This is the summary consisting of the endterm material for the course International Business offered at the University of Amsterdam.
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Chapter 1: Globalisation
Globalisation refers to the shift towards a more integrated and interdependent world economy
with declining barriers to cross-border trade and investment. Due to this, the material culture is
starting to look similar all over the world. Globalisation has several facets, including the
globalisation of markets and the globalisation of production.
The globalisation of markets refers to the merging of historically distinct and separate national
markets into one huge global marketplace. Tastes and preferences of consumers in di erent
nations are beginning to converge to some global norm, thereby helping create a global market.
Also, companies o ering the same basic product worldwide also helps to create a global market.
It is not only huge multinational rms that facilitate and bene t from the globalisation of markets,
but it is mostly the small and medium-size rms that do.
The most global of markets are not typically markets for consumer products (where national
di erences in tastes and preferences are still very present) but markets for industrial goods and
materials that serve universal needs the world over.
In many cases it is not the country of origin that matters for the consumer (“made in Germany”)
but the company that is the quality assurance platform (“made by BMW”). Due to the outsourcing
of production activities, products are also often “global products”.
The globalisation of production refers to the sourcing of goods and services from locations
around the globe to take advantage of national di erences in the cost and quality of factors of
production (such as labor, energy, land and capital). By doing this, companies hope to lower their
overall cost structure or improve the quality or functionality of their product o ering, thereby
allowing them to compete more e ectively. Outsourcing e orts are not only limited to
manufacturing activities but are also related to modern communications technology.
Over the past half century, a number of important global institutions have been created to help
manage, regulate and police the global marketplace and to promote the establishment of
multinational treaties to govern the global business system. One of these institutions is the
General Agreement on Tari s and Trade (GATT). The GATT had no provision for creating an
organisation and it allowed for contradictions in local law and GATT agreements.
The successor of the GATT is the World Trade Organisation (WTO) which is primarily responsible
for policing the world trading system and making sure nation-states adhere to the rules laid down
in trade treaties signed by them. The WTO is also responsible for facilitating the establishment of
additional multinational agreements among WTO member states. Its goal is to create a more open
global business system unencumbered by barriers to trade and investment between countries (so
it encourages globalisation). The WTO is permanent and it has legal basis because its member
states have veri ed the WTO agreements. It has more authority than GATT and it doesn’t allow for
contradictions in local law.
The International Monetary Fund (IMF) and the World Bank were both created in 1944 by 44
nations. The IMF was established to maintain order in the international monetary system and
function as the lender of the laster resort. The World Bank was set up to promote economic
development and has focused on making low-interest loans to cash-strapped governments in
poor nations that wish to undertake signi cant infrastructure investments.
The United Nations (UN) was established in 1945 by 51 countries committed to preserving peace
through international cooperation and collective security. Today, the UN totals 193 countries who
have all agreed to the UN Charter which is an international treaty that establishes basic principles
of International relations. According to the charter, the UN has four purposes:
1. To maintain international peace and security
2. To develop friendly relations among nations
3. To cooperate in solving international problems and in promoting respect for human rights
4. To be a center for harmonising the actions of nations
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, The UN believes that eradicating poverty and improving the well-being of people everywhere is
the necessary steps in creating conditions for lasting world peace.
The Group of Twenty (G20) was established in 1999 and comprises the nance ministers and
central bank governors of the 19 largest economies in the world, plus representatives from the
European Union and the European Central Bank.
There are two macro factors that underlie the trend toward greater globalisation. First, the decline
in barriers to the free ow of goods, services and capital. Second, the technological change
(particularly the dramatic developments in communication, information processing and
transportation technologies).
International trade occurs when a rm exports goods or services to consumers in another
country. Foreign direct investment (FDI) occurs when a rm invests resources in business
activities outside its home country.
During the 1920s and 1930s, the barriers to international trade and FDI were high (high tari s on
imports of manufactured goods). The aim was to protect domestic industries from foreign
competition, however, it led to “beggar thy neighbour” trade policy (remedy own problems by
creating problems for others) which led to the Great Depression. Learning from this, the GATT
progressively reduced trade barriers (from very high in 1913 to around 1.6% in 2017).
The gure shows some interesting changing
globalisation trends. First of all, the value of world
trade in merchandised goods has grown
consistently faster than the growth rate in the world
economy (world production). This means that while
we produce more goods and services today
compared with before, a far greater proportion of
that production is being traded across national
borders. Thus, the larger the di erence between the
growth rates of world trade and world production,
the greater the extend of globalisation.
An implication we see from the graph relates to sustainability. As world production approaches
the total population curve, we can infer that resource availability for all of our needs and wants in
the world will potentially be drastically constrained.
The fact that the volume of world trade has been growing faster than world GDP implies several
things.
1) More rms are dispersing parts of their production process to di erent locations around the
globe to drive down production costs and increase product quality.
2) The economies of the world’s nation-states are becoming ever more intertwined and
dependent on each other for important goods and services.
3) The world has become signi cantly wealthier in the last two decades. The implication is that
rising trade is the engine that has helped pull the global economy along.
While the lowering of trade barriers has been globalisation a theoretical possibility, technological
change has made it a tangible reality. This starts with the global communications that have been
revolutionised by developments in satellite and the Internet for instance. All these
communications rely on the microprocessor which is becoming cheaper while their power
increases. Moore’s law predicts that the power of microprocessor technology doubles and its
cost of production falls in half every 18 months.
Another technological change is the development of the so-called Internet of Things (meaning the
explosive growth of the Internet). The Internet has developed into the information backbone of the
global economy. Viewed globally, the Internet has emerged as an equaliser: it rolls back some of
the constraints of location, scale and time zones.
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