Globalization Unit 1.9 In business, the competition will bite you if you keep running. If you stand still, they will swallow you. -William Knusden ( ), former president of General Motors.

What is Globalization? Globalization is defined as the integration of the word’s economies in terms of economics, sociology, and politics. In a globalized world, firms sell the same products in different countries. Examples are McDonalds, Heineken, etc. One effect of globalization is that many markets, cultures, and tastes are converging at a rapid pace.

7 Indicators of Globalization Higher value of world trade over time Higher levels of foreign direct investment. E.g. Toyota manufacturing plants in the U.S. Multinational corporations (MNC) accounting for a higher share of world GDP Greater cultural awareness and exchange, such as the export of cultural foods Spreading of multiculturalism. E.g. Hollywood and Bollywood movies. Higher spending on international travel and tourism Information and communication technology spreading throughout the world. E.g. the internet.

Multinational Corporation (or transnational corporation A multinational corporation is a business organization that operates in two or more countries.

Advantages of Globalization to Businesses They can exploit economies of scale. They can move to a “new” market in a different country selling the same product. Decisions taken in one region of the world can influence behaviour in another region of the world. (This can be a double-edged sword.) Cheaper production MNCs can spread risks around their different subsidiary countries Avoid protectionist policies

Further Advantages/Effects of Globalization on Business Activity Increases the level of competition in local markets for local stores, and foreign markets for other firms. Many different customer expectations and needs to be fulfilled Benefits of economies of scale Choice of location for MNC. Mergers, acquisitions and joint ventures allow a business to grow at a faster pace than if they were to grow organically Increased customer base. – E.g. India and China Businesses have to adapt to their different customer bases in each country

Factors Contributing to the Growth of Globalization Liberalization of International Trade – Trade protection methods have stopped in World Trade Organization Countries – Ex: The EU with its single currency and free travel between member nations Technical Progress – Communications Technology Deregulation – Drop in the cost of transport and distribution – Important example: China Cultural Awareness and Recognition – Consumers are more open to buying foreign products. Language – English has become the de-facto Lingua Franca for businesses.

Potential Problems of Expansion Overseas A lack of knowledge and experience in new markets Storage, transportation, and distribution costs will increase External factors have a greater weighting in decision making – Ex: Legal Restrictions, language barriers and cultural differences Infrastructure may be less developed in overseas markets, thereby limiting the efficiency of operations of an MNC – Ex: Communications systems or roads Political and Economic conditions in foreign countries may limit a firm’s prosperity overseas.

MNC’s effect on host countries A host country is any nation that allows a MNC to set up in its country. Ability to create jobs Boost a country’s GDP Technology Transfer Creates competition in a host country Environmentalists and anti-globalization groups are concerned about social responsibility. MNCs can create unemployment as well MNCs pose a threat to domestic business

Regional Trading Blocks Regional economic blocks strive to eliminate trade barriers. – Between two or more countries Closer Economic Partnership Agreement Free Trade Area – Member states agree to trade freely with each other, but have separate trade barriers Common Market – Free trade and free movement of labour

Regional Trading Blocks 2 RTBs will impose barriers to international trade, such as external tariffs and quotas on the volume or value of foreign goods – Ex: Great Britain used to purchase some items cheaply from New Zealand that it must now buy at higher prices from EU suppliers. That is the cost of belonging to a RTB

Examples Of Regional Trading Blocks European Union (EU) – Evolved from the European Free Trade Association (EFTA) North American Free Trade Agreement – NAFTA The Association of South East Asian Nations – ASEAN Closer Economic Partnership Agreement (CEPA)

Miscellaneous Trade Creation: takes place when a country switches from buying commodities from a high cost country to buying them from a lower cost country, following the formation of a RTB. Trade Diversion: results in losers in a trading bloc when a country switches from buying commodities from a low-cost country to buying them from a higher cost country Glocalization: Firms must develop an international strategy to succeed, one for every country.

Key Terms 1 Common Market: refers to a customs union, such as the EU, that allows the free movement of factors of production (land, labour, capital and enterprise) between member countries. Customs union: refers to a group of member countries that trade freely with each other but impose a common external tariff (CET) on imports from non-member states. This means that all members must enforce the same (common) trade barriers to non-member countries. Free trade: occurs when countries trade without any international trade barriers such as tariffs, quotas and bureaucratic procedures. Globalization: is the integration of economic, social, technical and cultural issues of the world’s economies. This has taken place largely due to the expansion of multinational corporations and governments advocating freer international trade. Multinational corporations (MNC): are companies that operate production or service facilities outside their home country.

Key Terms 2 Regional Trading Bloc: refers to a group of countries that agree to freer international trade with each other, through the removal of trade barriers. Examples of trading blocs include the EU and the North American Free Trade Agreement (NAFTA). Protectionist measures: are the policies used by a government to guard the interest of its domestic industries from foreign competition. Examples of protectionist policies include the use of import taxes and imposing higher safety standards on foreign products.

Review Questions 1. What is meant by ‘globalization’? 2. State 5 indicators of globalization. 3. Outline four factors that have led to globalization in the world economy. 4. Explain how some businesses benefit from globalization, whilst others are constrained by it. 5. What is a ‘multi-national corporation’? 6. What are the reasons for a business wanting to become a multinational? 7. What are the advantages and limitations to a host country of multinationals? 8. What is a ‘regional trading block’? 9. How might a business benefit from being located in a regional trading block? 10. Distinguish between ‘trade diversion’ and ‘trade creation’