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UNIT-1 ► GLOBALIZATION ► TRADE PATTERNS  THEORIES 1.IPLC 2.FACTOR MOBILITY COMPARISON OF IPLC AND FACTOR MOBILITY THEORIES. 1.

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Presentation on theme: "UNIT-1 ► GLOBALIZATION ► TRADE PATTERNS  THEORIES 1.IPLC 2.FACTOR MOBILITY COMPARISON OF IPLC AND FACTOR MOBILITY THEORIES. 1."— Presentation transcript:

1 UNIT-1 ► GLOBALIZATION ► TRADE PATTERNS  THEORIES 1.IPLC 2.FACTOR MOBILITY COMPARISON OF IPLC AND FACTOR MOBILITY THEORIES. 1

2 Globalization 1. A holistic approach covers the following aspects: a. Economic b. Financial c. Political d. Cultural All the above aspects/factors interact with each other. [See Joshi (2011), fig.1.3, p.9] 2

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4 2. Economic globalization has the following five major components/aspects: a. Production b. Markets c. Competition d. Technology e. Corporations & Industry All the components work in an interactive manner. [See Joshi (2011), fig.1.5, p.13] 4

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6 3.1. Factors that give impetus to globalization or movers: a.Economic liberalization b.Technical break through ► Manufacturing ► Transportation ► Information & Communication. c.Multilateral institutions. d.Interventional economic integration. e.Move towards free market systems. f.Rising R&D costs. g.Advents in logistic management. h.Emergence of global customer segments. 3.2. Factors that restrain globalization or restraining factors: a. Regulatory controls b. Emerging new trade barriers. c. Cultural factors d. Nationalism e. Wards and civil disturbances. f. Management myopia. How much globalization proceeds/progresses depends on the relative strength of factors in 3.1 and 3.2. [See Joshi (2011), fig.1.6, pg.16] 3. Movers and Restraining Factors: 6

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8 Globalization : A TYPICAL MODERN IMAGE Conspicuously seen in terms of  Westernization  Americanization Some of the popular examples are:  Walmartization  Cocacolination  Disneyfication  Mc Donalization 1. Walmartization* 2. Cocacolination Walmart – US Retail Chain Perceived as an invasion of cultural Walmart Effectvalues.  Keeping small competitors out  Driving down wages  Keeping inflation low  Keeping productivity high It has a conservative image as reflected in  Firm cutting down costs  Favoring policy of ► Cutting down taxes ► Keeping welfare state competitive * See Charles Fishman: Walmart Effect 8

9 3. Walmartization See George Ritzer (1995) [MacDonaldization of Society] Four Dimensions of fast food restaurant: i.Efficiency: Best mode of production with little scope of individuality. ii.Calculability: Quantifiable Objective : - Sale - Focus on Quantity (big MAC, not so much quality) iii.Predictability: Uniform Production Process. iv.Control: Substitution of non-human technologies for human labour.(System of “Iron Cage” – same principle governs all Institutions). Criticism: (a)Irrationality – Every worker performs highly rationalized task leading to workers’ “Burn Out”. (b)Deskilling: Workers perform repetitive tasks – cheap training of workers. workers can be replaced easily. 4. Disneyfication What is signified? Society dedicated to i.Themes ii.Huge consumption iii.Emotion based labor. (also signifies a diluted version of original form) 9

10 INTERNATIONAL PRODUCT LIFE CYCLE THEORY (IPCL) ISSUES: 1. Do international markets follow a cyclical Pattern? Why? What does it explain? - Shift in markets. - Shift in production location. 2. What factors are behind the phenomenon? Does it explain trade patterns? - Level of innovation and technology. -Quantum & Quality of Resources. -Size of market. -Competitive structure. 10

11 IPCL: Four Stages: What Determines these stages? ► Difference/gap in technology between countries/economies. ► Ability (purchasing power) of customers. ► Preferences of customers. Innovation: What Makes it Effective? ► If domestic market is big – economies of scale – cost efficiency – international competition – (US, China, India): Big markets but their innovative capacity and technology levels differ. ► Innovation but no big domestic market: How to achieve economies of scale? Set up marketing and production facilities outside the country. How to achieve economies of scale? Set up marketing and production facilities outside the country. 11

12 What are the critical factors for expanding into international market? ► Innovative capacity, level of technology ► Scope of economies ► Achieving economies of scale ► The innovating firm starts looking for establishing production base in other high income countries. ► When this is successful, these countries (where production base is established) start exporting to the innovating country. ► International competition increases 12

13 Stages of International Product Life Cycle. See exhibit and interpret: In each column, start moving down and interpret against the row title. Try matching the movements of three types of curves. 13

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15 Stage 1: Introduction:- Advanced countries – Innovation for new product.  Lot of resources required for R&D.  Initially price of new product is high.  Hence search for markets for new product in high income countries. Stage 2: Growth:-  Search for other developed markets for exports.  Globalization  Trade patterns Theories  IPLC  Factor Mobility  Comparison. 15

16 Note & Interpret: (i) Opposite movements of curves representing high income countries. (ii) Testes and preferences change in low income countries also. They too start importing new product. Stage 3: Maturity: ► By now technical know-how is known to many countries. The innovating country starts setting up production facility in the third world (low income developing) economies by taking advantage of low wages in the latter. ► Imports of low income countries decline as the domestic production of this product increases. Stage 4: Decline: ► What is the marketing strategy at this stage? Production shifts even to least developing countries – innovating country imports from these countries 16

17 Examples: i. UK was largest manufacturer and exporter of bicycles. Bicycle industry declined in UK. This industry emerged in low income countries, including India. ii. Developed countries shift environmentally hazardous industries to low income countries. 17

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19 Criticism of IPCL Theory: It explains the emerging pattern of international market. This was ok earlier. Now information about prices, technology and preferences travels across the globe. The product may be launched by the innovating country simultaneously in several countries. [Discuss Maruti Suzuki case. Japanese company, Suzuki, is an innovating company. The latter established manufacturing base in India. India first imported Maruti Suzuki Standard -800 Model. After the product gained maturity and popularity, Maruti Suzuki Exports Cars to several developed and semi developed countries. The time has come when India may also base manufacturing facilities in other least developing countries]. 19

20 Theory of Competitive Advantage  Porter–Diamond Theory: (Michael Porter, 1990, The competitive advantage of nations). (Michael Porter, 1990, The competitive advantage of nations).  Main focus is on Domestic Environment.  Contrast it with IPCL. – which lays emphasis on innovation/invention and looks forward to off-shore investment/production.  Diamond? See four blocks/diamonds The interaction of these explains and determines the trade competitive advantage of a country. See arrows in diagram.  4 Diamonds – Blocks: a)Factor input – Natural & Creaed b)Demand conditions.  Greater is the sophistication in demand conditions, more demanding the consumer is – product quality – better service – change in preferences – (Global exposure…). 20

21 c)Related and supporting industries  Development of ancillary industry (as in auto industry).  Strong supply chain management.  Development of industrial clusters. For example: For example: IT – Banglore, IT – Banglore, Textiles – Tirupur Textiles – Tirupur Metal Handicraft – Moradabad Metal Handicraft – Moradabad d) Firm Strategy, Structure & Rivalry d) Firm Strategy, Structure & Rivalry  Transformation of family enterprise.  Competition policy  Incentive structure  Global exposure  Domestic rivalry (competition?) 21

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23 Summary  IPCL: Explains Sifts in  Trade Patterns  Manufacturing base  Theory of competitive advantage: To explain national competitiveness, it focuses on:  Environmental factors (factor conditions)  Demand conditions  Related supporting industries  Firm strategy, structure, etc.  Degree of competition (Rivalry, etc).  Merit of above theoretical models: They help provide basis for:  Principles for regulatory framework.  Preparing trade promotion strategies to national as well as international Govt./Bodies. The relative advantage may vary across countries. 23

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25 25 DISCUSS TWO CASE STUDIES ATTACHED

26 CASE STUDY 1 ► CHIP INDUSTRY 26

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31 CASE STUDY 2 ► Factor mobility :TCS-case study 31

32 ► Daniels et.al See page no. 247-259 Factor mobility theory 32

33 ► Biggest change being observed is the demographic one. ► By 2050 – 033 countries will have lower population than their present population due to lower fertility ( lower than population ranging from 14% to 22%.) ► On the other hand, eight countries will account for 50% of world population. Supplementary notes 33

34 ► Labor mobility across countries likely to be faster in coming decades than now. ► Why factors move? ► Capital Long term movement-FDI Long term movement-FDI  Shifting manufacturing base  Shifting services industry base  Reform capital account convertibility  Political stability  Investor friendly policies Consequences 34

35 ► 200 million ( approx 3% of worlds population) have migrated not uniformly all over the world. ► USA got high migration ( 11 % of population of USA is made up immigrants ) Two – third’s of UAE population consists of temporary workers. ► Indonesian labor migrates to Malaysia (huge- 10 times wage differential) people 35

36 ► Singapore transformed from low-wage ► Labor-intensive to high-wage capital intensive economy ( due to high capital inflow ) ► Trade and factor mobility Factor movement From abundant area to scare area. (eg,maxicon labor to USA.) From abundant area to scare area. (eg,maxicon labor to USA.) Complementarity Complementary products-needs equipment. This happens through foreign investment. Impact 36

37 ► Services growing much faster than manufacturing. ( change in consumption pattern in fast growing economies) ( change in consumption pattern in fast growing economies) Many services can be provided by small scale units. They have flexibility in labor employment too. Flexible and small scale population 37

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