Globalization in the Modern Economy

Globalization: A Reality Beyond Ideology

• Globalization is the increasing interconnectedness of societies and economies worldwide.
• In today's interdependent global economy, international business activities are widespread, and companies operate across national borders.

What is Globalization?

• Globalization is a matter of controversy, with no single definition accepted by scholars and the public.
• It involves the increasing interconnections of economies and societies worldwide.
• Business people focus on the increasing cross-border trade of goods and capital, while political scientists look at the impact on national governments.
• Social scientists examine the cultural and societal influences, and scholars of international relations discuss the development of global institutions.

Key Elements of Globalization

• Cultural and political forces
• Increasing interconnection between societies and economies
• Integration of economic processes and information transfer on a global level
• Shrinking political influence of national governments
• Shift from national and regional to fully integrated global markets
• Increasing homogeneity of societies and markets worldwide

Impact of Globalization on Business

• International companies operate across national borders, contributing to the development of globalization.
• Strategies for engaging in international business include buying or selling abroad, and becoming a truly multinational company.
• Global markets have developed in different ways, with standardized goods and services gaining importance.

Globalized Production

• Globalized production is a reality in almost every industry.
• Reasons for internationalizing production vary, including low relative unit labor costs, operating independently, and desiring to move production closer to sales markets or raw material sources.

Relationship Between Globalization and Government

• The increasing interconnectedness of economies and societies has changed the role of nation states significantly.
• National boundaries have lost importance, and nation states have lost competence and influence.
• Supranational organizations and multinational alliances have been established to undermine nation-state autonomy.

Criticisms of Globalization

• Shift of jobs from developed to underdeveloped countries
• Exploitation of cheap labor and poor working conditions abroad
• Harm to the environment through lack of ecological standards and enforcement
• Decline of national sovereignty and autonomy

Facts about Globalization and the Global Economy

• Worldwide exports grew at an average annual rate of 5% from 1980 to 2007.
• In 2007, exports worldwide accounted for 31% of the gross world domestic product (GDP).
• Foreign direct investment increased by a factor of five between 1980 and 2007.
• Cross-border mergers and acquisitions rose by 700% between 1990 and 2007.
• The hundred largest multinational companies have experienced above-average growth in their foreign assets and sales and workforces.

Economic Changes

• Markets have been subject to liberalization, such as financial services, telecommunications, and others.
• Value chains have been globalized, with multinational corporations sourcing materials and producing and marketing products on a global level.
• Modern technology and telecommunications have helped large companies manage their business across national borders and time zones.

Political Changes

• The globalization trend has required political and regulatory changes on both national and international levels.
• The collapse of the former communist regime and the end of the Cold War around 1990 opened up unprecedented opportunities for global growth.
• The world economy has changed, with the Southeast Asian region, including China, becoming a driving force.

Technological Changes

• Major developments in technology in the last two decades have facilitated globalization trends.
• Information is readily available on the internet, and mobile phone services enable people to communicate on the go.
• These technologies have helped increase international business activities.

Societal and Behavioral Changes

• The trends described above have influenced the way people travel.
• The number of international travelers rose annually from 260 million to 800 million between 1980 and 2008.
• Paid leave has increased, and people have more leisure time.

Theoretical Explanations for Globalization

• Gains by absolute advantage
• Gains by comparative advantage
• Characteristics of competitive advantages
• These theories date back to the 18th and 19th centuries, when industrialization was in its early stages, especially in Europe.### Absolute Advantage Theory
• Country A can produce 20 units of textiles or 40 units of steel with 1 unit of resource.
• Country B can produce 80 units of textiles or 20 units of steel with 1 unit of resource.
• Country A has an absolute advantage in producing steel, while Country B has an absolute advantage in producing textiles.
• If each country spends 1 unit of resource on each product, the overall output would be 100 units of textiles and 60 units of steel.
• With specialization, the overall output would be 80 units of steel and 160 units of textiles.

Comparative Advantage Theory

• Even if two countries have no absolute advantage in production, both countries can still benefit from specialization and cross-border trade.
• The country with a comparative advantage in a product should focus on that product.
• The country with a comparative disadvantage should focus on the product in which it is least disadvantaged.
• Country A has a comparative advantage in producing textiles, while Country B has a comparative advantage in producing steel.

Characteristics of Competitive Advantages

• According to Michael Porter, a company's competitive advantage is based on three key characteristics:
  • Architecture: Successful companies manage to agree on preferential contractual obligations with suppliers and customers.
  • Innovation: Top companies are more innovative than competitors.
  • Incumbency advantages: These relate to a company's ability to be an earlier player in its market, providing a chance to establish a good reputation and control access to resources.

National Competitive Advantages

• According to Porter, a nation's competitive advantage is based on two key capacities:
  • Product innovation
  • Process innovation
• These capacities are influenced by six variables:
  • Demand conditions
  • Factor conditions
  • Firm strategies
  • Related and support industries
  • Government policies
  • Chance

Porter's View of Competitive Advantages

• The first four variables are most important and interconnected.
• They are influenced by one another, as seen in Porter's view of competitive advantages.

Globalization and International Business

• Globalization is an increasing interconnectedness among societies and economies worldwide.
• International trade is beneficial for all parties, as it allows countries to specialize in products they are most efficient in producing.
• Theories of Adam Smith and David Ricardo explain the economic benefits of globalization.

Globalization: A Reality Beyond Ideology

• Globalization is the increasing interconnectedness of societies and economies worldwide.
• In today's interdependent global economy, international business activities are widespread, and companies operate across national borders.

What is Globalization?

• Globalization is a matter of controversy, with no single definition accepted by scholars and the public.
• It involves the increasing interconnections of economies and societies worldwide.
• Business people focus on the increasing cross-border trade of goods and capital, while political scientists look at the impact on national governments.
• Social scientists examine the cultural and societal influences, and scholars of international relations discuss the development of global institutions.

Key Elements of Globalization

• Cultural and political forces
• Increasing interconnection between societies and economies
• Integration of economic processes and information transfer on a global level
• Shrinking political influence of national governments
• Shift from national and regional to fully integrated global markets
• Increasing homogeneity of societies and markets worldwide

Impact of Globalization on Business

• International companies operate across national borders, contributing to the development of globalization.
• Strategies for engaging in international business include buying or selling abroad, and becoming a truly multinational company.
• Global markets have developed in different ways, with standardized goods and services gaining importance.

Globalized Production

• Globalized production is a reality in almost every industry.
• Reasons for internationalizing production vary, including low relative unit labor costs, operating independently, and desiring to move production closer to sales markets or raw material sources.

Relationship Between Globalization and Government

• The increasing interconnectedness of economies and societies has changed the role of nation states significantly.
• National boundaries have lost importance, and nation states have lost competence and influence.
• Supranational organizations and multinational alliances have been established to undermine nation-state autonomy.

Criticisms of Globalization

• Shift of jobs from developed to underdeveloped countries
• Exploitation of cheap labor and poor working conditions abroad
• Harm to the environment through lack of ecological standards and enforcement
• Decline of national sovereignty and autonomy

Facts about Globalization and the Global Economy

• Worldwide exports grew at an average annual rate of 5% from 1980 to 2007.
• In 2007, exports worldwide accounted for 31% of the gross world domestic product (GDP).
• Foreign direct investment increased by a factor of five between 1980 and 2007.
• Cross-border mergers and acquisitions rose by 700% between 1990 and 2007.
• The hundred largest multinational companies have experienced above-average growth in their foreign assets and sales and workforces.

Economic Changes

• Markets have been subject to liberalization, such as financial services, telecommunications, and others.
• Value chains have been globalized, with multinational corporations sourcing materials and producing and marketing products on a global level.
• Modern technology and telecommunications have helped large companies manage their business across national borders and time zones.

Political Changes

• The globalization trend has required political and regulatory changes on both national and international levels.
• The collapse of the former communist regime and the end of the Cold War around 1990 opened up unprecedented opportunities for global growth.
• The world economy has changed, with the Southeast Asian region, including China, becoming a driving force.

Technological Changes

• Major developments in technology in the last two decades have facilitated globalization trends.
• Information is readily available on the internet, and mobile phone services enable people to communicate on the go.
• These technologies have helped increase international business activities.

Societal and Behavioral Changes

• The trends described above have influenced the way people travel.
• The number of international travelers rose annually from 260 million to 800 million between 1980 and 2008.
• Paid leave has increased, and people have more leisure time.

Theoretical Explanations for Globalization

• Gains by absolute advantage
• Gains by comparative advantage
• Characteristics of competitive advantages
• These theories date back to the 18th and 19th centuries, when industrialization was in its early stages, especially in Europe.### Absolute Advantage Theory
• Country A can produce 20 units of textiles or 40 units of steel with 1 unit of resource.
• Country B can produce 80 units of textiles or 20 units of steel with 1 unit of resource.
• Country A has an absolute advantage in producing steel, while Country B has an absolute advantage in producing textiles.
• If each country spends 1 unit of resource on each product, the overall output would be 100 units of textiles and 60 units of steel.
• With specialization, the overall output would be 80 units of steel and 160 units of textiles.

Comparative Advantage Theory

• Even if two countries have no absolute advantage in production, both countries can still benefit from specialization and cross-border trade.
• The country with a comparative advantage in a product should focus on that product.
• The country with a comparative disadvantage should focus on the product in which it is least disadvantaged.
• Country A has a comparative advantage in producing textiles, while Country B has a comparative advantage in producing steel.

Characteristics of Competitive Advantages

• According to Michael Porter, a company's competitive advantage is based on three key characteristics:
  • Architecture: Successful companies manage to agree on preferential contractual obligations with suppliers and customers.
  • Innovation: Top companies are more innovative than competitors.
  • Incumbency advantages: These relate to a company's ability to be an earlier player in its market, providing a chance to establish a good reputation and control access to resources.

National Competitive Advantages

• According to Porter, a nation's competitive advantage is based on two key capacities:
  • Product innovation
  • Process innovation
• These capacities are influenced by six variables:
  • Demand conditions
  • Factor conditions
  • Firm strategies
  • Related and support industries
  • Government policies
  • Chance

Porter's View of Competitive Advantages

• The first four variables are most important and interconnected.
• They are influenced by one another, as seen in Porter's view of competitive advantages.

Globalization and International Business

• Globalization is an increasing interconnectedness among societies and economies worldwide.
• International trade is beneficial for all parties, as it allows countries to specialize in products they are most efficient in producing.
• Theories of Adam Smith and David Ricardo explain the economic benefits of globalization.