The Global Economy

Global Economy
• Common to buy clothing anywhere in US which has a
tag labeled, ‘Made in Malaysia, China or Sri Lanka’
• Simple observation reminds us that our consumption
of goods has a strong international character
• Increasingly true to speak not only of national
economies but a larger, highly inter-connected and
interdependent- GLOBAL ECONOMY
• Before discussing basic mechanisms of
industrialization and economic change within Third
World, important to look at the broader global
industrial environment within which these nations are
forced to compete
 Setting the Stage: Origins of the Global
Economy
• Since 1970s world economy hit by turbulent
forces
• Unemployment in western countries
• Traditional industries (iron and steel) have
declined
• LDCs bearing huge financial debts which
threaten drive for development
• Trading tensions have emerged between
industrial countries and the newly
industrializing countries
 Causes of These Conditions?
• Some argue that continuing OPEC
escalation of oil prices through limited
production is root cause
• Had some effect but too simple an answer
• More profound changes in world economic
structure were underway before this
• Increasingly growing consensus that world
economy has become more volatile,
complex and tightly connected
• Countries affected by what is happening
abroad and at larger geographical scale
 Internationalization of Trade and Labor

• As with Japanese autos, American

computers and Taiwanese calculators
there is an emergence of a “new
international division of labor”
• Basically a change in geographical pattern
of specialization at the global scale-
constantly changing and very dynamic
• Example: movement of textile and shoe
production from Indonesia to China
 International Division of Labor

• Division of labor has taken on spatial

dimensions- some areas come to specialize in
certain types of economic activity
• At broad scale : industrialized countries ---
manufactured goods while non-industrialized
countries --- raw materials
• However this simple pattern no longer exists
• Now much more complex structure involving
fragmentation of many processes and their
geographical relocation on a global scale
 Forces Surrounding Global System of
Production
• These five factors are affecting production
patterns:
• 1. Trans-national or multi-national
corporations (MNCs)-firms that operate in
many nations
• Increasingly these firms have local production
points and suppliers that operate across national
boundaries providing and securing labor, capital
and other resources from a variety of places and
which have become very powerful and important
influences in the global economy
 Sequential Model of TNC Development

• Stage I- Serve domestic market only

• Stage II- Export to overseas markets through
independent channels (sales agents)
• Stage III- Establish sales outlets in overseas
markets by acquiring local firm and/or setting up
new facility
• Stage IV- Establish production facility overseas
by acquiring local firm and/or setting up new
facility
Geographical Growth of a Multinational
Corporation
1 2

Penetration of a National Market

f
ri f
Ta
Nation
Basic Enterprise

Center

n
t io
a
rN
he
Ot Factory
Distribution center
Representative
Penetration of Foreign Markets

Multinational Corporation
3 4
 Forces Surrounding Global System of
Production
• 2. National governments- through their
industrial, trade and foreign policies especially
liberalization policies
• Liberalization refers to the way in which policies
facilitate transactions (trade and sales) of a
variety of products and services
• Deregulation refers to the easing of taxation,
entry and pricing of products or services dictated
by government policy
• Privatization refers to the ownership of former
public sector operations and firms by private
corporations and enterprises
 Forces Surrounding Global System of
Production
• 3. Enabling Technologies- transport,
communications, production and organizational
improvements
• Explosion of enhanced transport and
communication services such as air cargo,
integrators offering definite time delivery (FedEx
and UPS), electronic mail and electronic data
interchange (EDI)
• Advanced inventory management such (just-in-
time (JIT)) and new systems of distribution such
as third party logistics (3PL)
 Just-in-Time and its Logistic

Delivery units for Production Unit Delivery units for

parts finished goods

W
Old warehouse before

ar
eh
Just-in-Time

ou
se
FACTORY
Assembly Line

Moving storage Assembly and warehousing Moving storage

units place units
 % of Products Shipped for “Just-in-Time”
Manufacturing

50
45
40
35
30
25
20
15
10
5
0
1990 1994 1996 1998 2000
 Forces Surrounding Global System of
Production
• 4. Shifts in Market Conditions and Demand
• Economic cycles affect markets and production,
e.g. the Asian financial crisis
• Dramatic shifts in demand affect over time
influence type of good being produced and
production schedules
• Application of new technology can mean product
obsolescence
• These changes can be described in part through
product life cycle
 Product Life Cycle

• Essence of PLC is that growth in sales of

product follows systematic path, from
initial introduction to market through
development, growth, maturity, decline
and obsolescence
 Product Life Cycle
Monopoly Competition

s
tt or
i
p e
o m
C

Inno
Sales

v ating
firm

Decline of
Idea Promotion First competitors Mass production production

Research and
Growth Maturity Decline
development
Stage 1 Stage 2 Stage 3 Stage 4
Cellular Phones of Nokia

• Evolution of basic Cellular

phones are an example
of a product which is
especially applicable to
the notion of the product
life cycle
• phone to color
enhancement to camera
and email device
 Global Financial Centers

Hinterland
Telecommunications

Space

Time

London

Tokyo
New York
Los Angeles
Hong Kong

Singapore

Stock Market Opening Period

 Global Production Chains and Networks
• Production Chain: Materials > Procurement >
Transformation > Marketing and Sales
>Distribution > Service
• Definition: transactionally linked sequence of
functions where each stage adds value to the
process of goods and services production
• Two aspects important: coordination and
regulation and geographical configuration
• Production chains may be very localized but
increasingly are global in scale to take
advantage of international division of labor
 KIA Auto Parts Flow
• Assembled in S Korea KIA Sorrento clear
example of global supply chain
• Uses 30K parts from all around world
• Parts shipped from places as diverse as
Wales and Mexico—but very risky
• War in Iraq and piracy in Malacca Straits
• Demonstrate surprising adaptability due to
advance planning, multiple sourcing of parts
and ability to shift routes on short notice
 KIA Auto Parts Flow
• Communicates regularly with suppliers-at least
once a week
• Order several months in advance
• If necessary use air freight instead of sea freight
• Greater demand forced KIA to air freight airbags
from Swedish company which makes them in the
U.S.
• Greater expense of trans-Pacific flight better
than slowing down production line