1 UNIT-1 GLOBALIZATION TRADE PATTERNS THEORIES IPLC FACTOR MOBILITY COMPARISON OF IPLC AND FACTOR MOBILITY THEORIES.
2 A holistic approach covers the following aspects: Economic Financial GlobalizationA holistic approach covers the following aspects:EconomicFinancialPoliticalCulturalAll the above aspects/factors interact with each other.[See Joshi (2011), fig.1.3, p.9]
4 Economic globalization has the following five major components/aspects: ProductionMarketsCompetitionTechnologyCorporations & IndustryAll the components work in an interactive manner.[See Joshi (2011), fig.1.5, p.13]
6 3. Movers and Restraining Factors: 3.1. Factors that give impetus to globalization or movers:Economic liberalizationTechnical break throughManufacturingTransportationInformation & Communication.Multilateral institutions.Interventional economic integration.Move towards free market systems.Rising R&D costs.Advents in logistic management.Emergence of global customer segments.3.2. Factors that restrain globalization or restraining factors:Regulatory controlsEmerging new trade barriers.Cultural factorsNationalismWards and civil disturbances.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]
8 Globalization: A TYPICAL MODERN IMAGE Conspicuously seen in terms ofWesternizationAmericanizationSome of the popular examples are:WalmartizationCocacolinationDisneyficationMc Donalization1. Walmartization* CocacolinationWalmart – US Retail Chain Perceived as an invasion of culturalWalmart Effect values.Keeping small competitors outDriving down wagesKeeping inflation lowKeeping productivity highIt has a conservative image as reflected inFirm cutting down costsFavoring policy ofCutting down taxesKeeping welfare state competitive* See Charles Fishman: Walmart Effect
9 3. Walmartization 4. Disneyfication See George Ritzer (1995) [MacDonaldization of Society]Four Dimensions of fast food restaurant:Efficiency: Best mode of production with little scope of individuality.Calculability: Quantifiable Objective :- Sale- Focus on Quantity (big MAC, not so much quality)Predictability: Uniform Production Process.Control: Substitution of non-human technologies for human labour.(System of “Iron Cage” – same principle governs all Institutions).Criticism:Irrationality – Every worker performs highly rationalized task leading to workers’ “Burn Out”.Deskilling: Workers perform repetitive tasks – cheap training of workers. workers can be replaced easily.4. DisneyficationWhat is signified? Society dedicated toThemesHuge consumptionEmotion based labor.(also signifies a diluted version of original form)
10 INTERNATIONAL PRODUCT LIFE CYCLE THEORY (IPCL) ISSUES:Do international markets follow a cyclical Pattern? Why? What does it explain?- Shift in markets.- Shift in production location.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.
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.
12 What are the critical factors for expanding into international market? Innovative capacity, level of technologyScope of economiesAchieving economies of scaleThe 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
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.
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.GlobalizationTrade patternsTheoriesIPLCFactor MobilityComparison.
16 Note & Interpret: Stage 3: Maturity: Stage 4: Decline: Opposite movements of curves representing high income countries.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
17 Examples:UK was largest manufacturer and exporter of bicycles. Bicycle industry declined in UK. This industry emerged in low income countries, including India.Developed countries shift environmentally hazardous industries to low income countries.
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].
20 Theory of Competitive Advantage Porter–Diamond Theory:(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:Factor input – Natural & CreaedDemand conditions.Greater is the sophistication in demand conditions, more demanding the consumer is – product quality – better service – change in preferences – (Global exposure…).
21 d) Firm Strategy, Structure & Rivalry Related and supporting industriesDevelopment of ancillary industry (as in auto industry).Strong supply chain management.Development of industrial clusters.For example:IT – Banglore,Textiles – TirupurMetal Handicraft – Moradabadd) Firm Strategy, Structure & RivalryTransformation of family enterprise.Competition policyIncentive structureGlobal exposureDomestic rivalry (competition?)
23 Summary IPCL: Explains Sifts in Trade PatternsManufacturing baseTheory of competitive advantage: To explain national competitiveness, it focuses on:Environmental factors (factor conditions)Demand conditionsRelated supporting industriesFirm 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.
32 Factor mobility theory Daniels et.alSee page no
33 Supplementary notesBiggest 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.
34 ConsequencesLabor mobility across countries likely to be faster in coming decades than now.Why factors move?CapitalLong term movement-FDIShifting manufacturing baseShifting services industry baseReform capital account convertibilityPolitical stabilityInvestor friendly policies
35 people200 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)
36 Impact Singapore transformed from low-wage Labor-intensive to high-wage capital intensive economy ( due to high capital inflow )Trade and factor mobilityFactor movementFrom abundant area to scare area. (eg,maxicon labor to USA.)ComplementarityComplementary products-needs equipment. This happens through foreign investment.
37 Flexible and small scale population Services growing much faster than manufacturing .( change in consumption pattern in fast growing economies)Many services can be provided by small scale units.They have flexibility in labor employment too.