Chapter 1: Globalization and International Linkages - International Management

Chapter 1 Globalization and International Linkages © McGraw Hill, LLC © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC. 1  Learning Objectives 1. Assess the implications of globalization for...

Chapter 1 Globalization and International Linkages © McGraw Hill, LLC © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC. 1  Learning Objectives 1. Assess the implications of globalization for countries, industries, firms, and communities. 2. Review the major trends in global and regional integration. 3. Examine the changing balance of global economic power and trade and investment flows among countries. 4. Analyze the major economic systems and recent developments among countries that reflect those systems. © McGraw Hill, LLC 2  Introduction Management is the process of completing activities with and through other people. International management is the process of applying management concepts and techniques in a multinational environment and adapting management practices to different economic, political, and cultural contexts. A multinational corporation (MNC) is a firm that has operations in more than one country, international sales, and a mix of nationalities among managers and owners. © McGraw Hill, LLC 3  Largest MNCs © McGraw Hill, LLC 4  Globalization, Antiglobalization, and Pressures for Change 1 Globalization is the social, political, economic, cultural, and technological integration among countries around the world. Offshoring is when some company activities take place at offshore locations instead of in their countries of origin. Outsourcing is contracting out to external organizations activities previously performed by the firm. Internationalization is the process of a business crossing national and cultural borders, while globalization is the vision of creating one world unit, a single market entity. © McGraw Hill, LLC 5  Offshoring VS Outsourcing © McGraw Hill, LLC 6  Globalization, Antiglobalization, and Pressures for Change 2 Proponents believe that everyone benefits from globalization, as evidenced in lower prices, greater availability of goods, better jobs, and access to technology. According to antiglobalization activists, if corporations are free to locate anywhere in the world, the world’s poorest countries will relax or eliminate environmental standards and social services in order to attract first- world investment and the jobs and wealth that come with it. Proponents believe global firms will employ modern, green technology. © McGraw Hill, LLC 7  Global and Regional Integration 1 World Trade Organization (WTO) is the global organization that oversees rules and regulations for international trade and investment, including agriculture, intellectual property, services, and competition. It is the world's largest international economic organization, with 166 members representing over 98% of global trade and GDP. North American Free Trade Agreement (NAFTA) is a free-trade agreement between the United States, Canada, and Mexico that removed most barriers to trade and investment. It was renegotiated and replaced by the United States. It removed most trade and investment barriers between the United States, Canada, and Mexico. United States–Mexico–Canada Agreement (USMCA) replaced NAFTA in 2020 following ratification by each country. USMCA maintains the key provisions of the original trade agreement while enacting minor changes. © McGraw Hill, LLC 8  Global and Regional Integration 2 Other regional and bilateral trade agreements, including the U.S.– Singapore Free Trade Agreement and the U.S.–Dominican Republic– Central American Free Trade Agreement (CAFTA-DR), were negotiated in the same spirit as NAFTA/USMCA. The European Union (EU) is a political and economic community consisting of 27 member states. EU has made significant progress over the past two decades in becoming a unified market. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) negotiated an Asia-Pacific trade agreement that includes Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam and The United Kingdom. © McGraw Hill, LLC 9  European Member States and Candidates, 2019 Source: Original graphic by Professor Ajai Gaur. © McGraw Hill, LLC 10  Changing Global Demographics In 2016, the global working-age population declined. By 2050, the Wall Street Journal projects that the working age population will reduce by nearly 5% worldwide. Fertility rate decreased. It was cut in half - from 5 children per woman in 1950 to 2.4 children per woman in 2019. Global life expectancy increased. Due to improvements in the technology and healthcare sectors, people are now living longer in both developed and developing countries. The amount of spending on healthcare-related services will continue to increase rapidly, while the demand for goods such as cars and computers will decline. © McGraw Hill, LLC 11  The Shifting Balance of Economic Power in the Global Economy The emerging markets of Brazil, Russia, India, and China (BRIC) are predicted to grow more than 40% of the economic share of world growth by 2025. The N-11 (next) may constitute the next wave of emerging markets growth. It includes Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, Philippines, South Korea, Turkey, and Vietnam. The MIST countries (Mexico, Indonesia, South Korea, and Turkey) are particularly attractive due to their young, growing populations and other positive conditions for economic growth. In 2050, E7 describing the 7 major emerging economies of Brazil, China, India, Indonesia, Mexico, Russia, and Turkey is predicted to be 50% higher than G7 that includes USA, Canada, France, Germany, Italy, UK and Japan. Foreign direct investment (FDI) is the term used to indicate the amount invested in property, plant, and equipment in another country. © McGraw Hill, LLC 12  Figure 1-2: G7 (Group of Seven) Economies Source: Original graphic by Professor Jonathan Doh. © McGraw Hill, LLC 13  Figure 1-3: E7 (Emerging Seven) Economies Source: Original graphic by Professor Jonathan Doh. © McGraw Hill, LLC 14  Global Economic Systems A market economy exists when A mixed economy is a private enterprise reserves the combination of a market and a right to own property and monitor command economy. While the production and distribution of some sectors of this system goods and services while the state reflect private ownership and simply supports competition and the freedom and flexibility of efficient practices. the law of demand, other sectors are subject to government planning. A command economy is comparable to a monopoly in the sense that the organization - in this case, the government - has explicit control over the price and supply of a good or service. © McGraw Hill, LLC 15  Established Economies North America constitutes one of the four largest trading blocs in the world. The combined purchasing power of the United States, Canada, and Mexico is more than $28 trillion. The ultimate objective of the EU is to eliminate all trade barriers among member countries (like between the states in the U.S.). Maintaining a unified EU in the coming decades may be challenging after the withdrawal of the U.K. from the EU in 2020. The Russian attack on Ukraine in February 2022 has acted as a boost for EU unity with people recognizing the economic and security guarantees that come with EU membership. There has been a steady decline in Japan’s overseas investments since the 1990s due to a slowing Japanese economy, poor management decisions, and competition from emerging economies, such as China. But, Japan remains a formidable international competitor and is well poised in all three major economic regions: the Pacific Rim, North America, and Europe. © McGraw Hill, LLC 16  Emerging and Developing Economies 1 Central and Eastern Europe Russia’s economy, based on the strength of oil and gas resources, has continued to emerge as poverty declines and the middle class expanded in years since 1991. The Russia/Ukraine war have led to further sanctions and isolation in the global economic space. Many foreign companies have withdrawn from the Russian markets, and those still operating feel pressure from their home markets to not make additional investments and wind down their operations in a planned manner. Thus, the Russian economy likely will have a number of years of economic instability and many recurrent political problems. Although Russia, the Czech Republic, Hungary, and Poland receive the most media coverage, others are struggling. The key is to maintain the social order, establish law, rebuild infrastructure, and get factories and other firms up and running. © McGraw Hill, LLC 17  Emerging and Developing Economies 2 China The growth of China’s GDP has been slowing considerably. MNCs find it very difficult to do business in and with China, because the balance between the 2 systems (communism and capitalism) is delicate, and foreign businesses are often caught in the middle. Intellectual property concerns and national policies favoring domestic companies make China a complicated and high-risk venture. Trade relations between China and developed countries and regions, such as the United States and the EU, remain tense. Trump implemented tariffs on certain Chinese imports and China retaliated by enacting tariffs on a variety of U.S. goods. Another contentious issue is the value of its currency, which some argue is kept artificially low, giving China an unfair advantage. © McGraw Hill, LLC 18  Emerging and Developing Economies 3 Other Emerging Markets of Asia The countries of the ASEAN bloc are also fueling growth and development in the region. In South Korea, the major conglomerates, called chaebols, include Samsung, Hyundai, and the LG Group. Hong Kong has been the headquarters for some of the most successful multinational operations is Asia. Singapore has emerged as an urban planner’s ideal model and the leader and financial center of Southeast Asia. Taiwan’s economy, boosted by increasing foreign trade, continues to grow steadily. Thailand, Malaysia, Indonesia, and now Vietnam have developed economically with a relatively large population base and inexpensive labor despite the lack of considerable natural resources. © McGraw Hill, LLC 19  Emerging and Developing Economies 4 India With a population of about 1.4 billion and growing, India has traditionally had more than its share of political and economic problems. India’s GDP growth rate is among the highest in the world. India is attractive to multinationals, especially to U.S. and British firms as many Indian people speak English, are well educated, and known for advanced IT expertise. The trend of locating software and other higher-value-added services in India has helped bolster a large middle- and upper-class market for goods and services. © McGraw Hill, LLC 20  Developing Economies on the Verge 1 South America Countries in South America have had difficult economic problems, accumulating heavy foreign debt and experiencing severe inflation. Brazil has one of the most stable governments in Latin America. It has attracted considerable foreign investment, given Brazil’s large, well- educated population, ample natural resources, existing industrial base, and strategic geographic position. Chile’s market-based economy is also one of the best and stablest performers in Latin America. Argentina has one of the strongest economies, however it has suffered the recurring economic problems of inflation, external debt… South American countries are looking to do business with the U.S. and discussing with the EU to create free trade between the two blocs. © McGraw Hill, LLC 21  Developing Economies on the Verge 2 Middle East and Central Asia Israel, the Arab countries, Iran, Turkey, and the Central Asian countries of the former Soviet Union are a special group of emerging countries. Because of their oil, some of these countries are considered to be economically rich. Countries in the Middle East continue to face complex problems but still hold economic promise for the future. Recently, this region has been in the world news because of the wars and terrorism concerns. The price of oil greatly fluctuates, and the Organization of Petroleum Exporting Countries (OPEC) has trouble holding together its cartel. © McGraw Hill, LLC 22  Developing Economies on the Verge 3 Africa Even with considerable natural resources, many African nations remain very poor and underdeveloped. International trade is only beginning as a major source of income. One major problem is the overwhelming diversity of 3,000 tribes speaking 1,000 languages and dialects. Political instability is pervasive, and generates substantial risks for foreign investors. While globalization has opened up new markets for developed countries, developing nations in Africa lack the institutions, infrastructure, and economic capacity to take full advantage. Despite these issues, the future potential of many African countries is promising. © McGraw Hill, LLC 23 © McGraw Hill, LLC 25