Lecture 1 – Globalization

Based on: Hill, C., 2009, International Business: Competing

in the global marketplace, 7th Ed, McGraw-Hill Irwin, USA

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Shift in world economy

Movement away from world of self-contained entities, isolated by:

Cross-border trade barriers

Distance

Language

National differences in government regulation, culture, etc

Shift in world economy

Movement toward world where:

Cross-border trade barriers are declining

Perceived distance is shrinking due to technology

Material culture is looking similar world over

National economies are merging into an interdependent, integrated global

economic system

Process by which shift is occurring is Globalization

We live in a world where:

$12.06 trillion of goods & $2.71 trillion of services sold across national
borders in 2006 (Hill, 2009:4)

International institutions such as World Trade Organisation have called for

even lower cross-border trade barriers

Symbols of material and popular culture are increasingly global e.g. Coca-
cola, Sony PlayStations, Apple iPods, Disney films, IKEA stores

Products are made from inputs that come from all over the world
 We live in a world where:

Groups protest against globalization, blaming it for ills

E.g. Unemployment in developed nations, environmental degradation,
Americanization of popular culture

Globalization has produced opportunities

E.g. Firms expand revenue by selling around world, reducing costs by producing
in nations where inputs are cheaper

Globalization has created threats to businesses in domestic markets

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Globalization refers to

“the shift toward a more integrated and interdependent world economy” (Hill,
2009:6)

“a process of movement towards a global world” (White, 2004:80)

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Integration/globalization of world markets/economy & production

Accelerated diffusion of new technology

Loss of national sovereignty

Homogenization of culture

Democratization of key activities

Integration/globalization of world markets/economy

Falling cross-border trade barriers, & “merging of historically distinct and

separate national markets into one huge global marketplace” (Hill, 2009:6)

Appearance of global firms, products & markets which have no specific

location

Same firms compete with each other e.g. Coca-cola & Pepsi, GM & Toyota,
Sony & Nintendo & Microsoft

Creation of homogeneity across markets replacing diversity & consumer

tastes & preferences converging on global norm e.g. McDonalds
Integration/globalization of production

“sourcing of goods and services from locations around the globe to take
advantage of national differences in the cost and quality of factors of
production” (Hill, 2009:6)

Lowering cost or improving quality for effective competition

E.g. Vizio: American company 75 employees – flat panel TV

components manufactured in South Korea, China, USA
assembled in Mexico, sold in USA market

Accelerated diffusion of new technology

Nature of technical change, impact of new technology

Impact of technical change on rate of diffusion of new technical knowledge

Communications revolution is part of globalization & acceleration in

internationalization

Loss of national sovereignty

Alleged reduction of factors specific to national sovereignty in influencing

business decisions

Discipline/control of government policies to make them fit requirements of a

global economy
 Homogenization of culture

The norm is for culture to reinforce national difference

Globalization allegedly breaks down cultural divisions, sharing a common

culture transcending all boundaries, (assisted by communications revolution)

Democratization of key activities

Greater scope for choice, increased scope for individuals to be involved in

process of decision making at all levels

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Two macro factors underlie tend in greater globalization:

Declining trade & investment barriers

Technological change

Declining trade & investment barriers

Decline in barriers to free flow of goods, services, & capital since end of
World War 2 - See table 1.1 (Hill, 2009:12)

Removing restrictions to Foreign Direct Investment (FDI)

FDI occurs when firms invest resources in business activities outside home
country

International trade occurs when firms export goods or services to consumers

in another country (Hill, 2009:10)

Forces making for increased competition

Declining trade & investment barriers

Implications:

Lower barriers to international trade enables firms to view the world as their
market, rather than a single country, lure of interconnected markets

More firms dispersing parts of production process to different locations around the
world to reduce costs & increase quality

Economies of nations becoming intertwined & increasing dependent on each other

for important goods & services

World is wealthier since 1950, and rising trade is engine pulling the global
economy
Technological change

Developments in communication, information processing, & transport

technologies

Microprocessor increase in power & telecommunication costs decreasing

Internet & World Wide Web, (information backbone of the global economy)

Technological change

Implications for globalization of production:

As transport cost for globalization of production decline, dispersal of production

becomes economical

Information processing & communications enables creation & management of a

globally dispersed production system

Technological change

Implications for globalization of markets:

Technological innovations & low cost transport facilitated globalization of markets,

low cost global communications networks create global marketplace e.g. Internet

Global communications & media network creates worldwide culture

Movement of people via jet travel reduces cultural distance between countries
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Demographics of the global economy – late 1960s

USA dominance in world economy

USA dominance in FDI

Dominance of large multinational USA firms on international business scene

Half the world was off-limits to Western international businesses (i.e. centrally
planned economies of the Communist world)

By 1980s, USA’s position as world’s leading exporter was threatened

USA’s world economic activity 40.3% in 1963 & 19.7% in 2006 (Hill, 2009:16)

Relative decline (not absolute decline) of USA reflects growing economic

development & industrialization of the world economy

Relative decline compared to faster growth of Asia, (see table 1.2 Hill 2009:17)

Emerging economies, China, India, Brazil

Implications: tomorrow’s economic opportunities & competitors emerge from

developing nations/regions
Changing FDI picture

Worldwide FDI flows in 1960s - USA 66.3%, second Britain 10.5% (Hill 2009:17)

Stock of FDI of USA firms declined from 38% in 1980 to 19% in 2005, while
that of France & developing nations increased, (see table 1.2, Hill 2009:19)

Stock of FDI of developing nations up from 1.1% in 1980 to 11.9% in 2005,

mainly Hong Kong, South Korea, Singapore, Taiwan, India, & China
(see table 1.2, Hill 2009:19)

Developing nations are destinations of FDI and amount of investment during

the 1990s reflects increasing internationalization of business corporations
(see table 1.3, Hill 2009:19)

Changing nature of the Multinational enterprise (MNE)

Since 1960s two trends in demographics of MNE:

Rise of non-USA multinationals
Growth of mini-multinationals (medium-size & small multinationals)

MNE is any business that has productive activities in two or more countries

Changing nature of the Multinational enterprise (MNE)

Rise of non-USA multinationals

In 1973, 48.5% of the world’s 260 largest multinationals were USA firms and Japan
accounted for 3.5% of the largest multinational (see figure 1.4, Hill 2009:20)

By 2005 , 27 of world’s 100 largest non-financial multinationals were USA firms, 15

French, 13 German, 11 British, and 9 Japanese (see figure 1.4, Hill 2009:20)

5 firms from developing economies entered the UN list of 100 largest multinationals
by 2005 (Hill 2009:20)

Globalization of world economy resulted in relative decline in dominance of USA

firms in global marketplace
Changing world order

Between 1989-1991 series of Communist Party government collapses in

Eastern Europe & Soviet Union

Some former Communist nations open to democratic politics & free market
economics

Countries previously closed to Western international businesses now present

export & investment opportunities

China’s market reforms create opportunities & threats for international

businesses
Annual FDI increased from less than $2bil in 1983 to $70bil in 2006 (Hill 2009:23)
China’s firms are proving to be capable competitors

Changing world order

Latin America undergone democratic & free market reforms

Debt & inflation is down, foreign investment welcomed, economies expanded

E.g. Brazil, Mexico

Risk still exist and governments seized control of oil & gas fields from foreign
investors in Bolivia & Venezuela

Global economy of the 21st Century

Barriers to free flow of good, services, & capital have been coming down

Cross-border trade & investment volume growing more rapidly than global
output, indicating national economies integrating into a global economic
system

More nations joining ranks of the developed world e.g. South Korea, Taiwan

State-owned businesses privatized, deregulation, markets opening to

competition, commitment to removing trade barriers

Trends indicate world moving rapidly toward an economic system more

favourable for international business
 Global economy of the 21st Century

Globalization is not inevitable

Countries may pull back if experiences do not meet expectations e.g. Russia

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! "

International trade & investment drives global economy toward prosperity

Broader access to consumer products, lower prices for goods & services

Gains from increased competition, in lower costs & increased productivity

Stimulation of economic growth

Raised income & employment levels

Higher living standards in many countries, reducing poverty in others

 ! "

Positive stimulus given to technical change

More efficient allocation of world resources

Widespread dissemination of information & knowledge

Free trade benefits all countries

Benefits outweigh costs (free trade results in specializing in production of goods

& services efficiently, while importing those not efficiently produced)

WTO meeting December 1999, Seattle demonstrations

Local unemployment
Job losses in industries attacked by foreign competitors
Exporting jobs to lower wage nations contributing to unemployment

Lost manufacturing jobs in advanced economies

Downward pressure on wage rates of unskilled workers

Detrimental effects on living standards

WTO meeting December 1999, Seattle demonstrations

Environmental degradation

Eroding standards, firms moving manufacturing facilities to less

developed countries lacking regulations to protect labour & environment,

Loss of nation state sovereignty, unelected bureaucrats impose policies

on governments

Uneven income distribution, widening gap between rich & poor nations
 Other arguments:

Erosion of regional, national & local cultures

Cultural imperialism of global media & MNE

Increased power of large companies & international organisations like

WTO

Data suggests:

Unskilled labour in developed nations has its share of national income

decline

Living standards of unskilled workers have not necessarily declined, as

results are mixed

Technological change has had bigger impact on labour’s declining share of

national income than globalization, and education is needed

Generally as countries get richer they enact tougher environmental & labour
laws

Reasons for economic stagnation vary, none have to do with globalization

e.g. Totalitarian governments, corruption, war, economic policies, debt

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Institutions help to

manage, regulate, & police the global market

Promote establishment of multinational treaties governing global business

Examples

General Agreement on Tariffs and Trade (GATT)

World Trade Organization (WTO) - successor to GATT

International Monetary Fund (IMF)

World Bank

United Nations (UN)

World Trade Organisation

Responsible for policing world trade system, making sure nation-states

adhere to rules of trade treaties

Responsible for facilitating additional multinational agreements between

WTO member states

Promotes lowering barriers to cross-border trade & investment

In 2007, 150 nations accounting for 97% of world trade were WTO members
International Monetary Fund (IMF)

Established to maintain order in the international monetary system

Lender of last resort to nation-states in economic turmoil and value losing

currencies

In return for loans nation-states adopt specific economic policies aimed at

economic stability & growth

World Bank

Established to promote economic development

Makes low-interest loans to cash-strapped poor nations wishing to undertake

significant infrastructure investment (e.g. Building dams, roads)

United Nations (UN)

Purposes of UN:
Maintain international peace and security
Develop friendly relations among nations
Co-operate in solving international problems
Promote respect for human rights

Members agreeing to accept obligations of the UN Charter, an international

treaty establishing basic principles of international relations
 #
Three main types of organizations:

Multilateral organizations

Regional organizations

Bilateral organizations

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Multilateral organizations

Straddle different regions

Multilateral relations through global organizations
E.g. WTO, World Bank, IMF, Greenpeace, Red Cross

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Regional organizations

Regional relations within units e.g. European Union, Free trade areas like
NAFTA

Informal alliances, some formal

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Bilateral organizations

Country/country, and government/multinational enterprise interactions

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The Triad

Tri-polar structure of economic activity linking main economic & political

centres of the world

North America, Japan, Western & Central Europe (EU)

Accounts for 60-70% of World GDP (White 2004:98)

Does most of the world’s trade, is the largest part of the world market

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$ $ %

“An international business is any firm that engages in international trade or

investment” (Hill 2009:32)

Many challenges face managers of international businesses:

Countries are different: culture, political & economic & legal systems, levels of
economic development

Country differences require international business vary practices between countries

e.g. Market, managing workers, strategy

Which markets to enter or avoid, opportunities/risks of location in the world

Behaving ethically in different countries with different standards

$ $ %

Many challenges face managers of international businesses:

Co-ordination & control of globally dispersed production activities

Choice of entry mode into foreign country

Dealing with government regulation

Foreign currencies & policies for exchange rate movements

International business managers need to be sensitive to differences & adopt

appropriate policies & strategies to cope with them

$ $ %

Managing international business & domestic business differ:

Countries are different

Problems international business managers confront are wider & more

complex

International business must find ways to work within limits imposed by

government intervention

International transactions involve converting money into different currencies

$ $ %

Two possible perspectives to global strategy

global approach
Views world as a single unit, viewing customers & markets on a geographically
indiscriminate & culturally inclusive market e.g. IKEA

Recognise uniqueness of all operating contexts

Recognising different nation states & growing level of interaction between them
Global environment is different from the domestic environment
This approach is most frequently adopted

$ $ %

Differences in corporate philosophy

Ethnocentric – focused strongly on the domestic scene

Polycentric – recognizes existence of many domestic scenes

Geocentric – one scene, the global

$ $ %

Differences in strategy

Multidomestic strategy – strategic & operating decisions decentralized to

strategic business units in each country, customizing markets due to differing
local cultures

Transnational strategy – achieve global efficiency & local responsiveness,

combining benefits of product differentiation with benefits of low costs e.g.
Nestle

Global strategy – standardized products across country markets

 $

“International business is different from national business because countries

and societies are different” (Hill 2009:112)

&
Hill, C., 2009, International business: Competing in the global marketplace,
McGraw-Hill Irwin, USA

White, C., 2004, Strategic management, Palgrave Macmillan, UK