INTRODUCTION AND OVERVIEW

Chapter 01, Globalization

OPENING CASE
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LEARNING OBJECTIVES
• What is Globalization?
• Main Drivers of Globalization
• Changing Nature of the Global Economy
• Debate over the impacts of Globalization
• Challenges and Opportunities Created by the Process of
Globalization 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
CHALLENGES DUE TO CHANGE IN
POLITICAL ENVIRONMENT
• Recent political events have raised some questions about
the inevitability of the globalization process.
• The exit of the United Kingdom from the European Union
(Brexit),
• the renegotiation of the North American Free Trade
Agreement (NAFTA),
• Trade disputes between the United States and many of
its trading partners, including most notably China, have
all contributed to uncertainty about the future of
globalization.
• While the world seems unlikely to pull back significantly
from globalization.
 WHAT IS THE
GLOBALIZATION OF MARKETS?

• Historically distinct and separate national markets

are merging
• It no longer makes sense to talk about the “German
market” or the “American market”
• Instead, there is the “global market”
• falling trade barriers make it easier to sell globally
• consumers’ tastes and preferences are converging on
some global norm
• firms promote the trend by offering the same basic
products worldwide
 WHAT IS THE
GLOBALIZATION OF MARKETS?
• Firms of all sizes benefit and contribute to the globalization
of markets
• In the United States, for example, according to the International Trade
Administration, more than 300,000 small- and medium-sized firms with fewer
than 500 employees, accounts for 98 percent of the companies that export.
• Exports from small and medium-sized companies account for 33 percent of the
value of U.S. exports of manufactured goods.3 Typical of these is B&S Aircraft
• Alloys, a New York company whose exports account for 40 percent of its $8
million annual revenues.4 The situation is similar in several other nations. For
example, in Germany, a staggering 98 percent of small and midsize companies
have exposure to international markets, via either exports or international
production. Since 2009, China has been the world’s largest exporter. In 2019,
China sold $2.5 trillion worth of products and services to the rest of the world.
 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
• Companies can
• lower their overall cost structure
• improve the quality or functionality of their product
offering
• For example, Boeing has made extensive use of outsourcing to foreign suppliers. Consider Boeing’s
777 first introduced in 1995: Eight Japanese suppliers make parts for the fuselage, doors, and wings; a
supplier in Singapore makes the doors for the nose landing gear; three suppliers in Italy manufacture
wing flaps; and so on.6 In total, some 30 percent of the 777, by value, is built by foreign companies.
And for its most recent jet airliner, the 787, Boeing has pushed this trend even further; some 65
percent of the total value of the aircraft is outsourced to foreign companies, 35 percent of which goes
to three major Japanese companies.
 WHY DO WE NEED
GLOBAL INSTITUTIONS?
• Global institutions
• help manage, regulate, and police the global marketplace
• promote the establishment of multinational treaties to govern the
global business system
 WHY DO WE NEED
GLOBAL INSTITUTIONS?
• Examples include
• the General Agreement on Tariffs and Trade (GATT)
• the World Trade Organization (WTO)
• the International Monetary Fund (IMF)
• the World Bank
• the United Nations (UN)
• the G20
 WHAT DO GLOBAL
INSTITUTIONS DO?
• The World Trade Organization (like its predecessor GATT
General Agreements on Trade and Tariffs)
• polices the world trading system makes sure that nation-states adhere
to the rules laid down in trade treaties promotes lower barriers to
trade and investment
• As of 2021, 164 nations accounted for 98% of world trade were
members of WTO.
 WHAT DO GLOBAL
INSTITUTIONS DO?
• The International Monetary Fund (1944)
• maintains order in the international monetary system
• lender of last resort for countries in crisis
• Argentina, Indonesia, Mexico, Russia, South Korea, Thailand, Turkey, Ireland,
and Greece

• The World Bank (1944)

• promotes economic development via low interest loans for
infrastructure projects
• Both institutions have emerged as significant players in the global economy. The
World Bank is the less controversial of the two sister institutions. It has focused
on making low-interest loans to cash-strapped governments in poor nations
wishing to undertake significant infrastructure investments (such as dams or
roads).
 WHAT DO GLOBAL
INSTITUTIONS DO?
• The United Nations (1945)
• maintains international peace and security
• develops friendly relations among nations
• cooperates in solving international problems and in promoting respect
for human rights
• is a center for harmonizing the actions of nations
• The G20
• forum through which major nations tried to launch a coordinated
policy response to the 2008-2009 global financial crisis
 WHAT IS DRIVING
GLOBALIZATION?
• Declining barriers to the free flow of goods,
services, and capital
• average tariffs are now at just 3%-4%
• more favorable environment for FDI
• global stock of FDI was $15.5 trillion in 2009
• facilitates global production
• Technological change
• microprocessors and telecommunications
• the Internet and World Wide Web
• transportation technology
DECLINING TRADE AND
INVESTMENT BARRIERS
DECLINING TRADE AND
INVESTMENT BARRIERS
• According to UN data, around 80 percent of the 2,250 changes made to
national laws governing foreign direct investment between 2003 and
2020 have created a more favorable environment. Partly due to such
liberalization.
• The value of FDI has grown significantly over the last 30 years. In 1990,
about $244 billion in foreign enterprises made investments. By 2019,
that figure had increased to $1.5 trillion
• Although due to the COVID-19 pandemic preliminary estimates suggest
that the total fell to under $1 trillion in 2020 (a rebound in FDI is
forecasted for 2021 and 2022). As result of sustained cross-border
investment, the sales of foreign affiliates of multinational corporations
reached $33 trillion, over $10 trillion more than the value of
international trade in 2020, and these affiliates employed some 86
million people.
 WHAT DOES GLOBALIZATION
MEAN FOR FIRMS?
• Lower barriers to trade and investment mean firms can
• view the world, rather than a single country, as their market
• base production in the optimal location for that activity

• But, firms may also find their home markets under attack by
foreign firms
 WHAT DOES GLOBALIZATION
MEAN FOR FIRMS?
• Technological change means
• lower transportation costs
• help create global markets and allow firms to disperse production to
economical, geographically separate locations
• low-cost information processing and communication
• firms can create and manage globally dispersed production
• low-cost global communications networks
• help create an electronic global marketplace
• global communication networks and global media
• create a worldwide culture and a global consumer product market
WHAT DOES GLOBALIZATION
MEAN FOR FIRMS?
• Technological change means
• low-cost information processing and communication
• firms can create and manage globally dispersed production
• Over the past 30 years, global communications have been revolutionized by developments in satellite, optical
fiber, wireless technologies, and of course the internet.
• These technologies rely on the microprocessor to encode, transmit, and decode the vast amount of information
that flows along these electronic highways. The cost of microprocessors continues to fall, while their power
increases (a phenomenon known as Moore’s law, which predicts that the power of microprocessor technology
doubles and its cost of production falls in half every 18 months
• The explosive growth of the internet since 1994, when the first web browser was introduced, has revolutionized
communications and commerce. In 1990, fewer than 1 million users were connected to the internet. By 1995, the
figure had risen to 50 million. By 2020, the internet had almost 5 billion users, or 62 percent of the global
population.14 It is no surprise the internet has developed into the information backbone of the global economy.
• In North America alone, e-commerce retail sales were around $800 billion in 2020 (up from almost nothing in
1998), while global e-commerce sales were close to $4 trillion.
• E-commerce sales grew rapidly in 2020 due to the impact of the COVID-19 pandemic. Viewed globally, the internet
has emerged as an equalizer. It rolls back some of the constraints of location, scale, and time zones.16 The
internet makes it much easier for buyers and sellers to find each other, wherever they may be located and
whatever their size. It allows businesses, both small and large, to expand their global presence at a lower cost than
ever before. Just as important, it enables enterprises to coordinate and control a globally dispersed production
system in a way that was not possible 30 years ago.
 WHAT DOES GLOBALIZATION
MEAN FOR FIRMS?
• Technological change means
• lower transportation costs
• help create global markets and allow firms to disperse production to
economical, geographically separate locations
• In economic terms, the most important are probably the development of
commercial jet aircraft and superfreighters and the introduction of
containerization, which simplifies transshipment from one mode of transport
to another.
• The advent of commercial jet travel, by reducing the time needed to get
from one location to another, has effectively shrunk the globe. In terms of
travel time, New York is now “closer” to Tokyo than it was to Philadelphia in
the colonial days.
THE CHANGING DEMOGRAPHICS OF
THE GLOBAL ECONOMY
• Four trends are important:
1. The changing world output and world trade picture
2. The changing foreign direct investment picture
3. The changing nature of the multinational enterprise
4. The changing world order
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
• expected to account for more than 60% of world economic activity by
2020
HOW HAS WORLD OUTPUT AND
WORLD TRADE CHANGED?
HOW HAS FOREIGN DIRECT
INVESTMENT CHANGED OVER TIME?
• The outward stock of foreign direct investment (FDI) refers to the total
cumulative value of foreign investments by firms domiciled in a nation outside
of that nation’s borders
• Labor Costs: Labor Intensive Manufacturing Industries
• To disperse production activities to optimal locations and to build a direct
presence in major foreign markets
• For example, Toyota, the Japanese automobile company, rapidly increased its
investment in automobile production facilities in the United States and Europe
during the late 1980s and 1990s. Toyota executives believed that an
increasingly strong Japanese yen would price Japanese automobile exports out
of foreign markets; therefore, production in the most important foreign
markets, as opposed to exports from Japan, made sense. Toyota also
undertook these investments to head off growing political pressures in the
United States and Europe to restrict Japanese automobile exports into those
markets.
HOW HAS FOREIGN DIRECT
INVESTMENT CHANGED OVER TIME?
 HOW HAS FOREIGN DIRECT
INVESTMENT CHANGED OVER TIME?

• 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
• Among developing nations, the largest recipient has been
China, which received about $290 billion in inflows in 2020.
HOW HAS FOREIGN DIRECT
INVESTMENT CHANGED OVER TIME?

Percentage Share of Total FDI Stock 1980-2007

 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
• the number of mini-multinationals has risen
• By 2003, when Forbes magazine started to compile its annual ranking of the
world’s top 2,000 multinational enterprises, 776 of the 2,000 firms, or 38.8
percent, were U.S. enterprises. The second-largest source country was Japan
with 16.6 percent of the largest multinationals. The United Kingdom accounted
for another 6.6 percent of the world’s largest multinationals at the time. As
shown in Figure 1.4, by 2019 the U.S. share had fallen to 28.8 percent, or 575
firms, and the Japanese share had declined to 11.1 percent, while Chinese
enterprises had emerged to comprise 309 of the total, or 15.5 percent. There
has also been a notable increase in multinationals from Taiwan, India, and
South Korea.
WHAT IS A
MULTINATIONAL ENTERPRISE?
THE CHANGING WORLD
ORDER
• In 1989 and 1991, a series of democratic revolutions swept the communist world. For
reasons that are explored in more detail in Chapter 3, in country after country throughout
eastern Europe and eventually in the Soviet Union itself, Communist Party governments
collapsed.
• The Soviet Union receded into history, replaced by 15 independent republics.
Czechoslovakia divided itself into two states, while Yugoslavia dissolved into a bloody civil
war among its five successor states.
• Quieter revolutions have been occurring in China, other countries in Southeast Asia, and
Latin America. Their implications for international businesses may be just as profound as
the collapse of communism in eastern Europe and Russia some time ago. China
suppressed its pro-democracy movement in the bloody Tiananmen Square massacre of
1989. On the other hand, China continues to move progressively toward greater free
market reforms. If what is occurring in China continues for two more decades, China may
evolve from a third-world business giant into an industrial superpower even more rapidly
than Japan did. If China’s GDP per capita grows by an average of 6–7 percent, which is
slower than the 8–10 percent growth rate achieved during the past decade, then by 2030
this nation of 1.4 billion people could boast an average GDP per capita of about $23,000,
roughly the same as that of Chile or Poland today.
 GLOBAL ECONOMY OF 21ST
CENTURY?
• The past quarter century has seen rapid changes in the global economy.

• A generation ago, South Korea and Taiwan were considered second-tier developing nations. Now
they boast large economies, and firms based there are major players in many global industries, from
shipbuilding and steel to electronics and chemicals.

• The move toward a global economy has been further strengthened by the widespread adoption of
liberal economic policies by countries that had firmly opposed them for two generations or more. In
short, current trends indicate the world is moving toward an economic system that is more
favourable for international business.

• But it is always hazardous to use established trends to predict the future. The world may be moving
toward a more global economic system, but globalization is not inevitable. Countries may pull back
from the recent commitment to liberal economic ideology if their experiences do not match their
expectations. There are clear signs, for example, of a retreat from liberal economic ideology in
Russia. If Russia’s retreat were to become more permanent and widespread, the liberal vision of a
more prosperous global economy based on free market principles might not occur as quickly as
many hope. This would be a tougher world for international businesses.
 GLOBAL ECONOMY OF 21ST
CENTURY?
• Also, greater globalization brings with it risks of its own. This was starkly
demonstrated in 1997 and 1998 when a financial crisis in Thailand spread first to
other East Asian nations and then to Russia and Brazil. Ultimately, the crisis
threatened to plunge the economies of the developed world, including the United
States, into a recession. Even from a purely economic perspective, globalization is not
all good. The opportunities for doing business in a global economy may be
significantly enhanced, but as we saw in 1997–1998, the risks associated with global
financial contagion are also greater. Indeed, during 2008–2009, a crisis that started in
the financial sector of America, where banks had been too liberal in their lending
policies to homeowners, swept around
• The spread of the COVID-19 pandemic around the world in 2020 seriously disrupted
global supply chains and called into question the wisdom of relying upon globally
dispersed production systems. Still, as explained later in this text, firms can exploit
the opportunities associated with globalization while reducing the risks through
appropriate hedging strategies. These hedging strategies may also become more and
more important as the world balances globalization efforts with a potential increase in
nationalistic tendencies by some countries (e.g., recently in the United States and
United Kingdom).
GLOBALIZATION DEBATE

Is the shift toward a more integrated

and interdependent global economy a
good thing?
GLOBALIZATION DEBATE
• Supporters believe that increased trade and cross-
border investment mean
• lower prices for goods and services
• greater economic growth
• higher consumer income, and more jobs
• Critics worry that globalization will cause
• job losses
• environmental degradation
• the cultural imperialism of global media and MNEs
• Anti-globalization protesters now regularly show up
at most major meetings of global institutions
 HOW DOES GLOBALIZATION
AFFECT JOBS AND INCOME?
• Critics argue that falling barriers to trade are destroying
manufacturing jobs in advanced countries
• Supporters contend that the benefits of this trend outweigh
the costs
• countries will specialize in what they do most efficiently and trade for
other goods—and all countries will benefit
HOW DOES GLOBALIZATION AFFECT
LABOR POLICIES AND THE
ENVIRONMENT?
• Critics argue that firms avoid the cost of adhering
to labor and environmental regulations by moving
production to countries where such regulations do
not exist, or are not enforced
• Supporters claim that tougher environmental and
labor standards are associated with economic
progress
• as countries get richer from free trade, they implement
tougher environmental and labor regulations
HOW DOES GLOBALIZATION AFFECT
LABOR POLICIES AND THE
ENVIRONMENT?
HOW DOES GLOBALIZATION AFFECT
NATIONAL SOVEREIGNTY?
• Is today’s global economy shifting economic power away
from national governments toward supranational
organizations like the WTO, the EU, and the UN?
• Critics argue that unelected bureaucrats have the power to
impose policies on the democratically elected governments
of nation-states
• Supporters claim that the power of these organizations is
limited to what nation-states agree to grant
• the power of the organizations lies in their ability to get
countries to agree to follow certain actions
HOW IS GLOBALIZATION
AFFECTING THE WORLD’S POOR?
• Is the gap between rich nations and poor nations
getting wider?
• Critics believe that if globalization was beneficial
there should not be a divergence between rich and
poor nations
• Supporters claim that the best way for the poor
nations to improve their situation is to
• reduce barriers to trade and investment
• implement economic policies based on free market
economies
• receive debt forgiveness for debts incurred under
totalitarian regimes
HOW IS GLOBALIZATION
AFFECTING THE WORLD’S POOR?
 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
 HOW DOES THE GLOBAL
MARKETPLACE AFFECT MANAGERS?

The managers of an international business must decide:

• Where in the world to site production activities to minimize costs and maximize
value added.
• Is ethical to adhere to the lower labor and environmental standards found in many
less-developed nations.
• How best to coordinate and control globally dispersed production activities
• Which foreign markets to enter and which to avoid.
• Choose the appropriate mode for entering a particular foreign country. Is it best to
export its product to a foreign country?
• Should the firm allow a local company to produce its product under license in that
country?
• Should the firm enter into a joint venture with a local firm to produce its product in
that country? Or should the firm set up a wholly-owned subsidiary to serve the
market in that country? .
CLOSING CASE