Unit1: Globalization – Nations, Industries and Firms

Changing Global Landscape - Trends, Challenges and

Opportunities

Reference:
Hill, Charles W.L. and Jain, Arun K. (2014).
International Business: Competing in the Global Marketplace (10e). India: Tata McGraw- Hill
 Changing Global Landscape (Transportation)

Aérospatiale-BAC Concorde is a turbojet-powered supersonic passenger jet airliner that was

operated until 2003. It featured a maximum speed over twice the speed of sound at Mach
2.04 (1,354 mph or 2,180 km/h at cruise altitude), with seating for 92 to 128 passengers.
Boeing 747 @ 0.9 Mach (1000 km/hour approx.)
 What Is Globalization?

• Globalization - the shift toward a more integrated and

interdependent world economy

• Self-contained national economies => Interdependent,

integrated global economic system

• Can be viewed from three angles:

– Globalization of Markets
– Globalization of Production
– Global Institutions
 Globalization of Markets
• The globalization of markets refers to the merging of historically distinct
and separate national markets into one huge global marketplace.

• It no longer makes sense to talk about the “German market” or the

“American market”. Instead, there is the “global market”
– falling trade barriers make it easier to sell globally
– consumers’ tastes and preferences are converging on some global
norm
– firms promote the trend by offering the same basic products
worldwide

• Firms of all sizes benefit and contribute to the globalization of markets

– 97% of all U.S. exporters have less than 500 employees
– 98% of all small and mid-sized German companies participate in
international markets
 Globalization of Production

• The globalization of production refers to the sourcing of goods and

services from locations around the globe to take advantage of national
differences in the cost and quality of factors of production (such as
labour, energy, land, and capital).

• By doing this, companies hope to lower their overall cost structure

and/or improve the quality or functionality of their product offering,
thereby allowing them to compete more effectively.

• Ricardo’s Theory of Comparative Advantage

• Porter’s Diamond Framework

• Ecuador Rose Industry – Shift from illegal drug trade due to reduction in
trade barriers by US
 Global Institutions
Key Institutions Setup after World War II
• General Agreement on Tariffs and Trade (GATT)
• World Trade Organization (WTO)
• International Monetary Fund (IMF)
• World Bank
• United Nations (UN)

Role
• help manage, regulate, and police the global marketplace
• promote the establishment of multinational treaties to govern the global
business system
 What Do Global Institutions Do?
• The World Trade Organization (like its predecessor GATT)
– polices the world trading system
– makes sure that nation-states adhere to the rules laid down in trade
treaties
– promotes lower barriers to trade and investment
– 163 members in 2016
– GATT was signed by 23 nations in Geneva on October 30, 1947 and
took effect on January 1, 1948. It lasted until the signature by 123
nations in Marrakesh on April 14, 1994 of the Uruguay Round
Agreements, which established WTO on January 1, 1995

• The International Monetary Fund (1944)

– maintains order in the international monetary system
– lender of last resort for countries in crisis
 What Do Global Institutions Do?
• The World Bank (1944)
– promotes economic development via low interest loans for
infrastructure projects especially in developing economies

• The United Nations (1945)

– maintains international peace and security
– develops friendly relations among nations
– cooperates in solving international problems and in promoting
respect for human rights
– is a center for harmonizing the actions of nations
 Drivers of Globalization
• Declining barriers to the free flow of goods, services, and
capital
– average tariffs are now at just 4%
– more favorable environment for FDI
• global stock of FDI was $20.4 trillion in 2011
– facilitates global production
 Declining Trade Barriers
Average Tariff Rates on Manufactured Products as Percent of Value

Sources: The 1913–1990 data are from “Who Wants to Be a Giant?” The Economist: A Survey of the Multinationals, June 24, 1995, pp.
3–4. Copyright © The Economist Books, Ltd. The 2010 data are from World Trade Organization, The World Trade Report 2011 (Geneva:
WTO, 2011).
 Drivers of Globalization
• Microprocessors and Telecommunications: Major advances in communications
and information processing have lowered the cost of global communication and
therefore the cost of coordinating and controlling a global organization.

• The Internet: e-commerce retail transactions in the United States have grown
from virtually zero in 1998 to nearly $300 billion in 2012. Overall ecommerce
trade reached $4 trillion in 2012.

• Transportation Technology: the most important developments are probably

development of commercial jet aircraft and super freighters and the introduction
of containerization, which greatly simplifies trans-shipment from one mode of
transport to another.

• Improvements in transportation technology have enabled firms to better respond

to international customer demands.

• Virtualization of Value Chain for New Entrants and Globalization of Value Chain
for all.
The Changing Demographics Of The Global Economy
Four trends are important:
• The changing world output and world trade picture(dual role of
exporter and importer, trade barriers less than 4%)

• The changing foreign direct investment picture (developed

economies to developing economies – BRICS)

• The changing nature of the multinational enterprise (global to

transnational)

• The changing world order (developed economies to fast emerging

markets or developing economies, Web 2.0)
How Has World Output And World Trade Changed?
The Changing Demographics of World Output and Trade
 FDI - Shifts
Percentage Share of Total FDI Stock 1980-2011
 What Is A Multinational Enterprise?
• Multinational enterprise (MNE) - any business that has
productive activities in two or more countries

• Deals with multiple uncontrollable variables

 The Changing World Order
• Many former Communist nations in Europe and Asia are now
committed to democratic politics and free market economies
– creates new opportunities for international businesses
– but, there are signs of growing unrest and totalitarian
tendencies in some countries

• China and Latin America are also moving toward greater free
market reforms
– between 1983 and 2010, FDI in China increased from less than
$2 billion to $100 billion annually
– but, China also has many new strong companies that could
threaten Western firms
 Global Marketplace & Managers
• Managing an international business differs from managing a
domestic business because
– countries are different-PESTEL framework
– 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
 Globalization - National Sovereignty
• Is today’s 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
 Global Economy Of The 21st Century

• The world is moving toward a more global economic system…

• But globalization is not inevitable

– there are signs of a retreat from liberal economic ideology in Russia

• Globalization brings risks

– the financial crisis that swept through South East Asia in the late 1990s
– the recent financial crisis that started in the U.S. in 2008-2009, and moved
around the world

• Inter-connected, inter-affected, inter-dependent world

 Interdependent Global Economy – Good or Bad
• 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
 Globalization - Jobs And Income
• Critics argue that falling barriers to trade are destroying
manufacturing jobs in advanced countries

• 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
 Globalization - Labor Policies And Environment
• Critics argue that firms avoid the cost of adhering 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
 Globalization – Rich-Poor Nations
• Is the gap between rich nations and poor nations 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
Add-On Slides
 Example: Walmart’s Global Expansion

• Largest retailer in the world –Over 4500 stores

• International expansion in 1991 begins with Mexico in response

to market saturation in the US
– Localization strategy adopted after trial and error

• Global buying power has allowed it to reap economies of scale

• Walmart faces significant competition from other global

retailers, but has the first mover advantage in some markets
 What Does Globalization Mean For Firms?
Technological change means
– lower transportation costs
• help create global markets and allow firms to disperse
production to economical, geographically separate
locations

– low cost information processing and communication

• firms can create and manage globally dispersed
production

– low cost global communications networks

• help create an electronic global marketplace

– global reach
• create a worldwide culture and a global consumer
product market
FDI Changes
FDI Inflows 1988-2011
Environmental Performance And Income