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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
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
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.
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
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)
1950 18 % 26 % 25 % -1% 9%
Great Britain
United States
-44 %
%
14 %
5.9 %
4.8 %
4.0 %
4.0 %
Index 1992=100
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
Index 1950=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
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
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
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
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
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Japan
United States
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.
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
integrated global economy presents new opportunities, it also could result in political and economic disruptions that may throw plans into disarray
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
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
power is shifting away from national governments and toward supranational organizations Examples: World Trade Organization (WTO), the European Union (EU), and the United Nations
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
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