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International Business and Trade – Module 1

Globalization

• is the socioeconomic reform process of eliminating trade, investment, cultural, information

technology, and political barriers across countries
• It can lead to increased economic growth and geopolitical integration and interdependence
among nations of the world.
• Globalization has been based upon changes in national policies such as:
o Strengthening the role of private sectors
o Supporting free market pricing
o Eliminating barriers to free movement of goods, services, capital and information
technology
o Promoting institutions that promote transparency, disclosure and rule of law
• It is no longer simply another word for “Westernization” or “Americanization.”
• The fundamental basis of globalization represents freer international trade and investment or
the free flow of goods and services.
• Thus globalization, and international trade and investment are interlinked

Emerging economies

• These are countries that are implementing more open trade and free-market policies
• Prior to 2000, globalization generally implied that business expanded from developed countries
to developing countries
• Are implementing more open trade and free-market policies to “compete with everyone from
everywhere for everything”
• Are becoming the world’s center of economic gravity through innovation, research, and
development
• BRIC economies
o Brazil, Russia, India, and China

Decoupling

• A global shift in which industrialized country-dependent developing economies grow based on

their own underlying economic strengths rather than those of highly developed countries
• Eventually leads to multipolar world

Multipolar world

• A world economy in which the engines of growth are comprised of both industrialized (e.g., the
United States) and emerging market economies (e.g., BRIC countries)
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Key International Institutions That Facilitate Globalization

• Gained momentum after world war 2 when the government of free world countries recognized
the importance of international cooperation
• International Monetary Fund (IMF)
o It is an institution charged with overseeing the international monetary system and
provide financial stability
▪ The international monetary system is the global system of exchange rates and
international payments that enables countries and their citizens to purchase
goods and services from one another.
o It came to existence on December 1945 began its operation March 1,1947 in
Washington D.C.
o As of September 18, 2014, 188 countries were members of this institution
o It tracks global economic trends and performances, alerts its member countries when it
sees problem on the horizon, provides a forum for economic policy dialog, and
disseminates information to government on how to implement economic reforms.
▪ Economic reforms are economic policy changes that promote private sector
development, competitive markets, market pricing, freer trade, and
deregulation.
o International Monetary Fund’s role in global financial stability:
▪ Provides a forum for cooperation on international monetary problems
▪ Facilitates international trade that promotes job creation, economic growth,
and poverty reduction
▪ Promotes exchange rate stability and an open system of international payments
▪ Lends countries foreign exchange to help address balance of payment problems
• World Bank
o IMF and WB were conceived on July 1944 when representatives from 144 world
countries met in USA and agreed on a framework for international cooperation.
o World Bank’s initial role was to aid the reconstruction of Europe after World War II.
o Its focus is about reconstructing and restructuring economies
o Current focus areas:
▪ Global integration through trade liberalization
▪ Analysis and national trading policy advice
▪ Agreements supporting international standards in financial systems
▪ Information and knowledge transfer to developing countries to support
sustainable development
▪ Eradicating communicable diseases

TABLE 1.1 THE WORLD BANK GROUP’S DEVELOPMENTAL INSTITUTIONS

International Bank for Reconstruction Supports reconstruction and restructuring of member countries
and using funds raised in international capital markets

Development (IBRD)
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International Development Association Provides long-term low-interest social sector and infrastructure
(IDA) loans to the poorest members using foreign aid funds provided by
the rich nation members

International Finance Corporation (IFC) Provides loans and takes equity position in private companies of
developing countries and works toward developing capital markets
in those economies.

Capital market is a stock exchange where long-term financial

instruments such as stocks and bonds can be bought and sold.

Multilateral Investment Guarantee Provides political risk coverage for private investments made in
Agency (MIGA) developing countries

International Center for the Settlement Works on issues related to foreign investment
of Investment Disputes (ICSID)
disputes

• World Trade Organization (WTO)

o The WTO began trading in 1948 under the General Agreement on Tariffs and Trade
(GATT).
▪ Primary dealt with merchandise trade
▪ Liberalized trade by lowering and/or removing trade barriers such as tariffs,
quotas, and subsidies
o It is based in Geneva, Switzerland, has 160 members, and additional 23 countries are
negotiating to join
o WTO promotes global trade by:
▪ Administering trade agreements
▪ Acting as a forum for trade negotiations
▪ Settling trade disputes
▪ Reviewing national trade policies
▪ Providing developing countries with technical assistance and training programs
▪ Cooperating with the IMF and the World Bank
o At the heart of the system, known as the multilateral trading system, are the WTO’s
agreements, negotiated and signed by a large majority of the world’s trading nations
and ratified in their parliaments.
▪ Liberalization of the trading system means lowering and/or removing trade
barriers such as tariffs, quotas, and subsidies

Multilateral Trading System Principles Fostered by WTO Agreements

• Trade without discrimination

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• Increasingly freer trade

• Predictability of trading relationships
• Promotion of fair competition
• Encouragement of economic reforms in developing countries

Institutional Structure and Its Impact on Globalization

• What is institutional structure?

o Institutions are the rules, enforcement mechanisms, and organizations that support
market transactions.
o Successful institutions play three important roles:
▪ They efficiently channel information about market conditions
▪ Define property rights and contracts
▪ Promote competition and innovation
• Impact of globalization:
o Demand for transparency, openness, and disclosure from political institutions
▪ The foundations of globalized world are political.
▪ Political institutions and leaders must be transparent otherwise social unrest
will arise.
o Need for adaptive institutions that provide societal stability and incentives for private
investment
▪ Adaptive institutions are government organizations that create strong
incentives or private investments and operate under a system of checks and
balances.
▪ Here, accountability and transparency emerge as key factors for institutional
reform that promotes political stability, sustainable economic growth, and
globalization.
➢ Accountability is a system of responsibility in which an authority, such
as the government, is answerable for its actions.
➢ Transparency is a system of full disclosure and openness that aims to
avoid any semblance of corruption and cronyism.
o Increasing expectations of accountability and responsibility for those who govern
o Importance of independent judiciary and free press
▪ Investors have greater confidence when conducting business with countries that
have no crime, effective courts, dependable contracts enforcements and free
press.

Effective Policy Measures That Promote Globalization

• Good governance
o Policy transparency, competent administrators, and consistency overtime are measures
of effective governance
• Competitive markets
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o Countries must enforce regulations that promote free market such as anti-trust laws,
national laws aimed at maintaining competition at all sectors, and preventing
monopolistic behavior of firms.
• Property rights
o With physical and intellectual property rights protection, discourages domestic and
foreign investors of making long term commitments
• Anticorruption policies
o Illicit dealings undermine economic performance by raising cost, creating uncertainty
and thwarting competition and transparency.
o Globalized economies (e.g. New Zealand, the Nordic countries, and Singapore) are less
likely to tolerate corruption; they rank at the top in an index for absence of corruption
by Transparency International
▪ It is the global civil society organization leading the fight against corruption.

Impact of Information Technology on Globalization

• Innovations in information technology are radically changing the way people all over the world
live, communicate, and work.
• We are in a period of profound transformation adjusting lifestyles to make the Internet and
wireless technologies a part of everyday life called the digital era
• Digital Generation
o Communication has become the fastest-growing part of household expenditures since
1993 in many countries.
o Millions of people all over the world now use the Internet/smart phones for everything.
• Expanding the global use of information technology
o Internet based applications underlie major advances in science, business organization,
environment monitoring, transport management, education, and e-government.
o Because broadband prices had been falling, governments in emerging economies, such
as China, India, and South Africa, are facilitating the spread of broadband to rural towns
and villages to provide instant access to market information and government programs
to remote villagers.
o This will enable policymakers to maximize the economic potential of remote
communities and make globalization sustainable.
▪ Bandwidth is the amount of data and other information that can be transferred
in second via the Internet.
▪ World Wide Web (WWW) is a system of interlinked documents contained and
accessed via the Internet.
• Digital Divide Myth
o Describes the perceived economic gap between countries or people with easy access to
digital and information technology and those with very limited or no access.
o The rapid and progressive fall in prices of digital IT equipment and services has
increased access and accelerated globalization, thereby narrowing the digital gap.
• “Leapfrogging” into the Internet and Cellphone Era
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o As of 2014 about 43 % of the world’s population had access to the Internet

▪ Those people have been empowered by the opportunities that the Internet
presents for business, social interaction, and civic engagement.
o The next billion of internet users will be vastly different since majority of them belong to
developing countries, and they will connect to the internet principally via wireless
networks.
▪ In many developing countries, the number of cell phone subscribers now
outnumbers those for fixed-line networks by more than 20:1
▪ Developing countries escaping using of landline technology and now using
wireless systems.

The Globalization Controversy

• Globalization can be a force for exploitation and injustice.

• Arguments against globalization:
o Job Losses and Income Stagnation
▪ In developing economies, support for further trade liberalization that could lead
to a acceleration of globalization is uncertain.
▪ Critics argue that globalization harms the poor through loss of job and stagnant,
if not falling, wages.
▪ They also argue that open trade and foreign direct investment may take jobs
from workers in advanced industrial economies and transfer them to less
expensive workers in developing countries.
➢ This leaves the workers in richer country out of work.
▪ Workers in developing countries might be drawn to jobs that may exploit them.
o Sustainable Development and Environmental Degradation
▪ Sustainable development is an economic development that meets the needs of
the present generation without compromising the ability of future generations
to meet their own needs, whether environmentally, socially, or economically.
▪ Finding solutions depends upon a shared, single vision which is meeting the
needs of the present without compromising the future and working toward that
vision together.
▪ Corporate social responsibility (CSR) practices are now becoming significant
factor in determining where multinational corporations conduct business.
o Loss of local control over economic policies and developments
o Disappearance of old industries
o Related erosion of communities

Making Globalization Work for All

• Globalization should center on how to best manage the globalization process at both national
and international levels so that the benefits are widely shared and costs are kept to a minimum.
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• Globalization has the potential to increase the quality of life for people; however, there cannot
be a guarantee that quality of life for all people will increase or that all changes caused by
globalization will be positive.
• Because globalization does create winners and losers even in relatively open countries like the
United States, economists have argued that national policies ought to be implemented to help
retrain and educate displaced workers.
o Globalization’s Winners
▪ China
➢ According to the World Bank, more than 400 million Chinese citizens
have climbed out of poverty since the implementation of economic
reforms that started in 1978 in their country.
▪ India
➢ Since India’s initiation of economic reforms in 1991, that country has
become a rapidly growing economy with a middle class approaching 300
million out of a total population of some 1.24 billion.
▪ Brazil
o Globalization’s Losers
▪ Those that suffer most from the effects of globalization are those countries that
have not been able to seize the opportunities to participate in this process.
▪ Countries that fall under this category include those that do not provide
economic and political freedom to their citizens.
▪ Most of these countries are governed by authoritarian regimes with minimum
rule of law and insignificant transparency.
▪ Central Asia
▪ Much of Africa
▪ North Korea