Chapter 20 The Global Economy

Global Integration  Definition – Interdependency among the countries of the world, especially within financial markets and telecommunications  Telecommunications – Long distance communication, usually electronic, using communications, satellites and fiber optic cables  Improved long distance communication has increased interdependency among many countries

Improved Telecommunications  The first transatlantic telegraph was sent in Before that it took 2 weeks to find out the price of a dollar in London.  The telegraph reduced that amount of time to 2 minutes.  With the invention of the computer chip telecommunications world wide has grown rapidly  The Price of Computer power has dropped rapidly since 1980.

Telecommunications con’t  The internet and satellites have also played a role in the development of telecommunications.  Until the 1990’s virtually all television and radio was controlled by the government.  Viewers saw few advertisements and programs from the west.  Today, people in Asia, Africa and other regions see news, sports, music and advertisements via satellites.  This has caused a change in cultural tastes and buying habits  Because much of this communication is in English many are wanting to learn English as a 2 nd language

Globalization of Financial Markets  With the speed of computers and affordability of communications the world has become a financial market.  Trading in US government securities is the worlds fastest growing 24 hour market.  Foreign Exchange of currencies became a 24 hour market in the 1970’s  The commodities market also is worldwide  The worldwide stock market which was started in the mid ‘70’s still has some problems today

Problems with the Worldwide Stock Market  The U.S. economy represents a major part of the world economy so when the US economy falters so do markets worldwide.  In 1987 the US stock market has one of its worst days ever dropping 500 points. It took the US 2 years to recover but it took the foreign markets even longer.  In 2001 after 9/11, the US market dropped 700 points when it reopened. The world markets had already dropped fortunately it only took a few months to recover from that drop.

Spreading Risks  It is also now possible to spread out risks in a global economy. One nation may be having trouble while another may be doing well  By spreading the risk around multiple nations you can prevent large losses and ultimately increase your gains

Foreign investment in the US – Should we be worried?  Did you know that Burger King and Pillsbury are no longer American companies?  In addition, 20% of the office space in Los Angeles is owed by the Japanese.  Likewise, American companies have bought many foreign companies  Foreign investment has grown considerably in the last 20 years.

Foreign Investment – Then and Now  There is a long history of foreign investment in the US.  Great Britain was the largest investor in American Railroads in the late 1800’s and early 1900’s  At the beginning of WWI the US owed more to foreign lenders than any other country in the world

Direct Foreign Investment  Def- the purchase by foreigners of real estate and businesses in another country.  Today foreign investments have increased to the point that many want to restrict it  Anytime political upheaval strikes in another part of the world, foreign investment increases in the US because we remain politically stable

Foreign Control of American Companies  Many people argue about foreign ownership of American companies  Is Foreign control important?  Investors invest to make a profit  Profit making ability is not dependent on nationality  Economists do not believe that a foreign investor would do much different from a domestic investor so it should not cause harm

Foreign Control con’t  Can foreign investors influence our government?  Foreigners currently own 50% of all government securities  Our gov’t has some control and could use the Fed to raise inflation which would reduce the influence of the foreign debt  At the same time, we want to make the environment positive for foreign investment or investors will take their money to other nation

Investment here and abroad  Despite concerns over foreign investment only about 10% of US industries.  Foreign investment in the US is actually low compared to foreign investment of other countries  The US share of worldwide investment is 40%.  Most consumers have no idea where the goods they purchase actually come from or who owns the companies

Multinationals and Economic Competition  Multinationals – firms that do business and have offices or factories in other countries  Foreign Affiliates – branches of multinational firms  In 1970 many people predicted that a few hundred multinationals would own 80% of the worlds production by the mid 80’s.  By 2006 there were about 60,000 multinational corporations with 620,000 foreign affiliates

Worldwide Ownership  The top 100 multinationals account for 50% of all cross border assets.  However the top 100 multinationals account for less than 20% of the world’s productive assets.  The US, Great Britain, Japan, Germany and Swiss are no longer dominant in the multinational arena.  Today many multinationals are based in Asia like China, Taiwan, South Korea and Malaysia

Regional Cross-Border Investments  Although Multinational companies invest all over the world the largest part of their investments are in the regions closest to their home country.  The means EU companies invest mostly in western Europe and American Multinationals invest mostly in the US and North and South America

Beyond Multinationals - Alliances  Many multinationals form alliances with their foreign counter parts.  This can be through joint ventures or licensing deals  The majority of alliances have been between firms of industrialized countries  Alliances can be seen as acceptance of a firms limitations  Alliances can also help firms leap past competitors or catch up with them

Global Village and Tolerance  Economic globalization has the potential to promote greater tolerance of diversity within society  In the 1980’s the population of Asians increase 100% in the US  In 2003, Hispanics became the largest minority group in the US  In addition, globalization has also meant hiring firms from other countries to handle work like customer service  The US also helps provide work to foreign companies like financial information and health diagnosis