Topic 1

Globalization
 Learning Objectives
LO 1-1 Understand what is meant by the term globalization
LO 1-2 Examine the impact of globalization.
LO 1-3 Identify the key facets of globalization.
LO 1-4 Recognize the main drivers of globalization
LO 1-5 Describe the emergence of global institution and
global corporations.
LO 1-6 Analyze the main arguments in the debate over the
impact of globalization.
 Outline
 What is Globalization?
 Evidence and Impact of Globalization
 Facets of Globalization
 Globalization of Markets
 Globalization of Production
 Drivers of Globalization
 Decline in barriers
 Technological changes
 Emergence of Global Institutions
 Emergence and Transformation of Multinational
Corporations (MNCs)
 The Globalization Debate

3
 What is Globalization?
 Globalization - trend towards a more integrated and
interdependent global economic system.
 integration of economies through trade, capital flows,
migration and the spread of technology.
 Initial process primarily driven by economic factors,
but ultimately it has effects far beyond the economic
realm.
 interaction and integration amongst people across the
world in all facets of life
 impact on society and culture, legal and political
systems, environment …..

5
 Evidence of Globalization
 A highly integrated global economic system.
 $5tn (trillion) in foreign exchange transactions daily.
 The volume of world trade grew 42 times from 1950 to 2019 (fell 5% in
2020), whereas the world economy (GDP) was 21times larger.
 FDI flows grew more than 50-fold from 1975 to 2000 and 9-fold from
1992, increasing to more than $2 trillion in 2015 (falling to $859 bn in
2020).
 The establishment of global institutions.
 WTO, IMF, World Bank…..

 Globalization of corporations
 MNCs and their affiliates account for half of global exports, almost one-third
of world GDP and about one-fourth of global employment in 2018.
 Proliferation of global brands
 McDonald’s, Nike, IKEA, Samsung, Sony, VW, Huawei, ….
6
 covid

fall why?

global
economic
and
financial
crisis

Source: WTO

7
 Evolution of Global FDI

Source: OECD ilibrary (2021)

8
 Changing Demographics of Global
Economy
 1960s: U.S. was dominant in industrial power, accounting for
about 38 percent of world manufacturing output.
By 2018: U.S. accounts for only 15.8 percent; Germany,
France, the U.K., and Canada had similar decline.
• rapid economic growth in countries like China, India and Brazil.
 Increase in the flow of FDI from developing countries (most
notably China, as well as India).
 Growth of multi-national enterprises (MNEs) in developing
nations.
 The Rise of “Mini-Multinationals” involved in international
trade and investment (impact of internet)
9
 Changing Demographics of World
Output and Exports
Share of World Share of World Share of World
Country Output 1960 (%) Output Today (%) Exports Today (%)

United States 38.3 15.8 8.2

Germany 8.7 3.4 7.1

France 4.6 2.3 2.8

Italy 3.0 1.9 2.4

United Kingdom 5.3 2.4 2.3

Canada 3.0 1.4 2.2

Japan 3.3 4.3 3.6

China NA 17.1 11.1

10
 Changing demographics of FDI
Inflows (millions of USD)

11
 Globalization: Historical Impact on
the TWO most important Quality of
Life Indicators
“W _ _ l_h” & “H _ _l_h”
200 Years and Counting
(Gapminder: Hans Rosling)
Interactive
12
 Facets of Globalization
 Two key facets of globalization are
 The Globalization of Markets
 Examples: Coca Cola, Starbucks, Sony
PlayStation, McDonald’s hamburgers, IKEA
furniture

 The Globalization of Production

 Examples: Boeing, Vizio, iPhones

13
 Globalization of Markets
 Convergence of consumer tastes and preferences
onto a global norm, which leads to:
 merging of historically distinct and separate national
markets into one huge global marketplace
Global transport &
Reduces cultural distance
communication
between countries
networks

e.g., Coca Cola, McDonald’s, IKEA Consumer taste & preferences

converge onto the global norm

Emergence of global market Firms produce standardized

for consumer products products worldwide
14
 Globalization of Markets:
Starbucks around the World

15
 Benefit and Implication of Globalization of Markets
 Benefit of GOM
GOM Achieve
leads scale and Reduces
to scope production
economies and
Production
marketing
of Lower prices costs
standardized and greater
products & variety for
services consumers
Economies of scale - Unit or Average costs fall as volume of
output increases. Global market => Larger output
Economies of scope - Unit costs fall with product variety.
Global market => Larger product variety
 Implication of GOM: Homogenization of societies (Why?)
16
 Globalization of Markets: Limitations
 Presence of national differences:
Customize marketing and
Significant national differences operation strategies to match
still exist in many dimensions: country-specific conditions
culture, government intervention,
business systems, etc.
Compromise standardization
 Examples:
 McDonald’s (customization)
 Starbucks (customization, location strategy)
 Localization of product: Green tea in China and Japan.
 Food and in-store seating is much more important in China and Japan => larger
stores located in less expensive locations.
 Take-away order is more common in the US =>smaller stores located in prime
business districts.
17
 Globalization of Production
 The sourcing of goods & services from different
global locations to take advantage of national
differences in the cost and quality of factors of
production.
 offshoring and outsourcing of various intermediate layers
in the production process
 leading to the development of a global web of suppliers
as a source of competitive advantage.
 Examples:
 Lenovo computers,Vizio flat panel TVs, Boeing 787 Dreamliner
etc.
 Outsourcing of software design, radiology analysis to India
18
Globalization of Production: Boeing 787

 It takes a
world to
build a
Dreamliner

19
 Benefits and Implications of Globalization of
Production
 Benefits:
 Location economies: firms locate in countries where there is a
possibility of reducing the production costs and/or improving the
quality and functionality of products and services.
 Enhancing scale economies through location
economies.
 Diversifying investments and risks.

 Implications:
 Emergence of Foreign Direct Investment (FDI)
 Growth of Multinational Corporations (MNCs)

20
 Globalization: Key Opportunities and
Challenges
 Opportunities:
 Expand revenues - by selling globally (GOM)
 Reduce costs
 through economies of scale & scope (GOM)
 producing in locations where key inputs, including
labor, are cheaper or better quality (GOP).
 Challenges:
 heightened competition
 coordination and control (managing supply
chains)
 socio-political concerns
21
 Is Globalization New?
For thousands of years, people and later corporations -
have been buying from and selling to each other in lands
at great distances.

Silk Road across Central Asia connecting China and Europe during
the Middle Ages
22
 Modern Drivers of Globalization
 Two important factors driving the shift
toward increasing rates of globalization over
the past decades:
 Decline in trade and investment barriers
 led to the breaking down of barriers to flows
across borders of goods and services, capital,
knowledge and people.
 Technological innovations
 resulted in enormous reduction in costs of
communication and transportation.

23
 Drivers of Globalization: Decline in Trade and
Investment Barriers
 Decline in trade & investment barriers is
achieved through the lowering of
 tariffs, quotas, anti-dumping policy and administrative
policy
 Lower trade barriers enable companies to
view the world as a single market and
establish production activities in optimal
locations around the globe
 led to an acceleration in the volume of world trade and
investment since the early 1980s
24
Average Tariff Rates on Manufactured
Products as Percentage of Value
Country 1913 1950 1990 2020
France 21 percent 18 percent 5.9 percent 1.6 percent
Germany 20 26 5.9 1.6
Italy 18 25 5.9 1.6
Japan 30 -- 5.3 1.4
Netherlands 5 11 5.9 1.6
Sweden 20 9 4.4 1.6
United -- 23 5.9 1.6
Kingdom
United States 44 14 4.8 1.6

Sources: The 1913 to 1990 data are from “Who Wants to Be a Giant?” The Economist: A
Survey of the Multinationals, June 24, 1995, pp. 3–4. The 2020 data are estimated based on
data from the World Development Indicators, World Bank.
Decline in Trade Barriers: Value of World Trade
and World Production 1950-2020

Source: World Trade Organization.

 Drivers of Globalization: Technological Change
 Technological Changes in the fields of:
 Communications: advances in microprocessor technology led to
explosive growth in telecommunications and the spread of
internet (currently, 3.8bn users 51% of global population).
 lowers the cost of coordination & control in global production
(globalization of production)
 provides information backbone for global expansion at a lower cost
(globalization of production)
 reduces costs of sourcing from other locations, e.g. MRI scans from US
hospitals to India for analysis (globalization of production-outsourcing).
 reduces cultural distance leading to convergence in tastes and
preferences; makes it easier for buyers and sellers to find each other
(globalization of markets)
 low cost communication networks create electronic global marketplace
27
(globalization of markets)
 Drivers of Globalization: Technological
Change
 Transportation (commercial jets, superfreighters
and containerization)
 reduces the time needed to get from one location to
another, which facilitates movement of physical and
human resources.
 Between 1920 and today in the US, the average ocean
freight and port charges per ton fell from $95 to $29.
 The shipping cost of a $700 TV set is only $10.
 Between 1955 and today, the average air transport cost
per ton-kilometer fell by 80%.

28
 Implication of Technological Changes
 Implications for the Globalization of Production
 Lower communication and transportation costs
makes geographically dispersed production
system more economical.
 Implications for the Globalization of Markets
 Reduces cultural distance which leads to a
convergence of consumer tastes and preferences.

 Lowering of trade barriers makes globalization

of markets and production a theoretical
possibility, but technological changes made it a
tangible reality.
29
 Emergence of Global Institutions
 As a consequence of globalization, several global
institutions have emerged to
 manage, regulate, and police the global market place
 promote the establishment of multinational treaties to
govern the global business system
 Examples:
 the World Trade Organization (WTO) - polices world trading
system and ensures nations adhere to the rules established in WTO
treaties
 the International Monetary Fund (IMF) - maintains order in
the international monetary system
 the World Bank - promotes economic development
 the United Nations (UN) - maintains international peace and
security and functions as a center for harmonizing the actions of
nations
30
 Globalization and the Emergence of MNCs
 A multinational corporation (MNC) or
enterprise (MNE) is any business that has
productive activities in two or more
countries
 It is the principle agent for the international
transfer of resources
 viz. technology, management skills, marketing know-how
 Examples: Coca-Cola, Apple, Samsung, Toyota,
Lenovo
 MNCs can be characterized as both the
parent and the offspring of globalization!

31
 Prevalence of MNEs in the Global Economy (2016 %)

Source: OECD Analytical AMNE database.

32
 The Globalization Debate
 Is the shift toward a more integrated and interdependent global
economy a good thing?
 Experts and most policy makers believe that globalization is
promoting greater prosperity - more jobs, lower prices for goods
and services, better living conditions etc.
 However others feel that globalization adversely impacts a
significant number of the population, especially in terms of living
standards and the environment.
 The two groups disagree on the impact of globalization mostly
on economic issues of:
 Income and job security
 Environment and labor protection
 Income distribution
33
 Globalization Debate: Jobs and Income
 Critics:
 Falling trade and investment barriers lowers wages and eliminates
manufacturing jobs in developed nations. (U.S. and western Europe)
 Service sector jobs in developed countries also increasingly outsourced
to countries with lower costs.
 Exploits workers through low wages in developing nations.
 Supporters
 While some jobs are lost in developed countries, other (better-paying)
jobs are created, leading to a rise in average real income levels.
 Outsourcing & offshoring allows company to reduce its cost structure
and as a result reduces prices for consumers in developed nations.
 Creates opportunities for employment in developing countries which
are better than current alternatives.
34
 Globalization Debate: Labor and Environment
 Critics:
 Argue that weaker labor and environmental regulations in less
developed countries attract investment from MNCs, since adhering
to environmental regulations increases costs of manufacturing,
creating
 greater global environmental pollution.
 and “sweatshop” labor in developing countries.

 Supporters:
 Desire for tougher environmental regulation and stricter labor
standards comes with economic progress.
 studies reveal a “hump-shaped” relationship between income levels and
pollution levels (Kuznets' Curve).
 Globalization helps overall environment and labor protection in the
long-run through economic growth.
35
 Globalization Debate: Income Inequality
 Critics:
 Share of labor in national income has declined.
 attributed to a fall in unskilled labor’s share vis-à-vis high skilled labor and capital.
 Gap between poorest and richest segments of society in developed
economies has widened.
 Many countries have not benefited from globalization.
 Supporters:
 Increasing income inequality in developed societies is primarily due to a shift
towards a “knowledge economy,” highlighted by labour saving automation
technology in manufacturing and services.
 Many countries have not benefited from globalization because they suffer
from corruption and weak governance.
 Gap in income across countries has reduced and overall, countries open to
globalization on average grow faster than others.
37
 Joseph Stiglitz: Remaking Globalization
 Stiglitz acknowledges the impact of globalization on global
prosperity.
 However, he is also critical of how globalization often has a
devastating effect on countries, especially the desperately
poor.
 He advocates a rethink of how globalization has been
managed, including the suggested reformation of global
economic institutions (IMF, World Bank, WTO).
 Since abandoning globalization is neither feasible nor
desirable, Stiglitz recommends that globalization should be
restructured to realize greater benefits and minimize social
costs.
39
 Ideas Proposed by Joseph Stiglitz to “Remake”
Globalization
 MakingTrade Fair
 Stiglitz argues that the current trading system is particularly unfair to
smaller countries, whose political and economic weight are mostly
insufficient to defend their interest.
 E.g. refusal of developed countries to open their agricultural sector to
products from developing countries by removing tariffs and subsidies.
 Remaking the Patent System
 Argues that patents, by incentivizing inventions/discoveries catering
to the needs of primarily those sections of society with high
purchasing power, is particularly disadvantageous for the poor.
 Recommends a prize system for innovators, which would keep intact
the incentive for R&D without discriminating between groups based on
their purchasing power.
40
 Ideas Proposed by Joseph Stiglitz to
“Remake” Globalization
 MNC’s and CSR
 MNC’s bear the brunt of the blame amongst critics for the
negative impact of globalization.
 Stiglitz recommends that MNC’s should embrace their ethical
responsibilities through actively pursuing measures that promote
Corporate Social Responsibility (CSR).
 Environmental Protection
 Stiglitz proposes global regulation to protect the environment and
to provide recourse when one nation's environmental actions
harms others.
 Suggests that poor countries are entitled to compensation for
maintaining their biodiversity, especially those with flora that spawn
drugs and sequester carbon dioxide.
41
Summary
In this topic we have,
✓ Explored what is meant by the term globalization.
✓ Examined the impact of globalization.
✓ Identified the key facets and main drivers of
globalization.
✓ Analyzed the main arguments in the debate over the
impact of globalization.
✓ Discussed ideas for making globalization more
effective, especially towards improving the welfare
of the poor.
 Some Useful Resources and References
 Stiglitz, Joseph, Globalization and Its Discontent, London: Penguin Books, 2002.
 Stiglitz, Joseph, Making GlobalizationWork,W. W. Norton & Company, 2006.
 Global Edge International Business Resource Desk
 http://globaledge.msu.edu/resourceDesk/
 Businesses around the world –McGraw Hill Online Learning
 http://highered.mcgraw-
hill.com/sites/0073210544/student_view0/business_around_the_world.htm
l
 IMF – Globalization
 http://www.imf.org/external/np/exr/key/global.htm
 Gapminder Data
 http://www.gapminder.org/

43