Chapter 1
Globalization refers to the shift toward a more integrated and interdependent world economy.
Globalization has several facets, including the globalization of markets and the globalization of
production.
Globalization “waves”
- A transcontinental spread of religions. “World religions” (during 400-1000 AC).
- European colonization of the Americas (1500-1700).
- “Creation of the British and French Empires” (19 th century)
o Basically 19th century
o Colonization of Asia and Africa
o Created the 19th century world of developed and underdeveloped countries.
- Continuation with the revolutions in communication and transport (telephone, telegraph,
steamships, internet, etc.)
Globalization has both pros and cons
- Business side: trade, capital, technology (knowledge)
- General terms: people, culture, environment
- The transition of China into an economic superpower
o Example: largest economy, largest exporter of goods, largest automobile market.
The globalization of markets: refers to the merging of historically distinct and separate national
markets into one huge global marketplace.
- Falling barriers to cross-border trade and investment.
- Global tastes
- Competitors may not change among nations (Apple vs. Samsung [global competitors])
- Benefits small and large companies
- Significant differences between national markets
- The most global of markets are not typically markets for consumer products. They are
markets for industrial goods and materials that serve universal needs the world over.
The globalization of production: refers to the sourcing of goods and services form locations around
the globe to take advantage of differences in cost and quality of factors of production (such as labor,
energy, land, capital). By doing this, companies hope to lower their overall cost structure or improve
the quality or functionality of their product offering, thereby allowing them to compete more
effectively.
Early outsourcing was confined to manufacturing. Modern communication technology has advanced
outsourcing today for service activities.
,‘Mistaken global assumptions’
“Business is business everywhere and the language of business is English”
“They are eager to adopt our way of doing things”
“Our corporate culture is the same everywhere”
“Travel, reduction of trade blocks, and the global media are creating a single global culture”
The emergence of global institutions: As markets globalize and an increasing proportion of business
activity transcends national borders, institutions are needed to manage, regulate, and police the
global marketplace and to promote the establishment of multinational treaties to govern the global
business system.
Impediments (belemmeringen) prevent optimal dispersion of activities:
- Formal and informal barriers to trade.
- Barriers to foreign direct investment.
- Transportation costs
- Political and economic risk
- Challenge of coordinating globally dispersed supply chain.
Institutions needed to help manage, regulate, and ‘police’ the global marketplace.
- General Agreement on Tariffs and Trade (GATT)
- World Trade Organization (WTO): 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.
- International Monetary Fund (IMF): to maintain order in the international monetary system.
- The World Bank: set up to promote economic development.
- The United Nations (UN): committed to preserving peace through international cooperation
and collective security.
- Group of 20 (G20): established to formulate a coordinated policy response to financial crises
in developing nations.
- “Standards” (ISO)
Drivers of globalization
International trade: when a firm exports goods or services to consumers in another country.
Foreign Direct Investment (FDI): when a firm invests resources in business activities outside its
home-country.
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.
- Communications
o Development of the ‘microprocessor’ – single most important innovation since World
War II
o ‘Moore’s Law’ predicts that the power of microprocessor technology doubles and its
cost of production falls in half every 18 months.
- The Internet
o It allows businesses, small and large, to expand their global presence at a lower cost
than ever before.
- Transportation technology
o Commercial jets, ‘superfreigthers’, and ‘containerization’ have all “shrunk the globe”.
,Implications for the globalization of production
- As transportation costs associated with the globalization of production have declined,
dispersal of production to geographically separate locations has become more economical.
Implications for the globalization of markets
- Global communications networks and global media are creating a worldwide culture. Cultural
distance has been reduced and has brought some convergence of consumer tastes and
preferences.
The Changing demographics of the global economy
The changing World Output and World Trade picture
As barriers to the free flow of goods and services fell, non- U.S. firms increasingly invested across
national borders. The motivation for much of this foreign direct investment by non-U.S. firms was the
desire to disperse production activities to optimal locations and to build a direct presence in major
foreign markets.
The changing Foreign Direct Investment picture
The outward stock of foreign direct investment (FDI) refers to the total cumulative value of foreign
investments by firms domiciled in a nation outside of that nation’s borders. There is a striking
increase in the outward stock of FDI over time.
This reflects the faster economic growth of several other economies, particularly China.
- China and BRIC countries growing more rapidly.
- “Developing nations” may account for more than 60 percent of world economic activity by
20230.
The changing Nature of the Multinational Enterprise
Multinational Enterprise (MNE) is any business that has productive activities in two or more
countries. Two notable trends: (1) the rise of non-U.S. multinationals and (2) the growth of mini-
multinationals.
- The rise of Mini-Multinationals
o Growth in the number of medium- and small-sized businesses
o Internet is lowering barriers that smaller firms faced in international trade.
The changing World order
- Former communist countries present export and investment opportunities.
o Signs of growing unrest and commitment to market-based economic systems cannot
be assumed.
o Risks of doing business in these countries is high.
- China moving to industrial superpower
- In Latin America debt and inflation are down, more private investors, expanding economies.
Global economy of the Twenty-First Century
- Barriers to the free flow of goods, services, and capital have been coming down.
- Strengthened by the widespread adoption of liberal economic policies by countries that has
opposed them.
- Globalization is not inevitable:
o Countries may pull back.
o Risks are high.
, The globalization debate
Despite the existence of a compelling body of evidence, globalization has its critics.
Anti-globalization Protests
Protestors now typically show up at major meetings of global institutions.
Protestors believe globalization causes detrimental effects on living standards, wage rates, and the
environment. Theory and evidence suggest these fears may be exaggerated.
Globalization, Jobs, and Income
- Negative: Falling trade barriers allow firms to move manufacturing activities to countries
where wage rates are much lower. Fear of destroy of manufacturing jobs and lately also of
services.
- Positive: Benefits outweigh the costs.
Globalization, Labor Policies, and the Environment
Critics argue:
- Free trade encourages firms from advances nations to move manufacturing facilities to less-
developed countries that lack adequate regulations to protect labor and the environment
from abuse by the unscrupulous.
Supports argue:
- Tougher environmental regulations and stricter labor standards go hand in hand with
economic progress.
- Free trade leads to less labor exploitation and less pollution.
Globalization and national sovereignty
Critics argue:
- Today’s increasingly interdependent global economy shifts economic power away from
national governments towards supranational organizations such as the WTO, EU and UN.
- WTO, EU, United Nations.
Supporters argue:
- The power of supranational organizations is limited to what nation-states collectively agree
to grant.
- These organizations exist to serve the collective interests of member states.
