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International Business Midterm Summary
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INTERNATIONAL BUSINESSCHAPTER 1: GLOBALIZATION
What is globalization?
- Globalization: the shift toward a more integrated and interdependent world economy. It includes the globalization of
markets and production.
- Globalization of markets: the merging of historically distinct and separate national markets into one huge global
marketplace.
o Easier to sell internationally due to falling barriers to cross-border trade and investment.
o Tastes and preferences are converging on some global norm, creating a global market.
o The most global markets are markets for industrial goods and materials that serve universal needs the world over.
o As firms follow each other around the world, they bring with them many of the assets that served them well in other
national markets— their products, operating strategies, marketing strategies, and brand names—creating some
homogeneity across markets.
- Globalization of production: 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.
o Factors of production: inputs into the productive process of a firm, including labour, management, land, capital and
technological know-how.
o Companies hope to lower their cost structure or improve the quality or functionality of their product offering, in order
to gain a competitive advantage.
o Manufacturing activities are commonly outsourced, but through modern communications technology service activities
are also out-sourced to low-cost producers in other nations.
The emergence of global institutions
- As markets globalize, institutions are needed to help manage, regulate, and police the global marketplace and to promote
the establishment of multinational treaties to govern the global business system.
- General Agreement on Tariffs and Trade (GATT): international treaty that committed signatories to lowering barriers to the
free flow of goods across national borders and led to the WTO.
- World Trade Organization (WTO): the organization that succeeded the General Agreement on Tariffs and Trade (GATT) as a
result of the successful completion of the Uruguay Round of GATT negotiations.
o Policing the world trading system and making sure nation-states adhere to the rules laid down in trade treaties signed
by WTO member states.
o Organization has enormous scope and influence – 98% of world trade were members.
o Promotes the lowering of barriers to cross-border trade and investment.
o Critics charge that the organization is usurping the national sovereignty of individual nation-states.
- International Monetary Fund (IMF): international institution set up to maintain order in the international monetary system.
o Along with the World Bank, it was established in 1944, by 44 nations.
o The lender of last resort to nation-states whose economies are in turmoil and whose currencies are losing value against
those of other nations.
o IMF loans require nation-states to adopt specific economic policies aimed at returning their troubled economies to
stability and growth.
o Some say that the IMF’s policy recommendations are often inappropriate; others say that by telling governments what
economic policies they must adopt, the IMF, like the WTO, is usurping the sovereignty of nation-states.
- World Bank: international institution set up to promote general economic development in the world’s poorer nations.
o Less controversial than the IMF.
o Focused on making low-interest loans to cash-strapped governments in poor nations that wish to undertake significant
infrastructure investments.
- United Nations (UN): an international organization made up of 193 countries headquartered in New York City, formed in
1945 to promote peace, security, and cooperation.
o Established October 24 1945 by 51 countries.
o Commitment to preserve peace through international cooperation and collective security.
o 193 members.
o UN Charter: an international treaty that establishes basic principles of international relations. one of the organization’s
central mandates is the promotion of higher standards of living, full employment, and conditions of economic and
social progress and development. It has four purposes:
1. Maintain international peace and security
2. Develop friendly relations among nations
3. Cooperate in solving international problems and promote respect for human rights
4. Be a center for harmonizing the action of nations
- Group of Twenty (G20): established in 1999, the G20 comprises the finance ministers and central bank governors of the 19
largest economies in the world, plus representatives from the European Union and the European Central Bank.
o The G20 represents 90 percent of global GDP and 80 percent of international global trade.
, Drivers of globalization
- Macro factors underlying trend toward greater globalization:
1. The decline in barriers to the free flow of goods, services, and capital that has occurred in recent decades.
2. The technological change, particularly the dramatic developments in communication, information processing, and
transportation technologies.
Declining trade and investment barriers
- International trade: occurs when a firm exports goods or services to consumers in another country.
- Foreign direct investment (FDI): direct investment in business operations in a foreign country.
- In the 1920s there were many barriers to international trade and FDI.
o Barriers included high tariffs on imports of manufactured goods, with the aim of protecting domestic industries from
foreign competition.
o “Beggar thy neighbor” was a consequence which included retaliatory trade policies, which contributed to the Great
Depression of the 1930s.
- Goal to progressively reduce barriers to the free flow of goods, services, and capital among nations was enriched by the
GATT. Its most recent negotiations were known as the Uruguay Round (December 1993), which further reduced trade
barriers, included services, enhanced protection for patents, trademarks, and copyrights, and established the WTO.
- The knowledge society that we live in has resulted in consumers knowing more than ever about goods and services being
produced worldwide.
- Lowering of trade and investment barriers also allows firms to base production at the optimal location for that activity.
- There has been an increase in the number of trade agreements, which facilitates trade across country borders.
- UN’s Millennium Development Goals: reduce the number of people living in extreme poverty by 2015.
- UN’s Sustainable Development goals: 17 economic and human development goals for the world to target the end of
poverty, protect the planet, and ensure prosperity for all countries by 2030.
- Volume of world trade grows faster than world GDP:
o More firms are dispersing parts of their production process to different locations to drive down production costs and
increase product quality.
o The economies of the nation-states are becoming ever more intertwined.
o The world has become significantly wealthier.
Role of technological change
- Lowering trade barriers made globalization a theoretical possibility, but technological change has made it a tangible reality.
- Most important innovation is the microprocessor, which enabled the growth of high-power, low-cost computing, vastly
increasing the amount of information processing.
- Communication has been revolutionized by development in satellite, optical fiber, wireless technologies, and Internet.
- Moore’s law: the power of microprocessor technology doubles and its costs of production fall in half every 18 months.
- First web browser of the Internet was introduced in 1994. It allows businesses to expand their global presence at a lower
cost than ever before.
- The most important development in technology is the development of commercial jet aircraft and superfreighters and the
introduction of containerization.
- As transportation costs associated with the globalization of production have declined, dispersal of production to
geographically separate locations has become more economical and it is more economical to ship products around the
world, thereby helping create global markets
- While modern communications and transportation technologies are ushering in the “global village,” significant national
differences remain in culture, consumer preferences, and business practices.
The changing demographics of the global economy
- As late as the 1960s, four stylized facts described the demographics of the global economy:
1. U.S. dominance in the world economy and world trade picture.
2. U.S. dominance in world FDI.
3. Dominance of large, multinational U.S. firms on the international business scene.
4. Roughly half the globe—the centrally planned economies of the communist world—was off-limits to Western
international businesses.
The changing world output and world trade picture
- The United States was the world’s dominant industrial power in the 1960s, leading in the percentage of world output.
Although the US is still the largest economy overall, today China is the largest in respect to world output.
- US, Germany, France, Italy, Canada and the United Kingdom were all the first to industrialize globally.
- Emerging countries such as BRIC (Brazil, Russia, India, China) continue to grow and the relative decline in the share of world
output and exports accounted for by developed nations like the US, is likely. This is reflective of the the growing economic
development and industrialization of the world economy.
- Many future economic opportunities may be found in the developing nations of the world, and many of the future’s most
capable competitors will probably also emerge from these regions.
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