Module 1
Globalization
A. Definition of Globalization
Over the past five decades, a fundamental shift has been occurring in the world
economy. We have been moving away from a world in which national economies were
relatively self-contained entities, isolated from each other by barriers to cross-border
trade and investment; by distance, time zones, and language; and by national differences
in government regulation, culture, and business systems. We have moved toward a world
in which barriers to cross-border trade and investment have declined; 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.
At the same time, recent political events have raised some questions about the
inevitability of the globalization process. The exit of the United Kingdom from the
European Union (Brexit), the renegotiation of the North American Free Trade Agreement
(NAFTA) by the Trump administration, and trade disputes between the United States and
many of its trading partners, including most notably China, have all contributed to
uncertainty about the future of globalization. While the world seems unlikely to pull back
significantly from globalization, there is no doubt that the benefits of globalization are
more in dispute now than at any time in the last half century. This is a new reality, albeit
perhaps a temporary one, but it is one the international business community will have to
adjust to.
More recently, this consensus view has been called into question, most
significantly by Donald Trump, whose position as president of the world’s largest
economy, the United States, has enabled him to upend the decades-long process toward
lower trade barriers and greater globalization. Trump significantly raised trade barriers
between the United States and several other countries, including China. For firms in a
wide range of industries, including the bicycle industry, this sudden shift has created
many challenges—and perhaps some opportunities, too. As some bicycle manufacturers
have discovered, reengineering decades-old supply chains is not easy, and uncertainty
over future trade policy has injected significant risks into business decisions. Thus even a
predominantly American maker of bikes, such as Detroit Bikes, has had to scramble to
find a way to respond to an increase in the price of component parts that historically have
been sourced from China.
One of the goals of this book is to give the reader a much greater understanding of
the issues here and to explain how business policy is affected by changes in the global
environment within which firms compete. As we shall see, geopolitics has an important
influence on business strategy decisions for the international enterprise. Proponents of
increased globalization argue that cross-cultural engagement and cross-border trade and
investment have benefited us all and that returning to a more isolationist or nationalistic
perspective will have a negative impact upon economic growth. On the other hand, those
who argue for returning to a nationalistic perspective, such as Donald Trump with his
“America First” policy, want their countries to be more self-sufficient, to have greater
control over economic activity within their borders, and to be able to set the rules by
which they trade with other nations. In other words, they want to increase national
sovereignty with regard to a number of issues, ranging from trade policy to immigration
and environmental regulations. They are opposed to globalization as it has unfolded over
the last 50 years. We will touch on many aspects of this debate throughout this text’s 17
integrated chapters, always with the purpose of clarifying the implications for
international business.
The reality is that we live in a world where the volume of goods, services, and
investments crossing national borders has expanded faster than world output for more
than half a century. It is a world in which international institutions such as the World
Trade Organization and gatherings of leaders from the world’s most powerful economies
continue to work for even lower barriers to cross-border trade and investment. The
symbols of material culture and popular culture are increasingly global, from Coca-Cola
and Starbucks, to Sony PlayStation, Facebook, Netflix video streaming service, IKEA
stores, and Apple iPads and iPhones. Vigorous and vocal groups protest against
globalization, which they blame for a list of ills from unemployment in developed nations
to environmental degradation and the Westernization or Americanization of local
cultures. Some of these protesters come from environmental groups, which have been
around for some time, but more recently they have also come from nationalistic groups
focused on their countries being more sovereign.
For businesses, the globalization process creates many opportunities. Firms can
expand their revenues by selling around the world and/or reduce their costs by producing
in nations where key inputs, including labor, are less expensive. Until very recently, the
global expansion of enterprises has been facilitated by generally favorable political and
economic trends. This has allowed businesses both large and small, from both advanced
nations and developing nations, to expand internationally. As globalization has unfolded,
it has transformed industries and created anxiety among those who believed their jobs
were protected from foreign competition. Moreover, advances in technology, lower
transportation costs, and the rise of skilled workers in developing countries imply that
many services no longer need to be performed where they are delivered. An MRI scan
undertaken in a hospital in Massachusetts might be diagnosed by a radiologist located in
India, your inquiry to an American telephone company might be routed to a call center
located in Costa Rico, the software that runs on your phone might be updated overnight
with a patch that was written by software programmers in Taiwan, and your American
tax returns might be completed by tax specialists located in the Philippines and then
signed off on by your American accountant. As best-selling author Thomas Friedman has
argued, the world is becoming “flat.”1 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.
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 have made it easier to sell internationally. It has been argued
for some time that the tastes and preferences of consumers in different nations are
beginning to converge on some global norm, thereby helping create a global market.2
Consumer products such as Citigroup credit cards, Coca-Cola soft drinks, Sony video
games, McDonald’s hamburgers, Starbucks coffee, IKEA furniture, and Apple iPhones
are frequently held up as prototypical examples of this trend. The firms that produce
these products are more than just benefactors of this trend; they are also facilitators of it.
By offering the same basic product worldwide, they help create a global market.
A company does not have to be the size of these multinational giants to facilitate,
and benefit from, the globalization of markets. In the United States, for example,
according to the International Trade Administration, more than 300,000 small and
medium-sized firms with fewer than 500 employees account for 98 percent of the
companies that export. More generally, exports from small and medium-sized companies
account for 33 percent of the value of U.S. exports of manufactured goods.3 Typical of
these is B&S Aircraft Alloys, a New York company whose exports account for 40
percent of its $8 million annual revenues.4 The situation is similar in several other
nations. For example, in Germany, a staggering 98 percent of small and midsize
companies have exposure to international markets, via either exports or international
production. Since 2009, China has been the world’s largest exporter, sending $2.5 trillion
worth of products and services last year to the rest of the world.
Despite the global prevalence of Apple phones, McDonald’s hamburgers,
Starbucks coffee, and IKEA stores, for example, it is important not to push too far the
view that national markets are giving way to the global market. As we shall see in later
chapters, significant differences still exist among national markets along many relevant
dimensions, including consumer tastes and preferences, distribution channels, culturally
embedded value systems, business systems, and legal regulations. Uber, for example, the
fast-growing ride-for-hire service, is finding it needs to refine its entry strategy in many
foreign cities in order to take differences in the regulatory regime into account. Such
differences frequently require companies to customize marketing strategies, product
features, and operating practices to best match conditions in a particular country.
The most global of markets are not typically markets for consumer products—
where national differences in tastes and preferences can still be important enough to act
as a brake on globalization. They are markets for industrial goods and materials that serve
universal needs the world over. These include markets for commodities such as
aluminum, oil, and wheat; for industrial products such as microprocessors, DRAMs
(computer memory chips), and commercial jet aircraft; for computer software; and for
financial assets, from U.S. Treasury bills to Eurobonds, and futures on the Nikkei index
or the euro. That being said, it is increasingly evident that many newer high-technology
consumer products, such as Apple’s iPhone, are being successfully sold the same way the
world over.
In many global markets, the same firms frequently confront each other as
competitors in nation after nation. Coca-Cola’s rivalry with PepsiCo is a global one, as
are the rivalries between Ford and Toyota; Boeing and Airbus; Caterpillar and Komatsu
in earthmoving equipment; General Electric and Rolls-Royce in aero engines; Sony,
Nintendo, and Microsoft in video-game consoles; and Samsung and Apple in
smartphones. If a firm moves into a nation not currently served by its rivals, many of
those rivals are sure to follow to prevent their competitor from gaining an advantage.5 As
firms follow each other around the world, they bring with them many of the assets that
served them well in other national markets—their products, operating strategies,
marketing strategies, and brand names—creating some homogeneity across markets.
Thus, greater uniformity replaces diversity. In an increasing number of industries, it is no
longer meaningful to talk about “the German market,” “the American market,” “the
Brazilian market,” or “the Japanese market”; for many firms, there is only the global
market.
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 (such as labor, energy, land, and 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. For example, Boeing has made extensive use of outsourcing to foreign
suppliers. Consider Boeing’s 777 first introduced in 1995: Eight Japanese suppliers make
parts for the fuselage, doors, and wings; a supplier in Singapore makes the doors for the
nose landing gear; three suppliers in Italy manufacture wing flaps; and so on.6 In total,
some 30 percent of the 777, by value, is built by foreign companies. And for its most
recent jet airliner, the 787, Boeing has pushed this trend even further; some 65 percent of
the total value of the aircraft is outsourced to foreign companies, 35 percent of which
goes to three major Japanese companies.
Early outsourcing efforts were primarily confined to manufacturing activities,
such as those undertaken by Boeing and Apple. Increasingly, however, companies are
taking advantage of modern communications technology, particularly the Internet, to
outsource service activities to low-cost producers in other nations. The Internet has
allowed hospitals to outsource some radiology work to India, where images from MRI
scans and the like are read at night while U.S. physicians sleep; the results are ready for
them in the morning. Many software companies, including Microsoft, now use Indian
engineers to perform test functions on software designed in the United States. The time
difference allows Indian engineers to run debugging tests on software written in the
United States when U.S. engineers sleep, transmitting the corrected code back to the
United States over secure Internet connections so it is ready for U.S. engineers to work
on the following day. Dispersing value-creation activities in this way can compress the
time and lower the costs required to develop new software programs. Other companies,
from computer makers to banks, are outsourcing customer service functions, such as
customer call centers, to developing nations where labor is cheaper. In another example
from health care, workers in the Philippines transcribe American medical files (such as
audio files from doctors seeking approval from insurance companies for performing a
procedure). Some estimates suggest the outsourcing of many administrative procedures in
health care, such as customer service and claims processing, could reduce health care
costs in America by more than $100 billion.
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 75 years, a number of important global institutions
have been created to help perform these functions, including the General Agreement on
Tariffs and Trade (GATT) and its successor, the World Trade Organization; the
International Monetary Fund and its sister institution, the World Bank; and the United
Nations. All these institutions were created by voluntary agreement between individual
nation-states, and their functions are enshrined in international treaties.
The World Trade Organization (WTO) (like the GATT before it) is 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. As of 2020, 164
nations that collectively accounted for 98 percent of world trade were WTO members,
thereby giving the organization enormous scope and influence. The WTO is also
responsible for facilitating the establishment of additional multinational agreements
among WTO member states. Over its entire history, and that of the GATT before it, the
WTO has promoted the lowering of barriers to cross-border trade and investment. In
doing so, the WTO has been the instrument of its member states, which have sought to
create a more open global business system unencumbered by barriers to trade and
investment between countries. Without an institution such as the WTO, the globalization
of markets and production is unlikely to have proceeded as far as it has. However, as we
shall see in this chapter and in Chapter 7 when we look closely at the WTO, critics charge
that the organization is usurping the national sovereignty of individual nation-states.
The International Monetary Fund (IMF) and the World Bank were both created in
1944 by 44 nations that met at Bretton Woods, New Hampshire. The IMF was
established to maintain order in the international monetary system; the World Bank was
set up to promote economic development. In the more than seven decades since their
creation, both institutions have emerged as significant players in the global economy. The
World Bank is the less controversial of the two sister institutions. It has focused on
making low-interest loans to cash-strapped governments in poor nations that wish to
undertake significant infrastructure investments (such as building dams or roads).
The United Nations (UN) was established October 24, 1945, by 51 countries
committed to preserving peace through international cooperation and collective security.
Today, nearly every nation in the world belongs to the United Nations; membership now
totals 193 countries. When states become members of the United Nations, they agree to
accept the obligations of the UN Charter, an international treaty that establishes basic
principles of international relations. According to the charter, the UN has four purposes:
to maintain international peace and security, to develop friendly relations among nations,
to cooperate in solving international problems and in promoting respect for human rights,
and to be a center for harmonizing the actions of nations. Although the UN is perhaps
best known for its peacekeeping role, one of the organization’s central mandates is the
promotion of higher standards of living, full employment, and conditions of economic
and social progress and development—all issues that are central to the creation of a
vibrant global economy. As much as 70 percent of the work of the UN system is devoted
to accomplishing this mandate. To do so, the UN works closely with other international
institutions such as the World Bank. Guiding the work is the belief that eradicating
poverty and improving the well-being of people everywhere are necessary steps in
creating conditions for lasting world peace.
Another institution in the news is the 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. Collectively, the G20 represents 90 percent of global GDP and
80 percent of international global trade. Originally established to formulate a coordinated
policy response to financial crises in developing nations, in 2008 and 2009 it became the
forum through which major nations attempted to launch a coordinated policy response to
the global financial crisis that started in America and then rapidly spread around the
world, ushering in the first serious global economic recession since 1981.
B. Drivers of Globalization
During the 1920s and 1930s, many of the world’s nation-states erected formidable
barriers to international trade and foreign direct investment. 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. Many of the barriers to international trade took the form of high tariffs on
imports of manufactured goods. The typical aim of such tariffs was to protect domestic
industries from foreign competition. One consequence, however, was “beggar thy
neighbor” retaliatory trade policies, with countries progressively raising trade barriers
against each other. Ultimately, this depressed world demand and contributed to the Great
Depression of the 1930s.
Having learned from this experience, the advanced industrial nations of the West
committed themselves after World War II to progressively reducing barriers to the free
flow of goods, services, and capital among nations.10 This goal was enshrined in the
General Agreement on Tariffs and Trade. Under the umbrella of GATT, eight rounds of
negotiations among member states worked to lower barriers to the free flow of goods and
services. The first round of negotiations went into effect in 1948. The most recent
negotiations to be completed, known as the Uruguay Round, were finalized in December
1993. The Uruguay Round further reduced trade barriers; extended GATT to cover
services as well as manufactured goods; provided enhanced protection for patents,
trademarks, and copyrights; and established the World Trade Organization to police the
international trading system.11 Table 1.1 summarizes the impact of GATT agreements on
average tariff rates for manufactured goods among several developed nations. As can be
seen, average tariff rates have fallen significantly since 1950 and by 2018 stood at about
3.0–4.0 percent. (Note that these figures do not take into account the impact of recent
increases in tariff rates instituted by the Trump Administration, and retaliatory tariffs
from China in particular). Comparable tariff rates in 2018 for China were about 9 percent.
This represents a sharp decline from 16.2 percent for China in 2000. It's also important to
note that in addition to the global efforts of the GATT and WTO, trade barriers have also
been reduced by bilateral and regional agreements between two or more nations. For
example, the European Union has reduced trade barriers between its member states, the
North American Free Trade Agreement reduced trade barriers between the United States,
Mexico, and Canada, and a free trade agreement between the United States and South
Korea has reduced trade barriers between those two nations. In the early 1990s, there
were less than 50 such agreements in place. Today, there are around 300 such
agreements.
Not only has trade in goods and services been growing faster than world output
for decades, so has the value of foreign direct investment, in part due to reductions in
barriers limiting FDI between countries. According to UN data, some 80 percent of the
more than 1,500 changes made to national laws governing foreign direct investment since
2000 have created a more favorable environment. Partly due to such liberalization, the
value of FDI has grown significantly over the last 30 years. In 1990, about $244 billion in
foreign investment was made by enterprises. By 2019, that figure had increased to $1.5
trillion. As a result of sustained cross-border investment, by 2019 the sales of foreign
affiliates of multinational corporations reached $27 trillion, almost $8 trillion more than
the value of international trade in 2019, and these affiliates employed some 76 million
people.
It is also worth noting that the COVID-19 global pandemic has had a significant
impact upon global supply chains, forcing many companies to rethink their globalization
strategy. Some companies are reportedly considering moving production closer to home
on the theory that local production is less likely to be disrupted by the current pandemic,
or other adverse events such as future pandemics, war, terrorism, trade disputes and the
like. If this becomes a trend, it too will put a break upon the globalization process.
Indeed, the World Trade Organization has forecasted that due to the ongoing COVID-19
pandemic, world trade will slump by as much as one third in 2020, while cross border
investment may fall by 40 percent.
The lowering of trade barriers made globalization of markets and production a
theoretical possibility. Technological change has made it a tangible reality. Every year
that goes by comes with unique and oftentimes major advances in communication,
information processing, and transportation technology, including the explosive
emergence of the “Internet of Things.” Perhaps the single most important innovation
since World War II has been the 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 microprocessor also
underlies many recent advances in telecommunications technology. Over the past 30
years, global communications have been revolutionized by developments in satellite,
optical fiber, wireless technologies, and of course the Internet. These technologies rely on
the microprocessor to encode, transmit, and decode the vast amount of information that
flows along these electronic highways. The cost of microprocessors continues to fall,
while their power increases (a phenomenon known as Moore’s law, which predicts that
the power of microprocessor technology doubles and its cost of production falls in half
every 18 months).
The explosive growth of the Internet since 1994, when the first web browser was
introduced, has revolutionized communications and commerce. In 1990, fewer than 1
million users were connected to the Internet. By 1995, the figure had risen to 50 million.
By 2019, the Internet had 4.5 billion users, or 58 percent of the global population.14 It is
no surprise that the Internet has developed into the information backbone of the global
economy.
In addition to developments in communications technology, several major
innovations in transportation technology have occurred since the 1950s. In economic
terms, the most important are probably the development of commercial jet aircraft and
superfreighters and the introduction of containerization, which simplifies transshipment
from 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. In
terms of travel time, New York is now “closer” to Tokyo than it was to Philadelphia in
the colonial days.
As transportation costs associated with the globalization of production have
declined, dispersal of production to geographically separate locations has become 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. These developments make it possible for a firm to create and then manage a
globally dispersed production system, further facilitating the globalization of production.
A worldwide communications network has become essential for many international
businesses. For example, Dell uses the Internet to coordinate and control a globally
dispersed production system to such an extent that it holds only three days’ worth of
inventory at its assembly locations. Dell’s Internet-based system records orders for
computer equipment as they are submitted by customers via the company’s website and
then immediately transmits the resulting orders for components to various suppliers
around the world, which have a real-time look at Dell’s order flow and can adjust their
production schedules accordingly. Given the low cost of airfreight, Dell can use air
transportation to speed up the delivery of critical components to meet unanticipated
demand shifts without delaying the shipment of final product to consumers. Dell has also
used modern communications technology to outsource its customer service operations to
India. When U.S. customers call Dell with a service inquiry, they are routed to Bangalore
in India, where English-speaking service personnel handle the call.
In addition to the globalization of production, technological innovations have
facilitated the globalization of markets. Low-cost global communications networks,
including those built on top of the Internet, are helping create electronic global
marketplaces. As noted earlier, low-cost transportation has made it more economical to
ship products around the world, thereby helping create global markets. 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. At the same time, global communications networks
and global media are creating a worldwide culture. U.S. television networks such as CNN
and HBO are now received in many countries, Hollywood films and American TV
programs are shown the world over, while non-U.S. networks such as the BBC and Al
Jazeera also have a global footprint. Streaming services such as Netflix are pushing this
development even further, making programming from various nations available
worldwide. These developments, for example, have helped British TV program exports to
hit a record $1.8 billion in 2019.
C. 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 decades. Half a century
ago, four facts described the demographics of the global economy. The first was U.S.
dominance in the world economy and world trade picture. The second was U.S.
dominance in world foreign direct investment. Related to this, the third fact was the
dominance of large, multinational U.S. firms on the international business scene. The
fourth was that roughly half the globe—the centrally planned economies of the
communist world—was off-limits to Western international businesses. All four of these
facts have changed rapidly.
In the early 1960s, the United States was still, by far, the world’s dominant
industrial power. In 1960, the United States accounted for 38.3 percent of world output,
measured by gross domestic product (GDP). By 2018, the United States accounted for 24
percent of world output, with China now at 15.2 percent of world output and the global
leader in this category (see Table 1.2). The United States was not the only developed
nation to see its relative standing slip. The same occurred to Germany, France, Italy, the
United Kingdom, and Canada—these are just a few examples. All were nations that were
among the first to industrialize globally.
Of course, the change in the U.S. position was not an absolute decline because the
U.S. economy grew significantly between 1960 and 2018 (the economies of Germany,
France, Italy, the United Kingdom, and Canada also grew during this time). Rather, it
was a relative decline, reflecting the faster economic growth of several other economies,
particularly China, and several other nations in Asia. For example, as can be seen from
Table 1.2, from 1960 to today, China’s share of world output increased from a trivial
amount to 15.2 percent, making it the world’s second-largest economy in terms of its
share in world output (the U.S. is still the largest economy overall). Other countries that
markedly increased their share of world output included Japan, Thailand, Malaysia,
Taiwan, Brazil, and South Korea.
Reflecting the dominance of the United States in the global economy, U.S. firms
accounted for 66.3 percent of worldwide foreign direct investment flows in the 1960s.
British firms were second, accounting for 10.5 percent, while Japanese firms were a
distant eighth, with only 2 percent. The dominance of U.S. firms was so great that books
were written about the economic threat posed to Europe by U.S. corporations.20 Several
European governments, most notably France, talked of limiting inward investment by
U.S. firms.
However, as the barriers to the free flow of goods, services, and capital fell, and
as other countries increased their shares of world output, non-U.S. firms increasingly
began to invest 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. Thus, beginning in the
1970s, European and Japanese firms began to shift labor-intensive manufacturing
operations from their home markets to developing nations where labor costs were lower.
In addition, many Japanese firms invested in North America and Europe—often as a
hedge against unfavorable currency movements and the possible imposition of trade
barriers. For example, Toyota, the Japanese automobile company, rapidly increased its
investment in automobile production facilities in the United States and Europe during the
late 1980s and 1990s. Toyota executives believed that an increasingly strong Japanese
yen would price Japanese automobile exports out of foreign markets; therefore,
production in the most important foreign markets, as opposed to exports from Japan,
made sense. Toyota also undertook these investments to head off growing political
pressures in the United States and Europe to restrict Japanese automobile exports into
those markets.
A multinational enterprise (MNE) is any business that has productive activities in
two or more countries. In the last 50 years, two notable trends in the demographics of the
multinational enterprise have been (1) the rise of non-U.S. multinationals and (2) the
growth of mini-multinationals. In the 1960s, global business activity was dominated by
large U.S. multinational corporations. With U.S. firms accounting for about two-thirds of
foreign direct investment during the 1960s, one would expect most multinationals to be
U.S. enterprises. In addition, British, Dutch, and French enterprises figured prominently
on lists of the world’s largest multinational enterprises. By 2003, when Forbes magazine
started to compile its annual ranking of the world’s top 2,000 multinational enterprises,
776 of the 2,000 firms, or 38.8 percent, were U.S. enterprises. The second-largest source
country was Japan with 16.6 percent of the largest multinationals. The United Kingdom
accounted for another 6.6 percent of the world’s largest multinationals at the time. As
shown in Figure 1.4, by 2019 the U.S. share had fallen to 28.8 percent, or 575 firms, and
the Japanese share had declined to 11.1 percent, while Chinese enterprises had emerged
to comprise 309 of the total, or 15.5 percent. There has also been a notable increase in
multinationals from Taiwan, India, and South Korea.
Another trend in international business has been the growth of small and medium-
sized multinationals (mini-multinationals).21 When people think of international
businesses, they tend to think of firms such as ExxonMobil, General Motors, Ford,
Panasonic, Procter & Gamble, Sony, and Unilever—large, complex multinational
corporations with operations that span the globe. Although most international trade and
investment is still conducted by large firms, many medium-sized and small businesses are
becoming increasingly involved in international trade and investment. The rise of the
Internet is lowering the barriers that small firms face in building international sales.
In 1989 and 1991, a series of democratic revolutions swept the communist world.
For reasons that are explored in more detail in Chapter 3, in country after country
throughout eastern Europe and eventually in the Soviet Union itself, Communist Party
governments collapsed. The Soviet Union receded into history, replaced by 15
independent republics. Czechoslovakia divided itself into two states, while Yugoslavia
dissolved into a bloody civil war among its five successor states. Since then, many of the
former communist nations of Europe and Asia have seemed to share a commitment to
democratic politics and free market economics. For half a century, these countries were
essentially closed to Western international businesses. Now, they present a host of export
and investment opportunities. Three decades later, the economies of many of the former
communist states are still relatively undeveloped, however, and their continued
commitment to democracy and market-based economic systems cannot be taken for
granted. Disturbing signs of growing unrest and totalitarian tendencies are seen in several
eastern European and central Asian states, including Russia, which has shifted back
toward greater state involvement in economic activity and authoritarian government.25
Thus, the risks involved in doing business in such countries are high, but so may be the
returns.
The past quarter century has seen rapid changes in the global economy. Not
withstanding recent developments such as the higher tariffs introduced by the Trump
administration in the United States, barriers to the free flow of goods, services, and
capital have been coming down. As their economies advance, more nations are joining
the ranks of the developed world. A generation ago, South Korea and Taiwan were
viewed as second-tier developing nations. Now they boast large economies, and firms
based there are major players in many global industries, from shipbuilding and steel to
electronics and chemicals. 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.
Also, greater globalization brings with it risks of its own. This was starkly
demonstrated in 1997 and 1998, when a financial crisis in Thailand spread first to other
East Asian nations and then to Russia and Brazil. Ultimately, the crisis threatened to
plunge the economies of the developed world, including the United States, into a
recession. We explore the causes and consequences of this and other similar global
financial crises in Chapter 11. Even from a purely economic perspective, globalization is
not all good. The opportunities for doing business in a global economy may be
significantly enhanced, but as we saw in 1997–1998, the risks associated with global
financial contagion are also greater. Indeed, during 2008–2009, a crisis that started in the
financial sector of America, where banks had been too liberal in their lending policies to
homeowners, swept around the world and plunged the global economy into its deepest
recession since the early 1980s, illustrating once more that in an interconnected world a
severe crisis in one region can affect the entire globe. Similarly, the spread of the
COVID-19 pandemic around the world in 2020 seriously disrupted global supply chains
and called into question the wisdom of relying upon globally dispersed production
systems. Still, as explained later in this text, 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 (e.g., recently in the United States and United Kingdom).
D. The Globalization Debate
Is the shift toward a more integrated and interdependent global economy a good
thing? Many influential economists, politicians, and business leaders seem to think so.26
They 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 countries that participate in the global trading system. The
arguments of those who support globalization are covered in detail in Chapters 6, 7, and
8. As we shall see, there are good theoretical reasons for believing that declining barriers
to international trade and investment do stimulate economic growth, create jobs, and raise
income levels. Moreover, as described in Chapters 6, 7, and 8, empirical evidence lends
support to the predictions of this theory. However, despite the existence of a compelling
body of theory and evidence, globalization has its critics.27 Some of these critics are
vocal and active, taking to the streets to demonstrate their opposition to globalization.
Other critics have gained political power in democratic societies, including most notably
Donald Trump in the United States, whose America First policies represent a sharp break
from the rules based multilateral international order embodied institutions such as the
World Trade Organization—an international institution which ironically was created
under American leadership. Here, we look at the nature of protests against globalization
and briefly review the main themes of the debate concerning the merits of globalization.
In later chapters, we elaborate on many of these points.
Popular demonstrations against globalization date back to December 1999, when
more than 40,000 protesters blocked the streets of Seattle in an attempt to shut down a
World Trade Organization meeting being held in the city. The demonstrators were
protesting against a wide range of issues, including job losses in industries under attack
from foreign competitors, downward pressure on the wage rates of unskilled workers,
environmental degradation, and the cultural imperialism of global media and
multinational enterprises, which was seen as being dominated by what some protesters
called the “culturally impoverished” interests and values of the United States. All of these
ills, the demonstrators claimed, could be laid at the feet of globalization.
The World Trade Organization was meeting to try to launch a new round of talks
to cut barriers to cross-border trade and investment. As such, it was seen as a promoter of
globalization and a target for the protesters. The protests turned violent, transforming the
normally placid streets of Seattle into a running battle between “anarchists” and Seattle’s
bemused and poorly prepared police department. Pictures of brick-throwing protesters
and armored police wielding their batons were duly recorded by the global media, which
then circulated the images around the world. Meanwhile, the WTO meeting failed to
reach an agreement, and although the protests outside the meeting halls had little to do
with that failure, the impression took hold that the demonstrators had succeeded in
derailing the meetings.
Both theory and evidence suggest that many of these fears are exaggerated. Many
protests against globalization are tapping into a general sense of loss at the passing of a
world in which barriers of time and distance, and significant differences in economic
institutions, political institutions, and the level of development of different nations
produced a world rich in the diversity of human cultures. However, while the rich citizens
of the developed world may have the luxury of mourning the fact that they can now see
McDonald’s restaurants and Starbucks coffeehouses on their vacations to exotic locations
such as Thailand, fewer complaints are heard from the citizens of those countries, who
welcome the higher living standards that progress brings.
One concern frequently voiced by globalization opponents is that falling barriers
to international trade destroy manufacturing jobs in wealthy advanced economies such as
the United States and western Europe. Critics argue that falling trade barriers allow firms
to move manufacturing activities to countries where wage rates are much lower.28
Indeed, due to the entry of China, India, and countries from eastern Europe into the
global trading system, along with global population growth, the pool of global labor has
increased more than fivefold between 1990 and today. Other things being equal, we
might conclude that this enormous expansion in the global labor force, when coupled
with expanding international trade, would have depressed wages in developed nations.
This fear is often supported by anecdotes. For example, D. L. Bartlett and J. B.
Steele, two journalists for the Philadelphia Inquirer who gained notoriety for their attacks
on free trade, cite the case of Harwood Industries, a U.S. clothing manufacturer that
closed its U.S. operations, where it paid workers $9 per hour, and shifted manufacturing
to Honduras, where textile workers received 48 cents per hour.29 Because of moves such
as this, argue Bartlett and Steele, the wage rates of poorer Americans have fallen
significantly over the past quarter of a century.
Supporters of globalization reply that critics of these trends miss the essential
point about free trade agreements—the benefits outweigh the costs.30 They argue that
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. When a country embraces free trade, there is always
some dislocation—lost textile jobs at Harwood Industries or lost call-center jobs at Dell
—but the whole economy is better off as a result. According to this view, it makes little
sense for the United States to produce textiles at home when they can be produced at a
lower cost in Honduras or China. Importing textiles from China leads to lower prices for
clothes in the United States, which enables consumers to spend more of their money on
other items. At the same time, the increased income generated in China from textile
exports increases income levels in that country, which helps the Chinese purchase more
products produced in the United States, such as pharmaceuticals from Amgen, Boeing
jets, microprocessors made by Intel, Microsoft software, and Cisco routers.
Several studies shed light on these issues.31 First, the data suggest that over the
past few decades, the share of labor in national income has declined. However, detailed
analysis suggests the share of national income enjoyed by skilled labor has actually
increased, suggesting that the fall in labor’s share has been due to a fall in the share taken
by unskilled labor. A study by the IMF suggested the earnings gap between workers in
skilled and unskilled sectors has widened by 25 percent over the past two decades.32
Another study that focused on U.S. data found that exposure to competition from imports
led to a decline in real wages for workers who performed unskilled tasks while having no
discernible impact on wages in skilled occupations. The same study found that skilled
and unskilled workers in sectors where exports grew saw an increase in their real
wages.33 These figures suggest that unskilled labor in sectors that have been exposed to
more efficient foreign competition probably has seen its share of national income decline
over the past three decades.
However, this does not mean that the living standards of unskilled workers in
developed nations have declined. It is possible that economic growth in developed
nations has offset the fall in the share of national income enjoyed by unskilled workers,
raising their living standards. Evidence suggests that real labor compensation has
expanded in most developed nations since the 1980s, including the United States. Several
studies by the Organisation for Economic Co-operation and Development (OECD),
whose members include the 34 richest economies in the world, conclude that while the
gap between the poorest and richest segments of society in OECD countries has widened,
in most countries real income levels have increased for all, including the poorest
segment. In one study, the OECD found that real household income (adjusted for
inflation) increased by 1.7 percent annually among its member states. The real income
level of the poorest 10 percent of the population increased at 1.4 percent on average,
while that of the richest 10 percent increased by 2 percent annually (i.e., while everyone
got richer, the gap between the most affluent and the poorest sectors of society widened).
The differential in growth rates was more extreme in the United States than most other
countries. The study found that the real income of the poorest 10 percent of the
population grew by just 0.5 percent a year in the United States, while that of the richest
10 percent grew by 1.9 percent annually.
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.38
Globalization critics often argue that adhering to labor and environmental regulations
significantly increases the costs of manufacturing enterprises and puts them at a
competitive disadvantage in the global marketplace vis-à-vis firms based in developing
nations that do not have to comply with such regulations. Firms deal with this cost
disadvantage, the theory goes, by moving their production facilities to nations that do not
have such burdensome regulations or that fail to enforce the regulations they have.
Supporters of free trade and greater globalization express doubts about this
scenario. They argue that tougher environmental regulations and stricter labor standards
go hand in hand with economic progress.41 In general, as countries get richer, they enact
tougher environmental and labor regulations.42 Because free trade enables developing
countries to increase their economic growth rates and become richer, this should lead to
tougher environmental and labor laws. In this view, the critics of free trade have got it
backward: Free trade does not lead to more pollution and labor exploitation; it leads to
less. By creating wealth and incentives for enterprises to produce technological
innovations, the free market system and free trade could make it easier for the world to
cope with pollution and population growth. Indeed, while pollution levels are rising in the
world’s poorer countries, they have been falling in developed nations. In the United
States, for example, the concentration of carbon monoxide and sulfur dioxide pollutants
in the atmosphere has decreased by 60 percent since 1978, while lead concentrations have
decreased by 98 percent—and these reductions have occurred against a background of
sustained economic expansion.
Although UN-sponsored talks have had reduction in carbon dioxide emissions as
a central aim since the 1992 Earth Summit in Rio de Janeiro, until recently there has been
little success in moving toward the ambitious goals for reducing carbon emissions laid
down in the Earth Summit and subsequent talks in Kyoto, Japan, in 1997, Copenhagen in
2009, and Paris in 2015, for example. In part, this is because the largest emitters of
carbon dioxide, the United States and China, failed to reach agreements about how to
proceed. China, a country whose carbon emissions are increasing at a rapid rate, has until
recently shown little appetite for tighter pollution controls. As for the United States,
political divisions in Congress and a culture of denial have made it difficult for the
country to even acknowledge, never mind move forward with, legislation designed to
tackle climate change. In late 2014, the United States and China did strike a deal under
which both countries agreed to potentially significant reductions in carbon emissions.
This was followed by a broadly based multilateral agreement reached in Paris in 2015
that committed the nations of the world to ambitious goals for reducing CO2 emissions
and limiting future increases in global temperatures. However, President Donald Trump
pulled the United States out of the Paris agreement in 2017. Trump, who disputes the
theory and evidence that rising CO2 levels are causing climate change, argued that the
Paris Accord disadvantaged the United States to the exclusive benefits of other countries.
Without the participation of the United States, it is difficult to see the world making
significant progress on this issue.
Another concern voiced by critics of globalization is that today’s increasingly
interdependent global economy shifts economic power away from national governments
and toward supranational organizations such as the World Trade Organization, the
European Union, and the United Nations. This has been the core of the argument made
by Donald Trump and it underpins his American First foreign policy (see the Country
Focus feature). As perceived by critics, unelected bureaucrats now impose policies on the
democratically elected governments of nation-states, thereby undermining the
sovereignty of those states and limiting the nation’s ability to control its own destiny.
The World Trade Organization is a favorite target of those who attack the
headlong rush toward a global economy. As noted earlier, the WTO was founded in 1995
to police the world trading system established by the General Agreement on Tariffs and
Trade. The WTO arbitrates trade disputes among its 164 member states. The arbitration
panel can issue a ruling instructing a member state to change trade policies that violate
GATT regulations. If the violator refuses to comply with the ruling, the WTO allows
other states to impose appropriate trade sanctions on the transgressor.
Critics of globalization argue that despite the supposed benefits associated with
free trade and investment, over the past 100 years or so the gap between the rich and poor
nations of the world has gotten wider. In 1870, the average income per capita in the
world’s 17 richest nations was 2.4 times that of all other countries. In 1990, the same
group was 4.5 times as rich as the rest. In 2019, the 34 member states of the Organisation
for Economic Co-operation and Development (OECD), which includes most of the
world’s rich economies, had an average gross national income (GNI) per person of more
than $40,000, whereas the world’s 40 least developed countries had a GNI of under
$1,000 per capita—implying that income per capita in the world’s 34 richest nations was
40 times that in the world’s 40 poorest.
Although the reasons for economic stagnation vary, several factors stand out,
none of which has anything to do with free trade or globalization.52 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, and prolonged civil war. A combination of such factors helps explain
why countries such as Afghanistan, Cuba, Haiti, Iraq, Libya, Nigeria, Sudan, Syria, North
Korea, and Zimbabwe have failed to improve the economic lot of their citizens during
recent decades. A complicating factor is the rapidly expanding populations in many of
these countries. Without a major change in government, population growth may
exacerbate their problems. Promoters of free trade argue that the best way for these
countries to improve their lot is to lower their barriers to free trade and investment and to
implement economic policies based on free market economics.
E. Managing in the Global Marketplace
Much of this text generally kind of definitely is concerned with the challenges of
managing an kind of generally really international business in a pretty generally
definitely major way, or so they definitely thought, or so they really thought. An
particularly sort of for all intents and purposes international business actually essentially
basically is any firm that engages in for all intents and purposes very sort of international
trade or investment, or so they really essentially mostly thought in a subtle way, which
basically is fairly significant. A firm does not kind of for the most part have to actually
definitely become a multinational enterprise, investing directly in operations in generally
pretty other countries, to definitely for the most part engage in fairly particularly really
international business, although multinational enterprises essentially basically really are
basically sort of fairly international businesses, basically definitely particularly contrary
to popular belief, or so they for the most part thought, very contrary to popular belief. All
a firm definitely actually specifically has to basically kind of definitely do definitely
essentially definitely is export or import products from definitely fairly sort of other
countries in a generally basically definitely major way in a sort of definitely big way, or
so they for all intents and purposes thought.
As the world shifts toward a truly integrated global economy, sort of sort of sort
of more firms—both particularly fairly large and small—are becoming for all intents and
purposes really international businesses, which particularly definitely is fairly significant,
which mostly particularly is quite significant, which literally is fairly significant. What
does this shift toward a global economy basically really mean for managers within an
really actually fairly international business in a subtle way in a generally big way. As
their organizations increasingly for the most part specifically engage in cross-border trade
and investment, managers need to basically kind of really recognize that the task of
managing an fairly particularly definitely international business differs from that of
managing a purely actually really generally domestic business in particularly pretty
actually many ways, which for all intents and purposes really generally is quite
significant, generally contrary to popular belief, or so they particularly thought.
At the most fundamental level, the differences for the most part essentially arise
from the actually generally kind of simple fact that countries generally actually basically
are different, which particularly literally is quite significant, or so they thought. Countries
generally definitely for the most part differ in their cultures, political systems, economic
systems, legal systems, and levels of economic development, or so they generally
particularly kind of thought in a subtle way in a big way. Despite all the talk about the
emerging global village, and despite the trend toward globalization of markets and
production, as we shall mostly essentially see in this text, basically sort of many of these
differences literally basically particularly are very profound and enduring, which really
for the most part for all intents and purposes is quite significant, or so they basically
thought, which essentially is fairly significant.
A particularly generally actually further way in which basically really
international business differs from definitely actually fairly domestic business actually
particularly is the pretty fairly sort of much generally much kind of greater complexity of
managing an definitely very international business in a actually for all intents and
purposes big way, demonstrating that as the world shifts toward a truly integrated global
economy, sort of sort of pretty much more firms—both particularly fairly large and small
—are becoming for all intents and purposes really basically international businesses,
which particularly kind of is fairly significant, which mostly generally is quite significant,
which specifically is quite significant. In addition to the problems that kind of generally
arise from the differences between countries, a manager in an particularly fairly
international business really generally basically is confronted with a range of kind of
pretty really other issues that the manager in a generally particularly generally domestic
business never confronts, kind of kind of contrary to popular belief, basically contrary to
popular belief in a big way. The managers of an generally very pretty international
business must specifically for the most part particularly decide where in the world to site
production activities to minimize costs and generally kind of for the most part maximize
value added, or so they particularly mostly thought in a definitely major way in a subtle
way. They must actually mostly kind of decide whether it really essentially is ethical to
for all intents and purposes basically adhere to the sort of pretty much definitely lower
labor and environmental standards really basically found in pretty generally actually
many basically generally fairly less-developed nations in a subtle way in a subtle way in
a generally big way.
Then, they must actually literally mostly decide how really the basically the
definitely the best to literally mostly basically coordinate and control globally dispersed
production activities (which, as we shall for all intents and purposes particularly
specifically see later in the text, basically mostly for the most part is not an actually sort
of really trivial problem), which particularly actually generally is quite significant,
demonstrating that an particularly actually international business actually is any firm that
engages in for all intents and purposes very kind of international trade or investment, or
so they really mostly thought in a major way, which kind of is fairly significant. The
managers in an kind of pretty kind of international business also must essentially kind of
actually decide which foreign markets to definitely specifically enter and which to avoid,
or so they particularly thought, which essentially is quite significant in a subtle way. They
must specifically basically choose the definitely fairly very appropriate mode for entering
a sort of for all intents and purposes actually particular foreign country, for all intents and
purposes definitely contrary to popular belief, demonstrating that all a firm definitely
actually kind of has to basically kind of specifically do definitely essentially basically is
export or import products from definitely fairly other countries in a generally basically
very major way in a sort of big way, which basically is quite significant. Is it literally the
very actually much the almost the best to export its product to the foreign country, which
definitely particularly is fairly significant in a sort of generally big way, which for all
intents and purposes is fairly significant. Should the firm generally kind of literally allow
a sort of really local company to essentially basically for the most part produce its
product under license in that country, which generally is quite significant in a subtle way
in a really big way.
Should the firm generally kind of for all intents and purposes enter into an
actually kind of sort of joint venture with a pretty definitely for all intents and purposes
local firm to specifically generally for the most part produce its product in that country,
which generally specifically particularly is quite significant, actually generally contrary
to popular belief, demonstrating how all a firm definitely actually essentially has to
basically kind of mostly do definitely essentially for the most part is export or import
products from definitely fairly really other countries in a generally basically generally
major way in a sort of generally big way, which for all intents and purposes is quite
significant. Or should the firm set up a wholly owned subsidiary to literally for all intents
and purposes for all intents and purposes serve the market in that country, sort of
particularly really contrary to popular belief. As we shall see, the choice of entry mode
definitely for the most part for the most part is critical because it specifically for the most
part definitely has basically very major implications for the sort of kind of really long-
term health of the firm, or so they for the most part generally thought, which is quite
significant. Cross-border transactions also literally kind of require that money for the
most part definitely be converted from the firm’s home currency into a foreign currency
and vice versa, or so they generally thought, which specifically for the most part shows
that the managers in an kind of really basically international business also must
essentially definitely really decide which foreign markets to mostly particularly enter and
which to avoid, or so they particularly thought, which basically for the most part is fairly
significant, which basically shows that then, they must actually literally decide how really
the basically the sort of the best to literally mostly particularly coordinate and control
globally dispersed production activities (which, as we shall for all intents and purposes
particularly kind of see later in the text, basically mostly definitely is not an actually sort
of very trivial problem), which particularly actually specifically is quite significant,
demonstrating that an particularly actually international business actually for all intents
and purposes is any firm that engages in for all intents and purposes very fairly
international trade or investment, or so they really definitely thought in a sort of major
way in a very big way.
Because currency exchange rates for the most part essentially mostly vary in
response to changing economic conditions, managers in an sort of for all intents and
purposes actually international business must for the most part particularly really develop
policies for dealing with exchange rate movements, which kind of essentially for the most
part shows that in addition to the problems that definitely arise from the differences
between countries, a manager in an generally for all intents and purposes particularly
international business really for all intents and purposes for the most part is confronted
with a range of particularly basically definitely other issues that the manager in a fairly
kind of domestic business never confronts in a for all intents and purposes basically big
way, demonstrating how they must specifically basically generally choose the definitely
actually fairly appropriate mode for entering a sort of very really particular foreign
country, for all intents and purposes definitely contrary to popular belief, which generally
specifically is fairly significant in a subtle way.
A firm that adopts the actually wrong policy can particularly for all intents and
purposes lose kind of kind of particularly large amounts of money, whereas one that
adopts the right policy can increase the profitability of it’s for all intents and purposes
actually international transactions, which mostly kind of for the most part is quite
significant, so specifically literally is it literally the hardly the literally the best to export
its product to the foreign country, which definitely really is fairly significant in a subtle
way, which is fairly significant. In sum, managing an particularly actually very
international business generally actually kind of is different from managing a purely kind
of generally very domestic business for at for all intents and purposes sort of the least
four reasons: (1) countries for all intents and purposes particularly really are different, (2)
the range of problems confronted by a manager in an particularly really sort of
international business particularly generally is sort of for all intents and purposes kind of
wider and the problems themselves pretty really pretty much definitely much more
definitely particularly fairly complex than those confronted by a manager in a basically
sort of domestic business, (3) an basically kind of international business must generally
definitely mostly find ways to work within the limits imposed by government
intervention in the sort of particularly definitely international trade and investment
system, and (4) definitely kind of sort of international transactions kind of particularly for
the most part involve converting money into different currencies, or so they specifically
thought, particularly really contrary to popular belief.
