1. Introduction and Overview
Source: © Carl Court/Getty Images
Listening to changing customer demands and monitoring your environment allow you and the firm to identify potential growth opportunities. 
Chapter 1: Globalization

2. Learning Objectives
LO 1-1 Understand what is meant by the term globalization. LO 1-2 Recognize the main drivers of globalization. LO 1-3 Describe the changing nature of the global economy. LO 1-4 Explain the main arguments in the debate over the impact of globalization. LO 1-5 Understand how the process of globalization is creating opportunities and challenges for management practice.

3. What Is Globalization? 1 of 4
Globalization refers to the trend towards a more integrated and interdependent world economy
(Gardner) EVERYTHING moves – products, labor, capital, technology, information, cultural memes, etc.
Two key facets of globalization
The globalization of markets
The globalization of production
LO 1-1 Understand what is meant by the term globalization.

4. What Is Globalization? 2 of 4
The Globalization of Markets
The merging of historically distinct and separate national markets into one huge global marketplace
In many markets today, the tastes and preferences of consumers in different nations are converging upon some global norm
Coca Cola, McDonald’s, IKEA, Starbucks, Apple
A company does not have to be the size of these multinational giants to facilitate, and benefit from, the globalization of markets.

5. What Is Globalization 3 of 4
The Globalization of Production
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 (labor energy, land, and capital)
Lower overall cost structure
Improve the quality or functionality of the product to compete more effectively
Boeing only undertakes engineering design, marketing and sales, final assembly – everything else is outsourced globally
Currently rethinking this strategy
Management Focus: Boeing's Global Production System
Executives at the Boeing Corporation, America’s largest exporter, say that building a large commercial jet aircraft like the 747 or 787 involves bringing together more than a million parts in flying formation. Forty-five years ago, when the early models of Boeing’s venerable 737 and 747 jets were rolling off the company’s Seattle-area production lines, foreign suppliers accounted for only 5 percent of those parts on average. Boeing was vertically integrated and manufactured many of the major components that went into the planes. The largest parts produced by outside suppliers were the jet engines, where two of the three suppliers were American companies. The lone foreign engine manufacturer was the British company Rolls-Royce.
Fast-forward to the modern era, and things look very different. Why the change? One reason is that 80 percent of Boeing’s customers are foreign airlines, and to sell into those nations, it often helps to be giving business to those nations. A second rationale was to disperse component part production to those suppliers who are the best in the world at their particular activity. A third reason for the extensive outsourcing on the 787 was that Boeing wanted to unburden itself of some of the risks and costs associated with developing production facilities for the 787.
As the 787 moved through development in the 2000s, however, it became clear that Boeing had pushed the outsourcing paradigm too far. Coordinating a globally dispersed production system this extensive turned out to be very challenging.

6. What Is Globalization 4 of 4
The Globalization of Production continued
Early outsourcing was primarily for manufacturing
Today, modern communications technology allows companies to outsource services
Impediments to globalization
Formal and informal trade barriers
Barriers to foreign direct investment
Transportation costs
Economic and political risk
Managerial challenge
Fast-forward to the modern era, and things look very different. Why the change? One reason is that 80 percent of Boeing’s customers are foreign airlines, and to sell into those nations, it often helps to be giving business to those nations. A second rationale was to disperse component part production to those suppliers who are the best in the world at their particular activity. A third reason for the extensive outsourcing on the 787 was that Boeing wanted to unburden itself of some of the risks and costs associated with developing production facilities for the 787.

7. The Emergence of Global Institutions 1 of 3
Manage, regulate, and police the global market place
Promote the establishment of multinational treaties to govern the global business system
World Trade Organization (WTO)
Polices world trading system and ensures nations adhere to the rules established in WTO treaties
Succeeded the General Agreement on Tariffs and Trade (GATT)
162 nations accounted for 98% of world trade (2016)

8. The Emergence of Global Institutions 2 of 3
International Monetary Fund (IMF)
Promotes order in the international monetary system
Lender of last resort
The World Bank
Promotes economic development using low-interest loans

9. The Emergence of Global Institutions 3 of 3
The United Nations (UN)
Maintains international peace and security
Develops friendly relations among nations
193 member countries
Promotes respect for human rights
Is a center for harmonizing the actions of nations
The Group of 20 (G20)
Finance ministers and central bank governors of 19 largest world economies
Represents 90% of global BDP
A forum for a coordinated policy response to the financial crisis of

10. Drivers of Globalization 1 of 6
Two factors driving the move toward greater globalization
Decline in barriers to free flow of goods, services, and capital
Technological change
LO 1-2 Recognize the main drivers of globalization

11. Drivers of Globalization 2 of 6
Declining Trade and Investment Barriers
International trade: when a firm exports goods or services to consumers in another country
Foreign direct investment: when a firm invests resources in business activities outside its home country
During 1920s and 1930s, many nations put up barriers to international trade to protect domestic industries
After WWII, advanced Western countries reduced barriers
GATT, Uruguay Round, and WTO

12. Table 1.1 Average Tariff Rates on Manufactured Products as Percentage of Value
1913
1950
1990
2014
France
21%
18%
5.9%
1.5%
Germany 20 26
5.9
1.5
Italy 18 25
Japan 30 --
5.3
1.3
Holland 5 11
Sweden 9
4.4
United Kingdom 23
United States 44 14
4.8
Sources: The 1913–1990 data are from “Who Wants to Be a Giant?,” The Economist: A Survey of the Multinationals,
June 24, 1995, pp. 3–4. The 2014 data are from World Development Indicators 2015, World Bank.

13. Drivers of Globalization 3 of 6
Declining Trade and Investment Barriers continued
We produce more goods and services than ever before but a greater proportion being traded across national borders
Consumers more knowledgeable which drives demand
Volume of world trade growing faster than GDP
More companies dispersing parts production
Economies are becoming even more intertwined
World has become significantly wealthier

14. Figure 1.1 Value of World Trade and World Production 1950-2014
Source: World Trade Organization, 2016.

15. Drivers of Globalization 4 of 6
The Role of Technological Change
Since World War II, there have been major advances in communication, information processing, and transportation
Microprocessors and Telecommunications
Moore’s Law
The Internet
Currently, 3.3 billion users (46% of global population)
Transportation Technology
Containerization
Containerization has revolutionized the transportation business, significantly lowering the costs of shipping goods over long distances. Because the international shipping industry is responsible for carrying about 90 percent of the volume of world trade in goods, this has been an extremely important development.

16. Drivers of Globalization 5 of 6
The Role of Technological Change continued
Implications for the Globalization of Production
Lower transportation costs
Geographically dispersed production system more economical
Allow firms to better respond to customer demands

17. Improved Transportation has Shrunk the Globe
Commercial jet travel has reduced the time (and expense) needed to get from one location to another, effectively shrinking the globe. (Gardner): When I was a little kid, in 1956, we only imagined foreign travel by watching a series on “I Love Lucy” that was filmed in the U.S.
© Glow Images RF

18. Drivers of Globalization 6 of 6
The Role of Technological Change continued
Implications for the Globalization of Markets
Low cost communication networks help create electronic global marketplace
Low cost transportation makes it economical to ship products around the world
A reduction in cultural distance
A convergence of consumer tastes and preferences

19. The Changing Demographics of the Global Economy 1 of 7
In the 1960s:
U.S. dominated the world economy, world trade, and world FDI
U.S. MNEs dominated the international business scene
About half the world-- the centrally planned economies of the communist world-- was off limits to Western international business
Today, much of this has changed
LO 1.3 Describe the changing nature of the global economy.
Country Focus: India’s Software Sector
Summary
This feature explores the growth of India’s software industry. Starting from nothing just twenty-five years, the industry now generates revenues of nearly $40 billion, and exports of $31.3 billion. With global spending on information technology expected to be some $260 billion in 2009, Indian companies are primed to capture a significant share of the pie, forcing their Western counterparts to make changes to their strategies.
Suggested Discussion Questions
1. What factors have contributed to the growth of India’s software industry?
Discussion Points: Four key factors have contributed to the growth of India’s software industry. First is the huge number of engineers in India. Some 400,000 engineers graduate from Indian universities every year. A second factor is India’s low wage structure. Indian engineers make about 12 percent of what an American colleague might make. Third, coordination between Western firms and Indian firms is facilitated by the large number of English-speaking Indians. Finally, because of the differences in time zones, Indian firms operate while American firms are closed.
2. How has India’s software industry changed in recent years? What are the implications of these changes for American companies like IBM and Microsoft?
Discussion Points: There has been a gradual shift in the Indian software industry in recent years. Initially, Indian firms focused on the low end of the industry to supply basic software development and testing services to Western firms. Today however, many companies have moved into higher end services to compete for large software development projects, business outsourcing contracts, and information technology consulting services. This new competitive threat is forcing American firms like IBM and Microsoft to rethink their global strategies. Some Western companies are now investing in India with the goal of capturing some of the cost advantages Indian companies like Infosys and Wirpro enjoy.
Lecture Note: India’s smartphone industry is growing rapidly and Google is just one company that is looking to capitalize on this growth. To learn more, go to {
Video Note: The iGlobe India's Economy Remains Robust Despite Global Downturn examines India’s economic strength even during the recent global recession.

20. The Changing Demographics of the Global Economy 2 of 7
The Changing World Output and World Trade Picture
Early 1960s:
U.S. - dominant industrial power accounting for about 38.3% of world manufacturing output
By 2014:
U.S. accounted for only 22.4%
Germany, France, and the U.K. had a similar decline
Rapid economic growth now in countries like China, India, Russia, and Brazil
Further relative decline by the U.S. is likely

21. Table 1.2 The Changing Demographics of World Output and Trade
Country
Share of World Output 1960 (%)
Share of World Output 2014 (%)
Share of World Exports 2015 (%)
United States
38.3
22.4
9.2
Germany
8.7
5.0
8.4
France
4.6
3.6
3.1
Italy
3.0
2.8
2.9
United Kingdom
5.3
2.7
Canada
2.3
Japan
3.3
5.9
3.9
China NA
13.3
13.2
Sources: Output data from World Bank database, Trade data from WTO Statistical Database, 2015.

22. The Changing Demographics of the Global Economy 3 of 7
The Changing Foreign Direct Investment Picture
The share of world output generated by developing countries has been steadily increasing since the 1960s
The stock of foreign direct investment (total cumulative value of foreign investments) generated by rich industrial countries is declining
Cross-border flows of foreign direct investment are rising
The largest recipient of FDI is China, followed by Brazil, Mexico, and India

23. Figure 1.2 Percentage Share of Total FDI Stock
Source: C. W. L. Hill and G. T. M. Hult, International Business: Competing in the Global Marketplace. (New York, NY: McGraw-Hill Education, 2017).
Jump to Appendix 1 long image description

24. The Changing Demographics of the Global Economy 4 of 7
The Changing Nature of the Multinational Enterprise
Non-U.S. Multinationals
A multinational enterprise (MNE) is any business that has productive activities in two or more countries
Since the 1960s: There has been a rise in non-U.S. multinationals and there has been a rise in mini-multinationals
By 2012, largest nonfinancial multinationals were found in U.S., Britain, France, Germany and Japan

25. Figure 1.4 National Share of Largest Multinationals 1973 and 2012
Management Focus: The Dalian Wanda Group
The stated ambition of Dalian Wanda is to become a world-class multinational by 2020 with assets of $200 billion, revenue of $100 billion, and net profits of $10 billion.
In 2012, Dalian Wanda made a significant step in this direction when it acquired the U.S. cinema chain AMC Entertainment Holdings for $2.6 billion. At the time, the acquisition was the largest ever of a U.S. company by a Chinese enterprise, surpassing the $1.8 billion takeover of IBM's PC business by Lenovo in 2005.
In 2015, Wanda followed its AMC acquisition with the purchase of Hoyts Group, an Australian cinema operator with over 150 cinemas. By combining AMC's movie theaters with Hoyts and its already extensive movie properties in China, Dalian Wanda has become the largest cinema operator in the world with over 500 cinemas.
Source: C. W. L. Hill and G. T. M. Hult, International Business: Competing in the Global Marketplace. (New York, NY: McGraw-Hill Education, 2017).
Jump to Appendix 3 long image description

26. The Changing Demographics of the Global Economy 5 of 7
The Changing Nature of the Multinational Enterprise continued
The Rise of Mini-Multinationals
More small and medium-sized businesses involved in international trade and investment
Internet lowers barriers that small and medium firms face in building international sales
(Gardner) See Scott Szwast: “The global business next door”

27. The Changing Demographics of the Global Economy 6 of 7
The Changing World Order
The collapse of communism in Eastern Europe
Greater export and investment opportunities, but political unrest is increasing risk
Economic development in China
Huge opportunities despite continued government control, but also new competition from Chinese firms
Free market reforms and democracy in Latin America
New markets and new sources of materials and production, but economic and political risk remains high
(Gardner) But also “left turns” in Venezuela and some other Latin nations.

28. The Globalization Debate 1 of 7
Is the shift toward a more integrated and interdependent global economy a good thing?
Many experts believe that globalization is promoting greater prosperity in the global economy, more jobs, and lower prices for goods and services
Others feel that globalization is not beneficial
LO 1-4 Explain the main arguments in the debate over the impact of globalization.

29. The Globalization Debate 2 of 7
Antiglobalization Protests
Began with WTO protest in December 1999 in Seattle
Protest turned violent
Protestors fear globalization has detrimental effects on living standards, wages, and the environment
Theory and evidence suggests these fears are exaggerated

30. The Globalization Debate 3 of 7
Globalization, Jobs, and Income
Falling trade barriers destroy some manufacturing jobs in wealthy economies (U.S. and western Europe)
Service activities increasingly outsourced to nations with lower labor costs
Supporters say benefits outweigh the costs
Outsourcing allows company to reduce its cost structure and as a result, can reduce prices
Country Focus: Protesting Globalization in France
Summary
This feature 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.
Suggested Discussion Questions
1. Consider the trade war that initiated the protests led by Bove. The EU instituted restrictions on the import of hormone treated beef because it was feared that the product might lead to health problems. The WTO stated that the restrictions were prohibited under WTO agreements and ordered the EU to lift the restrictions or face retaliatory measures. In your opinion, did the WTO act appropriately? Should a government be permitted to make decisions as to what products are or are not available to consumers? Should the WTO? What do you think would have happened if the WTO had ruled in favor of the EU?
Discussion Points: Many students will probably argue that the European Union’s restrictions against hormone treated beef were nothing more than thinly veiled protectionism. Accordingly, students will probably feel that the World Trade Organization was justified in its ruling. Some students however, may suggest that the European Union was looking out for its citizens when it instituted the bans, and that therefore the World Trade Organization was overstepping its bounds.
2. Why was McDonald’s chosen as the target for anti-globalization protests? How can companies like McDonald’s protect themselves from the actions of protesters like Bove?
Discussion Points: Students will probably recognize that as an icon of the United States, McDonald’s is a symbol of America and as such was a natural target for protesters. The fact that its menu is based on beef was probably an added bonus. Many students will note that companies that are actively involved in local communities are less likely to attract negative feeling than those that are not. Students might recommend that companies like McDonald’s work to ingratiate themselves with the host country through charitable programs, social activities, and so on.

31. The Globalization Debate 4 of 7
Globalization, Jobs, and Income continued
OECD studies show that while gap between poorest and richest segments of society has widened, in most countries, real income levels have increased for all, including poorest segment
Many advanced economies report shortage of highly- skilled workers and an excess of unskilled workers

32. The Globalization Debate 5 of 7
Globalization, Labor Policies, and the Environment
Lack of regulations in less developed countries
Adhering to environmental regulations increases costs of manufacturing
Supporters argue that tougher regulations lead to economic progress
Studies show a hump-shaped relationship between income levels and pollution levels

33. Figure 1.5 Income Levels and Environmental Pollution
Source: Hill, C. W. L.; Hult, G. T. M., International Business: Competing in the Global Marketplace. New York, NY: McGraw-Hill Education, 2017.
Jump to Appendix 4 long image description

34. The Globalization Debate 6 of 7
Globalization and National Sovereignty
Critics worry economic power is shifting away from national governments and toward supranational organizations such as the WTO, the European Union (EU), and the UN
Supporters argue that the power of these organizations is limited to what nation-states collectively agree to grant
The organizations must be able to persuade members states to follow certain actions
Without the support of members, the organizations have no power

35. The Globalization Debate 7 of 7
Globalization and the World’s Poor
Critics argue the gap between rich and poor has gotten wider and the benefits of globalization have not been shared equally
Many of the world’s poorest nations are under totalitarian regimes, suffer from endemic corruption, have few property rights, are involved in war, and are burdened by high debt
United Nations adopted Millennium Goals
Eight economic and human development goals for the world

36. Managing in the Global Marketplace 1 of 2
International business is any firm that engaged in international trade or investment
Managing international business differs from managing purely domestic business
International business must vary its practices country by country
International business issues greater in complexity
Need to understand rules governing international trade and investment
LO 1-5 Understand how the process of globalization is creating opportunities and challenges for business managers

37. Managing in the Global Marketplace 2 of 2
International business different for four reasons
Countries are different
Range of problems is wider and problems more complex
Must find ways to work within governmental limits
Transactions involve converting money into different currencies

38. Summary In this chapter we have
Explored what is meant by the term globalization.
Identified the main drivers of globalization.
Described the changing nature of the global economy.
Explained the main arguments in the debate over the impact of globalization.
Discussed how the process of globalization is creating opportunities and challenges for business managers.