Chapter 1

Globalization

naqiewei/DigitalVision Vectors/Getty Images

© 2022 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw Hill.
 Learning Objectives
1-1 Understand what is meant by the term globalization.
1-2 Recognize the main drivers of globalization.
1-3 Describe the changing nature of the global economy.
1-4 Explain the main arguments in the debate over the
impact of globalization.
1-5 Understand how the process of globalization is creating
opportunities and challenges for management practice.

©McGraw-Hill Education
 Introduction
The world economy today
• Fewer self-contained national economies
• More integrated global economic system with lower
barriers to trade and investment
• Transformation is called globalization
• The volume of goods, services, and investments crossing
national borders has expanded faster than world output
for more than half a century
• Globalization offers business opportunities

©McGraw-Hill Education
 What Is Globalization? 1
Globalization: shift toward a more integrated and
interdependent world economy
Two key facets of globalization
• Globalization of markets
• Globalization of production

©McGraw-Hill Education
 What Is Globalization? 2
The Globalization of Markets
• The merging of historically distinct and separate national
markets into one huge global marketplace
• In many markets, the tastes and preferences of consumers
in different nations are converging on some global norm,
creating a global market
• Examples: Coca-Cola, McDonald’s, IKEA, Starbucks, Apple

• The most global of markets are for industrial goods and

materials that serve universal needs around the world
• Aluminum, oil, wheat, microprocessors

©McGraw-Hill Education
 Globalization of Markets:
Starbucks around the world

©McGraw-Hill Education
 What Is Globalization? 3
The Globalization of Production
• 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 (labor, energy, land,
and capital)
• Lower overall cost structure
• Improvement of the quality or functionality of a product
to compete more effectively

©McGraw-Hill Education
  It takes a
world to
build a
Dreamliner

©McGraw-Hill Education
 What Is Globalization? 4
The Globalization of Production continued
• Early outsourcing was primarily for manufacturing
• Today, modern communications technology allows
companies to outsource services
• Impediments to globalization
• Formal and informal trade barriers
• Barriers to foreign direct investment
• Transportation costs
• Economic and political risk
• Managerial challenge for coordinating a globally dispersed supply
chain

©McGraw-Hill Education
 The Emergence of Global Institutions 1
Global Institutions
• Manage, regulate, and police the global market place
• Promote the establishment of multinational treaties to
govern the global business system

©McGraw-Hill Education
 The Emergence of Global Institutions 2
World Trade Organization (WTO)
• Polices world trading system and ensures nations adhere
to the rules established in WTO treaties
• Succeeded the General Agreement on Tariffs and Trade
(GATT)
• 164 nations accounted for 98 percent of world trade
(2017)

©McGraw-Hill Education
 The Emergence of Global Institutions 3
International Monetary Fund (IMF)
• Maintains order in the international monetary system
• Lender of last resort
• Requires nation-states to adopt specific economic policies
in return for loans
World Bank
• Promotes economic development using low-interest loans
• Seen as less controversial than IMF

©McGraw-Hill Education
 The Emergence of Global Institutions 4
United Nations (UN)
• Maintains international peace and security
• Develops friendly relations among nations
• Promotes cooperation in solving international problems
• Promotes respect for human rights
• A center for harmonizing the actions of nations
• Includes 193 member countries

©McGraw-Hill Education
 The Emergence of Global Institutions 5
Group of Twenty (G20)
• Comprised of finance ministers and central bank
governors of the 19 largest world economies plus the EU
• Represents 90 percent of global GDP
• Became a forum for a coordinated policy response to the
financial crisis of 2008 and 2009

©McGraw-Hill Education
 Drivers of Globalization 1
Two macro factors driving the move toward greater
globalization
1. Decline in barriers to free flow of goods, services, and
capital
2. Technological change

©McGraw-Hill Education
 Drivers of Globalization 2
Declining Trade and Investment Barriers
• International trade occurs when a firm exports goods or
services to consumers in another country
• Foreign direct investment occurs when a firm invests
resources in business activities outside its home country
• During 1920s and 1930s, many nations put up barriers to
international trade to protect domestic industries
• After WWII, advanced Western countries reduced barriers
• GATT, Uruguay Round, and WTO

©McGraw-Hill Education
 Table 1.1 Average Tariff Rates on Manufactured
Products as Percentage of Value
Country 1913 1950 1990 2020
France 21 percent 18 percent 5.9 percent 1.6 percent
Germany 20 26 5.9 1.6
Italy 18 25 5.9 1.6
Japan 30 -- 5.3 1.4
Netherlands 5 11 5.9 1.6
Sweden 20 9 4.4 1.6
United -- 23 5.9 1.6
Kingdom
United States 44 14 4.8 1.6

Sources: The 1913 to 1990 data are from “Who Wants to Be a Giant?” The Economist: A Survey of the Multinationals, June 24, 1995, pp. 3–4. The
2020 data are estimated based on data from the World Development Indicators, World Bank.

©McGraw-Hill Education
 Drivers of Globalization 3
Declining Trade and Investment Barriers continued
• Knowledge Society and Trade Agreements
• World trade is predicted to increase more rapidly than world
production for the foreseeable future
• Produce more today and more of it traded across national borders
• Consumers are more knowledgeable, which drives demand
• Countries have been reducing restrictions to foreign investment and
trade
• Implications of fast-paced volume of world trade
• More companies dispersing parts production
• Economies of nation-states becoming more intertwined
• World becoming significantly wealthier

©McGraw-Hill Education
 Drivers of Globalization 4
Role of Technological Change
• Communications
• Since World War II, microprocessor created explosive growth of
high-power, lost-cost computing
• Microprocessors also advanced telecommunications
• Moore’s Law: as costs of microprocessors fall, their power increases

• Internet communications
• Makes it easier for buyers and sellers to find each other

©McGraw-Hill Education
 Telecom Costs Falling

©McGraw-Hill Education
 Drivers of Globalization 5
Role of Technological Change continued
• Transportation Technology
• Commercial jets, superfreighters
• Containerization

©McGraw-Hill Education
 Superfreighters

©McGraw-Hill Education
 Drivers of Globalization 6
Role of Technological Change continued
• Implications for the Globalization of Production
• Lower transportation costs makes geographically dispersed
production system more economical
• Allows firms to better respond to customer demands

• Implications for the Globalization of Markets

• Low cost communication networks create electronic global
marketplace
• Low cost transportation makes shipping products around the
world economical
• Reduced cultural distance
• Converging consumer tastes and preferences

©McGraw-Hill Education
 Figure 1.1 Value of World Trade, World Production, Number of
Regional Trade Agreements and World Population 1960 to 2020

Access the text alternative for these images

.
©McGraw-Hill Education
Sources: World Bank, 2019; World Trade Organization, 2019; United Nations, 2019.
 Figure 1.2 Comparisons of World Trade and World Population; World
Trade and Number of Regional Trade Agreements; World Population and
World Production; and World Population and World Trade

Access the text alternative for these images.

©McGraw-Hill Education Sources: World Bank, 2019; World Trade Organization, 2019;
 Table 1.3 Changing Demographics of World
Output and World Exports
Share of World Share of World Share of World
Country Output 1960 (%) Output Today (%) Exports Today (%)
United States 38.3 15.8 8.2
Germany 8.7 3.4 7.1
France 4.6 2.3 2.8
Italy 3.0 1.9 2.4
United Kingdom 5.3 2.4 2.3
Canada 3.0 1.4 2.2
Japan 3.3 4.3 3.6
China NA 17.1 11.1

©McGraw-Hill Education Sources: Output data from World Bank database, 2019. Trade data from WTO Statistical Database, 2019.
 Figure 1.4 Share of FDI Stock Outward as a
Percentage of GDP

©McGraw-Hill Education Sources: O E C D data 2020, World Development Indicators 2020,

 Figure 1.5 FDI Inflows (in millions of dollars)

Access the text alternative for these

images.

©McGraw-Hill Education Source: United Nations Conference on Trade and Development,

 Figure 1.6 National Share of Largest
Multinational Corporations

©McGraw-Hill Education Source: Forbes Global 2000 in 2019.

 The Changing Demographics of the Global
Economy
The Changing Nature of the Multinational Enterprise
• A multinational enterprise (MNE) is any business that has
productive activities in two or more countries
• Since the 1960s, a rise of non-U.S. multinationals and
growth of mini-multinationals
• Non-U.S. Multinationals
• Large number of U.S. multinationals reflects U.S. economic
dominance
• Today, world economy shifting away from North America and
Western Europe

©McGraw-Hill Education
 The Changing Demographics of the Global
Economy
The Changing Nature of the Multinational Enterprise
continued
• The Rise of Mini-Multinationals
• More small- and medium-size businesses (mini-multinationals)
involved in international trade and investment
• Internet lowers barriers that smaller firms face in building
international sales

©McGraw-Hill Education
 The Globalization Debate 1
Is the shift toward a more integrated and
interdependent global economy a good thing?
• Experts believe globalization promotes greater prosperity
in the global economy, more jobs, and lower prices for
goods and services
• Others feel that globalization is not beneficial

©McGraw-Hill Education
 Summary
In this chapter, we have
• Understood what is meant by the term globalization.
• Recognized the main drivers of globalization.
• Described the changing nature of the global economy.
• Explained the main arguments in the debate over the
impact of globalization.
• Understood how the process of globalization is creating
opportunities and challenges for management practice.

©McGraw-Hill Education
 Globalisation debate
“Globalisation is a good thing and should be
encouraged”

‘Pro’ Team (2-3 people)

Arguing in support of this motion (advantages)

‘Against‘ Team (2-3 people)

Arguing against this motion (disadvantages)

‘Judges’ (1-2 people)

Asking questions, making judgement, reporting back

©McGraw-Hill Education
 Debate format
• 15 minutes preparation
• 8 minutes ‘pro’ opening
arguments
• 8 minutes ‘against’ opening
arguments
• 10 minutes – judges Q & A
• 3 minutes ‘pro’ closing
arguments
• 3 minutes ‘against’ closing
arguments
• 6 minutes judge’s decision
and explanation
©McGraw-Hill Education
 The Globalization Debate 2
Antiglobalization Protests
• Began with WTO protest in December 1999 in Seattle
• Protest turned violent

• Protestors fear globalization has detrimental effects on

living standards, wages, and the environment
• Theory and evidence suggests these fears are exaggerated

©McGraw-Hill Education
 The Globalization Debate 3
Globalization, Jobs, and Income
• Falling trade barriers destroy manufacturing jobs in
wealthy economies (U.S. and western Europe)
• Service activities increasingly outsourced to nations with
lower labor costs
• Supporters say benefits outweigh the costs
• Outsourcing allows a company to reduce its cost structure
and reduce prices

©McGraw-Hill Education
 The Globalization Debate 4
Globalization, Jobs, and Income continued
• Share of labor in national income has declined
• Attributed to a fall in unskilled labor
• Gap between poorest and richest segments of society has widened

• In most countries, real income levels increased for all

• Many advanced economies report shortage of highly
skilled workers and an excess of unskilled workers

©McGraw-Hill Education
 The Globalization Debate 5
Globalization, Labor Policies, and the Environment
• Critics argue that the lack of labor and environmental
regulations in less developed countries attract investment
• Adhering to environmental regulations increases costs of
manufacturing
• Supporters argue that tougher regulations lead to
economic progress
• Tougher regulations come with economic progress

• Studies show a hump-shaped relationship between

income levels and pollution levels

©McGraw-Hill Education
 Figure 1.7 Income Levels and Environmental
Pollution

Access the text alternative for these

images.
©McGraw-Hill Education Source: C. W. L. Hill and G. T. M. Hult, Global Business Today
 The Globalization Debate 6
Globalization and National Sovereignty
• Critics worry economic power is shifting away from
national governments and toward supranational
organizations such as the WTO, the European Union, and
the UN
• Supporters say the power of these organizations is limited
to what nation-states collectively agree to grant
• Must be able to persuade members states to follow certain actions
• Without the support of members, the organizations have no
power

©McGraw-Hill Education
 The Globalization Debate 7
Globalization and the World’s Poor
• Critics argue the gap between rich and poor is wider and
the benefits of globalization not shared equally
• Many poor nations are under totalitarian regimes, suffer from
endemic corruption, have few property rights, are involved in war,
have rapidly expanding populations, are burdened by high debt
• No money to invest in public infrastructure

• Debt relief movements

• Rich nations gave to World Bank and IMF
• Reduce import barriers from poor nations

©McGraw-Hill Education