Chapter 1

Understanding Globalization

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Objectives Understand what is meant by globalization. Be familiar with the causes of globalization.

Changing international trade patterns, FDI flow, differences in economic growth among countries, and the rise of new MNCs are changing the nature of the world economy.

Debate over the impact of globalization. Numerous opportunities and challenges due

to globalization.

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Introduction

Whether a business student is studying marketing, finance, accounting, strategy, human relations, or operations management, the differences between countries in which a firm does business will affect decisions that must be made.

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The world is getting closer in terms of cross border trade and investment, -by distance, -time zones, -languages and -by national differences

in government regulation, culture and business systems and toward a world in which national economies are merging into one huge interdependent global economic system.

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What is globalization?1-Globalization is the trend toward a more

integrated global economic system.2-Globalization describes an ongoing

process by which regional economies, societies, and cultures have become integrated through a globe-spanning network of communication and trade. (Wikipedia.com)

3-Name for the process of increasing the connectivity and interdependence of the world's markets and businesses. (Investorword.com)

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Faces of globalization

Globalization has two faces: Globalization of markets Globalization of production

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Globalization of markets Globalization of markets refers to

the fact that in many industries historically distinct and separate national markets are merging into one huge global marketplace.

There is a movement towards a globalization of markets, as the tastes and preferences of consumers in different nations are beginning to converge upon some global norm.

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The global acceptance of Coca-Cola, Levi’s jeans, Sony Walkmans, and McDonald’s hamburgers are all examples. By offering a standard product worldwide, they are helping to create a global market. Even smaller companies can get the benefits from the globalization of markets.

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Globalization of production The globalization of production

refers to the tendency among many firms to source goods and services from different locations around the globe in an attempt to take advantage of national differences in the cost and quality of factors of production. (labor, energy, land and capital)

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Through this companies hope to lower their overall cost structure and or improve the quality or functionality of their product, thereby allowing them to compete more effectively against their rivals. The examples of Boeing and Swan Optical illustrate how production is dispersed.

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Boeing company’s commercial jet airliner, Boeing 777 contains 132,500 major components parts that are produced around the world by 545 different suppliers. Eight Japanese suppliers make parts of fuselage, doors and wings, a supplier in Singapore make the doors for the nose landing gear, three suppliers in Italy manufacture wing flaps etc.

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Drivers of globalization

Two key factors seem to underlie the trend towards the increasing globalization of markets and production:

a)-The decline of barriers to trade and investment

b)-Technological change

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The decline of barriers to trade and investment

International trade occurs when a firm exports goods or services to consumers in another country.

For example: Under GATT (General Agreement on Tariffs and Trade), over 140 nations negotiated even further to decrease tariffs and made significant progress on a number of non-tariff issues (e.g. intellectual property, trade in services).

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Decline in investment barriers

The Foreign direct Investment: FDI occurs when a firm invests to international trade activities outside its home country.

For example, in Japan, Kodak has taken market share from Fuji recent years. In the United States,

Japanese firms have taken away market share from General motors, and Chrysler and in Western Europe

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The role of technological change

While lowering trade barriers has made the globalization of markets and production a possibility, technological changes have made it a reality.

Telecommunications is creating a global audience. Transport is creating a global village. From Buenos Aires to Boston to Beijing, ordinary people are watching MTV, they are wearing Levi’s jeans, and they are listening to Sony Walkman as they commute to work

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The changing demographics of the global economy

In 1960’s there were four facts described in the demographics of the global economy.

The U.S dominance in the worlds economy and world trade.

U.S dominance in the world Foreign Direct Investment picture.

The dominance of large multinational U.S firms in the international business scene.

Roughly half of the globe (communist world), was unavailable to Western International Business

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All these four facts either have changed or now changing rapidly. The changing demographics has four facets.

The changing world output and world trade picture

A changing world Foreign Direct Investment picture

The changing nature of the Multinational Enterprise

The changing world order

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The changing world output and world trade picture

The changing pattern of World output and tradeCountry Share of world

output 1963 (%)Share of world output 1985 (%)

Share of world output 1995 (%)

United States 40.3 21.9 12.2

Japan 5.5 8.2 9.4

Germany 9.7 4.3 10.1

France 6.3 3.5 5.6

United kingdom 6.5 3.4 4.9

Italy 3.4 3.2 4.5

Canada 3.0 2.1 3.9

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A changing world Foreign Direct Investment picture

The U.S firms accounted for 66.3% of the worldwide FDI flow in 1960s.

British firms were second, accounting for 10.5 % while Japanese firms were a distant third, with

only 2%.

U.S firms declined substantially form around 44 percent in 1980 to 25 percent in 1994.

Japanese, France, other developed nations and the world’s developing nations reflects a small but growing trend in FDI.

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The changing nature of the Multinational Enterprise

Definition: A multinational enterprise is any business that has productive activities in two or more countries.

Before only U.S now non U.S but Japan, Korea,

Germany...

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changing in world order

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Review What is globalization? Discuss the changing demographics of

the global economy. What are the drivers of globalization? Is globalization prosperity or

impoverishment? Group discussion: What is an advantages and

disadvantages of Globalization?