MKT 425 Globalization.pdf

Globalization

A continuing process of increasing integration of national economies through

enhanced cross-border flows of trades, investments, financial capital and people.

o3 types of Flows that integrate national economies:

EuTrade of goods and services (trades)

Capital (investments and money)

People (workers)

Stakeholders (actors):

oCountry Governments (most important)

oMultinational Corporations

oExporting/Importing firms

Globalization started in 5000 BCE

The Case of Trades:

oCountries should specialize in making products if you have a relative

advantage

oCross-border trades increase the overall market size

oIncreased production can boost efficiency and labor productivity

oDrivers/factors for allowing Trades:

Country governments liberalize trade

Falling transportation costs

Deregulations of transport industry

Innovation in transportation

Facilities exporting

Falling communication costs

Organize globally

Can move things where they are cost

effective

Can trade different services

World economy is Less transport intensive

oExtent of Integration of trade:

Ratio of trade (exports + imports) to output(GDP)

Prices converge (after controlling tastes, taxes,

transport/distribution)

Comparison of within vs between nations trade (More within;

barriers still exist)

Capital Flows Globalization

oTypes

Bank in country makes loans to firms/govts in other countries

Investors buy in foreign markets (portfolio investments)

Multinational starts operations in a foreign country (Foreign

Direct Investment (Part of GDP)) <--- Preferred

oRecent History

Tight restriction during “interwar” (WW1 WW2)

Controls maintained after WW2

Bretton Woods System : fixed exchange rates among

major currencies (American, Western, European)

Financial Systems found ways to get around capital

controls (couldn’t be enforced) → Development of

Euromarkets

Collapse of Bretton Woods system in 70s

Major currencies were allowed to float against one another

(Chinese Yen is only one not allowed to “float”)

Cases for Allowing cross border capital flows

Where do I make the greatest return on my investment and also

minimize risk?

Enables savers to max returns

Allows for more efficient allocation of capital

Diversification of risk (finance class)

Greatest access for countries that….

Govt perspectives (Typically related to deficits or debt)

Insufficient domestic savings)

Investments in domestic economies have to be

financed from abroad (Think US and China)

Govt may need to borrow finance their own

expenditures (Relates to domestic savings (and

lackthereof in US)

Excessive Domestic Savings

Savers might get better returns elsewhere

Increased volatility in finance markets (due to basing

lending and spending on other countries currencies which

are ever-changing)

Govt ability to formulate/implement econ policy

Trade off between managing exchange and interest

rates

You can do any 2 of these 3: Free capital flows,

set exchange rate, and set domestic interest

rates (The United State does not set the exchange

rate, instead opting for free enterprise to dictate

said rate. Venezuela on the other hand does not

allow free capital flow of goods)

Countries with underdeveloped financial system can be

adversely affected by volatility of capital flows (no free

capital flows)

Assessing Extent of integration

Prices of similar financial assets should converge across

countries

Real interest rates should also converge across countries

Nominal interest rate - inflation interest rate = real

interest rate

Labor flows

oHistory

“Out of Africa” theory

Forced migration of slaves

Indentured servitude

Migration from Europe to Us

WW1 govt controls migration

Inter-war period

Policies driven by racism (keep our domestic workers

protected at the expense of other countries’ workforce)

Post WW2, labor shortages in Europe

1970s slowing economic growth in US and Western European

countries

oCase for allowing human capital flows (LABOR

FLOWS)

Supply/Demand imbalances among countries of different types of

skilled/unskilled labor

Demographic benefits for receiving countries

Immigrants are working age people

Improves Dependency ratios (children/elders are

dependents)

# of dependents/number of people between 15-64

Economic benefits for receiving countries

Increased demand for goods/services. creates new jobs

May compete with “natives” for jobs

Wage pressures

Increased unemployment

Problems with cultural assimilation

US stressed about illegal immigration vs europeans who

argue about legal immigration

US melting pot bs European multiculturalists (preserve

culture)

Pros and cons

oNo significant positive or negative overall

Immigration is small % of total population

oRole of technology

Automation destroys jobs more than immigrations (....oops)

oMultinational strategies

If companies can’t hire across borders, they take the jobs across

borders

oGlobally only 3.1% of people live outside of the

country of their birh

Multinational perspective

oIncentives to globalize

Increase customer base

limited growth prospects in home country market

Gerber, Auto Firms in US/Europe, large US banks

Follow customers abroad

Professional services firms (law, marketing, )

Manufacturers move, suppliers move

Differences in competitive environments between home country

and foreign markets

Market for Cars in China

Globalization is key element of firms strategy

“March of Mini” something

oIssues faced by firms in process

Unfamiliar business environments

Econ differences, political differences, cultural differences

(consumer & organizational)

oPositives

Access to new technologies

oNegatives:

Threaten govts ability to formulate/implement various policies

Profit shifting

finance minimizing taxes

export of jobs to low-wage countries

It is reversible but only somewhat

oMore interdependent -> harder to reverse

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