Chapter 12 Globalization This chapter: Explains globalization in more depth. Discusses its impact on culture, the growth of trade agreements, the erosion of nation-state sovereignty, and protectionism. Describes corruption and efforts to combat corruption
McDonald’s Corporation Opening Case More than half of McDonald’s restaurants are outside of the U.S., accounting for 62% of company revenues. As a prominent global brand McDonald’s symbolizes perceived evils of globalization. In developing nations, the arrival of a McDonald’s is regarded as a sign of modernization. McDonald’s does transfer cultural values and practices. However, most of McDonald’s international restaurants are franchises, run as local businesses. The entrepreneurs who run these businesses adapt them to local custom. The story of McDonald’s illustrates the complexity of globalization.
What is Globalization? Globalization occurs when networks of economic, political, social, military, scientific, or environmental interdependence grow to span worldwide differences. Economic globalization refers to the development of an increasingly integrated commercial system based on free markets in which nations are open to foreign trade and investment.
Major Forces in Expanding Globalization Ideas Capital Labor MNCs Governments Technology Multilateral organizations NGOs
Pros of Globalization Has lifted millions of people out of poverty. Consumer benefits of more variety, lower costs, and higher quality of products. Improved working conditions for millions of workers. Human rights have improved.
Flaws and Problems in Globalization In some countries the financial systems, laws, ideas, and institutions did not keep pace with the rapid spread of globalization. Politicians and their constituents have become increasingly protectionist. Tens of millions of manufacturing jobs have been lost in the U.S. and Europe because of global competition. The Western countries have pushed poor countries to eliminate trade barriers, but kept up their own barriers.
Expanding Trade Agreements Rapid increase in the number of trade agreements has been a major force in globalization. Trade agreements have helped to increase global competition and have accelerated world trade. The largest of these in terms of population are: European Union (EU) North American Free Trade Agreement (NAFTA) The Asia-Pacific Economic Cooperation (APEC) forum
The European Union On January 1, 1993, the EU became a unified regional market and by 2007 there were 27 member states. On January 1, 1999, the EU adopted the euro. A milestone was reached in 2004 when leaders of the 25 European nations then in the Union signed the 50-article EU constitution. Many businesses in newly joined nations face serious problems in complying with the rules and requirements found in some 80,000 pages of EU laws. Many individuals in the Union are unhappy; a survey said 44 percent believe life has become worse since their nation joined the EU.
The North American Free Trade Agreement Created a free trade block consisting of the United States, Canada, and Mexico. Labor unions in the U.S. opposed NAFTA from its beginning. Workers on both sides of the border have seen individual losses and gains. Expanding trade has opened new opportunities. Important problems have arisen in the operation of NAFTA.
Other Trade Agreements Mercado Comun del Sur (Mercosur) Asia-Pacific Economic Cooperation (APEC) Association of South East Asian Nations (ASEAN)
Globalization and the Erosion of State Sovereignty Disagreement exists regarding whether globalization has eroded the sovereignty of nations. Nation-state sovereignty has been eroded Market forces overwhelm the economic powers of nation- states to determine economic, political, cultural, and social affairs. The competitiveness imperative amounts to an infringement on state authority. Nation-state sovereignty has not been seriously eroded All nations have the authority and power to block the entrance of a large global company or to deny demands of an MNC for concessions.
Erosion of Cultures The rapid and explosive spread of American culture throughout the world is one significant trend within globalization. Throughout the world there is resentment about the transmission of certain Western cultural values. Majorities of people in Europe like American music, television, and films and technology but dislike the spread of American ideas. Economic forces of globalization have encouraged massive migrations of peoples.
Why Free Trade? Some nations have an advantage over others in the production of particular goods. Resources will be used most efficiently when each country produces that for which it enjoys a cost advantage. The law of comparative advantage. It is argued that free trade will stimulate competition, reward individual initiative, increase productivity, and improve national well-being. Job opportunities, and a wider variety of goods and services at minimum prices and with higher quality.
Pressures for Protectionism Most domestic businesses, whether engaged in foreign trade or not, feel pressures from foreign competitors with better products and lower prices. Three justifications are often given for protectionist measures. The U.S. has large trade deficits that must be reduced. Protectionists want to shield industries from foreign competition. Trade barriers in foreign countries restrict American imports to them.
Free Trader Responses to Protectionists One main argument is the logic for free trade. The cause of the exceptional rise in world trade, say antiprotectionists, has been in no small measure the world’s reduction in tariff barriers. Some argue that rich countries should reduce tariff barriers and poor ones should be allowed to maintain them since the underdeveloped countries do not have the infrastructure and institutions to open their markets to free trade.
U.S. Deviation from Free Trade Policy Despite strong free trade rhetoric and the steady lowering of tariff and other trade barriers, the United States protects industries from foreign competition. The Federal Buy American Act The Merchant Marine Act The Passenger Vessel Services Act U.S. tariffs have declined significantly in recent years, but there are many exceptions.
Tariff Barriers in Other Countries China still imposes substantial barriers on imports such as watches, automobiles, steel, textiles, and many food products. Japanese restricts U.S. imports of meat, poultry, vegetables, and fruit products. Various restrictions among European Union countries are applied to genetically engineered commodities. Taiwan restricts imports of rice. Korea imposes high duties maintains a broad range of trade restrictions and nontariff barriers on agricultural and fishery products. Brazil still retains high tariffs on technology products. Mexico still retains substantial trade restrictions on products such as meat, poultry, vegetables, and fruit.
Classical Free Trade Theory versus Reality The reality is that the global economy is a mixture of free trade and protectionism. Classical free trade theory based on comparative advantage has lost much validity for a large part of world trade. Porter argues that “industrial clusters” help a nation achieve global superiority in one industry. These clusters are composed of firms and industries that are mutually supporting, innovative, competitive, low-cost producers, and committed to meeting demanding consumer tastes.
Corruption in Business and Government Transactions Cultural differences, practices, and laws among the many countries where MNCs do business create extremely difficult moral, ethical, and legal problems for MNCs. Companies have found in many LDCs, and even in some highly industrialized countries, that to do business it is necessary to make a variety of payments.
What is Corruption? At one end of the spectrum is what might be called petty corruption or “grease” payments. When is the payment “normal,” and when does it become tainted with bribery? A different problem in identification of bribery is offsets, which have become popular in the international arms trade. Offsets can be part of an agreement to bring investment to a company. Contractors dislike offsets but they are an essential part of doing business in many countries.
Costs and Consequences of Corruption Foregoing bribery can costly in terms of business lost to competitors. Corruption imposes costs beyond individual company losses to competitors who bribe. It undermines democratic institutions It retards economic development It contributes to government instability It attacks the foundation of democratic institutions Corruption varies significantly among countries.
Business Anticorruption Practices and Procedures A study by The Conference Board concluded that “…anticorruption practices and procedures have become significant more widespread, detailed and sophisticated than in 2000.” Congress passed the Foreign Corrupt Practices Act (FCPA) in 1977, which makes it illegal for managers of U.S. corporations to bribe an official of a foreign government or ministry. Most large companies have formal policies against corrupt payments. Despite international, national, and corporate efforts at eradication, corruption and bribery endure.
Concluding Observations MNCs have major impacts on markets, social systems, and political institutions. Complexities of doing global business raise serious economic, ethical, political, social, and moral issues for their management. It is believed that more top managers of U.S. corporations, with help and prodding from government and strong activist critics, are exercising power responsibly.
Concluding Observations Globalization has created enormous wealth for people all over the world. It has led to exploitation, dislocation, and suffering for some who have yet to experience its benefits. It has changed business-government-society relationships in profound and fundamental ways. The forces of globalization are beneficial to the peoples of the world and promise even greater benefits in the future. Important reforms are necessary.