CHAPTER 1

Globalization
LEARNING OUTCOMES
• By the end of this chapter, students will be able
to -
• Understand what is meant by the term globalization.
• Recognize the main drivers of globalization.
• Describe the changing nature of the global
economy.
• Explain the main arguments in the debate over the
impact of globalization.
• Understand how the process of globalization is
creating opportunities and challenges for
management practice.
WHAT IS GLOBALIZATION?

• Globalization - the shift toward a more

integrated and interdependent world
economy
• The world is moving away from self-contained national
economies toward an interdependent, integrated global
economic system
• Globalization has several facets, including the globalization of
markets and the globalization of production.
WHAT IS THE GLOBALIZATION OF
MARKETS?
• Historically distinct and separate national
markets are merging and creating “ONE HUGE
GLOBAL MARKET”
• falling trade barriers make it easier to sell globally
• consumers’ tastes and preferences are
converging on some global norm (Global tastes)
• firms promote the trend by offering the same
basic products worldwide
• E.g., Coca-Cola Soft Drinks, McDonald’s burgers,
Starbucks coffee, Sony video games, Apple
iPhones, and IKEA furniture
WHAT IS THE GLOBALIZATION OF MARKETS?
• The Globalization of Market Perspectives -
• Benefits small and large companies.
• Significant differences between national markets due to consumer
tastes and preferences, distribution channels, culturally embedded
value systems, business systems, and legal regulations
• Products that serve universal needs are global, such as oil,
aluminum, wheat, microprocessors, DRAMs, and commercial jet
aircraft
• Competitors may not change among nations. E.g., Coca-Cola’s
vs. PepsiCo; Ford vs. Toyota; Boeing vs. Airbus; Caterpillar vs.
Komatsu in earthmoving equipment; General Electric vs. Rolls-
Royce in aero engines; Sony, Nintendo, and Microsoft in video-
game consoles; and Samsung and Apple in smartphones
WHAT IS THE GLOBALIZATION OF
PRODUCTION?
• Firms source goods and services from locations
around the globe to capitalize on national
differences in the cost and quality of factors of
production like land, labor, energy, and
capital
• Early outsourcing was confined to
manufacturing. Modern communications
technology has advanced outsourcing today
for service activities.
WHAT IS THE GLOBALIZATION OF
PRODUCTION?
• Benefits of Globalization of Production
• Companies can
• lower their overall cost structure
• improve the quality or functionality of their product
offering
• E.g., the production of Boeing’s 777 & 787 –
30% and 65% values are added by foreign
suppliers, including Japan, Singapore, Italy,
etc.
WHAT IS THE GLOBALIZATION OF PRODUCTION?
Due to the ‘Globalization of Production,’ talking about American,
Japanese, German, or Korean products is becoming irrelevant.
Robert Reich suggests “global products.”
Impediments of ‘Globalization of Production’ preventing optimal
dispersion of activities:
• Formal and informal barriers to trade
• Barriers to foreign direct investment
• Transportation costs
• Political and economic risk
• Challenge of coordinating a globally dispersed supply chain
 WHY DO WE NEED GLOBAL INSTITUTIONS?
• Global institutions -
• manage, regulate, and police the global
marketplace
• promote the establishment of multinational
treaties to govern the global business system
• As of 2021,164 nations that account for 98% of
world trade were W T O members.
• General Agreement on Tariffs and Trade (GATT)
• World Trade Organization (WTO)
• International Monetary Fund (IMF)
• World Bank
• United Nations (UN)
DRIVERS OF GLOBALIZATION?
• Declining barriers to the free flow of goods, services,
and capital
• average tariffs are now at just 4%
• more favorable environment for FDI
• Between 1960 and 2020, the value of the world economy increased
nine times, while the value of international goods increased 19.7 times
• facilitates global production
DECLINING TRADE AND INVESTMENT BARRIERS
Average Tariff Rates on Manufactured Products as
Percent of Value
DECLINING TRADE AND INVESTMENT BARRIERS
Figure - Value of World Merchandised Trade and
World Production 19 60 to 2021
DRIVERS OF GLOBALIZATION?
• Technological change
• Communications through microprocessors and telecommunications
• the Internet
• More than half of the world’s population uses the internet.
• Global e-commerce sales close to $4 trillion.
• The internet acts as an equalizer.

• transportation technology
• Commercial jets, super freighters, and containerization have all “shrunk the
globe.”
• Locating production in geographically separate locations has become
more economical.
• Cultural distance has been reduced and has brought some convergence
of consumer tastes and preferences.
HOW HAS WORLD OUTPUT AND WORLD
TRADE CHANGED?
• In 1960, the U.S. accounted for over 40% of world
economic activity, but by 2009, the U.S. accounted
for just 24%
• a similar trend occurred in other developed countries

• In contrast, the share of world output accounted for

by developing nations is rising
• China and BRIC countries growing more rapidly.
• Developing nations may account for more than 60 percent of world
economic activity by 2030
HOW HAS WORLD OUTPUT AND
WORLD TRADE CHANGED?
The Changing Demographics of World GDP and Trade
 HOW HAS FOREIGN DIRECT INVESTMENT
CHANGED?
• In the 1960s, U.S. firms accounted for about two-thirds
of worldwide FDI flows
• Today, the United States accounts for less than one-fifth of worldwide
FDI flows
• Other developed countries have followed a similar pattern

• In contrast, the share of FDI accounted for by

developing countries has risen
• Developing countries, especially China, have also become popular
destinations for FDI
HOW HAS FOREIGN DIRECT INVESTMENT
CHANGED?
Percentage Share of Total FDI Stock FDI Inflows 1990-2020
1995 - 2020
WHAT IS A MULTINATIONAL ENTERPRISE?
• Multinational enterprise (MNE) - any business that has
productive activities in two or more countries
• Since the 1960s
• the number of non-U.S. multinationals has risen
• In 2003, 38.8 percent of the world’s 2,000 largest multinationals
were U.S. firms.
• By 2019, 28.8 percent of the top 2,000 global firms were U.S.
multinationals, a drop of 201 firms.
• the number of mini-multinationals has risen
THE CHANGING WORLD ORDER
• Many former Communist nations in Europe and Asia
are now committed to democratic politics and free
market economies
• creates new opportunities for international businesses
• but there are signs of growing unrest and totalitarian tendencies in
some countries
• Risks of doing business in these countries are high.

• China and Latin America are also moving toward

more significant free-market reforms
• China is moving to become an industrial superpower.
• In Latin America debt and inflation are down, more private investors,
and expanding economies.
 HOW WILL THE GLOBAL ECONOMY OF THE
21ST CENTURY LOOK?
• The world is moving toward a more global economic
system. Barriers to the free flow of goods, services, and
capital have decreased.
• But globalization is not inevitable
• Countries may pull back
• Risks are high
• the financial crisis that swept through South East Asia in the late 1990s
• the recent financial crisis that started in the U.S. in 2008-2009 and moved
around the world
• the spread of the COVID-19 pandemic around the world in 2020 seriously
disrupted global supply chains
 THE GLOBALIZATION DEBATE
• Critics of globalization argue:
• Falling trade barriers allow firms to move manufacturing activities to
countries with much lower wage rates.
• Destroy manufacturing jobs in wealthy advanced economies.
• Services also being outsourced:
• Contributing to higher unemployment and lower living standards in their
home nations.
• Labor and environmental regulations increase manufacturing costs
• Loss of national sovereignty - Shift of power away from national
governments toward supranational organizations
• the gap between the rich and poor nations has gotten wider
• Anti-globalization protesters now regularly show up at most major
meetings of global institutions. Protestors believe globalization causes
detrimental effects on living standards, wage rates, and the
environment.
 THE GLOBALIZATION DEBATE
• Supporters argue
• Benefits outweigh the costs.
• Free trade will result in countries specializing in the production of goods
and services that they can produce most efficiently while importing
goods and services that they cannot produce as efficiently.
• As a result, the whole economy is better off.
• Companies can reduce their cost structure, and consumers benefit.

• Data suggests the share of labor in national income

has declined over the past two decades.
• Share of national income by skilled labor has increased.
• Unskilled labor experienced a fall in income, but not necessarily standard of
living due to economic growth
• The weak growth rate in real wage rates for unskilled workers is likely due to
a technology-induced shift within advanced economies
 THE GLOBALIZATION DEBATE
• Supporters argue
• Tougher environmental regulations and stricter labor standards go
hand in hand with economic progress.
• Free trade leads to less labor exploitation and less pollution.
• The power of supranational organizations is limited to what nation-
states collectively agree to grant.
• These organizations exist to serve the collective interests of member
states.
• Supporters suggest lowering barriers to trade and investment and
promoting free market policies.
HOW DOES THE GLOBAL
MARKETPLACE AFFECT MANAGERS?
• Managing an international business differs from
managing a domestic business because
• countries are different
• the range of problems confronted in an international business is
wider and the problems more complex than those in a domestic
business
• firms have to 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