Introduction to Globalization

Introduction to Globalization

• Globalization is the trend towards a more integrated global economic system.
• This involves declining barriers to cross-border trade and investment.
• Advances in transportation and telecommunications reduce distances.
• Material cultures are becoming more similar across borders.
• In 2013, $19 trillion of goods and $5 trillion of services were sold across borders, with over $5 trillion in daily foreign exchange transactions.
• Businesses face opportunities to expand revenue, reduce costs, and increase profits in the global economy.
• Businesses also face challenges of foreign market entry, product customization, and competition from efficient foreign entities.
• The rise of globalization has led to anxiety for workers due to technology, transportation, and skilled workers in low-cost nations.
• Accounting services is one industry transformed via accountants in countries like India trained in U.S. code performing work for U.S. firms.

What is Globalization?

• Globalization is the shift toward a more integrated and interdependent world economy.

The Globalization of Markets

• The globalization of markets refers to the merging of historically distinct and separate national markets into one huge global marketplace.
• Consumer tastes and preferences in different nations are beginning to converge upon some global norm, like Coca-Cola and McDonald's.
• Firms benefit from and facilitate this trend by offering the same products worldwide.
• Significant differences between markets require customized strategies and product features.
• Most global markets are for industrial goods and materials (like microprocessors) rather than consumer products.

The Globalization of Production

• The globalization of production involves sourcing goods and services globally to capitalize on national differences in costs and quality of factors of production (land, labor, capital, energy).
• This allows companies to compete more effectively.
• Boeing's 777 involves suppliers from Japan and Singapore.
• Boeing outsources 65% of 787 aircraft to foreign companies.

The Emergence of Global Institutions

• Global institutions help manage, regulate, and police the global marketplace.
• They promote the establishment of multinational treaties for the global business system.
• The World Trade Organization (WTO) polices the world trading system and ensures nations adhere to WTO treaties, similar to its predecessor, the General Agreement on Tariffs and Trade (GATT).
• As of 2016, 162 nations (98% of world trade) were members of the WTO.
• The International Monetary Fund (IMF) maintains order in the international monetary system.
• The World Bank promotes economic development.
• The United Nations (UN) maintains peace and security, develops friendly relations, solves international problems, promotes human rights, and harmonizes actions of nations.

Drivers of Globalization

• Two macro factors underlie the trend toward greater globalization: declining trade and investment barriers since the end of World War II and technological change.
• Technological change has brought advances in communication, information processing, and transportation.

Declining Trade and Investment Barriers

• International trade occurs when a firm exports goods or services to consumers in another country.
• Foreign Direct Investment (FDI) occurs when a firm invests resources in business activities outside its home country.
• Since WWII, Western industrialized countries have been removing barriers to the free flow of goods, services, and capital.
• Under GATT, countries negotiated decreases in tariffs.
• With the WTO's establishment, there is a mechanism for dispute resolution and enforcement of trade laws.
• The removal of trade barriers has occurred with increased international trade, world output, and foreign direct investment.
• The volume of world merchandise trade in 2014 was 5.3 times larger compared to 1990.
• International trade in services has grown since the 1980s, accounting for approximately 20% of world trade.
• The growth of foreign direct investment is a direct result of nations liberalizing to allow foreign firms to invest and acquire local companies.
• FDI flows in 2013 were about $1.5 trillion, below the 2007 peak of $2 trillion, but showing a strong upward trend.

The Role of Technological Change

• Lowering trade barriers made globalization of markets and production theoretically possible.
• Technological change made it a tangible reality.

Microprocessors and Telecommunications

• Since the end of WWII, there have been major advancements in communications and information processing.
• Moore's Law predicts that the power of microprocessor technology doubles and its production cost falls in half every 18 months, plummeting global communication costs.

The Internet

• The Internet's explosive growth provides a way to connect to its 3.3 billion users to each other as of 2015.
• In the United States, online retail sales in 2015 were about $340 billion and global e-commerce sales surpassed $1 trillion in 2012.

Transportation Technology

• Since WWII there have been major innovations in transportation technology: commercial jet aircraft, super freighters, and containerization which simplifies transshipment.

Implications for the Globalization of Production

• Technological innovations have dramatically decreased the real costs of information processing and communication in the past two decades.
• These developments enable firms to create and manage a globally dispersed production system.
• A worldwide communications network has become essential for international businesses.

Implications for the Globalization of Markets

• Today's managers operate in a complex and competitive environment with greater opportunities.
• Despite the convergence of consumer tastes and preferences into a global culture, firms must address differences between countries.

The Changing Demographics of the Global Economy

• In the 1960s, the U.S. dominated the world economy and trade, U.S. firms dominated foreign direct investment, large U.S. multinationals dominated international business, and half the world was off limits to Western business.

The Changing World Output and the Changing World Trade Picture

• In the early 1960s, the U.S. accounted for 38.3% of world manufacturing output.
• By 2014, the United States accounted for only 22.4%
• Most forecasts predict a rapid rise in the share of world output accounted for by developing nations such as China, Russia, India, Indonesia, Thailand, Mexico, Brazil, and South Korea, and a decline in the share enjoyed by rich industrialized countries.

The Changing Foreign Direct Investment Picture

• The share of total foreign direct investment stock since the 1980s for developed economies has declined.
• The same statistic indicates a considerable increase in developing economies.

The Changing Nature of the Multinational Enterprise

• A multinational enterprise is any business with productive activities in two or more countries.
• Large U.S. multinationals dominated the global business environment in the 1960s, accounting for about two-thirds of all foreign direct investment
• By 2012, the globalization of the world economy resulted in a relative decline in the dominance of U.S. firms in the global marketplace.
• There is growth of new multinational enterprises from the world's developing nations.

The Rise of Mini-Multinationals

• Another trend in international business has been the growth of medium-sized and small multinationals called mini-multinationals.

The Changing World Order

• The collapse of communism in Eastern Europe presented a host of export and investment opportunities for Western businesses; however, companies must be cautious.
• The economic development of China presents huge opportunities and risks, and firms must be aware of it's emerging multinationals.
• For North American firms, the growth and market reforms in Mexico and Latin America also present new opportunities, but the favorable trends may not continue.

The Global Economy of the 21st Century

• The path to full economic liberalization and open markets has economic crises in Latin America, South East Asia, and Russia which caused difficulties in 1997 and 1998.

The Globalization Debate

• The shift toward a more integrated and interdependent global economy stimulates economic growth, raises incomes, and helps to create jobs in all countries.
• There is a rising tide of opposition to globalization.

Anti-Globalization Protests

• Since 1999, anti-globalization protesters have turned up at almost every major meeting of a global institution.
• Protesters fear that globalization is forever changing the world in a negative way.

Globalization, Jobs, and Incomes

• In developed countries, labor leaders lament the loss of good paying jobs to low wage countries.
• Free trade will result in countries specializing in the production of those goods and services that they can produce most efficiently.

Globalization, Labor Policies, and The Environment

• The belief that free trade encourages firms from advanced nations to move manufacturing facilities offshore to less developed countries that lack adequate regulations to protect labor and the environment.

Globalization and National Sovereignty

• Globalization critics believe that in today's increasingly interdependent global economy, economic power is shifting away from national governments and toward supranational organizations.
• Countries and localities necessarily cede some authority over their actions with the development of the WTO and other multilateral organizations.

Globalization and the World's Poor

• Critics of globalization argue that over the last century, the gap between rich and poor has gotten wider, and the benefits of globalization have not been shared equally.

Managing in the Global Marketplace

• An international business is any firm that engages in international trade or investment.
• Managers need to recognize that the task of managing an international business differs from that of managing a purely domestic business in many ways (ie cultures, systems, development)
• Resulting in a more complex adaptation for businesses.
• Managing an international business is different from managing a purely domestic business for at least four reasons: countries differ, the range of problems a manager faces is greater and more complex, an international business must find ways to work within the limits imposed by governmental intervention and the global trading system, and international transactions require converting funds and are susceptible to exchange rate changes.