Globalization and its Impact

Sessions 1-3
 Globalization

Refers to shift toward a more integrated and

interdependent world economy.

Globalization of Globalization of
Markets Production

Sourcing of goods / services

Merging of historically
from locations around the
distinct & separate national
globe to take advantage of
markets into one huge global
national differences in the cost/
market place
quality of factors of production.
International Trade occurs when a firm exports
goods /services to consumers in another country

Foreign Direct Investment (FDI) occurs when a firm

Invests resources in business activities outside its
home country.
 Drivers of Globalization

1.) Decline in barriers to the free flow of

goods, services,and capital.
2.) Technological change.
3.) Industrialization and economic development.
4.) Integration of world financial markets &
development of institutions that support & faciilitate
International trade.
5.) Increased global competition.
 Cutting tariffs on import
Allows a firm to
of industrial goods,
base production
services & agricultural
at the optimal
products.
location to drive
Phasing out subsidies to down production
agricultural producers costs / increase
Declining Trade & product quality
Reducing barriers to
Investment
cross-border invetsment World economies
Barriers
becoming more
Limiting use of anti- inter-twined.
dumping laws

World is
Reducing barriers to becoming
Foreign Direct Investment wealthier.
 Development of micro-
Dispersal of
processors & advances
production/markets to
In telecommunication
geographically separate
technology.
locations has become
economical.

Rapid growth of internet

and world-wide web Real costs of processing
Technological
and communication have
Change fallen.

Innovations in
Mass movement of
transportation
people across countries.
technology.

Worldwide culture created

through global media
 Changing Demographics of the Global Economy
Changing World Output and World Trade Picture
¤ Share in the world output /exports of U.S., Germany,
France & U.K. has slipped.
¤ China's share has increased.

Changing Foreign Direct Investment Picture

¤ Share in FDI flows of U.S.declined from 66.3% in 1960 to
30% in 2003.
¤ Increased flow of foreign investment into developing nations.

Changing Nature of Multi-national Enterprises

¤ Rise of non-U.S. multi-nationals(drop of U.S. from 48.5 in
1973 to 28% in 2002.)
¤ Rise of mini-multi-nationals.
 Changing Demographics of the Global Economy

The Changing World Order and the 21st century

¤ Former Communist nations of Europe and Asia are moving
towards democratic politics and free market economies.
¤ China is progressively moving towards free market reforms.
¤ Latin America moving towards democracy & free market
Reforms.
¤ Privatization of state-owned businesses, widespread adoption
of deregulation, opening of markets to more competition,
removing of barriers to cross-border trade/investment.
 International Companies

Multi-national / Globally Multi-

Transnational Integrated Domestic
Companies Company Company
 Risks in International Business
Commercial
Risk

Currency
Cross-Cultural Risks
(Financial)
Risk Risk

Country
Risk
 PROS AND CONS OF GLOBALIZATION
JOBS AND INCOME
Loss of jobs in developed
nations by out-sourcing Leads to cost-effectiveness
of jobs to low-wage and reduction of product
nations, thereby leading prices
to higher unemployment
and and lower living
standards in home
nations.

LABOR POLICIES AND THE ENVIRONMENT

¤More pollution
¤ Rising income levels lead to lesser
¤Exploitation of labor of less
Pollution.
developed countries.
¤ Labor well-treated /
¤ Tougher environmental /
ethical standards.
labor regulations.
 NATIONAL SOVEREIGNTY

¤ Power shifts away from national

Governments to supranational ¤ Existence of WTO and UN rests on
Organziations such as the WTO, the support received from member
UN. states.

WORLD'S POOR

¤Divide between the rich and

the poor nations increases.
 Global Institutions
World Trade Organization ( Previously GATT)
¤ Policing the world trading system & ensuring nation-states adhere to the rules laid
down in trade treties signed by member states.
¤Facilitating the establishment of additional multinational agreements between
member states. Objective is to liberalize trade.

International Monetary Fund / World Bank

¤ To maintain order in the international monetary system.
¤ Lender of last resort to nation-states in economic turmoil.
¤ To promote economic development.

United Nations
¤ To maintain international peace & security.
¤ To develop friendly relations among nations.
¤ To cooperate in solving international problems / promoting respect for human rights.
¤ Be a centre for harmonizing the actions of nations.
Political Factors and Legal Systems in
Global Business Environment

Sessions 4 - 6
 Political System

System of Government in a nation

Collectivism Socialism Individualism Democracy Totalitarianism

Communist Theocratic Tribal

 Collectivism
¤ Stresses the primacy of collective goals over individual goals.
¤Needs of society as a whole more important than individual
freedom.

Socialism
¤Means of production owned by states for benefit of labor.
Communists – violent revolution & totalitarian dictatorship
Social Democrats- democratic means.

Individualism
¤Individual to have freedom in his/her economic/political pursuits.
¤Interests of the individual to take precedence over interests of
the state.
 Democracy
Government is by the people, exercised either directly or
through elected representatives.

Totalitarianism
One person/political party exercises absolute control over
all spheres of human life and prohibits opposing parties.

Communist Theocratic Tribal

Political power
Socialism can be
monopolized by a Political party that
achieved only
party, group, individual represents the interest
through
that governs according of aparticular tribe
totalitarian
to religious principles. monopolizes power.
dictatorship.
 Economic Systems

Market Command Mixed

¤All productive
activities are privately
owned.
¤ Quantity of goods & ¤ Certain sectors are
¤Production is
services to be left to private
determined by the
produced & their ownership & free
interaction between
prices decided market mechanism
demand & supply.
by Government. ¤ Other sectors have
¤ Role of government
¤ All businesses are significant state
Is to encourage
State owned. ownership &
Vigorous free & fair
Government planning.
competition between
private producers.
 Legal Systems
Rules or laws that regulate behavior along with the processes by
which laws are enforced and through which redress for
grievances is obtained.

Common Civil Theocratic

Based on tradition
(legal history),
precedent ( cases Based on detailed
Law based on
that have come before set of laws
Religious teachings.
thecourts in the past) organized into
and custom(ways in codes.
which laws are applied
inspecific situations).
 Property Rights
Bundle of legal rights :
 Over the use of a resource
Use of any income derived from the resource

Intellectual Property Right

Right over property that is the product
of intellectual activity

Patent Copyrights Trademarks

Grants the inventor of a Designs & names

Exclusive legal rights
new product or process by which merchants/
of authors, artist,
exclusive rights for a manufacturers
composers &
defined period to the designate &
publishers to publish
manufacture,use or sale differentiate their
& disperse their work.
of that invention. products.
Economic System and the Political Economy

Sessions 7 - 8
 Determinants of Economic Development

Gross National Income (GNI) – Total annual income

received by residents of a nation.

Purchasing Power Parity (PPP) – Allows for direct

comaparison of living standards in different countries.
The base for adjustment is the cost of living in the
United States.

GDP Growth Rate : Gives the rate of economic

growth in countries.
 Broader Conceptions of Development

Human Development Index

 Life Expectancy at birth (function of health care)
 Educational Attainment (adult literacy rate & enrollment in
primary, secondary& tertiary education)
 Whether average incomes sufficient to meet basic needs
(adequate food, shelter & health care).
Relationship between Political Economy and
Economic Progress

¤ Impact of innovation and entrpreneurship.

¤Importance of market economy for
innovation / entrepreneurship
¤ Importance of strong property rights
¤ Political system ( democracy / totalitarian regime).
¤Economic progress leads to a democratic regime.
 Relationship between Geography and
Economic progress.

 Topography ( Mountaineous/ landlocked/coastal)

 Climate
 Rate of disease
 Condition of soil
 Transition in States
Factors leading to spread in Democracy
 Totalitarian regime falied to deliver economic progress.
 New information/communication technologies led to
spread of democratic ideals/information from free societies.
 Increasingly prosperous middle & working class pushed
for democratic reforms.

Effect of Global Terrorism

 Tension between civilizations
 Clash of value systems and ideology.

Spread of Market-Based Systems

 Privatization
 Deregulation of economies to promote greater competition.
 Economic Transition
Deregulation
 Removing legal restrictions to free play of market.
 Removing restrictions to operations of private enterprises.
 Removing restrictions to direct investment by
foreign enterprises.

Privatization
 Transfer of ownership of state property into hands of
private individuals.
 No sheltering of privatized firms from competition.
 Proper corporate governance of the privatized firms.

Legal Systems
 Protection of property rights.
 Overall Attractiveness of a Country

Costs
Benefits Corruption
Size of Economy Lack of Infrastructure
Likely Economic Growth Strict standards with regard
to product safety, environmental
pollution etc.
Absence of cap on damage
awards
Overall
Attractiveness

Risks
Political risks, Social unrest/Anti-Business Trends
Economic Risks: Economic Mismanagement
Legal Risks:Failure to Safeguard
Property Rights
International Trade Theory

Sessions 9-11
 Mercantilism

¤It was in a country's best interests to maintain a

trade surplus,(export more than it imported), thereby
accumulating gold and silver to increase national wealth.
¤ Viewed trade as a zero-sum game (gain in one country
results in loss by another.)
 Theory of Absolute Advantage (Adam Smith)

¤ A country has an absolute advantage in the production

of a product when it is more efficient than any other
country in producing it.
¤ Countries should specialize in the production of goods
for which they have an absolute advantage and then trade
these for goods produced by other countries.
¤ A country should never produce goods that it can buy at
a lower cost from another country.
 Theory of Comparative Advantage ( Ricardo)

¤ A country should specialize in the production of

those goods that it produces most efficiently and
buy the goods that it produces less efficiently
from other countries.
¤ Potential world production is greater with
unrestricted free trade than it is with restricted trade.
¤ Differences in labor productivity between nations
underlie the notion of competitive advantage.
Critique of the Ricardian Model (PPF is not necessarily a straight
line)

Immobile Resources
 Resources do not always move easily from one
economic activity to another.

Diminishing Returns to Specialization

 The number of units of resources required to produce
each unit of output increases with additional units ( not
all units are of same quality or different goods use
resources in different proportions.)

Dynamic Effects and Economic Growth

 Free trade changes a country's stock of resources and
the efficiency to utilize those resources.
 Hecksher – Ohlin Theory

 Comparative advantage arises from differences

in national factor endowments (extent to which country
is endowed with land, labour, capital).
 Nations have varying factor endowments, leading to
varying costs. More abundant a factor, lower the cost.

Critique :
Assumes that technologies are same across countries.
( leading to Leontief Paradox).
 Product Life Cycle Theory

New Product
Low level of
New product Increase in produced by
Exports to
introduced in demand for foreign producers
Developing
U.S. new product In home
countries
coutry.

Producers in
Locus of
low cost Market in U.S.
U.S. Becomes an production
countries able matures, product
importer for switches to
to produce standardized,
the product developing
at low cost competition on price
countries.
 New Trade Theory

 Economies of scale are unit cost reductions associated with

a large volume of output.
 Through impact of economies of scale trade can
increase the variety of goods available to consumers and
decrease the average cost of goods.
 When the output required to attain economies of scale
represents a significant proportion of total world demand,
global market may be able to support a small number of
enterprises.
 First entrants into the industry gain first-mover advantages.
 National Competitive Advantage – Porter's Diamond

Firm Strategy,
Structure, and
Rivalry

Factor Demand
Endowments Conditions

Related and
Supporting
Industries
 Country- Similarity Theory

Economic
Similarity Similarity of
Similarity of Cultural
of Political &
Industrial Similarity
Location Economic
Countries
Interests
Parameters for Sustaining Superior Performance at all Levels
COUNTRY LEVEL COMPETENCIES & INVESTOR-CONFIDENCE
RAISING FRAMEWORKS
Presence of institutions & mechanisms that promote investor
confidence , skill &resource accumulation,human capital
Build-up, regulatory systems etc.

ORGANIZATIONAL LEVEL STRATEGIES, STRUCTURES,

CULTURES, REWARDING SYSTEMS, SENSE OF PURPOSE
IN SOCIETY
Leadership that promotes employee empowerment,
Experimentation & entrepreneurship

INDIVIDUAL LEVEL COMPETENCIES TALENTS, SKILLS,

MOTIVATION, LEARNING ABILITY & COMMITMENT TO EXCELLENCE
Individual's & organization's beliefs in self-development & skills
upgradation
Implications of International Trade Theory for Business

Location
A firm should disperse its production activities to those
countries where they can be performed more efficiently.

First-Mover Advantages
 Where global market supports few firms, it pays off to invest
substantial financial resources to to build first-mover
advantage

Government Policy
 Firms having pivotal role in international trade can exert a
strong influence on governmnet trade policy.

Building Factor Endowments

 Firms should build up their factors by invetsing in training &
greater commitment to R&D.
The Political Economy of International Trade

Sessions 12-15
 Instruments of Trade Policy

Local
Voluntary Administr Anti-
Import Content
Tariffs Subsidies Export -ative Dumping
Quotas Require
Restraints Policies Duties
ment
 Instruments of Trade Policy
Tariff
Tax levied on imports (or exports)

Specific Tariffs Ad Valorem Tariffs

Levied as a fixed charge for Levied as a proportion of the
each unit of a good imported value of goods imported.

 Tariffs are pro-producer and anti-consumer (protect producers from

foreign competitors; restriction of supply raises domestic prices.
 Import tariffs reduce overall efficiency of world economy.
 Subsidy
Government payment to a domestic producer

Low-interest Tax Breaks Government

Cash Grants
Loans Equity
Participation

Helps :
 To compete against foreign imports& gain export markets.
 Achieve a first-mover advantage in an emerging indutry
 Gains to the domestic economy due to increased employment
and tax revenues.

 Allows inefficient producers to stay in business.

 Encourages countries to overproduce heavily subsidized products
 Encourgaes countries to produce which could be imported at lower cost
 Reduces international trade in the subsidized product.
 Voluntary Export Restraint
Import Quota
Quota on trade imposed by the
Direct restriction on the
exporting Country, typically at the
quantity of some good that
request of the importing country’s
may be imported Into a country.
government.

Tariff Rate Quota

A lower tariff rate applied to
imports within the quota than
those over the quota.

• Benefit domestic producers by limiting import competition.

• Raises domestic price of an imported good; in case of excess demand
raises price of both domestically produced and imported good.
 Local Content Requirement
Requirement that some specific fraction of a good
should be produced domestically.

Physical Terms Value

A certain % of components of A certain % of value of
product to be produced product to be produced
locally locally
 Administrative Trade Policies
Bureaucratic rules designed to make it difficult for imports
to enter a country.

Anti-dumping Policies
Policies designed to punish foreign firms that enagage in
Dumping ( selling goods in a foreign market at below
Their costs of production, or selling goods in a foreign
Market at below their fair market value.
 Case for Government Intervention

Political Arguments Economic Arguments

 Protecting Jobs & Industries  Need to protect infant industry

 National Security  Helping firms' to gain first-mover
 Forcing trade partners to advantages and help overcome
“play by the rules of the game.” Barriers to entry creted by foreign
 Protecting consumers from firms.
“unsafe products”.
 Furthering foreign policy
objectives.
 Protecting human rights
 World Trade Organziation (WTO)

Is responsible for arbitraing trade disputes and monitoring /

enforcing trade policies of member countries.

¤ Trade policies with respect to manufactured goods (GATT).

¤ Trade policies with respect to services and intellectual
property.(1995)
¤ Opening up of telecommunications market to competition
and FDI (1998).
¤ Liberalize cross-border trade in financial services (March 1999).
¤ Cutting tariffs on industrial goods and services, phasing out
Subsidies to agricultural products, reducing barriers to cross-border
Invetsment & limiting use of anti-dumping laws. (DOHA round)
 Principles of Trading System under WTO

1.) Trade without discrimination

a.) MFN : Treating other people equally.
b.) National Treatment : Treating foreigners & nationals
equally.

2.) Freer Trade : Gradually through negotiations.

3.) Predictibility of business environment.
4.) Promoting fair competition.
5.) Encouraging development & economic reform.
 Implications for Managers

Effect on Firm's Strategy

¤Tariff barriers raise the costs of exporting products to
a country, leading to comeptitive dis-advantage vis-a-vis
indigenous competitors.
¤Quotas may limit a firm's ability to serve a country from
locations outside of that country.
¤Local content regulations may force a firm to locate more
production activities in a given market than it would otherwise.

Policy Implications
¤Firms can exert a strong influence on Government policy with
respect to protectionism, free trade etc. which further has a
direct impact on business.