Globalization

Prof. Dr. Ashfaq Ahmad

HCC, PU
 What Is Globalization?
 The shift toward a more integrated &
interdependent world economy

 World is moving away from self-contained

national economies toward an interdependent,
integrated global economic system

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 Globalization of Markets
Historically distinct & separate national markets
are merging & creating “global market”:

Falling trade barriers make it easier to sell globally

Consumers’ tastes & preferences are converging
on some global norm
Firms promote trend by offering same basic
products worldwide

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 Globalization of Production
 Firms outsource goods & services from
locations around the globe due to cost/quality
factors (of production) like:
land, labor, energy, and capital

 Companies can:
Lower their overall cost structure
Improve quality or functionality of their products

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 Why Do We Need Global Institutions?
 Global Institutions to:
 Manage, regulate, and police the global marketplace
 Promote establishment of multinational treaties to govern
global business system including:

 General Agreement on Tariffs and Trade (GATT)

 World Trade Organization (WTO)
 International Monetary Fund (IMF)
 World Bank
 United Nations (UN)
 G20
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 Globalization & International
Business?

Globalization- Ongoing process that

deepens & broadens the relationships
& interdependence among countries.

International Business- A mechanism

to bring about globalization.

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 International Business

It consists of all commercial transactions

including:
Sales,
Investments,
Transportation
that take place between two or more countries.

Increasingly foreign countries are a source of both

production & sales for domestic companies
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International Business: Operations and Influences

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 Factors to Growth of International Business

1. Increase in and expansion of technology

2. Liberalization of cross-border trade & resource
movements
3. Development of services that support international
business
4. Growing consumer pressures
5. Increased global competition
6. Changing political situations
7. Expanded cross-national cooperation
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 Measuring Globalization

 A.T. Kearney/Foreign Policy Globalization Index

Economic
Technological
Personal Contact
Political

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 What’s Wrong with Globalization

 Threats to national sovereignty

 Economic growth & environmental stress

 Growing income inequality & personal stress

 Offshoring (transferring of production abroad)

is controversial in terms of who benefits when costs are
reduced and whether process exchanges good jobs
for bad ones.
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 Benefits of Globalization

 Expand Sales: pursuing international sales increases

the potential market & potential profits

 Acquire Resources: may give companies lower costs,

new & better products, additional operating knowledge

 Diversify or Reduce Risks: may reduce operating risk

by smoothing sales & profits, preventing competitors
from gaining advantage
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 What Is Driving Globalization?
 Declining barriers to free flow of goods, services,
& capital
 average tariffs are now at just 4%
 more favorable environment for FDI
 global stock of FDI was $15.5 trillion
 facilitates global production
 Technological change
 microprocessors and telecommunications
 the Internet and World Wide Web
 transportation technology

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Changing Demographics of
Global Economy

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Declining Trade & Investment Barriers
Average Tariff Rates on Manufactured Products as Percent of Value

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How World Output & 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
expected to account for more than 60% of
world economic activity by 2020

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How Has World Output & World Trade Changed?
The Changing Demographics of World GDP and Trade

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 How Has Foreign Direct Investment Changed?

 In 1960s, U.S. firms accounted for about two-

thirds of worldwide FDI flows
Today, United States accounts for less than one-fifth
of worldwide FDI flows
Other developed countries have followed a similar
pattern
 In contrast, share of FDI accounted for by
developing countries has risen
Developing countries, especially China, have also
become popular destinations for FDI

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How Has Foreign Direct Investment
Changed?
Percentage Share of Total FDI Stock 1980-2007

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How Has Foreign Direct Investment Changed?
FDI Inflows 1988-2008

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 Multinational Enterprise?

 Multinational enterprise (MNE) - any business

that has productive activities in two or more
countries

 Since the 1960s

Number of non-U.S. multinationals has risen
Number of mini-multinationals has risen

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 Multinational Enterprises (MNEs)

MNEs take a global approach to markets and

production.

Sometimes they are referred to as multinational

corporations/companies (MNCs) or
transnational companies (TNCs).

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 Changing World Order
 Communist nations in Europe & Asia are now
committed to democratic politics & free market
economies
 Creates new opportunities for international businesses
 There are signs of growing unrest/tendencies in countries

 China & Latin America are moving toward greater free

market reforms
 1983-2010, FDI in China increased from less than $2 billion
to $100 billion annually
 China has many new strong companies that could threaten
Western/American firms

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 Global Economy of 21st Century

 World is moving to a more global economic system

 Globalization is not inevitable

 There are signs of a retreat from liberal economic ideology in
Russia
 Globalization brings risks
 Financial crisis that swept through South-East Asia in late
1990s
 the recent financial crisis that started in the U.S. in 2007-
2008, and moved around the world

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 Interdependent Global Economy

 Supporters believe that increased trade & cross-

border investment:
 Lower prices for goods & services
 Greater economic growth
 Higher consumer income, and more jobs

 Critics worry that globalization will cause:

 Job losses
 Environmental degradation
 Cultural imperialism of global media & MNEs

 Anti-globalization protesters now regularly show up at

most major meetings of global institutions
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 How Global Marketplace Affect Managers?

 Managing International vs Domestic Business:

 Countries are different
 Range of problems confronted in an international business is
wider
 Problems more complex than those in a domestic business
 Firms work within limits imposed by Govt. intervention in
international trade/investment system
 International transactions involve converting money into
different currencies

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 How Firms Engage in International Business

 International trade (exporting /importing)

The internet facilitates international trade by

enabling firms to advertise and manage orders
through their websites.

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 How Firms Engage in International Business

 Licensing
 allows a firm to provide its technology in
exchange for fees or some other benefits.
 Franchising
 obligates a firm to provide a specialized sales
or service strategy, support assistance, and
possibly an initial investment in the franchise in
exchange for periodic fees.

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 How Firms Engage in International Business

 Firms may also penetrate foreign markets by

engaging in a joint venture (joint ownership and
operation) with firms that reside in those markets.

 Acquisitions of existing operations in foreign

countries allow firms to quickly gain control over
foreign operations as well as a share of the
foreign market.

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 How Firms Engage in International Business

 Firms can also penetrate foreign markets by

establishing new foreign subsidiaries.

 In general, any method of conducting business

that requires a direct investment in foreign
operations is referred to as a foreign direct
investment (FDI).

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 Modes of Operation in International Business

Merchandise exports and imports

Service exports and imports
Tourism and Transportation
Service Performance
Asset Use
Investments
Foreign Direct Investment (FDI)
Portfolio Investment
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Physical and Social Factors Affecting International
Business Operations

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 Competitive Factors affecting Globalization &
International Business

 A company’s competitive strategy influences how and

where it can best operate.

 A company’s competitive situation may differ in terms

of its relative strength and which competitors it faces.

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 Future of International Business & Globalization

 Further globalization is inevitable.

 International business will grow primarily along

regional rather than global lines.

 Forces working against further globalization and

international business will slow down both trends.

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