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Chapter 1
Globalization
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What Is Globalization?
Globalization - the shift toward a moreintegrated and interdependent worldeconomy
The world is moving away from self-contained national economies toward aninterdependent, integrated global
economic system
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How to take this course
Read the assigned chapter
Watch the recorded lecture
Read the assigned chapter AGAINTake notes and highlight topics you are
not clear on
Recorded lectures do not cover every point ina chapter
Lectures do not cover examples and casescovered in the textbook (since many of you
will probably buy an older version of the book)
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What Is The
Globalization of Markets?Historically distinct and separate national
markets are merging
It no longer makes sense to talk about the
German market or the American market Instead, there is the global market
falling trade barriers make it easier to sell globally
consumers tastes and preferences are converging onsome global norm
firms promote the trend by offering the same basicproducts worldwide
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What Is The
Globalization of Markets?
Firms of all sizes benefit and contribute tothe globalization of markets
97% of all U.S. exporters have less than 500
employees
98% of all small and mid-sized Germancompanies participate in international markets
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What Is The
Globalization of Production?Firms source goods and services from
locations around the globe to capitalize onnational differences in the cost and quality
offactors of production like land, labor,energy, and capital
Companies can
lower their overall cost structureimprove the quality or functionality of their
product offering
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Why Do We NeedGlobal Institutions?
Global institutionshelp manage, regulate, and police the global
marketplace
promote the establishment of multinationaltreaties to govern the global business system
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Why Do We NeedGlobal Institutions?
Examples include
theGeneral Agreement on Tariffs and Trade(GATT)
theWorld Trade Organization (WTO)theInternational Monetary Fund (IMF)
theWorld Bank
theUnited Nations (UN)
theG20
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What Do GlobalInstitutions Do?
The World Trade Organization (like itspredecessorGATT)
polices the world trading system
makes sure that nation-states adhere to therules laid down in trade treaties
promotes lower barriers to trade and
investment154 members in 2011
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What Do GlobalInstitutions Do?
The International Monetary Fund (1944)
maintains order in the international monetarysystem
lender of last resort for countries in crisis
Argentina, Indonesia, Mexico, Russia, SouthKorea, Thailand, Turkey, Ireland, and Greece
The World Bank (1944)promotes economic development via low
interest loans for infrastructure projects
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What Do GlobalInstitutions Do?
The United Nations(1945)maintains international peace and securitydevelops friendly relations among nations
cooperates in solving international problemsand in promoting respect for human rightsis a center for harmonizing the actions of
nations
The G20forum through which major nations tried to
launch a coordinated policy response to the2008-2009 global financial crisis
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What Is DrivingGlobalization?
Declining barriers to the free flow of goods,services, and capital
average tariffs are now at just 4%
more favorable environment for FDIglobal stock of FDI was $15.5 trillion in 2009
facilitates global production
Technological change
microprocessors and telecommunications
the Internet and World Wide Web
transportation technology
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What Does GlobalizationMean For Firms?
Lower barriers to trade and investmentmean firms can
view the world, rather than a single country,
as their market
base production in the optimal location for thatactivity
But, firms may also find their homemarkets under attack by foreign firms
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Declining Trade AndInvestment Barriers
Average Tariff Rates on Manufactured Products as Percent of Value
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What Does GlobalizationMean For Firms?
Technological change means lower transportation costshelp create global markets and allow firms to
disperse production to economical, geographically
separate locations low cost information processing and communicationfirms can create and manage globally dispersed
production low cost global communications networks
help create an electronic global marketplaceglobal communication networks and global mediacreate a worldwide culture and a global consumer
product market
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The Changing DemographicsOf The Global Economy
Four trends are important:
1. The changing world output and worldtrade picture
2. The changing foreign direct investmentpicture
3. The changing nature of the multinationalenterprise
4. The changing world order
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How Has World Output AndWorld Trade Changed?
In 1960, the U.S. accounted for over 40%of world economic activity, but by 2009,the U.S. accounted for just 24%
a similar trend occurred in other developedcountries
In contrast, the share of world outputaccounted for by developing nations isrisingexpected to account for more than 60% of
world economic activity by 2020
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How Has World Output AndWorld Trade Changed?
The Changing Demographics of World GDP and Trade
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How Has Foreign DirectInvestment Changed Over Time?
In the 1960s, U.S. firms accounted forabout two-thirds of worldwide FDI flowsToday, the United States accounts for less
than one-fifth of worldwide FDI flowsOther developed countries have followed a
similar pattern
In contrast, the share of FDI accounted forby developing countries has risenDeveloping countries, especially China, have
also become popular destinations for FDI
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How Has Foreign DirectInvestment Changed Over Time?
Percentage Share of Total FDI Stock 1980-2007
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How Has Foreign DirectInvestment Changed Over Time?
FDI Inflows 1988-2008
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The Changing World Order
Many former Communist nations in Europe andAsia are now committed to democratic politicsand free market economiescreates new opportunities for international businesses
but, there are signs of growing unrest and totalitariantendencies in some countries
China and Latin America are also moving towardgreater free market reformsbetween 1983 and 2010, FDI in China increased from
less than $2 billion to $100 billion annuallybut, China also has many new strong companies that
could threaten Western firms
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How Will The Global EconomyOf The 21st Century Look?
The world is moving toward a more globaleconomic system
But globalization is not inevitable
there are signs of a retreat from liberal economicideology in Russia
Globalization brings risks
the financial crisis that swept through South East Asia
in the late 1990s
the recent financial crisis that started in the U.S. in2007-2008, and moved around the world
I A I t d d t Gl b l
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Is An Interdependent GlobalEconomy A Good Thing?
Supporters believe that increased trade andcross-border investment mean lower prices for goods and servicesgreater economic growth
higher consumer income, and more jobsCritics worry that globalization will causejob lossesenvironmental degradation
the cultural imperialism of global media and MNEsAnti-globalization protesters now regularly show
up at most major meetings of global institutions
H D Gl b li ti
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How Does GlobalizationAffect Jobs And Income?
Critics argue that falling barriers to tradeare destroying manufacturing jobs inadvanced countries
Supporters contend that the benefits ofthis trend outweigh the costs
countries will specialize in what they do most
efficiently and trade for other goodsand allcountries will benefit
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How Does Globalization Affect LaborPolicies And The Environment?
Critics argue that firms avoid the cost ofadhering to labor and environmental regulationsby moving production to countries where such
regulations do not exist, or are not enforcedSupporters claim that tougher environmental
and labor standards are associated witheconomic progress
as countries get richer from free trade, theyimplement tougher environmental and laborregulations
H D Gl b li ti
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How Does GlobalizationAffect National Sovereignty? Is todays global economy shifting economic power away
from national governments toward supranationalorganizations like the WTO, the EU, and the UN?
Critics argue that unelected bureaucrats have the power
to impose policies on the democratically electedgovernments of nation-states
Supporters claim that the power of these organizations islimited to what nation-states agree to grant
the power of the organizations lies in their ability toget countries to agree to follow certain actions
H I Gl b li ti
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How Is GlobalizationAffecting The Worlds Poor? Is the gap between rich nations and poor nations
getting wider?Critics believe that if globalization was beneficial
there should not be a divergence between rich
and poor nationsSupporters claim that the best way for the poor
nations to improve their situation is to reduce barriers to trade and investment
implement economic policies based on free marketeconomies receive debt forgiveness for debts incurred under
totalitarian regimes
H D Th Gl b l
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How Does The GlobalMarketplace Affect Managers?
Managing an international business differs frommanaging a domestic business because
countries are different
the range of problems confronted in an internationalbusiness is wider and the problems more complexthan those in a domestic business
firms have to find ways to work within the limits
imposed by government intervention in theinternational trade and investment system
international transactions involve converting moneyinto different currencies