Chapter 1: Globalization
What is Globalization
THE GLOBALIZATION OF MARKETS
Globalization: trend away from distinct national economic units and toward one
huge global market
Globalization of Markets: moving away from an economic system in which
national markets are distinct entities, isolated by trade barriers and barriers of
distance, time, and culture, and toward a system in which national markets are
merging into one global market
The most global markets are markets for industrial goods and materials that
serve universal needs the world over
THE GLOBALIZATION OF PRODUCTION
Globalization of Production: trend by individual firms to disperse parts of their
productive processes to different locations around the globe to take advantage
of difference in cost and quality of factors of production
Factors of Production: inputs into the productive process of a firm, including
labor, management, land, capital, and technological know-how
Companies hope to lower their overall cost structure or improve the quality of
functionality of their product offering, thereby allowing them to compete more
effectively
Substantial impediments still make it difficult for firms to achieve the optimal
dispersion of their productive activities to locations around the world.
Impediments include:
Formal and informal barriers to trade between countries
Barriers to foreign direct investment
Transportation costs
Issues associates with economic and political risk
The sheer managerial challenge of coordinating a globally dispersed
supply chain
The Emergence of Global Institutions
General Agreement on Tariffs and Trade: 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: primarily responsible for policing the world trading
system and making sure nation-states adhere to the rules laid down in trade
treaties signed by WTO member states
, WTO has promoted the lowering of barriers to cross-border trade and
investment
WTO has been the instrument to create a more open global business
system unencumbered by barriers to trade and investment between
countries
International Monetary Fund (IMF): international institution set up to maintain
order in the international monetary system
Seen as the lender of last resort to nation-states whose economies are in
turmoil and who currencies are losing value against those of other
nations
World Bank: international institution set up to promote general economic
development in the world’s poorer nations
Focused on making low-interest loans to cash-strapped governments in
poor nations that wish to undertake significant infrastructure investments
o Building dams or roads
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
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
Drivers of Globalization
DECLINING TRADE AND INVESTMENT BARRIERS
International Trade: occurs when a firm exports goods or services to consumers
in another country (measure of Globalization)
Foreign Direct Investments: direct investments in business operations in a
foreign country (measure of Globalization)
The barriers to international trade took the form of high tariffs on imports of
manufactured goods
Aim of such tariffs was to protect domestic industries from foreign
competition
Knowledge Society and Trade Agreements
While we produce more goods and services today compared with before,
a far greater
proportion of that
production is being
traded across
national borders
than at any time in
modern history
The larger the
difference between
, the growth rates of world trade and world production, the greater the
extent of globalization
The lowering of barriers to international trade enables firms to view the
world, rather than a single country, as their market
The lowering of trade and investment barriers also allows firms to base
production at the optimal location for that activity
The fact that the volume of world trade has been growing faster than world
GDP, implies several things:
1. Dispersing parts of the production process to different locations around
the globe to drive down production costs and increase product quality
2. Economies of the world’s nation-states are becoming even more
intertwined
a. As trade expands, nations are becoming increasingly dependent on
each other for important goods and services
3. The world has become significantly wealthier. The implication is that
rising trade is the engine that has helped pull the economy along
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.
There have been major advances in:
Communication
Moore’s Law: the power of microprocessor technology doubles and its costs of
production fall by half every 18 months
The Internet
Transportation Technology
Implications for the Globalization of Production
As transportation costs associated with the globalization of production
have declines, dispersal of production to geographically separate
locations have become more economical
These developments make it possible for a firm to create and then
manage a globally dispersed production system, further facilitating the
globalization of production
Implications for the Globalization of Markets
Low-cost global communications networks are helping create electronic
global marketplaces
In addition, low-cost jet travel has resulted in the mass movement of
people between countries. This has reduced the cultural distance
between countries and is bringing about some convergence of consumer
tastes and preferences
Global communications networks and global media are creating a
worldwide culture
The Changing Demographics of the Global Economy
, THE CHANGING FOREIGN DIRECT INVESMTENT PICTURE
As the barriers to the free flow of goods, services, and capital fell, and as other
countries increased their shares of world output, non-US firms increasingly
began to invest across national borders.
The motivation for much of this foreign direct investment by non-US firms was
the desire to disperse production activities to optimal locations and to build a
direct presence in major foreign markets
Stock of FDI: the total cumulative value of foreign investments as a percentage
of the country’s GDP
The sustained flow of foreign direct investment into developing nations is
an important stimulus for economic growth
THE CHANGING NATURE OF THE MULTINATIONAL ENTERPRISE
Multinational Enterprise: a firm that owns business operations in more than one
country (measure of Globalization)
Two notable trends in the demographics of the multinational enterprise have
been:
1. The rise of non-US multinationals
2. The growth of mini multinationals
Firms from developing nations will emerge as important competitors in global
markets, further shifting the axis of the world economy away from North
America and Western Europe and challenging the long dominance of companies
from the so-called developed world
The Rise of Mini-Multinationals
The growth of small- and medium-sized multinationals
Many medium-sized and small businesses are becoming increasingly
involved in international trade and investments
The rise of the Internet is lowering the barriers that small firms face in
building international sales
THE CHANGING WORLD ORDER
Poorly managed economies of Latin America were characterized by low growth,
high debt, and hyperinflation
GLOBAL ECONOMY OF THE TWENTY-FIRST CENTURY
Barriers to the free flow of goods, services and capital have been coming down
The move toward a global economy has been further strengthened by the
widespread adoption of liberal economic policies by countries that had firmly
opposed them for two generations or more
Firms can exploit the opportunities associated with globalization while reducing
the risks through appropriate hedging strategies
These hedging strategies may also become more and more important as
the world balances globalization efforts with a potential increase in
nationalistic tendencies by some countries
