4 Globalization Professor H. Michael Boyd, Ph.D. H. Michael Boyd, PhD International Business
5 Video: Global Business Trends Global Business Trends & Fundamentals (3:38)
6 What Is Globalization?Globalization - the shift toward a more integrated and interdependent world economyThe world is moving away from self-contained national economies toward an interdependent, integrated global economic systemLO 1 Understand what is meant by the term globalization.
7 What Is The Globalization of Markets? Historically distinct and separate national markets are mergingIt no longer makes sense to talk about the “German market” or the “American market”Instead, there is the “global market”falling trade barriers make it easier to sell globallyconsumers’ tastes and preferences are converging on some global normfirms promote the trend by offering the same basic products worldwideThe globalization of markets refers to the merging of historically distinct and separate national markets into one huge global marketplace.It is important to recognize that significant differences still exist among national markets, requiring companies to customize market strategies, product features, and operating practices to meet the conditions in particular markets.
8 What Is The Globalization of Markets? Firms of all sizes benefit and contribute to the globalization of markets97% of all U.S. exporters have less than 500 employees98% of all small and mid-sized German companies participate in international marketsThe most global markets currently are not markets for consumer products—where national differences in tastes and preferences are still often important enough to act as a brake on globalization—but markets for industrial goods and materials that serve a universal need the world over.These include the markets for commodities such as aluminum, oil, and wheat; the markets for industrial products such as microprocessors, DRAMs (computer memory chips), and commercial jet aircraft; the markets for computer software; and the markets for financial assets from U.S. Treasury bills to Eurobonds and futures on the Nikkei index or the Mexican peso.
9 What Is The Globalization of Production? Firms source goods and services from locations around the globe to capitalize on national differences in the cost and quality of factors of production like land, labor, energy, and capitalCompanies canlower their overall cost structureimprove the quality or functionality of their product offeringThe 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 and/or improve the quality or functionality of their product offering, thereby allowing them to compete more effectively.Early outsourcing efforts were primarily confined to manufacturing enterprises, but today, more companies like Vizio (see Management Focus: Vizio and the Market for Flat Panel TVs) are taking advantage of modern communications technology, like the Internet, to outsource service activities to low-cost producers in other nations.The Opening Case: Legal Outsourcing illustrates how the Internet has allowed U.S. law firms to outsource routine legal work to India, where lawyers, often schooled in the United States, earn significantly less than U.S. based personnel.There are still substantial impediments to the globalization of production including formal and informal barriers to trade, barriers to foreign direct investment, transportation costs, issues associated with economic risk, and issues associated with political risk.
10 Why Do We Need Global Institutions? help manage, regulate, and police the global marketplacepromote the establishment of multinational treaties to govern the global business system
11 Why Do We Need Global Institutions? Examples includethe General Agreement on Tariffs and Trade (GATT)the World Trade Organization (WTO)the International Monetary Fund (IMF)the World Bankthe United Nations (UN)the G20
12 What Do Global Institutions Do? The World Trade Organization (like its predecessor GATT)polices the world trading systemmakes sure that nation-states adhere to the rules laid down in trade treatiespromotes lower barriers to trade and investment154 members in 2011
13 What Do Global Institutions Do? The International Monetary Fund (1944)maintains order in the international monetary systemlender of last resort for countries in crisisArgentina, Indonesia, Mexico, Russia, South Korea, Thailand, Turkey, Ireland, and GreeceThe World Bank (1944)promotes economic development via low interest loans for infrastructure projects
14 What Do Global Institutions Do? The United Nations (1945)maintains international peace and securitydevelops friendly relations among nationscooperates in solving international problems and in promoting respect for human rightsis a center for harmonizing the actions of nationsThe G20forum through which major nations tried to launch a coordinated policy response to the global financial crisis
15 What Is Driving Globalization? Declining barriers to the free flow of goods, services, and capitalaverage tariffs are now at just 4%more favorable environment for FDIglobal stock of FDI was $15.5 trillion in 2009facilitates global productionTechnological changemicroprocessors and telecommunicationsthe Internet and World Wide Webtransportation technologyLO 2: Recognize the main drivers of globalization.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.After World War II, advanced industrial nations of the West committed themselves to removing barriers to the free flow of goods, services, and capital between nations.
16 What Does Globalization Mean For Firms? Lower barriers to trade and investment mean firms canview the world, rather than a single country, as their marketbase production in the optimal location for that activityBut, firms may also find their home markets under attack by foreign firmsManagers today operate in an environment that offers more opportunities, but is also more complex and competitive than that of a generation ago.
17 Declining Trade And Investment Barriers Average Tariff Rates on Manufactured Products as Percent of Value
18 What Does Globalization Mean For Firms? Technological change meanslower transportation costshelp create global markets and allow firms to disperse production to economical, geographically separate locationslow cost information processing and communicationfirms can create and manage globally dispersed productionlow cost global communications networkshelp create an electronic global marketplaceglobal communication networks and global mediacreate a worldwide culture and a global consumer product marketMicroprocessors and Telecommunications: Major advances in communications and information processing have lowered the cost of global communication and therefore the cost of coordinating and controlling a global organization.The Internet and the World Wide Web: Web-based transactions in the United States have grown from virtually zero in 1998 to nearly $165 billion in 2010.Transportation Technology: the most important developments are probably development of commercial jet aircraft and super freighters and the introduction of containerization, which greatly simplifies trans-shipment from one mode of transport to another.Improvements in transportation technology have enabled firms to better respond to international customer demands.
19 The Changing Demographics Of The Global Economy Four trends are important:The changing world output and world trade pictureThe changing foreign direct investment pictureThe changing nature of the multinational enterpriseThe changing world orderLO3: Describe the changing nature of the global economy.There has been a drastic change in the demographics of the world economy in the last 30 years.
20 How Has World Output And World Trade Changed? In 1960, the U.S. accounted for over 40% of world economic activity, but by 2009, the U.S. accounted for just 24%a similar trend occurred in other developed countriesIn contrast, the share of world output accounted for by developing nations is risingexpected to account for more than 60% of world economic activity by 2020In the 1960s: the U.S. dominated the world economy and the world trade picture, U.S. multinationals dominated the international business scene, and about half the world-- the centrally planned economies of the communist world-- was off limits to Western international business.
21 How Has World Output And World Trade Changed? The Changing Demographics of World GDP and TradeCountry Focus: India’s Software Sector explores the growth of India’ software sector over the last twenty-five years. Four factors account for the growth of the sector. First, the country has a large supply of engineers. Second, labor costs in India are low. Third, since many Indians are fluent in English, coordination between Western firms and Indian firms is easier. Fourth, because of time differences, Indians can work while Americans sleep.
22 How Has Foreign Direct Investment Changed Over Time? In the 1960s, U.S. firms accounted for about two-thirds of worldwide FDI flowsToday, the United States accounts for less than one-fifth of worldwide FDI flowsOther developed countries have followed a similar patternIn contrast, the share of FDI accounted for by developing countries has risenDeveloping countries, especially China, have also become popular destinations for FDIThe share of world output generated by developing countries has been steadily increasing since the 1960s.The stock (total cumulative value of foreign investments) generated by rich industrial countries has been on a steady decline.There has been a sustained growth in cross-border flows of foreign direct investment.The flow of foreign direct investment (amounts invested across national borders each year) has been directed at developing nations especially China.
23 How Has Foreign Direct Investment Changed Over Time? Percentage Share of Total FDI Stock
24 How Has Foreign Direct Investment Changed Over Time? FDI Inflows
25 What Is A Multinational Enterprise? Multinational enterprise (MNE) - any business that has productive activities in two or more countriesSince the 1960sthe number of non-U.S. multinationals has risenthe number of mini-multinationals has risenA multinational enterprise is any business that has productive activities in two or more countries.Expect the growth of new multinational enterprises (any business that has productive activities in two or more countries) from the world's developing nations.The number of mini-multinationals (small and medium-sized companies) is on the rise.
26 The Changing World Order Many former Communist nations in Europe and Asia are now committed to democratic politics and free market economiescreates new opportunities for international businessesbut, there are signs of growing unrest and totalitarian tendencies in some countriesChina and Latin America are also moving toward greater free market reformsbetween 1983 and 2010, FDI in China increased from less than $2 billion to $100 billion annuallybut, China also has many new strong companies that could threaten Western firmsManagement Focus: China’s Hisense – An Emerging Multinational examines how one Chinese company, Hisense, has emerged as one of China’s premier makers of televisions, air conditioners, refrigerators, personal computers, and telecommunications. Hisense began as a state-owned company in 1969, but became a private corporation in In 2007, the company had sales of $6.2 billion. Today, Hisense has sets its sights on becoming a global enterprise with a world class consumer brand. Hisense believes its core strength lies with its ability to rapidly innovate.
27 How Will The Global Economy Of The 21st Century Look? The world is moving toward a more global economic system…But globalization is not inevitablethere are signs of a retreat from liberal economic ideology in RussiaGlobalization brings risksthe financial crisis that swept through South East Asia in the late 1990sthe recent financial crisis that started in the U.S. in , and moved around the world
28 Is An Interdependent Global Economy A Good Thing? Supporters believe that increased trade and cross-border investment meanlower prices for goods and servicesgreater economic growthhigher consumer income, and more jobsCritics worry that globalization will causejob lossesenvironmental degradationthe cultural imperialism of global media and MNEsAnti-globalization protesters now regularly show up at most major meetings of global institutionsLO4: Explain the main arguments in the debate over the impact of globalization.Country Focus: Protesting Globalization in France describes the anti-globalization protests going on in France. The protests, led by activist Jose Bove, started when the U.S. retaliated against EU bans on beef imports by imposing a 100% tariff on some EU products. Bove and his associates targeted McDonald’s, and also California winemaker Mondavi as symbols of their opposition to American investments. Still, despite the protests, foreign investment in France is at record highs, and ironically, so are French investments abroad.
29 How Does Globalization Affect Jobs And Income? Critics argue that falling barriers to trade are destroying manufacturing jobs in advanced countriesSupporters contend that the benefits of this trend outweigh the costscountries will specialize in what they do most efficiently and trade for other goods—and all countries will benefit
30 How Does Globalization Affect Labor Policies And The Environment? Critics argue that firms avoid the cost of adhering to labor and environmental regulations by moving production to countries where such regulations do not exist, or are not enforcedSupporters claim that tougher environmental and labor standards are associated with economic progressas countries get richer from free trade, they implement tougher environmental and labor regulations
31 How Does Globalization Affect National Sovereignty? Is today’s global economy shifting economic power away from national governments toward supranational organizations like the WTO, the EU, and the UN?Critics argue that unelected bureaucrats have the power to impose policies on the democratically elected governments of nation-statesSupporters claim that the power of these organizations is limited to what nation-states agree to grantthe power of the organizations lies in their ability to get countries to agree to follow certain actions
32 How Is Globalization Affecting The World’s Poor? Is the gap between rich nations and poor nations getting wider?Critics believe that if globalization was beneficial there should not be a divergence between rich and poor nationsSupporters claim that the best way for the poor nations to improve their situation is toreduce barriers to trade and investmentimplement economic policies based on free market economiesreceive debt forgiveness for debts incurred under totalitarian regimes
33 How Does The Global Marketplace Affect Managers? Managing an international business differs from managing a domestic business becausecountries are differentthe range of problems confronted in an international business is wider and the problems more complex than those in a domestic businessfirms have to find ways to work within the limits imposed by government intervention in the international trade and investment systeminternational transactions involve converting money into different currenciesLO5: Understand how the process of globalization is creating opportunities and challenges for business managers.
34 A World Without Borders Conversation: World Without Borders (LOCAL) :55H. Michael Boyd, PhDInternational Business