Globalization PDF

International Business Chapter 1 Globalization 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...

International Business Chapter 1 Globalization 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. Introduction The world economy today Fewer self-contained national economies More integrated global economic system with lower barriers to trade and investment Transformation is called globalization The volume of goods, services, and investments crossing national borders has expanded faster than world output for more than half a century Globalization offers business opportunities What Is Globalization? Globalization: shift toward a more integrated and interdependent world economy. Two key facets of globalization Globalization of markets Globalization of production What Is Globalization? The Globalization of Markets The merging of historically distinct and separate national markets into one huge global marketplace. In many markets, the tastes and preferences of consumers in different nations are converging on some global norm, creating a global market. The most global of markets are for industrial goods and materials that serve universal needs around the world. Homi- Amazon What Is Globalization? 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 What Is Globalization? The Globalization of Production Early outsourcing was primarily for manufacturing Today, modern communications technology allows companies to outsource services Impediments to globalization Formal and informal trade barriers Barriers to foreign direct investment Transportation costs Economic and political risk Managerial challenge for coordinating a globally dispersed supply chain China is going after South Korea's wallet in their dispute over the THAAD missile system The Emergence of Global Institutions Global Institutions Manage, regulate, and police the global market place Promote the establishment of multinational treaties to govern the global business system The Emergence of Global Institutions World Trade Organization (WTO) Polices world trading system and ensures nations adhere to the rules established in WTO treaties Succeeded the General Agreement on Tariffs and Trade (GATT) 164 nations accounted for 98 percent of world trade (2017) The Emergence of Global Institutions 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 economic development using low-interest loans Seen as less controversial than IMF International Monetary Fund (IMF) The Emergence of Global Institutions United Nations (UN) Maintains international peace and security 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 United Nations (UN) ESG The Emergence of Global Institutions Group of Twenty (G20) Comprised of finance ministers and central bank governors of the 19 largest world economies plus the EU Represents 90 percent of global GDP Became a forum for a coordinated policy response to the financial crisis of 2008 and 2009 Group of Twenty (G20) Drivers of Globalization Two macro factors driving the move toward greater globalization Decline in barriers to free flow of goods, services, and capital Technological change Drivers of Globalization Declining Trade and Investment Barriers International trade occurs when a firm exports goods or services to consumers in another country Foreign direct investment 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 Table 1.1 Average Tariff Rates on Manufactured Products as Percentage of Value Country 1913 1950 1990 2020 France 21 percent 18 percent 5.9 percent 1.6 percent Germany 20 26 5.9 1.6 Italy 18 25 5.9 1.6 Japan 30 -- 5.3 1.4 Netherlands 5 11 5.9 1.6 Sweden 20 9 4.4 1.6 United Kingdom -- 23 5.9 1.6 United States 44 14 4.8 1.6 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. 3–4. The 2020 data are estimated based on data from the World Development Indicators, World Bank. Drivers of Globalization Declining Trade and Investment Barriers Knowledge Society and Trade Agreements World trade is predicted to increase more rapidly than world production for the foreseeable future Produce more today and more of it traded across national borders Consumers are more knowledgeable, which drives demand Countries have been reducing restrictions to foreign investment and trade Drivers of Globalization ▪ Implications of fast-paced volume of world trade More companies dispersing parts production Economies of nation-states becoming more intertwined World becoming significantly wealthier Figure 1.1 Value of World Trade, World Production, Number of Regional Trade Agreements and World Population 1960 to 2020 Sources: World Bank, 2019; World Trade Organization, 2019; United Nations, 2019. Figure 1.2 Comparisons of World Trade and World Population; World Trade and Number of Regional Trade Agreements; World Population and World Production; and World Population and World Trade Drivers of Globalization 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 Drivers of Globalization Role of Technological Change Internet of Things - In 2017, 3.8 billion users (51 percent of global population), Makes it easier for buyers and sellers to find each other Transportation Technology - Commercial jets, Superfreighters, Containerization Drivers of Globalization Role of Technological Change Lower transportation costs makes geographically dispersed production system more economical Allows firms to better respond to customer demands 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 The Changing Demographics of the 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 The Changing Demographics of the Global Economy 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 Recently Germany, France, the U.K., and Canada had similar decline Rapid economic growth now in countries like China, India, Russia, and Brazil Further relative decline by the U.S., Germany, and Japan; U.K. is likely Table 1.2 Changing Demographics of World Output and World Exports Share of World Share of World Share of World Country Output 1960 (%) Output Today (%) Exports Today (%) United States 38.3 15.8 8.2 Germany 8.7 3.4 7.1 France 4.6 2.3 2.8 Italy 3.0 1.9 2.4 United Kingdom 5.3 2.4 2.3 Canada 3.0 1.4 2.2 Japan 3.3 4.3 3.6 China NA 17.1 11.1 Sources: Output data from World Bank database, 2019. Trade data from WTO Statistical Database, 2019. The Changing Demographics of the Global Economy 3 The Changing Foreign Direct Investment Picture World output generated by developing countries steadily increasing since 1960s Stock of foreign direct investment (total cumulative value of foreign investments) generated by rich industrial countries declining Cross-border flows of foreign direct investment rising Largest developing country recipients of FDI are China, Mexico, and Brazil Figure 1.3 Share of FDI Stock Outward as a Percentage of GDP Sources: OECD data 2017, FDI stocks. Figure 1.4 FDI Inflows (in millions of dollars) Source: United Nations Conference on Trade and Development, World Investment Report 2018. (Data for 2019–2020 are forecast.) The Changing Demographics of the Global Economy The Changing Nature of the Multinational Enterprise A multinational enterprise (MNE) is any business that has productive activities in two or more countries Since the 1960s, a 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 shifting away from North America and Western Europe Figure 1.5 National Share of Largest Multinational Corporations Source: Forbes Global 2000 in 2003 and 2017. The Changing Demographics of the Global Economy The Changing Nature of the Multinational Enterprise continued The Rise of Mini-Multinationals More small- and medium-size businesses (mini- multinationals) involved in international trade and investment Internet lowers barriers that smaller firms face in building international sales The Changing Demographics of the Global Economy The Changing World Order Collapse of communism in Eastern Europe Greater export and investment opportunities, but political unrest is 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 remains high The Changing Demographics of the Global Economy Global Economy of the Twenty-First Century A more integrated global economy New opportunities for firms But, political and economic disruptions can upset plans The risk of a global financial crisis The Globalization Debate Is the shift toward a more integrated and interdependent global economy a good thing? 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 The Globalization Debate Antiglobalization Protests Began with WTO protest in December 1999 in Seattle Protest turned violent Protestors fear globalization has detrimental effects on living standards, wages, and the environment Theory and evidence suggests these fears are exaggerated WTO protest in December 1999 in Seattle The Globalization Debate Globalization, Jobs, and Income Falling trade barriers destroy manufacturing jobs in wealthy economies (U.S. and western Europe) Service activities 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 The Globalization Debate Globalization, Jobs, and Income 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 increased for all Many advanced economies report shortage of highly skilled workers and an excess of unskilled workers The Globalization Debate 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 Figure 1.6 Income Levels and Environmental Pollution Source: C. W. L. Hill and G. T. M. Hult, Global Business Today (New York: McGraw-Hill Education, 2018). The Globalization Debate Globalization and National Sovereignty Critics worry economic power is shifting away from national governments and toward supranational organizations such as the WTO, the European Union, and the UN Supporters say the power of these organizations is limited to what nation-states collectively agree to grant Must be able to persuade members states to follow certain actions Without the support of members, the organizations have no power The Globalization Debate Globalization and the World’s Poor Critics argue the gap between rich and poor is wider and the benefits of globalization 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 gave to World Bank and IMF Reduce import barriers from poor nations World Poor Managing in the Global Marketplace International business is any firm that is engaged in international trade or investment Managing international business differs from managing domestic business Practices vary country by country Issues are more complex Need to understand rules governing international trade and investment Need to convert currency 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.