lecture 1 – globalization

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Lecture 1 – Globalization

Based on: Hill, C., 2009, International Business: Competing in the global marketplace, 7th Ed, McGraw-Hill Irwin, USA

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GlobalizationChanging

Global Economy

Globalization Debate

Global Institutions

Management Implications

Dimensions

Drivers

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� Shift in world economy

� Movement away from world of self-contained entities, isolated by:

� Cross-border trade barriers

� Distance

� Language

� National differences in government regulation, culture, etc

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� Shift in world economy

� Movement toward world where:

� Cross-border trade barriers are declining

� Perceived distance is shrinking due to technology

� Material culture is looking similar world over

� National economies are merging into an interdependent, integrated global economic system

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� Process by which shift is occurring is Globalization

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� We live in a world where:

� $12.06 trillion of goods & $2.71 trillion of services sold across national borders in 2006 (Hill, 2009:4)

� International institutions such as World Trade Organisation have called for even lower cross-border trade barriers

� Symbols of material and popular culture are increasingly global e.g. Coca-cola, Sony PlayStations, Apple iPods, Disney films, IKEA stores

� Products are made from inputs that come from all over the world

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� We live in a world where:

� Groups protest against globalization, blaming it for ills � E.g. Unemployment in developed nations, environmental degradation,

Americanization of popular culture

� Globalization has produced opportunities� E.g. Firms expand revenue by selling around world, reducing costs by producing

in nations where inputs are cheaper

� Globalization has created threats to businesses in domestic markets

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Global Economy


Global Institutions


Dimensions

Drivers

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� Globalization refers to

� “the shift toward a more integrated and interdependent world economy” (Hill, 2009:6)

� “a process of movement towards a global world” (White, 2004:80)

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Global Economy


Global Institutions


Dimensions

Drivers

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� Integration/globalization of world markets/economy & production

� Accelerated diffusion of new technology

� Loss of national sovereignty

� Homogenization of culture

� Democratization of key activities

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� Integration/globalization of world markets/economy

� Falling cross-border trade barriers, & “merging of historically distinct and separate national markets into one huge global marketplace” (Hill, 2009:6)

� Appearance of global firms, products & markets which have no specific location

� Same firms compete with each other e.g. Coca-cola & Pepsi, GM & Toyota, Sony & Nintendo & Microsoft

� Creation of homogeneity across markets replacing diversity & consumer tastes & preferences converging on global norm e.g. McDonalds

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� Integration/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” (Hill, 2009:6)

� Lowering cost or improving quality for effective competition

� E.g. Vizio: American company 75 employees – flat panel TV� components manufactured in South Korea, China, USA� assembled in Mexico, sold in USA market

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� Accelerated diffusion of new technology

� Nature of technical change, impact of new technology

� Impact of technical change on rate of diffusion of new technical knowledge

� Communications revolution is part of globalization & acceleration in internationalization

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� Loss of national sovereignty

� Alleged reduction of factors specific to national sovereignty in influencing business decisions

� Discipline/control of government policies to make them fit requirements of a global economy

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� Homogenization of culture

� The norm is for culture to reinforce national difference

� Globalization allegedly breaks down cultural divisions, sharing a common culture transcending all boundaries, (assisted by communications revolution)

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� Democratization of key activities

� Greater scope for choice, increased scope for individuals to be involved in process of decision making at all levels

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Global Economy


Global Institutions


Dimensions

Drivers

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� Two macro factors underlie tend in greater globalization:

� Declining trade & investment barriers

� Technological change

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� Decline in barriers to free flow of goods, services, & capital since end of World War 2 - See table 1.1 (Hill, 2009:12)

� Removing restrictions to Foreign Direct Investment (FDI)

� FDI occurs when firms invest resources in business activities outside home country

� International trade occurs when firms export goods or services to consumers in another country (Hill, 2009:10)

� Forces making for increased competition

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� Implications:

� Lower barriers to international trade enables firms to view the world as their market, rather than a single country, lure of interconnected markets

� More firms dispersing parts of production process to different locations around the world to reduce costs & increase quality

� Economies of nations becoming intertwined & increasing dependent on each other for important goods & services

� World is wealthier since 1950, and rising trade is engine pulling the global economy

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� Developments in communication, information processing, & transport technologies

� Microprocessor increase in power & telecommunication costs decreasing

� Internet & World Wide Web, (information backbone of the global economy)

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� Implications for globalization of production:

� As transport cost for globalization of production decline, dispersal of production becomes economical

� Information processing & communications enables creation & management of a globally dispersed production system

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� Implications for globalization of markets:

� Technological innovations & low cost transport facilitated globalization of markets, low cost global communications networks create global marketplace e.g. Internet

� Global communications & media network creates worldwide culture

� Movement of people via jet travel reduces cultural distance between countries

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Global Economy


Global Institutions


Dimensions

Drivers

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� Demographics of the global economy – late 1960s

� USA dominance in world economy

� USA dominance in FDI

� Dominance of large multinational USA firms on international business scene

� Half the world was off-limits to Western international businesses (i.e. centrally planned economies of the Communist world)

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� By 1980s, USA’s position as world’s leading exporter was threatened

� USA’s world economic activity 40.3% in 1963 & 19.7% in 2006 (Hill, 2009:16)

� Relative decline (not absolute decline) of USA reflects growing economic development & industrialization of the world economy

� Relative decline compared to faster growth of Asia, (see table 1.2 Hill 2009:17)

� Emerging economies, China, India, Brazil

� Implications: tomorrow’s economic opportunities & competitors emerge from developing nations/regions

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� Changing FDI picture

� Worldwide FDI flows in 1960s - USA 66.3%, second Britain 10.5% (Hill 2009:17)

� Stock of FDI of USA firms declined from 38% in 1980 to 19% in 2005, while that of France & developing nations increased, (see table 1.2, Hill 2009:19)

� Stock of FDI of developing nations up from 1.1% in 1980 to 11.9% in 2005, mainly Hong Kong, South Korea, Singapore, Taiwan, India, & China(see table 1.2, Hill 2009:19)

� Developing nations are destinations of FDI and amount of investment during the 1990s reflects increasing internationalization of business corporations (see table 1.3, Hill 2009:19)

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� Changing nature of the Multinational enterprise (MNE)

� Since 1960s two trends in demographics of MNE:� Rise of non-USA multinationals� Growth of mini-multinationals (medium-size & small multinationals)

� MNE is any business that has productive activities in two or more countries

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� Changing nature of the Multinational enterprise (MNE)

� Rise of non-USA multinationals

� In 1973, 48.5% of the world’s 260 largest multinationals were USA firms and Japan accounted for 3.5% of the largest multinational (see figure 1.4, Hill 2009:20)

� By 2005 , 27 of world’s 100 largest non-financial multinationals were USA firms, 15 French, 13 German, 11 British, and 9 Japanese (see figure 1.4, Hill 2009:20)

� 5 firms from developing economies entered the UN list of 100 largest multinationals by 2005 (Hill 2009:20)

� Globalization of world economy resulted in relative decline in dominance of USA firms in global marketplace

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� Changing world order

� Between 1989-1991 series of Communist Party government collapses in Eastern Europe & Soviet Union

� Some former Communist nations open to democratic politics & free market economics

� Countries previously closed to Western international businesses now present export & investment opportunities

� China’s market reforms create opportunities & threats for international businesses� Annual FDI increased from less than $2bil in 1983 to $70bil in 2006 (Hill 2009:23)

� China’s firms are proving to be capable competitors

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� Changing world order

� Latin America undergone democratic & free market reforms

� Debt & inflation is down, foreign investment welcomed, economies expanded

� E.g. Brazil, Mexico

� Risk still exist and governments seized control of oil & gas fields from foreign investors in Bolivia & Venezuela

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� Global economy of the 21st Century

� Barriers to free flow of good, services, & capital have been coming down

� Cross-border trade & investment volume growing more rapidly than global output, indicating national economies integrating into a global economic system

� More nations joining ranks of the developed world e.g. South Korea, Taiwan

� State-owned businesses privatized, deregulation, markets opening to competition, commitment to removing trade barriers

� Trends indicate world moving rapidly toward an economic system more favourable for international business

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� Global economy of the 21st Century

� Globalization is not inevitable

� Countries may pull back if experiences do not meet expectations e.g. Russia

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Global Economy


Global Institutions


Dimensions

Drivers

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� International trade & investment drives global economy toward prosperity

� Broader access to consumer products, lower prices for goods & services

� Gains from increased competition, in lower costs & increased productivity

� Stimulation of economic growth

� Raised income & employment levels

� Higher living standards in many countries, reducing poverty in others

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� Positive stimulus given to technical change

� More efficient allocation of world resources

� Widespread dissemination of information & knowledge

� Free trade benefits all countries

� Benefits outweigh costs (free trade results in specializing in production of goods & services efficiently, while importing those not efficiently produced)

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� WTO meeting December 1999, Seattle demonstrations

� Local unemployment� Job losses in industries attacked by foreign competitors� Exporting jobs to lower wage nations contributing to unemployment

� Lost manufacturing jobs in advanced economies

� Downward pressure on wage rates of unskilled workers

� Detrimental effects on living standards

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� WTO meeting December 1999, Seattle demonstrations

� Environmental degradation

� Eroding standards, firms moving manufacturing facilities to lessdeveloped countries lacking regulations to protect labour & environment,

� Loss of nation state sovereignty, unelected bureaucrats impose policies on governments

� Uneven income distribution, widening gap between rich & poor nations

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� Other arguments:

� Erosion of regional, national & local cultures

� Cultural imperialism of global media & MNE

� Increased power of large companies & international organisations like WTO

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� Data suggests:

� Unskilled labour in developed nations has its share of national income decline

� Living standards of unskilled workers have not necessarily declined, as results are mixed

� Technological change has had bigger impact on labour’s declining share of national income than globalization, and education is needed

� Generally as countries get richer they enact tougher environmental & labour laws

� Reasons for economic stagnation vary, none have to do with globalization e.g. Totalitarian governments, corruption, war, economic policies, debt

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Global Economy


Global Institutions


Dimensions

Drivers

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� Institutions help to

� manage, regulate, & police the global market

� Promote establishment of multinational treaties governing global business

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� Examples

� General Agreement on Tariffs and Trade (GATT)

� World Trade Organization (WTO) - successor to GATT

� International Monetary Fund (IMF)

� World Bank

� United Nations (UN)

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� World Trade Organisation

� Responsible for policing world trade system, making sure nation-states adhere to rules of trade treaties

� Responsible for facilitating additional multinational agreements between WTO member states

� Promotes lowering barriers to cross-border trade & investment

� In 2007, 150 nations accounting for 97% of world trade were WTO members

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� International Monetary Fund (IMF)

� Established to maintain order in the international monetary system

� Lender of last resort to nation-states in economic turmoil and value losing currencies

� In return for loans nation-states adopt specific economic policies aimed at economic stability & growth

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� World Bank

� Established to promote economic development

� Makes low-interest loans to cash-strapped poor nations wishing to undertake significant infrastructure investment (e.g. Building dams, roads)

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� United Nations (UN)

� Purposes of UN:� Maintain international peace and security� Develop friendly relations among nations� Co-operate in solving international problems� Promote respect for human rights

� Members agreeing to accept obligations of the UN Charter, an international treaty establishing basic principles of international relations

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� Three main types of organizations:

� Multilateral organizations

� Regional organizations

� Bilateral organizations

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� Multilateral organizations

� Straddle different regions� Multilateral relations through global organizations� E.g. WTO, World Bank, IMF, Greenpeace, Red Cross

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� Regional organizations

� Regional relations within units e.g. European Union, Free trade areas like NAFTA

� Informal alliances, some formal

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� Bilateral organizations

� Country/country, and government/multinational enterprise interactions

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� The Triad

� Tri-polar structure of economic activity linking main economic & political centres of the world

� North America, Japan, Western & Central Europe (EU)

� Accounts for 60-70% of World GDP (White 2004:98)

� Does most of the world’s trade, is the largest part of the world market

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Global Economy


Global Institutions


Dimensions

Drivers

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� “An international business is any firm that engages in international trade or investment” (Hill 2009:32)

� Many challenges face managers of international businesses:

� Countries are different: culture, political & economic & legal systems, levels of economic development

� Country differences require international business vary practices between countries e.g. Market, managing workers, strategy

� Which markets to enter or avoid, opportunities/risks of location in the world

� Behaving ethically in different countries with different standards

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� Many challenges face managers of international businesses:

� Co-ordination & control of globally dispersed production activities

� Choice of entry mode into foreign country

� Dealing with government regulation

� Foreign currencies & policies for exchange rate movements

� International business managers need to be sensitive to differences & adopt appropriate policies & strategies to cope with them

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� Managing international business & domestic business differ:

� Countries are different

� Problems international business managers confront are wider & more complex

� International business must find ways to work within limits imposed by government intervention

� International transactions involve converting money into different currencies

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� Two possible perspectives to global strategy

� global approach� Views world as a single unit, viewing customers & markets on a geographically

indiscriminate & culturally inclusive market e.g. IKEA

� Recognise uniqueness of all operating contexts� Recognising different nation states & growing level of interaction between them� Global environment is different from the domestic environment� This approach is most frequently adopted

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� Differences in corporate philosophy

� Ethnocentric – focused strongly on the domestic scene

� Polycentric – recognizes existence of many domestic scenes

� Geocentric – one scene, the global

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� Differences in strategy

� Multidomestic strategy – strategic & operating decisions decentralized to strategic business units in each country, customizing markets due to differing local cultures

� Transnational strategy – achieve global efficiency & local responsiveness, combining benefits of product differentiation with benefits of low costs e.g. Nestle

� Global strategy – standardized products across country markets

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� “International business is different from national business because countries and societies are different” (Hill 2009:112)

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� Hill, C., 2009, International business: Competing in the global marketplace, McGraw-Hill Irwin, USA

� White, C., 2004, Strategic management, Palgrave Macmillan, UK

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lecture 1 – globalization

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