Globalization

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Chapter 1
Globalization

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Learning Objectives
LO 1-1 Understand what is meant by the term
globalization.
LO 1-2 Recognize the main drivers of globalization.
LO 1-3 Describe the changing nature of the global
economy.
LO 1-4 Explain the main arguments in the debate over the
impact of globalization.
LO 1-5 Understand how the process of globalization is
creating opportunities and challenges for
management practice.

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What Is Globalization?
The transformation of national economies into an
interdependent, integrated global economic
system.
Globalization allow firms to view the market as an
integrated marketplace that includes buyers,
producers, suppliers and governments in different
countries.
“Made in Germany” >> “Made by BMW”

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What Is Globalization?
I. The Globalization of Markets
1) Falling barriers to cross-border trade and
investment
2) Global tastes
3) Benefits small and large companies
4) Significant differences between national markets
5) Products that serve universal needs are global
6) Competitors follow each other around the world

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What Is Globalization?
II. The Globalization of Production
• Sourcing goods to take advantage of differences in
cost and quality of factors of production
• Early outsourcing was limited to manufacturing
• Increasingly outsourcing service activities
• Technology now used for outsourcing
• Dispersing value creation activities can compress time and
lower the costs

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What Is Globalization?
The Globalization of Production continued
• “global products”
• Impediments
• Formal and informal barriers to trade
• Transportation costs
• Political and economic risk
• Coordination

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The Emergence of Global Institutions
The increasing proportion of business activities on
a global scale requires institutions to:
- manage, regulate and police the global
marketplace
- promote the establishment of multinational
treaties

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The Emergence of Global Institutions
1) General Agreement on Tariffs and Trade
(GATT)
2) World Trade Organization
3) International Monetary Fund
4) The World Bank
5) The United Nations
6) Group of Twenty (G20)

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The Emergence of Global Institutions
2) The World Trade Organization (WTO)
• Polices the world trading system
• Ensures nation-states comply to the rules
• Facilitates multinational agreements among members
• 164 nations account for 98 percent of world trade

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The Emergence of Global Institutions
3) The International Monetary Fund (IMF)
• Established to maintain order in the international
monetary system
• Requires nation-states to adopt specific economic
policies aimed at returning their economies to stability
and growth
• Lender of last resort

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The Emergence of Global Institutions
4) The World Bank
• Set-up to promote economic development
• Focused on making low-interest loans to cash-
strapped governments in poor nations that wish to
undertake significant infrastructure investments

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The Emergence of Global Institutions
5) The United Nations
• Peace through international cooperation and
collective security
• 193 countries
• UN Charter – four basic purposes
• Maintain international peace and security
• Develop friendly relations among nations
• Cooperate in solving international problems and in promoting
respect for human rights
• Be a center for harmonizing the actions of nations

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The Emergence of Global Institutions
6) Group of Twenty (G20)
• Finance ministers and central bank governors of the
19 largest economies in the world, plus
representatives from the European Union and the
European Central Bank
• Represents 90 percent of global GDP and 80 percent
of international global trade

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Drivers of Globalization
Two macro factors:
1. Decline in barriers to the free flow of goods,
services and capital
2.Technological change: communication, information
processing, transport technology

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Drivers of Globalization
1. Declining Trade and Investment Barriers
• 1920s-30s: Barriers to international trade and
foreign direct investment
• High tariffs resulted in retaliatory trade policies
• GATT lowered barriers
• Uruguay Round
• Established World Trade Organization (WTO)

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Drivers of Globalization
Knowledge Society and Trade Agreements
Figure 1.1 Value of world trade, world production, number of
regional trade agreements in force, and world population from 1960 to
2020 (index 1960 = 100).

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Drivers of Globalization
Knowledge Society and Trade Agreements
• The value of world trade in merchandised goods has
grown consistently faster than the growth rate in the
world economy since 1950.
• Trade across country borders is 2.6 times higher than world
production.
• Knowledge society has produced more informed consumers,
driving demand.
• Removal of restrictions to FDI
• More trade agreements

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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 (index 1960 =
100).
Jump to long description in
appendix
Sources: World Bank, 2017; World Trade Organization, 2017; United Nations, 2017.
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Drivers of Globalization
2. Role of Technological Change
• Communications
• Development of the microprocessor
• Moore’s Law
• Internet of things
• Half the world’s population uses the Internet
• Global e-commerce sales over $2 trillion (2017)
• The Internet is an equalizer

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Drivers of Globalization
2. Role of Technological Change
• Transportation technology
• Commercial jet travel, superfreighters, and
containerization
• Implications for the globalization of production
• Production in geographically separate locations has
become more economical
• Worldwide communication networks are essential for
businesses
• Implications for the globalization of markets
• electronic global marketplaces allow fast and easy
access to the globzal market
• Convergence of consumer tastes and preferences
(people have access to global products)

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Megacarrier Jacques Saadé - LNG
https://www.youtube.com/watch?v=uQx_EPScmCI
https://worldmaritimenews.com/archives/283088/evergre
en-to-order-ten-23000-teu-containerships/
https://www.flows.be/nl/shipping/wereldpremiere-voor-cma-
cgm-eerste-containerreus-op-lng-uitgedokt
Superfreighters

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The Changing Demographics of the
Global Economy
I. The Changing World Trade Picture
• U.S., UK, Germany, and other developed nations
have experienced a relative decline reflecting the
faster economic growth of several other economies
• China and BRIC countries growing more rapidly
• Developing nations may account for more than 60 percent
of world economic activity by 2025

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The Changing Demographics of the
Global Economy
II. The Changing Foreign Direct Investment
Picture
• Non-U.S. firms are increasingly investing across
national borders
• Motivation to do this: the desire to disperse production
activities to optimal locations and to build a direct presence in
major foreign markets
• From the 70’s European and Japanese firms began to shift
their operations to markets with lower labor costs
• Increase of FDI

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Figure 1.3 Share of FDI stock outward as a
percentage of GDP.
Sources: OECD data 2017, FDI stocks.

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Figure 1.4 FDI inflows (in millions of dollars)
Source: United Nations Conference on Trade and Development, World Investment Report 2017. (Data for 2018–2020 are forecast.)

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The Changing Demographics of the
Global Economy
III. The Changing Nature of the Multinational
Enterprise
• Non-U.S. multinationals
• In 2003, 38.8 percent of the world’s 2000 largest
multinationals were U.S. firms (776 firms)
• By 2017, 27 percent of the top 2000 global firms are now
U.S. multinationals (540 firms), a drop of 236 firms
• Japan and UK also saw drops in their share among the top
2000
• Shift of the axis of the world economy away from North
America and western Europe

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The Changing Demographics of the
Global Economy
III. The Changing Nature of the Multinational
Enterprise
• The rise of mini-multinationals
• Medium- and small-sized businesses
• Internet is lowering barriers

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The Changing Demographics of the
Global Economy
IV. The Changing World Order
• Former communist countries present a host of export
and investment opportunities
• Signs of growing unrest and totalitarianism
• China moving to industrial superpower
• Latin America debt and inflation are down, more
private investors, expanding economies

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The Changing Demographics of the
Global Economy
V. Global Economy of the Twenty-First Century
• Barriers to the free flow of goods, services, and
capital have been coming down
• Strengthened by the widespread adoption of liberal
economic policies by countries that had firmly
opposed them
• Globalization is not inevitable
• Countries may pull back from their commitments
• Risks are high

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The Globalization Debate
Is the shift toward a more integrated and
interdependent global economy a good thing?
1) Antiglobalization Protests
• 1999, Seattle, protests at WTO meeting
• Detrimental effects on living standards, wage
rates, and the environment.

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The Globalization Debate
2) Globalization, Jobs, and Income
• Critics of globalization argue:
• Falling trade barriers allow firms to move
manufacturing activities to countries where wages are
much lower
• They destroy manufacturing jobs in wealthy advanced
economies
• Services also being outsourced
• Exporting jobs to low-wage nations
• Contributing to higher unemployment and lower living
standards in their home nations

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The Globalization Debate
2) Globalization, Jobs, and Income
• Supporters argue:
• Benefits outweigh the costs
• Free trade will result in countries specializing in
the production of goods and services that they can
produce most efficiently, while importing goods and
services that they cannot produce as efficiently
• As a result, the whole economy is better off
• Companies can reduce their cost structure, and
consumers benefit

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The Globalization Debate
3) Globalization, Labor Policies, and the
Environment
• Critics argue:
• Trade encourages firms to move manufacturing
facilities to less developed countries that lack
adequate regulations to protect labour and
environment from abuse
• Adhering to regulations increases costs >
competitive disadvantage > relocation to developing
countries

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The Globalization Debate
3) Globalization, Labor Policies, and the
Environment
• Supporters argue:
• Tougher environmental regulations and stricter labor
standards go hand in hand with economic progress
• As countries get richer, they enact tougher
environmental and labor regulations
• Possibility to tie multilateral agreements to tougher
environmental laws and labor laws to less developed
countries

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The Globalization Debate
4) Globalization and National Sovereignty
• Critics argue:
• Shift of power from national governments toward
supranational organizations
• WTO, EU, United Nations, G20
• Supporters argue:
• The power of supranational organizations is limited
to what nation-states collectively agree to grant
• These organizations exist to serve the collective
interests of member states

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The Globalization Debate
5) Globalization and the World’s Poor
• Critics argue:
• Gap between the rich and poor nations has
gotten wider
• Totalitarian governments
• Poor economic policies
• Corruption and lack of property rights
• Expanding populations in developing countries
• Debt burdens
• Supporters argue:
• The best way to change the situation is to lower
barriers to trade and investment and promote
free market policies

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Managing in the Global Marketplace
Managers
• Managing an international business differs from
managing a purely domestic business
1. Countries are different: need to vary practices from
country to country
2. Greater complexity: more complex decisions required,
the right entry strategy
3. Understanding the rules: develop strategy to deal with
governmental restrictions
4. Need to understand the international trading and
investment system, currency exchange (risks)

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Globalisation
Questions?