

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Pressures for
Most domestic businesses, whether engaged in
foreign trade or not, feel pressures from foreign
competitors with better products and lower prices.
Three justifications are often given for protectionist
The U.S. has large trade deficits that must be
Protectionists want to shield industries from
foreign competition.
Trade barriers in foreign countries restrict
American imports to them.
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Free Trader Responses to

One main argument is the logic for free trade.
The cause of the exceptional rise in world trade,
say antiprotectionists, has been in no small
measure the worlds reduction in tariff barriers.
Some argue that rich countries should reduce tariff
barriers and poor ones should be allowed to
maintain them since the underdeveloped countries
do not have the infrastructure and institutions to
open their markets to free trade.

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U.S. Deviation from Free

Trade Policy
Despite strong free trade rhetoric and the steady
lowering of tariff and other trade barriers, the
United States protects industries from foreign
The Federal Buy American Act
The Merchant Marine Act
The Passenger Vessel Services Act
U.S. tariffs have declined significantly in recent
years, but there are many exceptions.

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Tariff Barriers in
Other Countries
China still imposes substantial barriers on imports such as
watches, automobiles, steel, textiles, and many food products.
Japanese restricts U.S. imports of meat, poultry, vegetables,
and fruit products.
Various restrictions among European Union countries are
applied to genetically engineered commodities.
Taiwan restricts imports of rice.
Korea imposes high duties maintains a broad range of trade
restrictions and nontariff barriers on agricultural and fishery
Brazil still retains high tariffs on technology products.
Mexico still retains substantial trade restrictions on products
such as meat, poultry, vegetables, and fruit.

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Classical Free Trade Theory

versus Reality
The reality is that the global economy is a mixture
of free trade and protectionism.
Classical free trade theory based on comparative
advantage has lost much validity for a large part of
world trade.
Porter argues that industrial clusters help a nation
achieve global superiority in one industry.
These clusters are composed of firms and
industries that are mutually supporting, innovative,
competitive, low-cost producers, and committed to
meeting demanding consumer tastes.
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Corruption in Business and

Government Transactions
Cultural differences, practices, and laws
among the many countries where MNCs do
business create extremely difficult moral,
ethical, and legal problems for MNCs.
Companies have found in many LDCs, and
even in some highly industrialized
countries, that to do business it is
necessary to make a variety of payments.

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What is Corruption?
At one end of the spectrum is what might be called
petty corruption or grease payments.
When is the payment normal, and when does it
become tainted with bribery?
A different problem in identification of bribery is
offsets, which have become popular in the
international arms trade.
Offsets can be part of an agreement to bring
investment to a company.
Contractors dislike offsets but they are an essential
part of doing business in many countries.

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Costs and Consequences

of Corruption
Foregoing bribery can costly in terms of
business lost to competitors.
Corruption imposes costs beyond individual
company losses to competitors who bribe.
It undermines democratic institutions
It retards economic development
It contributes to government instability
It attacks the foundation of democratic
Corruption varies significantly among countries.

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Business Anticorruption
Practices and Procedures
A study by The Conference Board concluded that
anticorruption practices and procedures have become
significant more widespread, detailed and
sophisticated than in 2000.
Congress passed the Foreign Corrupt Practices Act
(FCPA) in 1977, which makes it illegal for managers of
U.S. corporations to bribe an official of a foreign
government or ministry.
Most large companies have formal policies against
corrupt payments.
Despite international, national, and corporate efforts at
eradication, corruption and bribery endure.
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Concluding Observations
MNCs have major impacts on markets,
social systems, and political institutions.
Complexities of doing global business raise
serious economic, ethical, political, social,
and moral issues for their management.
It is believed that more top managers of
U.S. corporations, with help and prodding
from government and strong activist critics,
are exercising power responsibly.

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Concluding Observations
Globalization has created enormous wealth for
people all over the world.
It has led to exploitation, dislocation, and
suffering for some who have yet to experience
its benefits.
It has changed business-government-society
relationships in profound and fundamental ways.
The forces of globalization are beneficial to the
peoples of the world and promise even greater
benefits in the future.
Important reforms are necessary.
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