Chapter 1 – Globalization
Over the past three decades a fundamental shift has been occurring in the world economy. We are moving
toward a world in which barriers to cross-border trade and investment are declining; perceived distance is
shrinking due to advances in transportation and telecommunications technology; material culture is starting to
look similar the world over; and national economies are merging into an interdependent, integrated global
economic system. The process by which this transformation is occurring is commonly referred to as
globalization.
We are living in a world in which international institutions such as the World Trade Organization and gatherings
of leaders from the world’s most powerful economies have repeatedly called for even lower barriers to cross-
border trade and investment. It is a world where symbols of material and popular culture are increasingly global.
It is also a world in which vigorous and vocal groups protest against globalization, which they blame for a list of
ills.
For businesses, this globalization process has produced many opportunities.
People living in developed nations no longer have the playing field tilted in their favor. Increasingly, enterprising
individuals based in India, China or Brazil have the same opportunities to better themselves as those living in
Western Europe, the United States, or Canada.
What is globalization?
Globalization = the shift toward a more integrated and interdependent world economy. Globalization has several
facets; including the globalization of markets and the globalization of production.
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 have made it easier to sell internationally. A
company does not have to be the size of a multinational giant to facilitate, and benefit from, the globalization of
markets. It is important to not push too far the view that national markets are giving way to the global market.
The most global market are not typically markets for consumer products, but markets for industrial goods and
materials that serve universal needs over the world.
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 (labor, energy, land, capital).
By doing this, companies hope to lower their overall cost structure to improve the quality or functionality of
their product offering, thereby allowing them to compete more effectively. Increasingly, the outsourcing of
productive activities to different suppliers result in the creation of products that are global in nature, that is,
“global products”. But as with the globalization of markets, companies must be careful not to push the
globalization of production too far. Substantial impediments still make it difficult for firms to achieve the
optimal dispersion of their productive activities to locations around the globe.
The emergence of global institutions
As markets globalize and an increasing proportion of business activity transcends national borders, 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. Over the past half century, a number of important
global institutions have been created to help these functions, including:
- General Agreement on Tariffs and Trade (GATT)
- World Trade Organization (WTO) – responsible for policing the world trading systems and making sure
nation-states adhere to the rules laid down in trade treaties signed by WTO members.
- International Monetary Fund (IMF) – Established to maintain order in the international monetary
system. Often seen as the lender of last resort to nation-states whose economies are in turmoil and whose
, currencies are losing value against those of other nations. In return for loans, it require nations to adopt
specific economic policies aimed at returning their troubled economies to stability and growth
- World Bank – set up to promote economic development. Less controversial than IMF. Focus on making
low-interest loans to cash-strapped governments in poor nations that wish to undertake significant
infrastructure investments.
- United Nations (UN) – in 1945, 51 countries committed to preserving peace through international
cooperation and collective security. Today, nearly every nation belongs to the United Nations. When
states become members of the UN, they agree to accept the obligations of the UN Charter, an
international treaty that establishes basic principles of international relations. According to Charter, the
UN has four purposes:
o To maintain international peace and security
o To develop friendly relations among nations
o to cooperate in solving international problems and in promoting respect for human rights
o To be a center for harmonizing the actions of nations.
- G20 – compromises 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 = when a firm exports goods or services to consumers in another country.
Foreign direct investment = when a firm invests resources in business activities outside its home country.
Advances industrial nations of the west committed themselves after World War II to removing barriers to the
free flow of goods, services, and capital among nations. In addition to reducing trade barriers, many countries
have also been progressively removing restrictions to foreign direct investment (FDI). Such trends have been
driving both the globalization of markets and the globalization of production. 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 as 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. More firms are dispersing parts of their production process to different 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. As trade expands,
nations are becoming increasingly dependent on each other for important goods and services.
3. The world has become significantly wealthier since 1990. The implication is that rising trade is the
engine that has helped pull the global economy along.
The globalization of markets and production and the resulting growth of world trade, FDI, and imports all imply
that firms are finding their home markets under attack from foreign competitors. However, declining barriers to
cross-border trade and investment cannot be taken for granted.
Technological change
Perhaps the single most important innovation has been development of the microprocessor, which enabled the
explosive growth of high-power, low-cost computing, vastly increasing the amount of information that can be
processed by individuals and firms. The cost of microprocessors continues to fall, while their power increases (a
phenomenon known as Moore’s law = prediction that the power of microprocessor technology doubles and its
costs of production falls in half every 18 months).
Viewed globally, the internet has emerged as an equalizer. It rolls back some of the constraints of location, scale,
and time zones. The internet makes it much easier for buyers and sellers to find each other, wherever they may
be located and whatever their size.
,Several major innovations in transportation technology have occurred since second world war. In economic
terms, the most important are probably the development of commercial jet aircraft and super freighters and the
introduction of containerization, which simplifies transshipment form one mode of transport to another. The
advent of commercial jet travel, by reducing the time needed to get from one location to another, has effectively
shrunk the globe.
As transportation costs associated with the globalization of production have declined, dispersal of production to
geographically separate locations became more economical. As a result of the technological innovations
discussed earlier, the real costs of information processing and communication have fallen dramatically in the
past two decades.
Implications to the globalization of production, technological innovations have facilitated the globalization of
markets. Low-cost global communication networks such as the internet are helping to create electronic global
marketplaces.
In any society, the media are primary conveyors of culture; as global media develop, we must expect the
evolution of something akin to a global culture. A logical result to this evolution is the emergence of global
markets for consumer products.
Despite these trends, we must be careful not to overemphasize their importance. 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
Hand in hand with the trend toward globalization has been a fairly dramatic change in the demographics of the
global economy over the past 30 years. U.S. dominance in export markets has waned as Japan, Germany, and a
number of newly industrialized countries have taken a larger share of world exports. As emerging economies
continue to grow, a further relative decline in the share of world output and world exports accounted for by the
United States and other long-established developed nations seems likely.
Most forecasts now predict a rapid rise in the share of world output accounted for by developing nations and a
commensurate decline in the share enjoyed by rich industrialized countries. Many of tomorrow’s economic
opportunities may be found in the developing nations of the world, and many of tomorrow’s most capable
competitors will probably also emerge from these regions.
As the barriers to the free flow of goods, services, and capital fell, and as other countries increased their shares
of the world output, non-U.S. firms increasingly began to invest across national borders. The motivation for
much of this FDI 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 stock of FDI = the total cumulative value of foreign investments. The rise in the share of FDI stock
accounted for by developing nations reflects a growing trend for firms from these countries to invest outside
their borders.
A multinational enterprise (MNE) = any business that has productive activities in two or more countries. Two
notable trends in the demographics of the MNE have been:
1. Non-U.S. multinationals
2. The growth of mini-multinationals
Disturbing signs of growing unrest and totalitarian tendencies continue to be seen in several eastern European
and central Asian states, which has shown signs of shifting back toward greater state involvement in economic
activity and authoritarian government. Thus the risk involved in doing business in such countries are high, but so
may be the returns. The potential consequences for international business are enormous.
, 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. In short, current
trends indicate the world is moving toward an economic system that is more favorable for international business.
Greater globalization brings with it risks of its own.
The globalization debate
Many influential economist, politicians, and business leaders argue that falling barriers to international trade and
investment are the twin engines driving the global economy toward greater prosperity. They say increased
international trade and cross-border investment will result in lower prices for goods and services. They believe
that globalization stimulates economic growth, raises the incomes of consumers, and helps create jobs in all
country’s that participate in the global trading systems.
One concern frequently voiced by globalization opponents is that falling barriers to international trade destroy
manufacturing jobs in wealthy advanced economies such as the U.S. and western Europe. The critics argue that
falling trade barriers allow firms to move manufacturing activities to countries where wage rates are much lower.
Supporters of globalization reply that critics of these trends miss the essential point about free trade – the
benefits outweigh the costs. They argue that free trade will result in countries specializing in the production of
these goods and services that they can produce most effectively, while importing goods and services that they
cannot produce efficiently. When a country embrace free trade, there is always some dislocation, but the
economy is better of as a result. In most countries real income levels have increased for all, including the poorest
segment.
A second source of concern is that free trade encourages firms from advanced nations to move manufacturing
facilities to less developed countries that lack adequate regulations to protect labor and the environment from
abuse by the unscrupulous.
A number of econometric studies have found consistent evidence of a hump-shaped relationship between income
levels and pollution levels. As an economy grows and income levels rise, initially pollution levels also rise.
However, past some point, rising income levels lead to demands for greater environmental protection, and
pollution levels then fall.
Critics of globalization argue that despite the supposed benefits associated with free trade and investment, over
the past hundred years or so the gap between the rich and poor nations of the world has gotten wider.
While recent history has shown that some of the world’s poorer nations are capable of rapid periods of economic
growth, there appear to be strong forces for stagnation among the world’s poorest nations. Several factors stand
out:
- Many of the world’s poorest countries have suffered from totalitarian governments
- economic policies that destroyed wealth rather than facilitated its creation
- endemic corruption
- scant protection for property rights
- war
- rapidly expanding populations in these countries.
Highly indebted poorer countries (HIPCs) are trapped in a cycle of poverty and debt that inhibits economic
development. Large-scale debt relief is needed for the world’s poorest nations to give them the opportunity to
restructure their economies and start the long climb toward prosperity. However, debt reliefs must be matched by
wise investment in public projects to boost economic growth and by the adoption of economic policies that
facilitate investment and trade.
