Chapter 1 Notes What is globalization?

? The world is moving away from self-contained national economies toward an interdependent, integrated global economic system Globalization refers to the shift toward a more integrated and interdependent world economy Globalization has two facets: 1) The globalization of markets 2) The globalization of production The globalization of Markets The globalization of markets refers to the merging of historically distinct and separate national markets into one huge global marketplace In many industries, it is no longer meaningful to talk about the German market or the American market Instead, there is only the global market The globalization of markets refers to the merging of historically distinct and separate national markets into one huge global marketplace. It is important to recognize that significant differences still exist among national markets, requiring companies to customize market strategies, product features, and operating practices to meet the conditions in particular markets. The most global markets currently are not markets for consumer productswhere national differences in tastes and preferences are still often important enough to act as a brake on globalizationbut markets for industrial goods and materials that serve a universal need the world over. These include the markets for commodities such as aluminum, oil, and wheat; the markets for industrial products such as microprocessors, DRAMs (computer memory chips), and commercial jet aircraft; the markets for computer software; and the markets for financial assets from U.S. Treasury bills to Eurobonds and futures on the Nikkei index or the Mexican peso.

The globalization of Markets Continued Falling trade barriers make it easier to sell internationally The tastes and preferences of consumers are converging on some global norm Firms help create the global market by offering the same basic products worldwide In many markets the emergence of a global marketplace has begun to occur. There are three causes: falling barriers to cross-border trade have made it easier to sell internationally; tastes and preferences are converging on some global norm helping to create a global market; and firms are facilitating the trend by offering standardized products worldwide creating a global market. Classroom Performance System: The shift toward a more integrated and interdependent world economy is referred to as a) Economic integration b) Economic interdependency c) Globalization d) Internationalization Globalization of Production The globalization of production refers to the 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 like land, labor, and capital Companies compete more effectively by lowering their overall cost structure or improving the quality or functionality of their product offering The globalization of production refers to the 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 (such as labor, energy, land, and capital). By doing this, companies hope to lower their overall cost structure and/or improve the quality or functionality of their product offering, thereby allowing them to compete more effectively.

Early outsourcing efforts were primarily confined to manufacturing enterprises, but today, more companies are taking advantage of modern communications technology, like the Internet, to outsource service activities to low-cost producers in other nations. The Country Focus: Outsourcing American Healthcare illustrates how the Internet has allowed hospitals to outsource some radiology work to India, where images from MRI scans and the like are read at night while U.S. physicians sleep, and are the results are ready for them in the morning. There are still substantial impediments to the globalization of production including formal and informal barriers to trade, barriers to foreign direct investment, transportation costs, issues associated with economic risk, and issues associated with political risk Classroom Performance System The merging of historically distinct and separate national markets into one huge global marketplace is known as a) Global market facilitation b) cross-border trade c) Supranational market integration d) The globalization of markets

Firms that are involved in international business tend to be a) Large b) Small C) medium-sized D) Large, small, and medium-sized

The Emergence of Global Institutions Institutions are needed to: help manage, regulate, and police the global marketplace

 promote the establishment of multinational treaties to govern the global business system The Emergence of Global Institutions Continued.. Institutions created over the past half century include: the General Agreement on Tariffs and Trade (GATT) the World Trade Organization (WTO) the International Monetary Fund (IMF) the World Bank the United Nations (UN) The World Trade Organization (like its predecessor GATT) is primarily responsible for policing the world trading system and making sure that nationstates adhere to the rules laid down in trade treaties signed by WTO members In 2007, the 150 nations that accounted for 97% of world trade were WTO members The WTO promotes lower barriers to trade and investment The International Monetary Fund and the World Bank were created in 1944 The IMF was established to maintain order in the international monetary system The World Bank was established to promote economic development The United Nations was established in 1945 to: maintain international peace and security develop friendly relations among nations cooperate in solving international problems and in promoting respect for human rights be a center for harmonizing the actions of nations

Classroom Performance System Which is not a factor of production? a) Trade b) Land c) Capital d) Energy

Drivers of Globalization Two macro factors underlie the trend toward greater globalization: the decline in barriers to the free flow of goods, services, and capital that has occurred since the end of World War II technological change The two macro factors underlie the trend towards greater globalization: First, the decline in the barriers to free flow of goods, services, and capital Second, technological change in communications, information processing, and transportation technologies.

Declining Trade and Investment Barriers International trade occurs when a firm exports goods or services to consumers in another country Foreign direct investment (FDI) occurs when a firm invests resources in business activities outside its home country After World War II, advanced countries made a commitment to lower barriers to trade and investment Since 1950, average tariffs have fallen significantly and are now at about 4% Countries have also been opening markets to FDI

International trade occurs when a firm exports goods or services to consumers in another country. Foreign direct investment (FDI) occurs when a firm invests resources in business activities outside its home country. After World War II, advanced industrial nations of the West committed themselves to removing barriers to the free flow of goods, services, and capital between nations. Classroom Performance System: The sourcing of good and services from around the world to take advantage of national differences in the cost and quality of factors of production is called a) Economies of scale b) The globalization of production c) Global integration d) Global sourcing

Declining Trade and Investment Barriers Table 1.1: Average Tariff Rates on Manufactured Products as Percent of Value

Lower barriers to trade and investment mean: that firms can view the world, rather than a single country, as their market

 that firms can base production in the optimal location for that activity

Classroom Performance System: Which organization is responsible for policing the world trading system? a) The International Monetary Fund b) The United Nations c) The World Trade Organization d) The World Bank

The Role Of Technological Change

Technological change has made the globalization of markets a reality Important advances have occurred in: microprocessors and telecommunications the Internet and World Wide Web transportation technology The lowering of trade barriers made globalization of markets and production a theoretical possibility, technological change made it a tangible reality. 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 transshipment 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.

Implications of technological change for the globalization of production include: lower transportation costs that enable firms to disperse production to economical, geographically separate locations lower information processing and communication costs that enable firms to create and manage globally dispersed production systems Implications of technological change for the globalization of markets include: low cost global communications networks help create electronic global marketplace low-cost transportation help create global markets global communication networks and global media are creating a worldwide culture, and a global market for consumer products

The Changing Demographics Of The Global Economy

There has been a drastic change in the demographics of the world economy in the last 30 years Four trends are important: the Changing World Output and World Trade Picture the Changing Foreign Direct Investment Picture the Changing Nature of the Multinational Enterprise the Changing World Order

The Changing World Output And World Trade Picture

In 1960, the United States accounted for over 40% of world economic activity By 2006, the United States accounted for less than 20% of world economic activity A similar trend occurred in other developed countries The share of world output accounted for by developing nations is rising and is expected to account for more than 60% of world economic activity by 2020

In the 1960s: the U.S. dominated the world economy and the world trade picture, U.S. multinationals dominated the international business scene, and about half the world-- the centrally planned economies of the communist world-- was off limits to Western international business.

Table 1.2: The Changing Demographics of World GDP and Trade

The Country Focus: Indias Software Sector feature explores the growth of India software sector over the last twenty-five years. Four factors account for the growth of the sector. First, the country has a large supply of engineers. Second, labor costs in India are low. Third, since many Indians are fluent in English, coordination between Western firms and Indian firms is easier. Fourth, because of time differences, Indians can work while Americans sleep.

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