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Globalization

The shift toward a more integrated and interdependent world economy Two components: The globalization of markets The globalization of production

The merging of distinctly separate national markets into a global marketplace Falling barriers to cross-border trade have made it easier to sell internationally Tastes and preferences converge onto a global norm Firms offer standardized products worldwide creating a world market

Difficulties that arise from the globalization of markets Significant differences still exist among national markets Country-specific marketing strategies Varied product mix

The most global markets are not consumer markets The most global markets are for industrial goods and materials that serve a universal need the world over

Refers to sourcing of goods and services from locations around the world to take advantage of
Differences in cost or quality of the factors of production

Labor Land Capital

Historically this has been primarily confined to manufacturing enterprises Increasingly companies are taking advantage of modern communications technology, and particularly the Internet, to outsource service activities to low-cost producers in other nations

Outsourcing of productive activities to different suppliers results in the creation of products that are global in nature Impediments to the globalization of production include Formal and informal barriers to trade Barriers to foreign direct investment Transportation costs Issues associated with economic risk Issues associated with political risk

Globalization has created the need for institutions to help manage, regulate and police the global marketplace
GATT WTO IMF World bank United Nations

World Trade Organization (WTO): responsible for

policing the world trading system and ensuring that nations adhere to the rules established in WTO treaties International Monetary Fund (IMF): maintains order in the international monetary system World Bank: promotes economic development United Nations (UN): 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

Two macro factors seem to underlie the trend toward greater 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

During the 1920s and 30s, many of the nationstates of the world 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.

After WWII, the industrialized countries of the

West began the process of removing barriers to the free flow of goods, services, and capital between nations
Under GATT, over 100 nations negotiated further

decreases in tariffs and made significant progress on a number of non-tariff issues

Under the WTO, a mechanism now exists for dispute resolution and the enforcement of trade laws, and there is a push to cut tariffs on industrial goods, services, and agricultural products
Removal of barriers to trade has contributed to increased international trade (the export of goods or services to consumers in another country), world output, and foreign direct investment (the investing of resources and business activities outside a firms home country)

1913 France Germany Italy Japan Holland Sweden 21 % 20 % 18 % 30 % 5% 20 %

1950 18 % 26 % 25 % -1% 9%

1990 5.9 % 5.9 % 5.9 % 5.3 % 5.9 % 4.4 %

2002 4.0 % 4.0 % 4.0 % 3.8 % 4.0 % 4.0 %

Great Britain
United States

-44 %

%
14 %

5.9 %
4.8 %

4.0 %
4.0 %

Figure 1.2: Growth of World Trade, Production and FDI, 1992-2004


800 700

Index 1992=100

600 500 400 300 200 100 0

19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04
World Trade World Production FDI Outflows

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


3100 2600

Index 1950=100

2100 1600 1100 600 100

19 50 19 54 19 58 19 62 19 66 19 70 19 74 19 78 19 82 19 86 19 90 19 94 19 98 20 02
Total Merchandise Exports World Production

Lowering of trade barriers made globalization possible; technology has made it a reality Since the end of World War II the world has seen advances in
Communication Information processing Transportation technology

Microprocessors and Telecommunications: Major advances in

communications and information processing have lowered the cost of global communication and therefore the cost of coordinating and controlling a global organization
The Internet and the World Wide Web: Web-based transactions have grown

from virtually zero in 1994 to nearly $7 trillion in 2004


Transportation Technology: the most important developments are probably

development of commercial jet aircraft and super freighters and the introduction of containerization, which greatly simplifies trans-shipment from one mode of transport to another

Improvements in transportation technology

have enabled firms to better respond to international customer demands

Managers today operate in an environment

that offers more opportunities, but is also more complex and competitive than that of a generation ago

In 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

In the early 1960s, the U.S. was the world's dominant industrial power

accounting for about 40.3 percent of world manufacturing output By 2005 the United States accounted for only 20.1 percent Rapid economic growth is now being experienced by countries such as China, Thailand, and Indonesia Further relative decline in the U.S. share of world output and world exports seems likely Forecasts predict a rapid rise in the share of world output accounted for by developing nations such as China, India, Indonesia, Thailand, and South Korea, and a decline in the share by industrialized countries such as Britain, Japan, and the United States

The share of world output generated by developing

countries has been steadily increasing since the 1960s The stock (total cumulative value of foreign investments) generated by rich industrial countries has been on a steady decline There has been a sustained growth in cross-border flows of foreign direct investment The flow of foreign direct investment (amounts invested across national borders each year) has been directed at developing nations especially China

Figure 1.3: Internet Users per 1000 People, 19902003


700.00 600.00

Internet Users per 1000 people

500.00 400.00 300.00 200.00 100.00 0.00

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

Japan

United States

European Monetary Union

World

2003

World output and trade Changing foreign direct investment Changing nature of multinationals

Pro Factors
Lower prices for goods and

Con Factors
Destroys manufacturing

services Economic growth stimulation Increase in consumer income Creates jobs Countries specialize in production of goods and services that are produced most efficiently

jobs in wealthy, advanced countries Wage rates of unskilled workers in advanced countries declines Companies move to countries with fewer labor and environment regulations Loss of sovereignty

Managing an international business is different from managing a purely domestic business in four areas:
Countries are different Range of problems confronted by a manager in an international

business is wider and the problems themselves are more complex than those confronted by a manager in a domestic business An international business must find ways to work within the limits imposed by government intervention in the international trade and investment system International transactions involve converting money into different currencies

A multinational enterprise is any business that has productive activities in two or more countries.

The collapse of communism in Eastern Europe

represents a host of export and investment opportunities for Western businesses The economic development of China presents huge opportunities and risks, in spite of its continued Communist control Mexico and Latin America also present tremendous new opportunities both as markets and sources of materials and production

Firms must be aware that while the more

integrated global economy presents new opportunities, it also could result in political and economic disruptions that may throw plans into disarray

Critics of globalization worry that jobs are being

lost to low-wage nations


Supporters of globalization argue that free trade

will result in countries specializing in the production of those goods and services that they can produce most efficiently, while importing goods and services that they cannot produce as efficiently

Critics of globalization argue that that free trade

encourages firms from advanced nations to move manufacturing facilities offshore to less developed countries with lax environmental and labor regulations
Supporters of free trade point out that tougher

environmental regulation and stricter labor standards go hand in hand with economic progress and that foreign investment often helps a country to raise its standards

Critics of globalization worry that economic

power is shifting away from national governments and toward supranational organizations Examples: World Trade Organization (WTO), the European Union (EU), and the United Nations

Globalization and the Worlds Poor


Critics of globalization argue that the gap

between rich and poor has gotten wider and that the benefits of globalization have not been shared equally
Supporters of free trade suggest that the actions

of governments have made limited economic improvement in many countries

MANAGING IN THE GLOBAL MARKETPLACE Managing an international business (any firm that engages in international trade or investment) is different from managing a domestic business because:
countries differ managers face a greater and more complex range of

problems international companies must work within the limits imposed by governmental intervention and the global trading system international transactions require converting funds and being susceptible to exchange rate changes