Chapter 1: Globalization

Komatsu Case Study

Ironworks, machine tools, mining equipment etc. for Japanese market
Post WWII advantage of increasing demand for construction
equipment moved headquarters to Tokyo for government contract,
skilled labour.
Post war market protected from foreign competition by barriers.
Expanded to enter foreign markets.
Limited domestic market US dominated Caterpillar.
Threatened by Mitsubishi & Caterpillar JV
Considered inferior overseas to US products collaborative
agreements to improve image gained knowledge and sold products
in same market as licensor.
Manufacturing plants globally Japan, China, Europe, US
47% international production
Large revenue from foreign markets, including emerging economies.
Wanted to produce superior products
o Mother and daughter plants
o R&D concentrated in mother plants each different
o Cost reduction built in at design stage cost-efficiency
o Technology transferred to daughter plants
Remained in Japan high manufacturing capacity, growth, suppliers,
staff, technologies.
Daughter plants allow localisation of products
Product support operations important after market strategy.

Introduction

Away from self-contained national economies, isolated by barriers to
cross-border trade and investment, distance, time zones, language,
differences in government regulation, culture and business systems.
Towards declined barriers to trade, perceived distance shrinking due to
transport and telecommunication advances, homogeneity of material
culture, national economies becoming interdependent, integrated
global economic systems.
Shift towards a more integrated and interdependent world economy.
Volume of goods, services and investments crossing national borders
has expanded faster than world output consistently for over 50 years.
As Internet penetrates more regions and information flows become
mostly instantaneous and almost costless, global integration is
becoming more individualized, rather than being between institutions or
businesses.
GFC evidence for single economic world downturn in global
economic activity. Internationalisation activities of firm curtailed,
difficult to raise finance for investment, grim market prospects. FDI fell
14% in 2008 vs. usually annual growth 35% 2004-2007
o Initial cause deflated US housing market and associated
decline in US sub-prime mortgage market.
o Fundamental causes low US interest rates due to US
monetary policy, high level of international liquidity due to global
imbalances
o China, Singapore & oil exporters in ME accumulated large
financial surpluses from international receipts, and Americans
international payments deficit expanded.
o Chinese etc. had money, looking to invest, chose America
(residential market)
o Low interest rates because of lots of money people not fighting
for it global level.
o Low interest rates happy to invest fuelled share markets
and houses bought.
o Low returns on mainstream investments e.g. US Treasury
Bonds people wanted higher returns
o Weaker the borrower, higher the yeidl high risk (bad jobs),
high interest rate. Overall, rates lower than before, but still
higher for high-risk clients, benefitting banks.
o Investors were source of funds, allowing sub-prime lenders to
increase number of loans.
o Sub-prime loans created by banks, packaged, sold to
investment banks, pension funds etc.
Bank paid out for them by middle man
Expectation bank had low risk of losing money,
because house prices were rising (loan at under what
people payed for it), meaning % of value of house the
bank originally invested/lent is decreased. E.g. start
house value $500,000, bank lent 90%. House value
increased to $1million 45% loan.
o But housing market reverse value of house became less than
the value of the mortgage/loan (undermined)
o Value of debt exceeded value of asset for the bank. When
people walk out on houses, they dont receive payments, so
they sell, but money from sale is less than initial loan debt.
o All funds dried up no money to lend other parts of economy
e.g. government for roads, or business for machines
RECESSION (credit squeeze)
Offshoring is increasing trend form of outsourcing; task previously
performed in one country now being undertaken abroad.
Outsourcing tasks previously preformed in-house now purchased
from another firm.

LO1.1. Explain the process and drivers of globalisation and the
opportunities and challenges it creates for business.
Globalisation
Globalisation shift towards a more integrated and interdependent
world economy.
Globalisation of markets merging of historically distinct and separate
national markets into one huge marketplace.
o Converging consumer tastes
o Falling barriers to cross-border trade
o Difference in consumer taste brake to globalization
o Largest global markets commodities e.g. iron ore, oil, wheat;
industrial products e.g. microprocessors; commercial jet aircraft;
financial assets e.g. Eurobonds.
o Companies use similar strategies across markets
homogeneity
o Small and large MNEs benefitting e.g. 42% AU goods exporters
are small firms (<20 employees)
o Cant push idea too far that national markets are giving way
entirely to a global market.
o Differences in global markets consumer preference,
distribution channels, political and legal systems, economic
development.
Globalisation of production sourcing goods and services from
locations around the globe to take advantage of national differences in
the cost and quality of various factors of production (components e.g.
technology, labour, land and capital)
o Lowers overall cost structure, improves quality or functionality
more competitive.
o International outsourcing superior product, and higher chance
of getting orders from the supplying countries.
o Modern ICT (internet) facilitates outsourcing service activities to
low-cost producers overseas, in a timely manner e.g.
radiologists in UK/AU hospitals (12hr time difference)
Outsourcing medical services heavily restricted by
national and state licensing and accreditation rules. E.g.
British trained, licensed doctors in AU for British patients.
o Dispersing value-creation activities offshore compresses time,
lowers costs.
o Creation of global products
o Barriers barriers to trade, FDI, transportation and supply chain
management costs, issues re economic/political risk.


Global Institutions
To manage, regulate, police global marketplace, establish multinational
treaties.
General Agreement of Tariffs & Trade (GATT) An international treaty
that committed signatories to lowering barriers to the free flow of goods
across national borders. Predecessor of WTO.
WTO organisation succeeded GATT, acts to police world trading
system. 2012 157 nations
IMF international institution set up to maintain order in the
international monetary system. Created 1944, 44 nations.
o Lender of last resort to nation-states whose economies are in
turmoil, currencies losing value against other nations.
o Usurps sovereignty of nation-states must comply for loan
World Bank international organisation set up to promote economic
development, primarily by offering low-interest loans to governments of
poor nations. Created 1944, 44 nations
o Less controversial than IMF. Focus on financial and technical
assistance to improve living standards & reduce poverty.
o IMF & World Bank to prevent recurrence of trade wars
1920s/30s, where international trade/investment were restricted
by tariffs and exchange rate devaluations when governments
sought to protect own economies form Great Depression.
UN international organisation of 192 countries charged with keeping
international peace, developing cooperation between nations and
promoting human rights.
o Maintain international peace & security
o Develop friendly relations among nations
o To cooperate in solving international problems and promoting
respect for human rights
o Be a centre for harmonising the actions of nations.
o Central mandate higher living standards, full employment,
conditions for economic/social progress & development UN
Conference on Trade and Development (UNCTAD) promotes
integration of developing countries into world economy as a
means of attaining sustainable economic development.

Drivers of Globalisation
Micro consumers accepting global products, outsourcing production,
pressure on business to compete globally, match rivals
Macro decline in barriers to free flow of goods, services & capital;
technological change (ICT & transport)
Declining trade & investment barriers
International trade when a firm exports goods or services to buyers in
another country.
FDI when a firm invests resources in business activities outside of
home country, giving it some control over these activities.
High tariffs on imports of manufactured goods protect domestic
industries from foreign competition.
o countries retaliating, barriers against each other
depressed world demand.
Post WWII GATT lower barriers, now 4%. Low in US, EU, Japan.
Not AU (11%), China, Brazil, India etc.
o Discrepancy between old and emerging economic powers
(BRIC)
o Current round cut tariffs on industrial goods, services &
agricultural products; phase out subsidies to agricultural
producers; reduce barriers to cross-border investment; limit use
of antidumping laws.
Lowered restrictions to FDI 90% changes between 1992-2008
created more favourable market to FDI. Reduced after GFC cushion
economies from impacts.
Lower trade barriers world as the market, not one country.
Lower trade & investment barriers base production at optimal
location for activity.
Volume world merchandise trade (trade in manufactured, agricultural
and mining goods) grown consistently at a faster rate than world
production (GDP). Continual growth in trade of services too.
4 main points:
o More production by firms destined for export markets
o More outsourcing dispersing production to cut costs and
increase quality
o World economies becoming more intertwined
o World become wealthier rising trade helped global economy
along.
FDI has increasing role firms increasing cross-border investment
o FDI flow amount of FDI undertaken over a given time
o FDI stock total accumulated value of foreign-owned assets at
given time
o FDI outflow flow of FDI out of a country
o FDI inflow flow of FDI into a country
FDI inflows pre-GFC grew consistently more rapidly than world exports.
Fragile global economic recovery uncertainty.
o Because business feared protectionist pressures FDI as a way
of circumventing trade barriers.
o Increase in FDI driven by political and economic changes in
developing countries. Shift to democratic politics and free
market economies encourages FDI.
o Globalisation of economy whole world as market. FDI
presence in various regions.

Technological Change
Microprocessors and telecommunications
o Microprocessor enabled growth of high power, low cost
computing increased amount of info individuals/firms can
process. Foundation of other technologies.
o Cost of microprocessors fall, power increases (Moores Law
power doubles, cost drops by half every 18 months)
decreased cost of global communication.
Internet and WWW
o 2011 70% developed households, 20% developing w/ www
o Take up of Internet in developing countries promise for IB to
exploit growth potential of markets in these economies.
o ICT advancements small firms sell to international markets
reach wide audience w/o expense of physical shops.
o Facilitating increase in offshoring of production.
o Means to coordinate flow of component parts in global supply
chains and production systems.
o E.g. Rio Tinto outsourcing legal work. Save 20% annual legal
costs. CPA Global (India) contract drafting, legal research etc.
o Web = equalizer. No location, scale, time zone constraints.
o Businesses expand global presence at lower cost.

Transport Technology
Jet aircraft reduced time needed, effectively shrinking globe. Retain
competitiveness as costs/time reduced.
Containerisation increased efficiency transport costs decreased.
Cost-savings of these are lost if customs-checks or poor quality of port
infrastructure causes long waiting times.
Logistics performance factors
o Efficiency of clearance process by border control agencies,
o Quality of trade- and transport-infrastructure (roads, rail, ports),
o Ease of arranging competitively priced shipments,
o Competence and quality of transport operators and customs,
o Ability to track consignments, timeliness of delivery.
Firms international competitiveness is being able to access an efficient
logistics chain. Many weak links (e.g. trade procedures, transport and
telecommunication infrastructure) are within a country. Firm wont
choose country with inadequate transport, logistics and trade-related
infrastructure and services.

Implications for Globalization of Production & Markets
Production
Firms better able to respond to customer demand
Low transport costs dispersal of production more economical.
Decreased cost of information processing and communication
create and manage globally dispersed and networked production
system
Jet aircraft able to travel overseas. Managers oversee globally
dispersed production systems
Increase in trade in intermediate inputs including services, rather than
trade in final goods.
Markets
Low cost global communication (www) global marketplace.
Low cost transport economical to ship globally, creating global
markets. E.g. Ecuador roses sold I US 2 days later.
Low cost air travel mass movement of people overseas reduces
cultural distance convergence of consumer taste/preference
Global communication networks & global media global culture

LO1.2. Illustrate how the global economy has changed over the past 50
years.
US, Western Europe, Japanese dominance in world economy.
Dominance by these countries in FDI
Dominance of large MNEs from these countries in IB
Half globe (centrally planned economies of Communist world) off limits
Changing World Output and World Trade Picture
Decrease in US industrial power (from 40% to 20% since 1960)
Germany, France, UK all experienced relative decline (first to
industrialise) still grew
China & India significant growth
1960s trade as bipolar US & Western Europe
1990s tripolar with Japan
Now China & India contribute more than any Western European
country. Share of world output > Japan. Brazil & Russia dominant.
As BRIC grows, relative decline in share of world output & exports by
US and other industrialised countries is likely. Reflects economic
development and industrialisation of world economy but strong US
economy necessary to support growth and development.
Parallel decline in political power in global forums. G20 favoured over
G8.
o G8 international forum of government reps of Western
industrial economies Canada, France, Germany, Italy, Japan,
US, UK, Russia
o G20 gov reps of G8 and others including emerging economies
e.g. Brazil, India, China reflects their rising global economic
and political power.
Shift in economic geography of world opportunities in developing
nations despite attendant risks, and will be a source of competitors.

Changing FDI Picture
US firms accounted for 60% FDI flows accumulated considerable
stock of productive assets abroad.
Decreased barriers non-US firms investing across borders, to
disperse production activities to optimal locations and build direct
presence in major foreign markets.
Stock of FDI generated by rich industrial countries has been on a
steady decline
Been a sustained growth in cross-border flows of FDI
Flow of FDI has been directed at developing nations, especially China.
Not all FDI held by privately owned, commercial businesses new
investor, the sovereign wealth fund (SWF) government-controlled
fund that manages and invests government savings
o Investment in foreign government bonds and non-controlling
holdings of company shares
o Scrutinized because increasing participation in FDI
(geographically and industry specific UK, US, oil, business,
mining); most growth from balance of payments surpluses run
by China and East Asian countries; many of investing SWFs
based in China, Russia, West Africa authoritarian
governments rule.

Changing Nature of MNEs
MNEs any business that has productive activities in 2+ countries
Rise of non-US multinationals
Growth of MNEs form Japan, Europe, Australia and NZ post WWII
Declining dominance of US firms reflects global change stock of FDI
assets accounted for by developed countries fallen.
Expected growth of new MNEs from worlds developing nations
Most MNEs from US and developed nations, but from developing
nations starting to make presence in global economy. I.e. equal
number from Japan and developing.

Rise of mini-multinationals
Rise of Internet lowered barriers that small firms face in providing
products and services internationally and in building international sales.
Number of mini-multinationals on the rise

Changing World Order
No communism freer, market based economies, previously off limits
to IB
Collapse of communism in Eastern Europe host of export and
investment opportunities for Western businesses
Economic development of China poses huge opportunities and risks, in
spite of continued Communist control
Mexico and Latin America present new opportunities, as markets and
sources of materials and production. Previously ruled by dictators,
closed to Western IB; and debt and inflation are down, governments
sold state-owned enterprises, FDI welcome.
o E.g. Brazil, Mexico, Chile.
GFC changed things previously, free markets, private ownership and
reduced government regulation. GFC state intervention, buying
controlling shares

LO1.3. Justify the labelling of the twenty-first century as the Emerging
Markets Century.
Opportunities and Risks
The more integrated the global economy with many opportunities
political and economic disruptions that may disrupt plans.
Move to global economy strengthened by widespread adoption of
liberal economic policies deregulation, privatisation, removed barriers
i.e. market oriented economies
GFC and SWFs increasing trade and investment protectionist
sentiment.
Emerging Market Economies
Investors looking for somewhere exciting to put their money not too
rich, not too poor, not too closed to foreign capital.
High population, national production, economic growth, rising living
standards, attraction to investors and increasing MNEs
Chinas growth 2x US growth
Emerging = developing
UN developed, developing, transition
IMF advanced, developing, emerging
World Bank low income, lower-middle income, upper-middle etc.
Emerging countries that arent the 34 advanced economies.
Emerging if meet standards related to 1+ of following:
o Size of economy in terms of population and national production
o Wealth of country in terms of rising per capita incomes,
burgeoning middle class, reduced poverty
o Openness of country to foreign trade & investment
o Rate of growth of economy
o Prospect of further growth and development, indicated by quality
of people and resources and maturity and stability of economic,
political and social institutions
o Transition to a more business-friendly, market economy.

LO1.4. Debate the impact of globalisation on issues such as job
security, income inequality and the environment.
Is the shift to a more integrated, interdependent global economy good?
Yes politicians, economists etc. falling barriers to trade &
investment economic prosperity, jobs, raises incomes etc.
Anti-Globalisation Protests
Highlight disruptive forces of globalisation job losses through foreign
competition, downward pressure on wage rates for unskilled workers,
environmental degradation, cultural imperialism of global media and
MNEs.
Turn up at major meetings of global institutions
Fear that globalization is forever changing the world in a negative way
E.g. Occupy Wall Street symbol of corporate and financial power.
Fought corporate corruption of political systems, takeover of
democracy, manipulation of globalisation to benefit corporation,
environmental degradation etc.
Main concern exporting jobs overseas

Globalisation, jobs and income inequality
Critics worry jobs are being lost to low-wage nations
Argue expanded labour force and expanding international trade
depressed wages in developed nations.
Supporters argue that free trade countries specialising in production
of goods and services they can produce most efficiently, while
important goods and services they cant produce efficiently.
By outsourcing to cheaper areas, cost structures are cut, meaning
prices in Australia can be cut for consumers, spending more on other
goods. Also, more money in India, China etc. (outsource country)
locals more money to spend on Australian goods more jobs in AU.
Relocation effect offshored jobs lost
Scale effect when increased productivity from offshoring creates
more jobs.
Causing income inequality
o Jobs offshored from developed to developing low-skill
intensive jobs from developed POV but high-skill-intensive from
developing POV increases demand for high-skilled labour in
developed and developing countries increasing inequality.
o If low-income workers work for low-productivity, low-profit firms,
and these firms suffer most from import competition, trade will
increase income inequality by reducing employment
opportunities, and lowering relative wages of low-income
workers.

Globalisation, labour policies and the environment
Critics argue that free trade encourages firms form advanced nations to
move manufacturing facilities offshore to less developed countries with
lax environmental and labour regulations.
Following environmental regulations increases costs competitive
disadvantage
Transported goods further more greenhouse emissions
Hump shape relationship between income and pollution levels. As
economy grow sand income levels rise, initially pollution does too. But
past some point, rising income demands for greater environmental
protection pollution falls. Occurs before pre capita income reached
USD$8,000.
o Except for CO2 emissions, rising steadily with incomes.
o Soln: get nations to agree to tougher standards on limiting
emissions little success because
It could undermine international competitiveness of
domestic industry
Monitoring of progress impinges on their national
sovereignty
Concerned about carbon leakage carbon emission will
shift from parts of the planet that will undertake carbon
reduction to other areas that wont.
Supporters of free trade highlight that tougher environmental regulation
and stricter labour standards go hand in hand with economic progress
and that foreign investment often helps a country raise standards.
Globalisation and National Sovereignty
Critics worry that economic power is shifting away from national
government and towards supranational organisations e.g. WTO, EU
and UN.
Unelected bureaucrats imposing policies on democratically elected
governments of nation-states undermines sovereignty.
E.g. WTO signatories must comply with policies. If not, other states
allowed to impose appropriate trade sanctions on transgressor.
Supporters argue power is limited to what nation-states collectively
agree to grant them, and they serve the collective interests of the state.
If not, they withdraw support.

Globalisation and the worlds poor
Critics argue that the gap between rich and poor is widening and the
benefits of globalisation havent been shared equally
International income inequality measure of the income inequality
based on average income per capita of country in which they live
o Decreased since 1980-2010
o High economic growth rates in BRIC countries and developing
countries contributed to this.
Global inequality measure of income inequality based on individuals
income regardless of country they live in
o Income inequality increased between 1980-2005, using not
country averages, but individual incomes.
o Differs because GI takes account of changing income inequality
with nations, in developed and developing economies.
Supporters of free trade suggest actions of governments have brought
limited economic improvement in many countries poor governance,
corruption, macroeconomic stability, social welfare safety nets,
education, health services etc.
Argued wealth from international trade and investment favours rich
nations who set rules. E.g. global food crisis rules enforcing trade
liberalisation prevented developing countries from supporting local
farmers and ensuring national food security.

LO1.5. Compare how the management of international business differs
from the management of domestic business.

Managing an IB different from domestic business
International business any firm that engages in international trade or
investment
Countries differ culture, political, legal, economic systems.
Differences vary practises between countries. E.g. marketing.
Managers face greater and more complex range of problems e.g. rival
competition more intense, no home advantage; where to locate
activities; how to minimize costs; which market to enter; how to enter;
etc.
International companies must work within the limits imposed by
government intervention and the global trading system
International transactions require converting funds and being
susceptible to exchange rate changes.