Globalization

Chapter 1

What is Globalization? The shift toward a more integrated and interdependent world economy

Two components:The globalization of marketsThe globalization of production

Globalization of Production

Vizio flat panel TV is designed in a small office in California assembled in Mexico From

panels made in South Koreaelectronic components made in Chinamicroprocessors made in the U.S.

Not just manufacturing… Globalization of production has

historically been about manufacturing

Increasingly companies are using modern communications to outsource service activities to low-cost nations

Globalization of markets In the past, each country had

its own companies in many industries and its own products I never saw Japanese media and little

non-US media in college

Today everyone knows… Nintendo Starbucks Coca-Cola Ikea McDonald’s Samsung

But the most global markets are for standard

goodsAluminum WheatMicroprocessorsAircraft

For many consumer end-products, huge differences still exist among national marketsFood, clothing, entertainment

Drivers of Globalization

Two factors underlie globalization“Decline in barriers to the free flow of

goods, services, and capital” that has occurred since the end of World War II

Technological change

Declining Trade and Investment Barriers

During the 1920s and ‘30s, many of nations erected formidable barriers to international trade and foreign direct investment

Advanced industrial nations of the West committed themselves after World War II to removing barriers to the free flow of goods, services, and capital between nations.

Average Tariff Rates on Manufactured Products

1913 1950 1990 2002France 21 % 18 % 5.9 % 4.0 %Germany

20 % 26 % 5.9 % 4.0 %

Italy 18 % 25 % 5.9 % 4.0 %Japan 30 % -- 5.3 % 3.8 %Holland 5 % 1 % 5.9 % 4.0 %Sweden 20 % 9 % 4.4 % 4.0 %UK -- 4% 5.9 % 4.0 %US 44 % 14 % 4.8 % 4.0 %

Affects of Lowering Trade Barriers

Figure 1.1: Volume of World Trade and World Production, 1950-2004

100

600

1100

1600

2100

2600

3100

19501954195819621966197019741978198219861990199419982002

Index 1950=100

Total Merchandise Exports World Production

The Role of TechnologyLowering of trade barriers

made globalization possible;technology has made it a

transforming movement

Internet Usage GrowthFigure 1.3: Internet Users per 1000 People, 1990-

2003

0.00

100.00

200.00

300.00

400.00

500.00

600.00

700.00

19901991199219931994199519961997199819992000200120022003

Internet Users per 1000 people

Japan United States European Monetary Union World

The Emergence of Global Institutions

Notable global institutions include the World Trade Organization (WTO) which

is responsible for policing the world trading system and ensuring that nations adhere to the rules established in WTO treaties In 2008, 151 nations accounting for 97% of

world trade were members of the WTO the International Monetary Fund (IMF)

which maintains order in the international monetary system

The Emergence of Global Institutions

the World Bank which promotes economic development

the United Nations (UN) which maintains international peace and security, develops friendly relations among nations, cooperates in solving international problems and promotes respect for human rights, and is a center for harmonizing the actions of nations

The Changing Roles of Countriesin

the Global EconomyIn the 1960s: the U.S. dominated the world economy

and the world trade picture U.S. multinationals dominated the

international business scene about half the world-- the centrally

planned economies of the communist world-- was off limits to Western international business

Today, much of this has changed.

The Changing World Output and World Trade Picture

In the early 1960s, the U.S. was the world's dominant industrial power accounting for about 40.3% of world manufacturing output

By 2007, the U.S. accounted for only 20.7%

Other developed nations experienced a similar decline

The Changing Nature of the Multinational Enterprise

Since the 1960s, there has been a rise in non-U.S.

multinationals there has been a rise in mini-

multinationals

The Globalization DebatePro

Lower prices for goods and services

Economic growth Increase in consumer

incomeCreates jobs (for many)Countries specialize in

production of goods and services that are produced most efficiently

ConDestroys manufacturing

jobs in wealthy nationsWage rates of unskilled

in advanced countries decline

Companies move to countries with fewer labor and environment regulations

Loss of sovereigntyHomogenized cultures

Managing in the Global Marketplace

Much of this course is concerned with managing an international business i.e., any business with international

sales, sourcing, or Investment

Managing an international business is

different Countries are different International transactions involve converting

money into different currencies Range of problems in an international

business is wider and problems are more complex

International business must cope with different, conflicting government rules and systems

Different strategic approaches required

Key terms An international business – any

business with international sales, sourcing, or investment

A multinational business – any business with productive activities in 2 or more countries

A global business – a business that takes a global approach to production and sourcing (Coca-Cola, Intel)