CHAPTER 1:Globalization

What is Globalization ?

From business perspective globalization refers to the shift toward a more integrated and interdependent world economy.

Components of Globalization

A. The globalization of markets

B. The globalization of production.

A.The Globalization of Markets

The globalization of markets refers to the merging of historically distinct and separate national markets into one huge global marketplace.

The global acceptance of consumer products such as Citicorp credit cards, Coca-Cola, Levi’s jeans, Sony Walkmans, Nintendo game players, and McDonald’s hamburgers are all frequently held up as prototypical examples of this trend

3. Offering a standardized product worldwide , they are helping to create a global market.

•A company does not have to be the size of these multinational giants to facilitate, and benefit from, the globalization of markets. For example, the accompanying Management Focus describes how a small British enterprise with annual sales in 1997 of just £6.8 million ($10 million) is trying to build a global market for the traditional British fare of fish ‘n’ chips.

Factors increasing the Globalization of Markets

1. Converge of the tastes and preferences of consumers in different nations

2. The global acceptance of consumer products

3. Offering a standardized product worldwide

B. The Globalization of Production

The globalization of production refers to the tendency among firms to source goods and services from locations around the globe to take advantage of national differences in the cost and quality of factors of production (such as labor, energy, land, and capital).

• companies hope to lower their overall cost structure

• and/or improve the quality or functionality of their product offering, thereby allowing them to compete more effectively.

•Consider the Boeing Company’s latest commercial jet airliner, the 777. The 777 contains 132,500 major component parts that are produced around the world by 545 suppliers.

Drivers of Globalization

Two macro factors seem to underlie the trend toward greater globalization.

A. The first is the decline in barriers to the free flow of goods, services, and capital that has occurred since the end of World War II.

B. The second factor is technological change, particularly the dramatic developments in recent years in communications, information processing, and transportation technologies.

A. Declining Trade and Investment Barriers

•During the 1920s and 30s, many of the nation-states of the world erected formidable barriers to international trade and foreign direct investment.

•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.

•Many of the barriers to international trade took the form of high tariffs on imports of manufactured goods.

•The typical aim of such tariffs was to protect domestic industries from “foreign competition.” One consequence, however, was “beggar thy neighbor” retaliatory trade policies with countries progressively raising trade barriers against each other.

Having learned from this experience, after World War II, the advanced industrial nations of the West- and east committed themselves to removing barriers to the free flow of goods, services, and capital between nations.

1.This goal was enshrined in the treaty known as the General Agreement on Tariffs and Trade (GATT). Under the umbrella of GATT

•There have been more than eight rounds of negotiations among member states–which now number over 130–designed to lower barriers to the free flow of goods and services. The most recent round of negotiations, known as the Uruguay Round, was completed in December 1993. The Uruguay Round further reduced trade barriers; extended GATT to cover services as well as manufactured goods; provided enhanced protection for patents, trademarks, and copyrights;

2. established the World Trade Organization (WTO) to police the international trading system.

•Impact of GATT agreements on average tariff rates for manufactured goods. As can be seen, average tariff rates have fallen significantly since 1950 and under the Uruguay agreement should hit 3.9 percent in 2000.

The growth of world Trade and world output

B. The Role of Technological Change

The lowering of trade barriers made globalization of markets and production a theoretical possibility, and technological change has made it a tangible reality.

•Microprocessors and Telecommunications

•The Internet and World Wide Web

•Transportation Technology

•Implications for the Globalization of Production

The Changing Demographics of the Global Economy

•The Changing World Output and World Trade Picture

• The Changing Foreign Direct Investment Picture

% share of total FDI stock, 1980-1996

The National Composition of Largest Multinational

The Changing World Order

•Between 1989 and 1991 a series of remarkable democratic revolutions swept the communist world.

Eastern Europe and eventually in the Soviet Union itself, Communist governments collapsed like the shells of rotten eggs.

The Soviet Union is now history, having been replaced by 15 independent republics.

•Czechoslovakia has divided itself into two states

• while Yugoslavia has dissolved into a bloody civil war among its five successor states.

The Globalization Debate: Prosperity or Impoverishment?

¿Is the shift toward a more integrated and interdependent global economy a good thing?

¿Many influential economists, politicians, and business leaders seem to think so.

¿They argue that falling barriers to international trade and investment are the twin engines that are driving the global economy toward greater prosperity.

¿They argue that increased international trade and cross-border investment will result in lower prices for goods and services.

¿Globalization stimulates economic growth

¿Raises the incomes of consumers

¿Helps to create jobs in all countries that choose to participate in the global trading system.

¿Declining barriers to international trade and investment do stimulate economic growth, create jobs, and raise income levels .

¿Benefits outweigh the costs. It is argued that free trade results in countries specializing in the production of those goods and services that they can produce most efficiently, while importing goods that they cannot produce as efficiently

•The falling trade barriers allow firms to move their manufacturing activities offshore to countries where wage rates are much lower.

Globalization, Jobs, and Incomes

Harwood Industries, a US clothing manufacturer that closed its US operations, where it paid workers $9 per hour, and shifted manufacturing to Honduras, where textile workers receive 48 cents per hour

•Because of moves like this, the wage rates of poorer Americans have fallen significantly over the last quarter of a century.

Globalization, Labor Policies, and the Environment

A second source of concern is 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 from abuse by the unscrupulous

Globalization, Labor Policies, and the Environment

Globalization critics often argue that adhering to labor and environmental regulations significantly increases the costs of manufacturing enterprises and puts them at a competitive disadvantage in the global marketplace vis-à-vis firms based in developing nations that do not have to comply with such regulations

Firms deal with this cost disadvantage, the theory goes, by moving their production facilities to nations that do not have such burdensome regulations

Failing to enforce the regulations they have on their books. If this is the case, one might expect free trade to lead to an increase in pollution and result in firms from advanced nations exploiting the labor of less developed nations.

Globalization and National Sovereignty

A final concern voiced by critics of globalization is that in today’s increasingly interdependent global economy, economic power is shifting away from national governments and toward supranational organizations such as the World Trade Organization, the European Union, and the United Nations. As perceived by critics, unelected bureaucrats are now able to impose policies on the democratically elected governments of nation-states, thereby undermining the sovereignty of those states. In this manner, claim critics, the national state’s ability to control its own destiny is being limited

Conducting business transactions across national borders requires understanding the rules governing the international trading and investment system.

Cross-border transactions also require that money be converted from the firm’s home currency into a foreign currency and vice versa. Since currency exchange rates vary in response to changing economic conditions, an international business must develop policies for dealing with exchange rate movements

Reasons for the difference of Managing International and domestic Business

Countries are different

More wider and complex problem faced by managers of international business than those of a domestic business

Managers in an international business must find ways to work within the limits imposed by governments’ intervention in the international trade and investment system, and

International transactions involve converting money into different currencies.

International Business

An international business is any firm that engages in international trade or investment.

A firm does not have to become a multinational enterprise, investing directly in operations in other countries, to engage in international business, although multinational enterprises are international businesses.

All a firm has to do is export or import products from other countries.
As the world shifts toward a truly integrated global economy, more firms, both large and small, are becoming international businesses.