International Business : Challenges in a Changing World International Business Lecture 2: Perspectives on globalization International Business : Challenges in a Changing World Aims of the lecture To define and contrast globalization of markets and globalization of production To identify methods of internationalizing operations To apply theories of internationalization and foreign direct investment (FDI) To follow trends in FDI outflows and inflows, highlighting the growing influence of emerging economies To outline the impacts of globalization on societies, together with the roles (actual and potential) of MNEs International Business : Challenges in a Changing World What is globalization? Definition: Increasing and deepening interactions between individuals and organizations across the globe. Processes are ongoing, at varying pace between countries and between sectors. Globalization of markets, implying growing uniformity, has been partially realized, but local preferences predominate in many sectors. Globalization of production, implying co-ordination of operations across borders, has transformed manufacturing, but country differences are important. International Business : Challenges in a Changing World Classifying countries in terms of economic development Developed countries Industrialized and economically advanced countries, with high levels of prosperity. Developing countries Countries changing from mainly agricultural or natural resource-based economy to industrial production. Transition economies Countries moving from communist or state-planned systems to market-based systems. (They overlap with developing countries, as modernization of their industries is a priority.) Emerging economies or markets Fast-growing developing and transition economies. International Business : Challenges in a Changing World Figure 2.1: Globalization International Business : Challenges in a Changing World Table 2.1: What does globalization mean for business, society and government? International Business : Challenges in a Changing World Methods of internationalizing operations Outsourcing contracting with another company to carry out operations, usually more cheaply than the firm can do in- house. Includes: Business process outsourcing (BPO) Offshoring (contracting out of a function to a low-cost location) FDI ownership and control of foreign assets. Includes: Greenfield investment Acquisition of an existing business Joint venture International Business : Challenges in a Changing World Figure 2.2: Methods of internationalizing operations International Business : Challenges in a Changing World Theories of internationalization Early theories of FDI were based on location and ownership advantages Product life cycle theory Theory of incremental internationalization Concept of psychic distance Dunnings eclectic paradigm, known as the OLI paradigm configuring ownership, location and internalization advantages International Business : Challenges in a Changing World Figure 2.3: Product Life Cycle International Business : Challenges in a Changing World Figure 2.4: Incremental internationalization International Business : Challenges in a Changing World Figure 2.5: Dunnings eclectic paradigm International Business : Challenges in a Changing World Changing patterns of FDI FDI has been a driver of globalization. FDI inflows into developed countries have focused on proximity to large markets. into to developing and emerging economies are growing, due to the benefits of globalized production and growth in emerging markets. Outward investors have been predominantly from the developed countries, but emerging MNEs are now rapidly internationalizing investing in both developed and developing countries. International Business : Challenges in a Changing World Figure 2.6: Growth in value of FDI stock Source: UN, World Investment Reports 2005 and 2007 (Geneva: UN) International Business : Challenges in a Changing World Figure 2.7: FDI inflows, Source UN, World Investment Reports 2005 and 2007 (Geneva: UN) International Business : Challenges in a Changing World Figure 2.8: Number of MNEs based in developed, developing and transition economies Source UN, World Investment Report 2007 (Geneva: UN) International Business : Challenges in a Changing World Figure 2.9: FDI outflows from developing and transition countries Source UN, World Investment Reports 2005, 2006 and 2007 (Geneva: UN) International Business : Challenges in a Changing World Impacts of globalization on societies Economic impacts: For host societies, FDI and outsourcing bring jobs and prosperity in favoured sectors but, especially in low-skill sectors, work is insecure as investors may shift production to another country Loss of low-skill jobs in home countries of investors Widening inequality both within and between countries. Diffusion of technology: Host societies benefit from technology transfer and spillover effects, but risk of stifling local innovative capacity. International Business : Challenges in a Changing World Figure 2.10: Share of the top 1% of earners in gross income in selected industrialized countries Source ILO (2004) A Fair Globalization (Geneva : ILO) International Business : Challenges in a Changing World Figure 2.11: Number of internet users per thousand people Source UNDP (2007) Human Development Report (Basingstoke: Palgrave Macmillan) International Business : Challenges in a Changing World Figure 2.12: Globalized production and social impacts International Business : Challenges in a Changing World Global financial markets Global finance is often cited as at the forefront of globalization, facilitated by: The revolution in IT and the internet Liberalization of national financial systems, opening up to outside investors. The benefits for emerging economies have been rapid economic integration, capital investment and economic growth. However, risks of global financial volatility have grown. International Business : Challenges in a Changing World Cultural and environmental impacts of globalization Cultural Culture change through industrialization and urbanization. Convergence in lifestyles as consumer societies grow. On the other hand, cultural differences persist. Environmental Industrialization, power generation and extraction of natural resources have gathered pace, bringing environmental degradation and hastening climate change. Developed and emerging countries have differing perspectives of on the need to promote environmental protection International Business : Challenges in a Changing World Conclusions Globalization has shrunk the world due to IT, communications and modern transport, combined with opening up of countries to outside investors. Globalization of production has transformed manufacturing, but markets, especially in consumer products, remain localized. MNEs have been at the forefront of internationalization of production, especially through FDI, now increasingly encompassing emerging MNEs and markets. New jobs and greater consumer choice have resulted, but negative social impacts represent the dark side of globalization.