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CHAPTER 1
GLOBALIZATION

Mahmud Zaman
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LEARNING OBJECTIVES
•Understand what is meant by the term
globalization
•Recognize the main drivers of globalization
• Explain the main arguments in the debate
over the impact of globalization
•Understand how the process of globalization
is creating opportunities and challenges for
business managers
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WHAT IS GLOBALIZATION?
• Process by which
• barriers to cross-border trade and investments are declining,
• perceived distance is shrinking due to advances in transportation and
telecommunication technologies,
• national economies are merging into an interdependent, integrated
global economic system.
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WHAT IS GLOBALIZATION?
Interdependent:
Independently India has IT trained workforce but they do not have the capital to establish giant
firms like Microsoft.
Again independently USA has capital but they lack cheap IT trained workforce. So, the countries
will be better off being interdependent.
Integration:
USA invests in India and thus ensures capital flow in India.
India ensures supply of cheap IT trained workforce which is needed to produce software.
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WHAT IS THE GLOBALIZATION OF

MARKETS?
 It is the merging of historically distinct and separate national markets into one huge global marketplace.

• E.g. Consumer products  E.g. markets for industrial goods and materials
• Citigroup credit cards, such as
• Coca Cola & PepsiCo soft drinks,  aluminum,
• Sony PlayStation video games,  oil,
• McDonald’s Hamburger,  wheat,
• Starbucks coffee,  computer software, etc.
• General Motors & Toyota, etc.

It no longer makes sense to talk about the “German market” or the “American market”
Instead, there is the “global market”
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WHAT IS THE GLOBALIZATION OF

MARKETS?
Reasons for globalization of markets:
• falling trade barriers make it easier to sell internationally
• consumers’ tastes and preferences are converging on some global norm
• firms promote the trend by offering the same basic products worldwide
• Coca-Cola, McDonalds and Sony all sell standardized products.
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WHAT IS THE GLOBALIZATION OF

PRODUCTION?
• It refers to sourcing goods and services from locations around the globe to take advantage of
national differences in the cost and quality of factors of production i.e. Basic - labor, energy, land
and capital & Advanced - Technology).
• This helps to
• Gain cost advantage by producing in locations with low cost of production

• Improve the quality or functionality of the products, thus differentiating them

• E.g. Apple’s I Phones – Made in China

• E.g. Car- designed in Germany, assembled in Mexico with components from US and Japan,
fabricated steel from Korea and Malaysian rubber
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WHY DO WE NEED GLOBAL

INSTITUTIONS?
• Institutions
• help manage, regulate and monitor 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)
• the G20
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DRIVERS OF GLOBALIZATION
1. Declining Trade and Investment Barriers
Previously there were,
• High tariff rate on each others goods and services to protect domestic industries from
foreign competition. High tariff lead to high price of foreign goods which prevent these
goods to compete with local goods.

• Governments used to provide subsidies to important local industries. This reduced the cost
of production of domestic goods. Consequently, foreign products could not compete.
For e.g. RMG, Textile, Jute & Agricultural sectors in Bangladesh.

• Due to lack of international business activities, countries which were poor became poorer.
Such strategies are called ‘Beggar thy neighbour policy’.
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DRIVERS OF GLOBALIZATION
• Moreover, high tariff on foreign goods depressed the world demand and contributed to the Great
Depression of the 1930s.

• After World War II, formation of General Agreement on Tariffs and Trade (GATT) contributed
towards the reduction of barriers and ensured free flow of goods between nations. Eight rounds of
negotiations among member states (now numbering 153) have worked to lower the barriers.

• Uruguay Round held in December 1993, to further reduce trade barriers. Doha round in late 2001
also contributed for reduction of barriers and subsidies, particularly in agricultural sector. During 1913
to 2005 tariff rates reduced to 3.9% from 44%.

• Countries have opened their markets to FDI.

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DRIVERS OF GLOBALIZATION
2. The Role of Technological Change
The lowering of trade barriers made globalization of markets and
production a theoretical possibility.
Technological change has made it a tangible reality.

• Microprocessors and Telecommunications

The single most important innovation has been the development of
microprocessor which enabled the explosive growth of
 high power, low cost computing
 recent advances in telecommunication technology, satellite, optical fiber,
wireless technology, world wide web and internet.
 telecommunication cost between London and New York has reduced from
$244.65 to $3.32 during 1930 to 1990.
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DRIVERS OF GLOBALIZATION
• Internet and World Wide Web:
Development in Internet increased the scope of e-business.
It makes buyers and sellers to find each other.
It allows businesses, both small and large, to expand their global
presence at a lower cost.

• Transportation technology:
The beginning of commercial jet travel, by reducing the time needed
to get from one location to another, has effectively shrunk the globe.
 Containerization has revolutionized the transportation business,
significantly lowering the costs of shipping goods over long distances.
IMPLICATIONS FOR THE GLOBALIZATION 13

OF PRODUCTION
• As transportation costs associated with the globalization of production declined, companies can
now select geographically separate locations which are more economical.
• These developments make it possible for a firm to create and then manage a globally dispersed
production system.
• E.g. Web allows:
• Hospitals in Chicago send MRI scans to India for analysis
• Accounting offices in San Francisco outsource routine tax preparation work to
accountants in Philippines
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IMPLICATIONS FOR THE GLOBALIZATION

OF MARKETS
• Low-cost transportation made it more economical to ship products around the world, thereby
helping to create global markets.
• Low cost of transportation has increased movement of people between countries which reduced the
cultural distance among people and created convergence of taste and preferences.
• Low-cost global communications network such as WWW are helping to create electronic global
market places.
• Global communication network and global media like, CNN, MTV etc. also contributed for the
convergence.
• E.g. McDonald’s in China, Gap Jeans in Paris, E-bay
• E.g. Ecuador supplies roses to New York
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THE GLOBALIZATION DEBATE

Anti-Globalization Protests
Negative
Anti globalization groups protest because globalization creates,
•Job losses
•Downward pressure on the wage rates of unskilled workers
•Environmental degradation
•The cultural imperialism of global media and multinational enterprises

In Seattle, the WTO was meeting to try to launch a new round of talks to cut barriers to cross-border
trade and investment in December 1999. There was violent protest by the anti globalization groups,
where 40,000 protesters marched against globalization.
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THE GLOBALIZATION DEBATE

Positive
• Globalization improves the living standard.
• International chains like McDonalds and Starbucks are now available almost at every
location.
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THE GLOBALIZATION DEBATE

Globalization, Jobs and Income
Negative

 MNCs shifted their production to low cost locations where wage rate is low. As a result, the
demand of labor reduced in the USA. This resulted in job losses and reduction of wage rate in USA.

 Advanced economies are becoming technology-oriented.

 So the demand of unskilled workers is reducing in advanced economies creating an excess supply
of unskilled labor.
 Thus, growing income inequality is a result of the wages for skilled workers being bid up by the
labor market and the wage of unskilled workers being discounted.
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THE GLOBALIZATION DEBATE

Globalization, Jobs and Income
Positive
• However, benefits outweigh cost of globalization.
- improve the living standards
- creating employment
- economic growth of host country
• E.g. USA and China (Medicine and textile).

• Globalization encourages countries to specialize

• world output and overall economic condition improvement
• 1987-1994 the income gap reduced by 5.5% .
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THE GLOBALIZATION DEBATE

Globalization, Labour Policies and the Environment
Negative
• LDCs lack adequate regulations to protect labour and the environment from abuse by the corrupts. Free
trade leads to an increase in pollution and result in firms from advanced nations exploiting the labour of
less developed nations.
• Supporters of anti-globalization argued that NAFTA might stimulate US manufacturing firms
moving to Mexico and then pollute the environment, employ child labour and ignore workplace
safety.
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THE GLOBALIZATION DEBATE

Globalization, Labour Policies and the Environment

Positive
• The supporters of free trade argue that tougher environmental regulations and stricter
labor standards go hand in hand with economic progress. So free trade enables developing
countries to increase their economic growth and become richer which in turn strengthen the
regulations.
• International free trade agreements protect countries from exploitation. E.g. NAFTA protects
Mexico from being exploited by the US firms.
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THE GLOBALIZATION DEBATE

Globalization and National Sovereignty
Negative
• World Trade Organization (WTO), the European Union and the United Nations—
•these supranational organizations impose policies on the democratically elected governments of
the nation-states.
•Thus the independent economies are transferring their economic power away from national
governments towards these organizations.

• WTO monitor the trade policies and activities of its 150 member states who are signatory to the
GATT. The arbitration panel can issue a ruling instructing a member state to change trade policies
that violate GATT regulations.
•This is regarded as interference by the protesters of globalization.
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THE GLOBALIZATION DEBATE

Globalization and National Sovereignty
Positive
• Supporters say that WTO and such other organizations generate collective decision which reflects the
opinion of all the member states. If these bodies fail to serve the collective interest of member states,
those states will withdraw their support and the supranational organization will collapse. In this view,
the real power still resides with individual nation–states.
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THE GLOBALIZATION DEBATE

Globalization and the
World’s Poor
Negative
Gap between the rich and poor nations of the
world has gotten wider.

In 1870, the average income per capita in the

world’s 17 richest nations was 2.4 times that of
all other countries.

In 1990, the same group was 4.5 times as rich as

the rest.
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THE GLOBALIZATION DEBATE

Globalization and the World’s Poor
Due to globalization some world’s nations are now observing economic growth like, South Korea,
Thailand and Malaysia.
However, some are still poor and the reasons for their poverty property rights, and war or political
unrest, for e.g. African nations. are purely internal like dictator government, economic policies that
destroy wealth, insufficient protection of
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HOW DOES THE GLOBAL MARKETPLACE

AFFECT MANAGERS?
Managing an international business is different from managing a domestic business
for at least four reasons:

• 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
 SOME DEFINITIONS
• International Business is business whose activities are carried out across
national borders
• Ex. importers and exporters, having no investment outside of their home country

• MNC have investment in other countries, but do not have coordinated

product offerings in each country.
• Ex. Microsoft, Nestle, P&G

• Foreign Business denotes the operations of a company outside its home or

domestic market; many refer to this as business conducted within a foreign
country.
• Ex. ICICI Bank Ltd. of INDIA and Barclays Bank of UK in USA’s NYSE
 SOME DEFINITIONS

• A global Company (GC) is an organisation that attempts to standardise and

integrate operations (i.e. same coordinated image/brand)  worldwide in most or all
functional areas
• Ex. CISCO, FEDEX, MARS

• Foreign Direct Investment and Exporting Direct investments in equipment,

structures, and organisation in a foreign country at a level that is sufficient to obtain
significant management control
• does not include mere foreign investment in stock markets
 Orientations
• Ethnocentric : Home office people put in charge of key international positions.

• Polycentric : Local nationals placed in key positions and allowed to appoint and
develop their own people

• Regiocentric : Depends on local managers from a particular geographic region

to handle operations in and around that area.

• Geocentric : Attempt to integrate diverse regions of the world through a global

approach to decision making. Subsidiary and headquarters managers are treated
on equal terms.
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Question!
IS GLOBALIZATION
GOOD OR BAD?