Global Business Today Chapter 1 PDF

Because learning changes everything.® Chapter 1 Globalization...

Because learning changes everything.® Chapter 1 Globalization naqiewei/DigitalVision Vectors/Getty Images © 2022 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw Hill.  Learning Objectives 1-1 Understand what is meant by the term globalization. 1-2 Recognize the main drivers of globalization. 1-3 Describe the changing nature of the global economy. 1-4 Explain the main arguments in the debate over the impact of globalization. 1-5 Understand how the process of globalization is creating opportunities and challenges for management practice. © McGraw Hill 2  Opening Case Detroit Bikes By 2018, about 95 percent of bikes sold in U.S. were assembled in China; about 65 percent of component parts were also produced in China. American consumers benefitted from lower prices. Detroit Bikes is an exception to outsourcing trend but struggled with production and local sourcing. 2018 tariffs and resulting trade war was a mixed blessing for Detroit Bikes, due to supply chain disruptions. Detroit Bikes is trying to avoid raising prices, other companies say they have no choice. © McGraw Hill VCG/Getty Images 3  Introduction World Economy Today Fewer self-contained national economies. More integrated global economic system with lower barriers to trade and investment. Transformation is called globalization. Today, benefits of globalization are more in dispute than at any time in the last half century. This shift has created many challenges and some opportunities, too. Globalization continues to impact almost everything we do. © McGraw Hill 4  What Is Globalization? 1 Globalization A shift toward a more integrated and interdependent world economy. Two facets: Globalization of markets. Globalization of production. © McGraw Hill 5  What Is Globalization? 2 The Globalization of Markets The merging of historically distinct and separate national markets into one huge global marketplace. In many markets, tastes and preferences of consumers in different nations are converging on some global norm, creating a global market. Examples: Coca-Cola, McDonald’s, IKEA, Starbucks, Apple. The most global of markets are for industrial goods and materials that serve universal needs around the world. Aluminum, oil, wheat, microprocessors. © McGraw Hill 6  What Is Globalization? 3 The 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 (labor, energy, land, and capital). Lower overall cost structure. Improvement of the quality or functionality of a product to compete more effectively. © McGraw Hill 7  What Is Globalization? 4 The Globalization of Impediments to globalization: Production continued Formal and informal trade Early outsourcing was barriers. primarily for manufacturing. Barriers to foreign direct investment. Today, modern communications technology Transportation costs. allows companies to Economic and political risk. outsource services. Managerial challenge for coordinating a globally dispersed supply chain. © McGraw Hill 8  The Emergence of Global Institutions 1 Global Institutions Manage, regulate, and police the global marketplace. Promote the establishment of multinational treaties to govern the global business system. Created by voluntary agreement between individual nation- states. © McGraw Hill 9  The Emergence of Global Institutions 2 World Trade Organization (WTO) Polices world trading system and ensures nation-states adhere to the rules established in WTO treaties. Succeeded the General Agreement on Tariffs and Trade (GATT). 164 member nations accounted for 98 percent of world trade (2020). © McGraw Hill 10  The Emergence of Global Institutions 3 International Monetary Fund (IMF) Maintains order in the international monetary system. Lender of last resort. Requires nation-states to adopt specific economic policies in return for loans. World Bank Promotes development using low-interest loans. Seen as less controversial than IMF. © McGraw Hill 11  The Emergence of Global Institutions 4 United Nations (UN) Committed to maintaining international peace and security on basis of UN Charter: Develops friendly relations among nations. Promotes cooperation in solving international problems. Promotes respect for human rights. A center for harmonizing the actions of nations. Includes 193 member countries. © McGraw Hill 12  The Emergence of Global Institutions 5 Group of Twenty (G20) Comprised of finance ministers and central bank governors of the 19 largest world economies plus the EU and European Central Bank. Represents 90 percent of global GDP. Became a forum for a coordinated policy response to the financial crisis of 2008 and 2009. © McGraw Hill 13  Drivers of Globalization 1 Two Macro Factors Toward Greater Globalization 1. Decline in barriers to free flow of goods, services, and capital. 2. Technological change. © McGraw Hill 14  Drivers of Globalization 2 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. During 1920s and 1930s, many nations put up barriers to international trade to protect domestic industries. After WWII, advanced Western countries reduced barriers. GATT, Uruguay Round, and WTO. © McGraw Hill 15  Table 1.1 Average Tariff Rates on Manufactured Products as Percentage of Value Country 1913 1950 1990 2018 France 21 percent 18 percent 5.9 percent 3.9 percent Germany 20 26 5.9 3.9 Italy 18 25 5.9 3.9 Japan 30 -- 5.3 2.5 Netherlands 5 11 5.9 3.9 Sweden 20 9 5.9 3.9 United Kingdom -- 23 5.9 3.9 United States 44 14 5.7 3.1 Sources: The 1913 to 1990 data are from “Who Wants to Be a Giant?” The Economist: A Survey of the Multinationals, June 24, 1995, pp. 3 to 4. The 2018 data are from the World Tariff Profiles 2019, published by the World Trade Organization. © McGraw Hill 16  Drivers of Globalization 3 Declining Trade and Investment Barriers continued Trade in goods and services has been growing faster than world output for decades. By 2019, sales of foreign affiliates of multinational corporations reached $27 trillion. Implications of fast-paced volume of world trade: More companies dispersing parts production. Economies of nation-states becoming more intertwined. World becoming significantly wealthier. © McGraw Hill BCFC/Shutterstock 17  Figure 1.1 Value of World Merchandised Trade and World Production 1960 to 2019 Access the text alternative for slide images. © McGraw Hill Sources: World Bank, 2020; World Trade Organization, 2020; United Nations, 2020. 18  Drivers of Globalization 4 Declining Trade and Investment Barriers continued Some firms finding home markets under attack from foreign competitors. Global financial crisis of 2008 to 2009 and drop in global output that occurred led to more calls for trade barriers to protect jobs at home. Resulting trade wars, such as one between U.S. and China. May slow the rate of globalization and production. COVID-19 global pandemic has had a significant impact on global supply chains, and thus on globalization. © McGraw Hill 19  Drivers of Globalization 5 Role of Technological Change Communications. Since World War II, microprocessor created explosive growth of high-power, lost-cost computing. Microprocessors also advanced telecommunications. Moore’s Law: as costs of microprocessors fall, their power increases. © McGraw Hill 20  Drivers of Globalization 6 Role of Technological Change continued The Internet. In 2019, 4.5 billion users (58 percent of global population). Reduces constraints of location, scale, and time zones. Transportation Technology. Commercial jets, superfreighters. Innovation of containerization has significantly lowered shipping costs. © McGraw Hill 21  Drivers of Globalization 7 Role of Technological Change continued Implications for the Globalization of Production. Lower transportation costs makes geographically dispersed production system more economical; allows firms to better respond to demand shifts. Implications for the Globalization of Markets. Low-cost communication networks create electronic global marketplace. Low-cost transportation makes shipping products around the world economical. Reduced cultural distance. Converging consumer tastes and preferences. © McGraw Hill 22  The Changing Demographics of the Global Economy 1 Global Economy: Early 1960s U.S. dominated the world economy, world trade. U.S. dominated world FDI. U.S. MNEs dominated international business. About half the world was off limits to Western international business. Today, much has changed. © McGraw Hill 23  The Changing Demographics of the Global Economy 2 The Changing World Output and World Trade Picture Early 1960s. U.S. was dominant in industrial power, accounting for about 38 percent of world manufacturing output. Today: U.S. accounts for only 24 percent. Germany, France, the U.K., and Canada had similar decline. Rapid economic growth now in countries like China, India, Russia, and Brazil. Chinese economy could surpass U.S. within a decade. Further relative decline by the U.S. and others is likely. © McGraw Hill 24  Table 1.2 Changing Demographics of World Output and World Exports Share of World Share of Share of Output in 1960 World Output World Exports Country (%) Today (%) Today (%) United States 38.3 percent 24.0 percent 8.2 percent Germany 8.7 4.6 7.1 France 4.6 3.2 2.8 Italy 3.0 2.4 2.4 United Kingdom 5.3 3.3 2.3 Canada 3.0 2.0 2.2 Japan 3.3 6.0 3.6 China NA 15.2 11.1 © McGraw Hill Sources: Output data from World Bank database, 2019. Trade data from WTO Statistical Database, 2019. 25  The Changing Demographics of the Global Economy 3 The Changing Foreign Direct Investment Picture World output generated by developing countries has been steadily increasing since 1960s. Stock of foreign direct investment (total cumulative value of foreign investments) generated by rich industrial countries is declining. Cross-border flows of foreign direct investment is rising. Largest developing country recipients of FDI are China, Mexico, and Brazil. © McGraw Hill 26  Figure 1.2 FDI Outward Stock as a Percentage of GDP Access the text alternative for slide images. © McGraw Hill Sources: OECD data 2020, World Development Indicators 2020, UNCTAD database, 2020.. 27  Figure 1.3 FDI Inflows (in millions of dollars) 1990 to 2019 Access the text alternative for slide images. © McGraw Hill Source: United Nations Conference on Trade and Development, World Investment Report 2020. 28  The Changing Demographics of the Global Economy 4 The Changing Nature of the Multinational Enterprise A multinational enterprise (MNE) is any business that has productive activities in two or more countries. In last 50 years, rise of non-U.S. multinationals and growth of mini-multinationals. Non-U.S. Multinationals. Large number of U.S. multinationals reflects U.S. economic dominance. Today, world economy is shifting away from North America and western Europe. © McGraw Hill 29  Figure 1.4 National Share of the Largest 2,000 Multinational Corporations in 2019 Access the text alternative for slide images. © McGraw Hill Source: Forbes Global 2000 in 2019. 30  The Changing Demographics of the Global Economy 5 The Changing Nature of the Multinational Enterprise continued The Rise of Mini-Multinationals. More small- and medium-size businesses (mini-multinationals) are involved in international trade and investment. Internet lowers barriers that smaller firms face in building international sales. © McGraw Hill 31  The Changing Demographics of the Global Economy 6 The Changing World Order Collapse of communism throughout eastern Europe. Greater export and investment opportunities, but political unrest is an increasing risk. Economic development in China. Huge opportunities despite continued government control, but also new competition from Chinese firms. Free market reforms and democracy in Latin America. New markets and new sources of materials and production, but economic and political risk remain high. © McGraw Hill 32  The Changing Demographics of the Global Economy 7 Global Economy of the Twenty-First Century A more integrated global economy. New opportunities for firms. But political and economic disruptions can upset plans. Risks associated with global financial crisis. Impact of global supply chain disruptions. Hedging strategies increasing in importance. © McGraw Hill 33  The Globalization Debate 1 Is A More Integrated and Interdependent Global Economy Good? Experts believe globalization promotes greater prosperity in the global economy, more jobs, and lower prices for goods and services. Others feel that globalization is not beneficial. © McGraw Hill 34  The Globalization Debate 2 Antiglobalization Protests Began with WTO protest in December 1999 in Seattle. Protest turned violent. Other protests have occurred worldwide. Critics fear globalization has detrimental effects on living standards, wages, and the environment. Theory and evidence suggests these fears are exaggerated. © McGraw Hill 35  The Globalization Debate 3 Globalization, Jobs, and Income Critics say that falling trade barriers destroy manufacturing jobs in wealthy economies (U.S. and western Europe). Service activities are increasingly outsourced to nations with lower labor costs. Supporters say benefits outweigh the costs. Outsourcing allows a company to reduce its cost structure and reduce prices. © McGraw Hill 36  The Globalization Debate 4 Globalization, Jobs, and Income continued Share of labor in national income has declined. Attributed to a fall in unskilled labor. Gap between poorest and richest segments of society has widened. In most countries, real income levels have increased for all. Many advanced economies report shortage of highly skilled workers and an excess of unskilled workers. © McGraw Hill 37  The Globalization Debate 5 Globalization, Labor Policies, and the Environment Critics argue that the lack of labor and environmental regulations in less developed countries attract investment. Adhering to environmental regulations increases costs of manufacturing. Supporters argue that tougher regulations lead to economic progress. Tougher regulations come with economic progress. Studies show a hump-shaped relationship between income levels and pollution levels. © McGraw Hill 38  Figure 1.5 Income Levels and Environmental Pollution Access the text alternative for slide images. © McGraw Hill Source: C. W. L. Hill and G. T. M. Hult, Global Business Today (New York: McGraw-Hill Education, 2018). 39  The Globalization Debate 6 Globalization and National Sovereignty Critics worry economic power is shifting away from national governments and toward supranational organizations such as the WTO, European Union, and UN. Believe that unelected bureaucrats impose policies and undermine sovereignty. Supporters say the power of these organizations is limited to what nation-states collectively agree to grant. Must be able to persuade member states to follow certain actions. Without the support of members, the organizations have no power. © McGraw Hill 40  The Globalization Debate 7 Globalization and the World’s Poor Critics argue the gap between rich and poor is wider, and the benefits of globalization are not shared equally. Many poor nations are under totalitarian regimes, suffer from endemic corruption, have few property rights, are involved in war, have rapidly expanding populations, are burdened by high debt. No money to invest in public infrastructure. Debt relief movements: Rich nations like the U.S. offer debt relief for “highly indebted poorer countries” (HIPCs). Reduce import barriers from poor nations. © McGraw Hill 41  Figure 1.6 Percentage of the World's Population Living in Poverty During 1981 to 2015 Access the text alternative for slide images. © McGraw Hill Source: World Bank Data Base on Poverty and Equity, World Development Indicators, 2019. 42  Managing in the Global Marketplace International Business Any firm that is engaged in international trade or investment. Managing international business differs from managing domestic business. Practices vary by country. Issues are more complex. Need to understand rules governing international trade and investment. Need to convert currency. © McGraw Hill Qilai Shen/In Pictures Ltd./Corbis/Getty Images 43  Summary In this chapter, we have Understood what is meant by the term globalization. Recognized the main drivers of globalization. Described the changing nature of the global economy. Explained the main arguments in the debate over the impact of globalization. Understood how the process of globalization is creating opportunities and challenges for management practice. © McGraw Hill 44  Because learning changes everything. ® www.mheducation.com © 2022 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw Hill.