Globalization Weekly assignment

Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

McGraw-Hill/Irwin

Global Business Today 7e

by Charles W.L. Hill

Welcome to Global Business Today, Seventh Edition by Charles W.L. Hill.

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Chapter 1

Globalization

Chapter 1: Globalization

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Introduction

In the world economy today, we see

• fewer self-contained national economies with high barriers to cross-border trade and investment
• a more integrated global economic system with lower barriers to trade and investment
• over $4 trillion in foreign exchange transactions daily
• over $12 million of goods and $3.3 trillion of services being sold across national borders
• the establishment of international institutions

You’ve probably heard the term globalization on the news, or at your job, or perhaps you’ve read about globalization in the newspaper or on a web site. But what does it really mean? We can define globalization as the shift away from self-contained national economies that are closed to cross-border trade towards a more integrated and interdependent world economy where millions of dollars of goods and services are traded daily.

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What Is Globalization?

Question: What is globalization?

Answer:

• Globalization refers to the trend towards a more integrated global economic system

Two key facets of globalization are:

• the globalization of markets
• the globalization of production

Think for a minute about your day so far. Perhaps you work up this morning in a bed made by Sweden’s Ikea, got dressed in a shirt made in Guatemala and American Levi’s jeans that were produced in China. After putting on your Brazilian made shoes, you drove to work in your Nissan that was made in Tennessee. On the way to your job for a company that is headquartered in France, but has operations in the U.S., you might have talked to your friend on your Nokia cell phone that was designed in Finland, about getting together later for Spanish style tapas and Corona beer from Mexico. As you can see, your day has already been filled with the effects of globalization.

The effects of globalization can be seen everywhere. Think about the cars people drive—cars with American names like Ford that were actually assembled in Mexico, or German BMWs made in South Carolina, or a South Korean Hyundai made in Alabama. Think about the food people eat. We talk about going out for Chinese food or Japanese sushi. In Moscow, people line up to try their first Big Mac. You can buy your favorite Starbucks coffee in most countries in the world. Next, think about how globalization has changed the working world. If you’ve already got a job, you might be working for a large multinational company or maybe a smaller company that exports to other countries. If you’re just starting your job search, you’ve probably noticed that many companies rely on international markets for some part of their revenues, or on suppliers located in different countries. Finally, check the labels of your clothes and shoes. You’ll probably find that very few items are actually made in the U.S. Your Nike shoes for example, might be made in China, and your American Eagle sweatshirt is probably made in low wage labor country like Indonesia. If you’ve ever been to other countries, you may have noticed that people now dress in a similar way everywhere. You can shop at the Gap in New York, and also in Paris!

So, in answer to the question what is globalization, we can say that globalization refers to the trend towards a more integrated global economic system. Two key parts of the globalization process are the globalization of markets and the globalization of production.

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The Globalization of Markets

• Globalization of markets - the merging of historically distinct and separate national markets into one huge global marketplace
• In many markets today, the tastes and preferences of consumers in different nations are converging upon some global norm
• Coca Cola, Starbucks, Sony PlayStation, and McDonald’s hamburgers, IKEA furniture

The globalization of markets refers to the merging of historically distinct and separate national markets into one huge global marketplace. As trade barriers between countries fall, companies like Ikea, Sony, and Coca-Cola are able to sell their product to a global market where consumers are more and more alike. And, as the companies benefit from these global opportunities, they also promote even greater globalization.

Keep in mind though, that the globalization of markets doesn’t mean that consumers are the same everywhere, and differences between markets no longer exist. National markets are still very relevant, challenging companies to develop different marketing strategies and operating procedures.

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The Globalization of Production

• 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, and capital)
• Goal: lower overall cost structure or improve the quality or functionality of their product and gain competitive advantage
• Boeing and Vizio

The globalization of production refers to 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. Companies hope that by sourcing and producing their product in the optimal location, wherever in the world that might be, they will be able to better compete against their rivals.

Boeing, for example, is outsourcing about 65 percent of its 787 aircraft to foreign companies. About 35 percent of the jet will be made by three Japanese companies! Boeing believes that this strategy allows it to use the best suppliers in the world, an advantage that will help it win market share over its rival Airbus Industries. Similarly, China’s Lenovo, a computer manufacturer, acquired IBM’s PC division to help the company become a global player in the market. The company’s ThinkPad is designed in the U.S., but assembled in Mexico using parts from Thailand, Malaysia, and South Korea.

Thanks to advances in shipping, even perishable products like flowers, can be produced in optimal locations and then shipped around the world. Ecuador, for example, has become a global supplier of roses in recent years. Now, the country supplies about 70 percent of the roses sold in the U.S!

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The Emergence of Global Institutions

Global institutions

• manage, regulate, and police the global market place
• promote the establishment of multinational treaties to govern the global business system
• the World Trade Organization (WTO) - polices world trading system and ensures nations adhere to the rules established in WTO treaties
• In 2010, its 154 members accounted for 97% of world trade
• the International Monetary Fund (IMF) - maintains order in the international monetary system

As more business activities takes place across national borders, several global institutions have emerged to manage, regulate, and police the global marketplace, and to promote the establishment of multinational treaties to govern the global business system. We’ll talk more about these institutions in later chapters, but for now, let’s take a quick look at some of them.

One of the most important global institutions is the World Trade Organization, or WTO, which is responsible for policing the world trading system, and making sure that members adhere to trade treaties. The 154 nations that account for about 97 percent of the world’s trade are all WTO members, so the organization is very influential in working toward an open business system where goods can cross national borders without barriers to trade and investment.

The International Monetary Fund, or IMF, is responsible for maintaining order in the international monetary system, and as we’ll see in later chapters, is a significant player in the global economy.

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The Emergence of Global Institutions

• the World Bank - promotes economic development
• the United Nations (UN) - maintains international peace and security, develops friendly relations among nations, cooperates in solving international problems and promotes respect for human rights, and is a center for harmonizing the actions of nations

The World Bank promotes economic development by making loans to cash-strapped nations wishing to make significant infrastructure improvements like building dams or roads.

Finally, the United Nations, or UN, is committed to preserving peace through international cooperation and collective security. Nearly every country in the world belongs to the UN, and accepts its basic principles of international relations.

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Drivers of Globalization

Question: What is driving the move toward greater globalization?

Answer:

declining trade and investment barriers

technological change

You might be wondering what prompted the move toward globalization. Two macro factors are important: first, the decline in trade and investment barriers that has taken place since World War II, and second, technological change, specifically dramatic improvements in communication, information processing, and transportation technologies. Let’s talk about each of these.

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Declining Trade and Investment Barriers

• International trade occurs when a firm exports goods or services to consumers in another country
• Foreign direct investment (FDI) occurs when a firm invests resources in business activities outside its home country
• During the 1920s and 1930s, many nations erected barriers to international trade and FDI to protect domestic industries from foreign competition

It wasn’t always so easy to trade with other countries. During the 1920s and 1930s, many countries erected barriers to the free flow of goods across borders, and also limited the ability of firms to invest. When a firm invests resources in business activities outside its home country, we say foreign direct investment or FDI has taken place.

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Declining Trade and Investment Barriers

• After WWII, advanced Western countries began removing trade and investment barriers
• Under GATT (the forerunner of the WTO), over 100 nations negotiated further decreases in tariffs and made significant progress on a number of non-tariff issues
• Under the WTO, a mechanism now exists for dispute resolution and the enforcement of trade laws, and there is a push to cut tariffs on industrial goods, services, and agricultural products

At the end of World War II, nations, learning from mistakes made in the 1920s and 1930s, worked toward removing barriers that prevented the free flow of goods, services, and capital between countries. The process was formalized using the General Agreement on Tariffs and Trade, or GATT.

The GATT was replaced by the WTO which, like the GATT, provides a forum for dispute resolution and the enforcement of trade laws, and has set new goals for further reducing trade barriers on industrial goods, services, and agricultural products.

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Declining Trade and Investment Barriers

• Lower trade barriers help companies view the world as a single market and establish production activities in optimal locations around the globe
• This has led to an acceleration in the volume of world trade and investment since the early 1980s

Because of the efforts of the two organizations, we have seen an increase in international trade and also in foreign direct investment.

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Declining Trade and Investment Barriers

Figure1.1: Growth in World Merchandise Trade and Production, 1950 - 2008

As you can see, world trade and production was very limited in the early 1950s, but thanks to the GATT and its role in promoting a reduction in trade barriers, the volume of world trade and world production has increased dramatically, especially since the 1980s.

Because trade barriers are lower, firms like Boeing and Nike are now able to view the world, rather than a single country, as their market, and as a result, the world as a whole is significantly wealthier. Production and sales now take place in multiple markets creating interdependency between countries for goods and services.

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The Role of Technological Change

• Since World War II, there have been major advances in communication, information processing, and transportation
• The microprocessor - lowered the cost of global communication and the cost of coordinating and controlling a global organization
• U.S. web-based transactions - $133 billion in 2008
• 1.6 billion Internet users in 2009
• Commercial jet aircraft and super freighters and the introduction of containerization - simplify trans-shipment from one mode of transport to another

The role of technological change has also been critical to the globalization of markets. Major advances in communication, information processing, and transportation technology have made what had been possibilities into tangible realities!

The cost of global communication has fallen because advances in telecommunications and information processing help firms coordinate and control global organizations at a fraction of what it might have cost even a decade ago. The microprocessor that facilitates high-power, low-cost computing is perhaps the most important of these developments.

The Internet has made it possible for even small companies to play a role in the global economy. Yet, less than twenty years ago, this technology didn’t even exist. Growth in Internet usage has gone from fewer than 1 million users in 1990 to more than 1.6 billion users in 2009—a quarter of the world’s population!

Improvements in transportation such as containerization and the development of super freighters have also facilitated the growth of globalization. The time it takes people and products to get from one place to another has shrunk, as has the cost.

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The Role of Technological Change

Question: What are the implications of technological change for the globalization of production?

Answer: Lower transportation costs make a geographically dispersed production system more economical and allow firms to better respond to international customer demands

What does all of this mean? These technological innovations have facilitated the globalization of production. Dell for example, takes advantage of these innovations to control its globally dispersed production system. When a customer submits an order via the company’s web site, it’s immediately transmitted to the suppliers of the various components, wherever they are located in the world. Suppliers have real time access to Dell’s order flows, and can then adjust their production accordingly. Dell uses inexpensive airfreight to transport its products to meet demand as needed. The company maintains a customer service operation in India where English speaking personnel handle calls from the U.S.

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The Role of Technological Change

Question: What are the implications of technological change for the globalization of markets?

Answer:

• Low cost communications networks help create electronic global marketplaces
• Low cost transportation enable firms to create global markets, and facilitate the movement of people from country to country promoting a convergence of consumer tastes and preferences

The globalization of markets has also been facilitated by these technological innovations which have helped create global, electronic marketplaces. Ecuador for example, has become a global supplier of roses thanks to falling transportation costs that make it possible to ship flowers while they’re still fresh. Similarly, television networks like MTV and CNN are received in many countries and are contributing to the development of a sort of global culture that transcends national borders.

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Changing Demographics of the Global Economy

In the 1960s:

• the U.S. dominated the world economy and world trade and world FDI
• U.S. multinationals dominated the international business scene
• about half the world-- the centrally planned economies of the communist world-- was off limits to Western international business

Today, much of this has changed.

Let’s move on to look at how the demographics of the global economy have changed over the last 50 years.

In the 1960s, the U.S. dominated the world economy and world trade picture. U.S. multinational companies were powerful, and because of the Cold War, a significant portion of the world was off limits to the Western companies.

Today, this picture has changed.

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Changing World Output and World Trade Picture

• In the early 1960s:
• U.S. - dominant industrial power accounting for about 40.3% of world manufacturing output
• By 2008:
• U.S. accounted for only 20.7%
• Other developed nations experienced a similar decline
• Rapid economic growth now in countries like China, India, and Brazil
• Further relative decline by the U.S. is likely
• So companies may find both new markets and new competitors in the developing regions of the world

By 2008, the U.S. had gone from its position in the 1960s of accounting for more than 40 percent of the world’s manufacturing output, to accounting for just over 20 percent. Countries like China, Brazil, and India have emerged as global economic players.

Most experts expect that similar trends will continue. Countries like the U.S., the U.K., Germany, and Japan that were among the first to industrialize, will continue to see their standings in world exports and world output slip, while developing nations like China, India, and Brazil will see their economies and role in global trade and investment increase.

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Changing World Output and World Trade Picture

Table 1.2: The Changing Demographics of World GDP

and Trade

As you can see from the Table, the U.S., despite its decline, is still the world’s largest exporter. However, China has emerged to challenge the U.S. for this position.

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Changing Foreign Direct Investment Picture

• The share of world output generated by developing countries has been steadily increasing since the 1960s
• The stock of foreign direct investment (total cumulative value of foreign investments) generated by rich industrial countries is declining
• Cross-border flows of foreign direct investment are rising
• The largest recipient of FDI is China

A similar trend is taking place with regard to foreign direct investment. In the 1960s, the U.S. accounted for over 66 percent of worldwide foreign direct investment flows. Britain was a distant second with just 10 percent of worldwide investment flows. Today, investments by developing nations are on the rise, while the stock, or total cumulative value, of foreign investments by rich industrial countries is falling.

As you might expect from our earlier discussion, developing nations like China have also become important destinations for foreign direct investment flows. Yum Brands for example, is hoping to capitalize on the emerging middle class in India. The company opened its first Taco Bell store in Bangalore in 2010, and is hoping more will follow. The company modeled its Indian store after its American stores. Yum Brands’ expansion into India follows those of other rivals like McDonald’s and Domino’s Pizza.

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Changing Foreign Direct Investment Picture

Figure 1.2: Percentage Share of Total FDI Stock,

1980 - 2008

Figure 1.2 shows that the stock of foreign direct investment by the world’s six most important sources has changed significantly from 1980 to 2008. In particular, notice the decline by the U.S., and the increase by France, and the world’s developing countries.

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Changing Foreign Direct Investment Picture

Figure 1.3: FDI Inflows, 1988 - 2008

In Figure 1.3, you can see the growth in cross-border flows of foreign direct investment and also the importance of developing nations as destinations for investment. These two trends reflect the internationalization of companies that we have discussed.

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The Changing Multinational Enterprise

• A multinational enterprise is any business that has productive activities in two or more countries
• Since the 1960s:
• there has been a rise in non-U.S. multinationals
• there has been a rise in mini-multinationals

The demographics of the global economy have also shifted in terms of the type of companies that are involved. We define a multinational enterprise as any business that has productive activities in two or more countries.

Two important trends to consider are the rise in non-U.S. multinationals and the growth in the number of mini-multinationals. Let’s talk about each of these trends.

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The Changing Multinational Enterprise

• Globalization has resulted in a decline in the dominance of U.S. firms in the global marketplace
• In 1973, 48.5 % of the world’s 260 largest MNEs were U.S. firms
• By 2008, just 19 of the world’s 100 largest non-financial MNEs were from the U.S., 13 were from France, 13 from Germany, 14 were from Britain, and 10 were from Japan
• Small and medium-size firms are now expanding internationally
• easier to build international sales via the Internet

In the 1960s, global business activity was dominated by large, U.S. multinational firms. Today, however, things have shifted significantly. Multinational firms from France, Germany, Britain, and Japan have become more important, and there has been a notable decline in the role of U.S. firms. Firms from developing countries such as China and South Korea have also emerged as important players. So, in addition to thinking of American companies like Ford and Microsoft, we now think of South Korea’s Samsung and Hong Kong’s Hutchison Whampoa.

We have also seen an increase in the number of small and medium-sized multinationals, or mini-multinationals. China’s Lenovo for example, acquired IBM’s PC division in 2004, in an effort to become a global player in the PC industry. Lenovo even moved its headquarters to the U.S. as part of its strategy. Traditionally, global markets have been the venue for large firms, but today, thanks to advances in technology like the Internet, international sales can account for a significant share of revenues for small companies, too.

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The Changing World Order

• The collapse of communism in Eastern Europe
• export and investment opportunities
• Economic development in China
• huge opportunities despite continued Communist control
• Free market reforms and democracy in Latin America
• new markets and new sources of materials and production

Finally, the significant change in world order has affected the global economy. The collapse of communism has brought about new opportunities in Eastern Europe, and China’s economic development and enormous population presents huge opportunities for companies.

Mexico and Latin America have also emerged both as new markets, and as source and production locations.

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The Global Economy in the 21st Century

• A more integrated global economy
• new opportunities for firms
• but, political and economic disruptions can throw plans into disarray

The trends of privatization, market deregulation, more open markets, and the removal of cross-border restrictions to trade and investment have created many new opportunities for companies. However, it’s important to remember that political and economic disruptions can ruin even the best laid plans.

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The Globalization Debate

Question: Is the shift toward a more integrated and interdependent global economy a good thing?

Answer:

• Many experts believe that globalization is promoting greater prosperity in the global economy, more jobs, and lower prices for goods and services
• Others feel that globalization is not beneficial

So far, we’ve focused primarily on the benefits of globalization. But is the shift toward a more integrated and interdependent global economy always a good thing? Not everyone thinks so.

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Antiglobalization Protests

Question: What are the concerns of critics of globalization?

Answer:

• Anti-globalization protesters now turn up at almost every major meeting of a global institution
• Protesters fear that globalization is forever changing the world in a negative way

Anti-globalization protesters who fear that globalization is forever changing the world in a negative way now turn up at almost every major meeting of global institutions like the WTO and IMF. In some cases, for example in Seattle in 1999, and France in 1999, the protests have been violent. You can learn more about what occurred in France in the Country Focus in your text. Let’s talk about some of the protesters’ concerns.

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Globalization, Jobs, and Income

• Critics claim jobs in advanced economies are being lost to low-wage nations
• Supporters claim while some jobs may be lost, the economy as a whole is better off
• free trade will result in countries specializing in the production of those goods and services that they can produce most efficiently, while importing goods and services that they cannot produce as efficiently, and that in doing so, all countries will gain

Critics of globalization worry that jobs are being lost to low-wage nations. They argue that falling trade barriers are allowing companies to move manufacturing jobs to countries where wage rates are low. For example, clothing manufacturing has increasingly shifted away from the U.S. where workers might earn $9 per hour to countries like Honduras where wages are less than 50 cents per hour. Critics believe that this leads to falling wages and living standards in the U.S.

Supporters however, claim that free trade will prompt countries to specialize in what they can produce most efficiently, and to import everything else. They argue that the whole economy will be better off as a result. In other words, if you can buy an imported shirt that was made for pennies in Honduras, you’ll have more money to spend on products the U.S. can produce efficiently like software.

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Globalization, Labor Policies, and the Environment

• Critics argue free trade encourages firms from advanced nations to move manufacturing facilities offshore to less developed countries with lax environmental and labor regulations
• Supporters claim tougher environmental regulation and stricter labor standards reflect economic progress
• as countries get richer as a result of globalization, they raise their environmental and labor standards
• free trade does not lead to more pollution and labor exploitation, it leads to less

Another concern raised by protesters is that free trade encourages firms from advanced nations, where there are costly environmental standards, to move manufacturing facilities offshore to less developed countries with lax environmental and labor regulations.

However, advocates of globalization claim that environmental regulation and stricter labor standards go hand in hand with economic progress, so foreign direct investment actually encourages countries to raise their standards. Studies support this claim with the exception of carbon dioxide emissions which appear to rise along with income levels. Advocates of globalization argue that by tying free trade agreements to the implementation of tougher environmental and labor laws, economic growth and globalization can occur together with a decrease in environmental pollution.

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Globalization and National Sovereignty

• Critics worry economic power is shifting away from national governments and toward supranational organizations such as the WTO, the European Union (EU), and the UN
• Supporters argue that the power of these organizations is limited to what nation-states collectively agree to grant
• the organizations must be able to persuade members states to follow certain actions
• without the support of members, the organizations have no power

A third concern raised by critics of globalization is the worry that economic power is shifting away from national governments and towards supranational organizations like the WTO and the European Union, or EU.

However, globalization’s supporters argue that the power of these organizations is limited to what they are granted by their members. They also point out that the organizations are designed to promote the collective interests of members, and they won’t gain support for policies that don’t achieve this goal.

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Globalization and the World’s Poor

• Critics argue the gap between rich and poor has gotten wider and the benefits of globalization have not been shared equally
• Supporters suggest that the actions of governments have made limited economic improvement in many countries
• many of the world’s poorest nations are under totalitarian regimes, suffer from endemic corruption, have few property rights, are involved in war, and are burdened by high debt

Finally, critics of globalization worry that the gap between rich and poor is growing and that the benefits of globalization haven’t been shared equally.

While supporters of globalization concede the gap between rich and poor has gotten wider, they also contend that it has more to do with the policies countries have followed than with globalization. For example, many countries have chosen to pursue totalitarian regimes, or have failed to contain population growth, and many countries have huge debt loads that are stagnating economic growth.

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Managing in the Global Marketplace

Question: What does the shift toward a global economy mean for managers within an international business?

Answer:

• Managing an international business (any firm that engages in international trade or investment) differs from managing a domestic business in four key ways

So, what does all of this mean for companies?

Managing an international business, or any firm that engages in international trade or investment, is different from managing a domestic business for many reasons.

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Managing in the Global Marketplace

Countries differences require companies to vary their practices country by country

Managers face a greater and more complex range of problems

International companies must work within the limits imposed by governmental intervention and the global trading system

International transactions require converting funds and being susceptible to exchange rate changes

Countries differ, the range of problems faced by mangers is greater and more complex, and government intervention in markets creates limitations for companies, as does the global trading system. Finally, firms must deal with exchange rate changes when they conduct international transactions that require converting funds to other currencies.

We’ll be talking more about these ideas in later chapters.

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Classroom Performance System

The trend away from distinct national economic units and toward one huge global market is known as

Internationalization

Economic integration

Globalization

Privatization

Now, let’s see how well you understand the material in this chapter. I’ll ask you a few questions. See if you can get them right. Ready?

Question 1: The trend away from distinct national economic units and toward one huge global market is known as

a) internationalization

b) economic integration

c) globalization

d) privatization

If you picked C, you’re right!

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Classroom Performance System

Which of the following is not an example of a global institution?

The Federal Reserve

The International Monetary Fund

The World Bank

The World Trade Organization

Question 2: Which of the following is not an example of a global institution?

a) the Federal Reserve

b) the International Monetary Fund

c) the World Bank

d) the World Trade Organization

If you picked A, you’re correct!

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Classroom Performance System

Coca-Cola, Sony Playstations, and McDonald’s hamburgers are all examples of

American products

Global products

Industrial products

National products

Question 3: Coca-Cola, Sony Playstations, and McDonald’s hamburgers are all examples of

a) American products

b) Global products

c) Industrial products

d) National products

If you picked B, you’re doing great!

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Classroom Performance System

Which organization provides a mechanism for dispute resolution and the enforcement of trade laws?

The UN

The IMF

The WTO

The World Bank

Question 4: Which organization provides a mechanism for dispute resolution and the enforcement of trade laws?

a) the UN

b) the IMF

c) the WTO

d) the World Bank

Did you pick C? I hope so!

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Classroom Performance System

Which of the following statements is true?

The U.S. has been accounting for an increasing share of world trade in recent years

The U.S. has been accounting for an increasing share of world foreign direct investment in recent years

The U.S. has been accounting for an increasing share of world output in recent years

The share of world trade accounted for by China has been increasing in recent years

Question 5: Which of the following statements is true?

a) the U.S. has been accounting for an increasing share of world trade in recent years

b) the U.S. has been accounting for an increasing share of world foreign direct investment in recent years

c) the U.S. has been accounting for an increasing share of world output in recent years

d) the share of world trade accounted for by China has been increasing in recent years

The correct answer is D. Did you get it right?