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International Business Chapter One Globalization: A shift towards a more integrated and independent world economy .

Globalization is shown in the globalization of markets and production Globalization of Markets Globalization of markets refers to the fact that different national markets had changed into one global market place as the barriers are falling and making it easier to sell internationally Consumers' tastes and preferences across nations started to be global tastes as consumers use same products all over the world Not only large multinational companies benefit from globalization ,as in USA 98% of the firms exporting are small business organizations with employees less than 100 Most of the global markets are not markets for consumer goods but markets for industrial goods because differences in consumers tastes and preferences are still to exist Firms confront each other's as competitors in nation after nation example Pepsi against Coca Cola ,when these firms move from one nation to another they bring with them assets used in other national markets ,they bring their goods ,strategies and brand names ,accordingly uniformity replaces diversity Low cost global communications created global markets and lower costs of transportation enables flow of goods across countries and this resulted in reducing the cultural distance between nations and diversity in consumers preferences Global communications and global media are creating a worldwide culture and this helped the global market for consumer goods

Globalization of Production Globalization of production refers to the sourcing of goods and services from locations all over the world to take advantage of

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differences in cost and the quality of factors of production example labor, energy, capital. Boeing uses foreign outsourcing from many foreign suppliers because these suppliers are the best at their activities. As transportation costs decreased production started to exist in several distinct locations ,and as communication has developed it's easy for a firm to create and manage a global production system

Emergence of Global Institutions As markets globalizes and rise happened in the proportion of business activity across national borders ,number of global institutions have emerged to regulate the global market place and to establish treaties to govern the global business system GATT: General agreement on Tariffs and Trade ,it was followed by the World Trade Organization (WTO)

1. Responsible for policing the world trading system and making sure that nations follow the trade rules 2. Responsible for lowering the trade and investment barriers across nations International Monetary Fund and World Bank 1. Established at Bretton woods 1944 keep order in the international monetary system. 2. The world bank focuses on making low interest loans to governments in poor nations to establish infrastructure investments 3. The IMF is the lender to nations with economies facing problems and currencies facing depreciation 4. IMF requires that borrowing nations should use specific economic policies. 5. There is always a debate concerning the bad effects IMF policy recommendations and sovereignty concerns by telling nations what policies they should use

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United Nations(UN)

1. Members of the UN accept the obligations of the UN charter which is an international treaty that have 4 main purposes : o International Peace o Solving international problems o Respect for human rights o Harmonizing nations actions 2. UN is not only known for peace keeping roles but also the promotion of higher standards of living ,full employment and economic development G20

1. Established 1999 ,includes the finance ministries of the 19 largest economies in the world plus representatives from the European Union 2. Established to formulate policies to face financial crisis in developing nations Drivers of Globalization First: The Declining Trade and Investment Barriers International trade barriers examples are tariffs on imports of manufactured goods with an objective to protect domestic production from foreign competition .These barriers had caused reduction in world demand and resulted in great depression 1930 Under the umbrella of GATT ,8 rounds had been held between the member nations to lower the barriers and by 2001the WTO had been established in DOHA round Doha Round :

1. Cutting tariffs on industrial goods ,services and agricultural products 2. Reducing subsidies to agriculture producers 3. Reducing the barriers to cross boarder investment 4. If the Doha round has ever completed the greatest winner will be the poor nations concerning the tariffs on agricultural goods and reducing the subsidies to agriculture products, the

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rich countries will stop to subsidize its agriculture goods producers and give access to the poor nations goods to the developed markets Second: The role of technological change Microprocessors :the most important innovation which enabled the growth of computing and information processing The Internet and World Wide Web : internet makes it much easier for buyers and sellers to find each other's ,allowing business to expand globally at lower cost and allow companies to coordinate its global production system Transportation Technology : the development of commercial jet air crafts and super freighters and containerization Containerization : 1. Revolutionized the transportation business 2. Lowered cost of shipping goods over long distances The changing world output and world picture Globalization resulted in that the large industrial countries example USA, Germany, Japan had lower share of the world economic activity after globalization and the developing nations shares started to increase greatly If current trend continues the Chinese economy would be larger than that of the USA Developing nations now account for 60 % of the world economic activity by 2020 ,given that currently the rich countries account for 55% of the world economic activity

The changing Foreign Direct Investment Developed nations manufacturers started to shift labor intensive manufacturing operations from their home markets to developing nations where labor cost is low and also to protect against changes in currency and possible trade barriers

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For example Toyota had seen that expensive Yen would raise Toyota prices and accordingly Toyota exports will decrease so Toyota started producing outside Japan to confront USA restrictions against Japanese cars The share in world's FDI of the large countries had decreased and the developing nations shares had increased

Antiglobalization Protests (Against) JOBS 1. Falling trade barriers allow firms to move manufacturing to countries where wage rates are much lower .This caused large growth in the world labor supply and reduced the wages in developed nations 2. The wage rates of unskilled workers had declined due to lower demand on unskilled workers and low wage manufacturers went abroad Argument Supporters of globalization argue that free trade will result in countries in specializing in production of goods they can produce most efficiently. If USA produces Microsoft software and imports textile from China, they will be able to buy textile at low prices and have more enough money to spend on other goods, Textile production in China would help increase the Chinese income and so Chinese can buy US goods that would again raise US income and so on Supporters argue that demand on unskilled workers decreased due to the technological change that caused income inequality between skilled and non-skilled labor

Labor policies and environment Free trade encourages firms to move production to less developed countries that dont have suitable regulations to protect labor and environment because sticking to the labor and environmental rules will increase the cost of production and make manufacturers less competitive

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Argument Better labor and environmental regulations need economic progress, as countries get richer they can apply strict labor and environmental laws . Free trade would enable developing nations to have higher income and can apply these rules similarly to the developed nations

National Sovereignty Today's interdependence of global economy shifts economic power from national governments to the hands of supranational organizations such as WTO, European Union and the UN Argument These organizations are made up of member nations ,these organizations try to convince members to follow a certain action ,if these organizations fail to serve the collective interests of the members ,the members can easily withdraw their support so the organization will collapse ,accordingly the power is still in hands of the individual members

Globalization and the Poor The gap between the rich and the poor nations is getting wider and wider ,and if globalization had been positive the gap would have been reduced

Argument Many of the world poorest countries have suffered from totalitarian governments that used economic policies that destroyed their wealth These countries suffer from the over population that also reduce the ability to develop These countries suffer from high debt burden ,and a large percentage of the firm's exports income goes to service (pay interest) of these debts

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