Unit – 1 - Globalization and International Business

Global Business Environment:

Globalism:

Globalism refers to a group of ideologies that advocate the concept of globalization. It tends to advocate
for such policies as increases in immigration, free trade, lowering tariffs, interventionism and global
governance. It is typically viewed as opposite of nationalism, and has become increasingly divisive in
politics in many developed countries, such as the United States.

The word itself came into widespread usage, first and foremost in the United States, from the early 1940s.
This was the period when US global power was at its peak: the country was the greatest economic power
the world had ever known, with the greatest military machine in human history. America's allies and foes
in Eurasia were, of course, at this time suffering the dreadful effects of World War II.

In their position of unprecedented power, US planners formulated policies to shape the kind of postwar
world they wanted, which, in economic terms, meant a globe-spanning capitalist order centered
exclusively upon the United States.

Paul James defines globalism as the “dominant ideology and subjectivity associated with different
historically-dominant formations of global extension.” The definition thus implies that there were pre-
modern or traditional forms of globalism and globalization long before the driving force of capitalism
sought to colonize every corner of the globe. While ideologies of the global have a long history,
globalism emerged as a dominant set of associated ideologies across the course of the late twentieth
century. As these ideologies settled, and as various processes of globalization intensified, they contributed
to the consolidation of a connecting global imaginary. In their recent writings, Manfred Steger and Paul
James have theorized this process in terms of four levels of change: changing ideas, ideologies,
imaginaries and ontologies.

Globalization:

Globalization is the action or procedure of international integration arising from the interchange of world
views, products, ideas, and other aspects of culture. Advances in transportation (such as the steam
locomotive, steamship, jet engine, and container ships) and in telecommunications infrastructure
(including the rise of the telegraph and its modern offspring, the Internet and mobile phones) have been
major factors in globalization, generating further interdependence of economic and cultural activities.
Though many scholars place the origins of globalization in modern times, others trace its history long
before the European Age of Discovery and voyages to the New World, some even to the third millennium
BC. Large-scale globalization began in the 1820s. In the late 19th century and early 20th century, the
connectivity of the world's economies and cultures grew very quickly. In 2000, the International
Monetary Fund (IMF) identified four basic aspects of globalization:

 Trade and transactions

 Capital and investment movements
 Migration and movement of people
 Dissemination of knowledge.
Further, environmental challenges such as global warming, cross-boundary water and air pollution, and
overfishing of the ocean are linked with globalization. Globalizing processes affect and are affected by
business and work organization, economics, socio-cultural resources, and the natural environment.
Academic literature commonly subdivides globalization into three major areas:

 Economic globalization
 Cultural globalization and
 Political globalization.

Globalism, at its core, seeks to describe and explain nothing more than a world which is characterized by
networks of connections that span multi-continental distances. It attempts to understand all the inter-
connections of the modern world — and to highlight patterns that underlie (and explain) them.

In contrast, globalization refers to the increase or decline in the degree of globalism. It focuses on the
forces, the dynamism or speed of these changes.

In short, consider globalism as the underlying basic network, while globalization refers to the dynamic
shrinking of distance on a large scale. Globalism is a phenomenon with ancient roots. Thus, the issue is
not how old globalism is, but rather how “thin” or “thick” it is at any given time.

As an example of “thin globalism,” the Silk Road provided an economic and cultural link between ancient
Europe and Asia. Getting from thin to thick globalism is globalization — and how fast we get there is the
rate of globalization.

Drivers of Globalization:

1. Technological drivers

Technology shaped and set the foundation for modern globalization. Innovations in the transportation
technology revolutionized the industry. The most important developments among these are the
commercial jet aircraft and the concept of containerization in the late 1970s and 1980s. Inventions in
the area of microprocessors and telecommunications enabled highly effective computing and
communication at a low-cost. Finally the rapid growth of the Internet is the latest technological driver
that created global e-business and e-commerce.

2. Political drivers

Liberalized trading rules and deregulated markets lead to lowered tariffs and allowed foreign direct
investments in almost all over the world. The institution of GATT (General Agreement on Tariffs and
Trade) 1947 and the WTO (World Trade Organization) 1995 as well as the ongoing opening and
privatization in Eastern Europe are only some examples of latest developments.

3. Market drivers

As domestic markets become more and more saturated, the opportunities for growth are limited and
global expanding is a way most organizations choose to overcome this situation. Common customer
needs and the opportunity to use global marketing channels and transfer marketing to some extent are
also incentives to choose internationalization.
 4. Cost drivers

Sourcing efficiency and costs vary from country to country and global firms can take advantage of
this fact. Other cost drivers to globalization are the opportunity to build global scale economies and
the high product development costs nowadays.

5. Competitive drivers

With the global market, global inter-firm competition increases and organizations are forced to “play”
international. Strong interdependences among countries and high two-way trades and FDI actions
also support this driver.

International Regulation of Trade:

World Trade Organization (WTO):

The World Trade Organization (WTO) is an intergovernmental organization which regulates international
trade. The WTO officially commenced on 1 January 1995 under the Marrakesh Agreement, signed by
123 nations on 15 April 1994, replacing the General Agreement on Tariffs and Trade (GATT), which
commenced in 1948. The WTO deals with regulation of trade between participating countries by
providing a framework for negotiating trade agreements and a dispute resolution process aimed at
enforcing participants' adherence to WTO agreements, which are signed by representatives of member
governments and ratified by their parliaments. Most of the issues that the WTO focuses on derive from
previous trade negotiations, especially from the Uruguay Round.

The WTO's current Director-General is Roberto Azevêdo, who leads a staff of over 600 people in
Geneva, Switzerland.

Functions:

Among the various functions of the WTO, these are regarded by analysts as the most important:

 It oversees the implementation, administration and operation of the covered agreements.

 It provides a forum for negotiations and for settling disputes.

Additionally, it is the WTO's duty to review and propagate the national trade policies, and to ensure the
coherence and transparency of trade policies through surveillance in global economic policy-making.
Another priority of the WTO is the assistance of developing, least-developed and low-income countries in
transition to adjust to WTO rules and disciplines through technical cooperation and training.

1) The WTO shall facilitate the implementation, administration and operation and further the
objectives of this Agreement and of the Multilateral Trade Agreements, and shall also provide the
frame work for the implementation, administration and operation of the multilateral Trade
Agreements.
2) The WTO shall administer the Understanding on Rules and Procedures Governing the Settlement
of Disputes.
3) The WTO shall administer Trade Policy Review Mechanism.
 4) The WTO shall provide the forum for negotiations among its members concerning their
multilateral trade relations in matters dealt with under the Agreement in the Annexes to this
Agreement.
5) With a view to achieving greater coherence in global economic policy making, the WTO shall
cooperate, as appropriate, with the international Monetary Fund (IMF) and with the International
Bank for Reconstruction and Development (IBRD) and its affiliated agencies.

The above five listings are the additional functions of the World Trade Organization. As globalization
proceeds in today's society, the necessity of an International Organization to manage the trading systems
has been of vital importance. As the trade volume increases, issues such as protectionism, trade barriers,
subsidies, violation of intellectual property arise due to the differences in the trading rules of every nation.
The World Trade Organization serves as the mediator between the nations when such problems arise.
WTO could be referred to as the product of globalization and also as one of the most important
organizations in today's globalized society.

The WTO is also a center of economic research and analysis: regular assessments of the global trade
picture in its annual publications and research reports on specific topics are produced by the organization.
Finally, the WTO cooperates closely with the two other components of the Bretton Woods system, the
IMF and the World Bank.

Principles of the Trading System:

The WTO establishes a framework for trade policies; it does not define or specify outcomes. That is, it is
concerned with setting the rules of the trade policy games. Five principles are of particular importance in
understanding both the pre-1994 GATT and the WTO:

A. Non-discrimination: It has two major components: the most favored nation (MFN) rule, and the
national treatment policy. Both are embedded in the main WTO rules on goods, services, and
intellectual property, but their precise scope and nature differ across these areas. The MFN rule
requires that a WTO member must apply the same conditions on all trade with other WTO
members, i.e. a WTO member has to grant the most favorable conditions under which it allows
trade in a certain product type to all other WTO members. "Grant someone a special favor and
you have to do the same for all other WTO members." National treatment means that imported
goods should be treated no less favorably than domestically produced goods (at least after the
foreign goods have entered the market) and was introduced to tackle non-tariff barriers to trade
(e.g. technical standards, security standards et al. discriminating against imported goods).

B. Reciprocity: It reflects both a desire to limit the scope of free-riding that may arise because of
the MFN rule, and a desire to obtain better access to foreign markets. A related point is that for a
nation to negotiate, it is necessary that the gain from doing so be greater than the gain available
from unilateral liberalization; reciprocal concessions intend to ensure that such gains will
materialize.

C. Binding and enforceable commitments: The tariff commitments made by WTO members in a
multilateral trade negotiation and on accession are enumerated in a schedule (list) of concessions.
These schedules establish "ceiling bindings": a country can change its bindings, but only after
 negotiating with its trading partners, which could mean compensating them for loss of trade. If
satisfaction is not obtained, the complaining country may invoke the WTO dispute settlement
procedures.

D. Transparency: The WTO members are required to publish their trade regulations, to maintain
institutions allowing for the review of administrative decisions affecting trade, to respond to
requests for information by other members, and to notify changes in trade policies to the WTO.
These internal transparency requirements are supplemented and facilitated by periodic country-
specific reports (trade policy reviews) through the Trade Policy Review Mechanism (TPRM).
The WTO system tries also to improve predictability and stability, discouraging the use of quotas
and other measures used to set limits on quantities of imports.

E. Safety values: In specific circumstances, governments are able to restrict trade. The WTO's
agreements permit members to take measures to protect not only the environment but also public
health, animal health and plant health. There are three types of provision in this direction:

a. Articles allowing for the use of trade measures to attain non-economic objectives;
b. Articles aimed at ensuring "fair competition"; members must not use environmental
protection measures as a means of disguising protectionist policies.
c. Provisions permitting intervention in trade for economic reasons.

Exceptions to the MFN principle also allow for preferential treatment of developing countries, regional
free trade areas and customs unions.

Organizational structure

The General Council has the following subsidiary bodies which oversee committees in different areas:

1. Council for Trade in Goods

There are 11 committees under the jurisdiction of the Goods Council each with a specific task. All
members of the WTO participate in the committees. The Textiles Monitoring Body is separate from the
other committees but still under the jurisdiction of Goods Council. The body has its own chairman and
only 10 members. The body also has several groups relating to textiles.

2. Council for Trade-Related Aspects of Intellectual Property Rights

Information on intellectual property in the WTO, news and official records of the activities of the TRIPS
Council and details of the WTO's work with other international organizations in the field are handled by
this council.

3. Council for Trade in Services

The Council for Trade in Services operates under the guidance of the General Council and is responsible
for overseeing the functioning of the General Agreement on Trade in Services (GATS). It is open to all
WTO members, and can create subsidiary bodies as required.
 4. Trade Negotiations Committee

The Trade Negotiations Committee (TNC) is the committee that deals with the current trade talks round.
The chair is WTO's director-general. As of June 2012 the committee was tasked with the Doha
Development Round.

5. The Service Council

The Service Council has three subsidiary bodies: financial services, domestic regulations, GATS rules
and specific commitments. The council has several different committees, working groups, and working
parties. There are committees on the following: Trade and Environment; Trade and Development
(Subcommittee on Least-Developed Countries); Regional Trade Agreements; Balance of Payments
Restrictions; and Budget, Finance and Administration. There are working parties on the following:
Accession. There are working groups on the following: Trade, debt and finance; and Trade and
technology transfer.

Decision-making

The WTO describes itself as "a rules-based, member-driven organization—all decisions are made by the
member governments, and the rules are the outcome of negotiations among members". The WTO
Agreement foresees votes where consensus cannot be reached, but the practice of consensus dominates
the process of decision-making.

Dispute settlement

The WTO's dispute-settlement system "is the result of the evolution of rules, procedures and practices
developed over almost half a century under the GATT 1947". In 1994, the WTO members agreed on the
Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU) annexed to the
"Final Act" signed in Marrakesh in 1994. Dispute settlement is regarded by the WTO as the central pillar
of the multilateral trading system, and as a "unique contribution to the stability of the global economy".
WTO members have agreed that, if they believe fellow-members are violating trade rules, they will use
the multilateral system of settling disputes instead of taking action unilaterally.

The operation of the WTO dispute settlement process involves case-specific panels appointed by the
Dispute Settlement Body (DSB), the Appellate Body, The Director-General and the WTO Secretariat,
arbitrators and advisory experts.

The priority is to settle disputes, preferably through a mutually agreed solution, and provision has been
made for the process to be conducted in an efficient and timely manner so that "If a case is adjudicated, it
should normally take no more than one year for a panel ruling and no more than 16 months if the case is
appealed. If the complainant deems the case urgent, consideration of the case should take even less time.
WTO member nations are obliged to accept the process as exclusive and compulsory.

Accession and membership

The process of becoming a WTO member is unique to each applicant country, and the terms of accession
are dependent upon the country's stage of economic development and current trade regime. The process
takes about five years, on average, but it can last longer if the country is less than fully committed to the
process or if political issues interfere. The shortest accession negotiation was that of the Kyrgyz Republic,
while the longest was that of Russia, which, having first applied to join GATT in 1993 was approved for
membership in December 2011 and became a WTO member on 22 August 2012. On 24 August 2012, the
WTO welcomed Vanuatu as its 157th member. An offer of accession is only given once consensus is
reached among interested parties.

Accession process

 Draft Working Party Report or Factual Summary adopted

 Goods and/or Services offers submitted

 Working party meetings

 Memorandum on Foreign Trade Regime submitted

 Working party established

A country wishing to accede to the WTO submits an application to the General Council, and has to
describe all aspects of its trade and economic policies that have a bearing on WTO agreements. The
application is submitted to the WTO in a memorandum which is examined by a working party open to all
interested WTO Members.

After all necessary background information has been acquired; the working party focuses on issues of
discrepancy between the WTO rules and the applicant's international and domestic trade policies and
laws. The working party determines the terms and conditions of entry into the WTO for the applicant
nation, and may consider transitional periods to allow countries some leeway in complying with the WTO
rules.

The final phase of accession involves bilateral negotiations between the applicant nation and other
working party members regarding the concessions and commitments on tariff levels and market access
for goods and services. The new member's commitments are to apply equally to all WTO members under
normal non-discrimination rules, even though they are negotiated bilaterally.

When the bilateral talks conclude, the working party sends to the general council or ministerial
conference an accession package, which includes a summary of all the working party meetings, the
Protocol of Accession (a draft membership treaty), and lists ("schedules") of the commitments of the
member-to-be. Once the general council or ministerial conference approves of the terms of accession, the
applicant's parliament must ratify the Protocol of Accession before it can become a member. Some
countries may have faced tougher and a much longer accession process due to challenges during
negotiations with other WTO members, such as Vietnam, whose negotiations took more than 11 years
before it became official member in January 2007.

Members and observers

The WTO has 164 members and 22 observer governments. Liberia became the 163rd member on 14 July
2016, and Afghanistan became the 164th member on 29 July 2016. In addition to states, the European
Union, and each EU Country in its own right, is a member. WTO members do not have to be fully
independent states; they need only be a customs territory with full autonomy in the conduct of their
external commercial relations.

As of 2007, WTO member states represented 96.4% of global trade and 96.7% of global GDP. Iran,
followed by Algeria, is the economies with the largest GDP and trade outside the WTO, using 2005 data.
With the exception of the Holy See, observers must start accession negotiations within five years of
becoming observers. A number of international intergovernmental organizations have also been granted
observer status to WTO bodies. 12 UN member states have no official affiliation with the WTO.

General Agreement on Tariffs and Trade (GATT):

General Agreement on Tariffs and Trade (GATT) was a multilateral agreement regulating international
trade. According to its preamble, its purpose was the "substantial reduction of tariffs and other trade
barriers and the elimination of preferences, on a reciprocal and mutually advantageous basis." It was
negotiated during the United Nations Conference on Trade and Employment and was the outcome of the
failure of negotiating governments to create the International Trade Organization (ITO). GATT was
signed by 23 nations in Geneva on October 30, 1947 and took effect on January 1, 1948. It lasted until the
signature by 123 nations in Marrakesh on April 14, 1994 of the Uruguay Round Agreements, which
established the World Trade Organization (WTO) on January 1, 1995.

The original GATT text (GATT 1947) is still in effect under the WTO framework, subject to the
modifications of GATT 1994.

In 1993, the GATT was updated (GATT 1994) to include new obligations upon its signatories. One of the
most significant changes was the creation of the World Trade Organization (WTO). The 75 existing
GATT members and the European Communities became the founding members of the WTO on 1 January
1995. The other 52 GATT members rejoined the WTO in the following two years (the last being Congo
in 1997). Since the founding of the WTO, 21 new non-GATT members have joined and 29 are currently
negotiating membership. There are a total of 164 member countries in the WTO, with Liberia and
Afghanistan being the newest members as of 2016.

Whilst GATT was a set of rules agreed upon by nations, the WTO is an institutional body. As such,
GATT was merely a forum for nations to discuss, while the WTO is a proper international organization
(which implies physical headquarters, staff, delegation...). The WTO expanded its scope from traded
goods to include trade within the service sector and intellectual property rights. Although it was designed
to serve multilateral agreements, during several rounds of GATT negotiations (particularly the Tokyo
Round) plurilateral agreements created selective trading and caused fragmentation among members.
WTO arrangements are generally a multilateral agreement settlement mechanism of GATT.

Effects on trade liberalization

The average tariff levels for the major GATT participants were about 22 percent in 1947. As a result of
the first negotiating rounds, tariffs were reduced in the GATT core of the United States, United Kingdom,
Canada, and Australia, relative to other contracting parties and non-GATT participants. By the Kennedy
round (1962–67), the average tariff levels of GATT participants were about 15%. After the Uruguay
Round, tariffs were under 5%.
In addition to facilitating applied tariff reductions, the early GATT's contribution to trade liberalization
includes:

 Binding the negotiated tariff reductions for an extended period (made more permanent in 1955)
 Establishing the generality of nondiscrimination through most-favored nation (MFN) treatment
and national treatment, ensuring increased transparency of trade policy measures
 Providing a forum for future negotiations and for the peaceful resolution of bilateral disputes.

All of these elements contributed to the rationalization of trade policy and the reduction of trade barriers
and policy uncertainty.

International Monetary Fund (IMF):

The International Monetary Fund (IMF) is an international organization headquartered in Washington,

D.C., of "189 countries working to foster global monetary cooperation, secure financial stability, facilitate
international trade, promote high employment and sustainable economic growth, and reduce poverty
around the world." Formed in 1944 at the Bretton Woods Conference it came into formal existence in
1945 with 29 member countries and the goal of reconstructing the international payment system. It now
plays a central role in the management of balance of payments difficulties and international financial
crises. Countries contribute funds to a pool through a quota system from which countries experiencing
balance of payments problems can borrow money. As of 2016, the fund had SDR477 billion (about $668
billion).

Through the fund, and other activities such as the gathering of statistics and analysis, surveillance of its
members' economies and the demand for particular policies, the IMF works to improve the economies of
its member countries. The organization's objectives stated in the Articles of Agreement are: “to promote
international monetary co-operation, international trade, high employment, exchange-rate stability,
sustainable economic growth, and making resources available to member countries in financial
difficulty.”

The IMF was originally laid out as a part of the Bretton Woods system exchange agreement in 1944.[25]
During the Great Depression, countries sharply raised barriers to trade in an attempt to improve their
failing economies. This led to the devaluation of national currencies and a decline in world trade.[26]

The Gold Room within the Mount Washington Hotel where the Bretton Woods Conference attendees
signed the agreements creating the IMF and World Bank

This breakdown in international monetary co-operation created a need for oversight. The representatives
of 45 governments met at the Bretton Woods Conference in the Mount Washington Hotel in Bretton
Woods, New Hampshire, in the United States, to discuss a framework for postwar international economic
co-operation and how to rebuild Europe.

There were two views on the role the IMF should assume as a global economic institution. American
delegate Harry Dexter White foresaw an IMF that functioned more like a bank, making sure that
borrowing states could repay their debts on time. Most of White's plan was incorporated into the final acts
adopted at Bretton Woods. British economist John Maynard Keynes imagined that the IMF would be a
cooperative fund upon which member states could draw to maintain economic activity and employment
through periodic crises. This view suggested an IMF that helped governments and to act as the United
States government had during the New Deal in response to World War II.

The IMF formally came into existence on 27 December 1945, when the first 29 countries ratified its
Articles of Agreement. By the end of 1946 the IMF had grown to 39 members. On 1 March 1947, the
IMF began its financial operations, and on 8 May France became the first country to borrow from it.

Functions

Upon the founding of the IMF, its three primary functions were:

 To oversee the fixed exchange rate arrangements between countries

 Help national governments manage their exchange rates allowing the governments to prioritize
economic growth
 To provide short-term capital to aid the balance of payments.

This assistance was meant to prevent the spread of international economic crises. The IMF was also
intended to help mend the pieces of the international economy after the Great Depression and World War
II as well, to provide capital investments for economic growth and projects such as infrastructure.

The IMF's role was fundamentally altered by the floating exchange rates post-1971. It shifted to
examining the economic policies of countries with IMF loan agreements to determine if a shortage of
capital was due to economic fluctuations or economic policy. The IMF also researched what types of
government policy would ensure economic recovery. A particular concern of the IMF was to prevent
financial crisis, such as those in Mexico 1982, Brazil in 1987, East Asia in 1997–98 and Russia in 1998,
from spreading and threatening the entire global financial and currency system. The challenge was to
promote and implement policy that reduced the frequency of crises among the emerging market countries,
especially the middle-income countries which are vulnerable to massive capital outflows. Rather than
maintaining a position of oversight of only exchange rates, their function became one of surveillance of
the overall macroeconomic performance of member countries. Their role became a lot more active
because the IMF now manages economic policy rather than just exchange rates.

In addition, the IMF negotiates conditions on lending and loans under their policy of conditionality,
which was established in the 1950s. Low-income countries can borrow on concessional terms, which
mean there is a period of time with no interest rates, through the Extended Credit Facility (ECF), the
Standby Credit Facility (SCF) and the Rapid Credit Facility (RCF). Non-concessional loans, which
include interest rates, are provided mainly through Stand-By Arrangements (SBA), the Flexible Credit
Line (FCL), the Precautionary and Liquidity Line (PLL), and the Extended Fund Facility. The IMF
provides emergency assistance via the Rapid Financing Instrument (RFI) to members facing urgent
balance-of-payments needs.

Surveillance of the global economy

The IMF is mandated to oversee the international monetary and financial system and monitor the
economic and financial policies of its member countries. This activity is known as surveillance and
facilitates international co-operation. Since the demise of the Bretton Woods system of fixed exchange
rates in the early 1970s, surveillance has evolved largely by way of changes in procedures rather than
through the adoption of new obligations. The responsibilities changed from those of guardian to those of
overseer of members’ policies.

The Fund typically analyses the appropriateness of each member country’s economic and financial
policies for achieving orderly economic growth, and assesses the consequences of these policies for other
countries and for the global economy.

In 1995 the International Monetary Fund began work on data dissemination standards with the view of
guiding IMF member countries to disseminate their economic and financial data to the public. The
International Monetary and Financial Committee (IMFC) endorsed the guidelines for the dissemination
standards and they were split into two tiers: The General Data Dissemination System (GDDS) and the
Special Data Dissemination Standard (SDDS).

The executive board approved the SDDS and GDDS in 1996 and 1997 respectively, and subsequent
amendments were published in a revised Guide to the General Data Dissemination System. The system is
aimed primarily at statisticians and aims to improve many aspects of statistical systems in a country. It is
also part of the World Bank Millennium Development Goals and Poverty Reduction Strategic Papers.

The primary objective of the GDDS is to encourage member countries to build a framework to improve
data quality and statistical capacity building to evaluate statistical needs, set priorities in improving the
timeliness, transparency, reliability and accessibility of financial and economic data. Some countries
initially used the GDDS, but later upgraded to SDDS.

Conditionality of loans

IMF conditionality is a set of policies or conditions that the IMF requires in exchange for financial
resources. The IMF does require collateral from countries for loans but also requires the government
seeking assistance to correct its macroeconomic imbalances in the form of policy reform. If the conditions
are not met, the funds are withheld. The concept of conditionality was introduced in a 1952 Executive
Board decision and later incorporated into the Articles of Agreement.

Conditionality is associated with economic theory as well as an enforcement mechanism for repayment.
Stemming primarily from the work of Jacques Polak, the theoretical underpinning of conditionality was
the "monetary approach to the balance of payments".

Structural adjustment

Some of the conditions for structural adjustment can include:

 Cutting expenditures, also known as austerity

 Focusing economic output on direct export and resource extraction
 Devaluation of currencies
 Trade liberalization, or lifting import and export restrictions
 Increasing the stability of investment (by supplementing foreign direct investment with the
opening of domestic stock markets)
 Balancing budgets and not overspending
 Removing price controls and state subsidies
  Privatization, or divestiture of all or part of state-owned enterprises
 Enhancing the rights of foreign investors vis-a-vis national laws
 Improving governance and fighting corruption

These conditions are known as the Washington Consensus.

These loan conditions ensure that the borrowing country will be able to repay the IMF and that the
country will not attempt to solve their balance-of-payment problems in a way that would negatively
impact the international economy. The incentive problem of moral hazard—when economic agents
maximize their own utility to the detriment of others because they do not bear the full consequences of
their actions—is mitigated through conditions rather than providing collateral; countries in need of IMF
loans do not generally possess internationally valuable collateral anyway.

Conditionality also reassures the IMF that the funds lent to them will be used for the purposes defined by
the Articles of Agreement and provides safeguards that country will be able to rectify its macroeconomic
and structural imbalances. In the judgment of the IMF, the adoption by the member of certain corrective
measures or policies will allow it to repay the IMF, thereby ensuring that the resources will be available
to support other members.

As of 2004, borrowing countries have had a very good track record for repaying credit extended under the
IMF's regular lending facilities with full interest over the duration of the loan. This indicates that IMF
lending does not impose a burden on creditor countries, as lending countries receive market-rate interest
on most of their quota subscription, plus any of their own-currency subscriptions that are loaned out by
the IMF, plus all of the reserve assets that they provide the IMF.

Member countries

Not all member countries of the IMF are sovereign states, and therefore not all "member countries" of the
IMF are members of the United Nations. Amidst "member countries" of the IMF that are not member
states of the UN are non-sovereign areas with special jurisdictions that are officially under the sovereignty
of full UN member states, such as Aruba, Curaçao, Hong Kong, and Macau, as well as Kosovo. The
corporate members appoint ex-officio voting members, who are listed below. All members of the IMF are
also International Bank for Reconstruction and Development (IBRD) members and vice versa.

Qualifications

Any country may apply to be a part of the IMF. Post-IMF formation, in the early postwar period, rules for
IMF membership were left relatively loose. Members needed to make periodic membership payments
towards their quota, to refrain from currency restrictions unless granted IMF permission, to abide by the
Code of Conduct in the IMF Articles of Agreement, and to provide national economic information.
However, stricter rules were imposed on governments that applied to the IMF for funding.

The countries that joined the IMF between 1945 and 1971 agreed to keep their exchange rates secured at
rates that could be adjusted only to correct a "fundamental disequilibrium" in the balance of payments,
and only with the IMF's agreement.
Some members have a very difficult relationship with the IMF and even when they are still members they
do not allow themselves to be monitored. Argentina, for example, refuses to participate in an Article IV
Consultation with the IMF.
Benefits

Member countries of the IMF have access to information on the economic policies of all member
countries, the opportunity to influence other members’ economic policies, technical assistance in banking,
fiscal affairs, and exchange matters, financial support in times of payment difficulties, and increased
opportunities for trade and investment.

Leadership

Board of Governors

The Board of Governors consists of one governor and one alternate governor for each member country.
Each member country appoints its two governors. The Board normally meets once a year and is
responsible for electing or appointing executive directors to the Executive Board. While the Board of
Governors is officially responsible for approving quota increases, Special Drawing Right allocations, the
admittance of new members, compulsory withdrawal of members, and amendments to the Articles of
Agreement and By-Laws, in practice it has delegated most of its powers to the IMF's Executive Board.

The Board of Governors is advised by the International Monetary and Financial Committee and the
Development Committee. The International Monetary and Financial Committee are made up of 24
members and monitors developments in global liquidity and the transfer of resources to developing
countries. The Development Committee has 25 members and advises on critical development issues and
on financial resources required to promote economic development in developing countries. They also
advise on trade and environmental issues.

Executive Board

24 Executive Directors make up Executive Board. The Executive Directors represent all 189 member
countries in a geographically based roster. Countries with large economies have their own Executive
Director, but most countries are grouped in constituencies representing four or more countries.

Following the 2008 Amendment on Voice and Participation which came into effect in March 2011, eight
countries each appoint an Executive Director: the United States, Japan, China, Germany, France, the
United Kingdom, the , and Saudi Arabia. The remaining 16 Directors represent constituencies consisting
of 4 to 22 countries. The Executive Director representing the largest constituency of 22 countries
accounts for 1.55% of the vote. This Board usually meets several times each week. The Board
membership and constituency is scheduled for periodic review every eight years.

The IMF is led by a managing director, who is head of the staff and serves as Chairman of the Executive
Board. The managing director is assisted by a First Deputy managing director and three other Deputy
Managing Directors. Historically the IMF's managing director has been European and the president of the
World Bank has been from the United States. However, this standard is increasingly being questioned and
competition for these two posts may soon open up to include other qualified candidates from any part of
the world.
In 2011 the world's largest developing countries, the BRIC nations, issued a statement declaring that the
tradition of appointing a European as managing director undermined the legitimacy of the IMF and called
for the appointment to be merit-based.

Voting power

Voting power in the IMF is based on a quota system. Each member has a number of basic votes (each
member's number of basic votes equals 5.502% of the total votes), plus one additional vote for each
Special Drawing Right (SDR) of 100,000 of a member country's quota. The Special Drawing Right is the
unit of account of the IMF and represents a claim to currency. It is based on a basket of key international
currencies. The basic votes generate a slight bias in favor of small countries, but the additional votes
determined by SDR outweigh this bias. Changes in the voting shares require approval by a supermajority
of 85% of voting power.

Effects of the quota system

The IMF's quota system was created to raise funds for loans. Each IMF member country is assigned a
quota, or contribution, that reflects the country's relative size in the global economy. Each member's quota
also determines its relative voting power. Thus, financial contributions from member governments are
linked to voting power in the organization.

This system follows the logic of a shareholder-controlled organization: wealthy countries have more say
in the making and revision of rules. Since decision making at the IMF reflects each member's relative
economic position in the world, wealthier countries that provide more money to the IMF have more
influence than poorer members that contribute less; nonetheless, the IMF focuses on redistribution.

Quotas are normally reviewed every five years and can be increased when deemed necessary by the
Board of Governors. IMF voting shares are relatively inflexible: countries that grow economically have
tended to become under-represented as their voting power lags behind. Currently, reforming the
representation of developing countries within the IMF has been suggested. These countries' economies
represent a large portion of the global economic system but this is not reflected in the IMF's decision
making process through the nature of the quota system.

World Bank:

The World Bank is an international financial institution that provides loans to countries of the world for
capital programs. It comprises two institutions: the International Bank for Reconstruction and
Development (IBRD), and the International Development Association (IDA). The World Bank is a
component of the World Bank Group, which is part of the United Nations system.

The World Bank's stated official goal is the reduction of poverty. However, according to its Articles of
Agreement, all its decisions must be guided by a commitment to the promotion of foreign investment and
international trade and to the facilitation of capital investment.

The World Bank is different from the World Bank Group, an extended family of five international
organizations:

 International Bank for Reconstruction and Development (IBRD)

  International Development Association (IDA)
 International Finance Corporation (IFC)
 Multilateral Investment Guarantee Agency (MIGA)
 International Centre for Settlement of Investment Disputes (ICSID)

The World Bank was created at the 1944 Bretton Woods Conference, along with three other institutions,
including the International Monetary Fund (IMF). The president of the World Bank is, traditionally, an
American. The World Bank and the IMF are both based in Washington, D.C., and work closely with each
other.

Although many countries were represented at the Bretton Woods Conference, the United States and
United Kingdom were the most powerful in attendance and dominated the negotiations.

Members

The International Bank for Reconstruction and Development (IBRD) has 189 member countries, while
the International Development Association (IDA) has 173 members. Each member state of IBRD should
be also a member of the International Monetary Fund (IMF) and only members of IBRD are allowed to
join other institutions within the Bank (such as IDA).

Voting power

In 2010 voting powers at the World Bank were revised to increase the voice of developing countries,
notably China. The countries with most voting power are now the United States (15.85%), Japan (6.84%),
China (4.42%), Germany (4.00%), the United Kingdom (3.75%), France (3.75%), India (2.91%), Russia
(2.77%), Saudi Arabia (2.77%) and Italy (2.64%). Under the changes, known as 'Voice Reform – Phase
2', countries other than China that saw significant gains included South Korea, Turkey, Mexico,
Singapore, Greece, Brazil, India, and Spain. Most developed countries' voting power was reduced, along
with a few developing countries such as Nigeria. The voting powers of the United States, Russia and
Saudi Arabia were unchanged.

Programs by World Bank

Poverty reduction strategies: For the poorest developing countries in the world, the bank's assistance
plans are based on poverty reduction strategies; by combining a cross-section of local groups with an
extensive analysis of the country's financial and economic situation the World Bank develops a strategy
pertaining uniquely to the country in question.

World Bank organizes Development Marketplace Awards, a competitive grant program that surfaces and
funds innovative, development projects with high potential for development impact that are scalable
and/or replicable. The grant beneficiaries are social enterprises with projects that aim to deliver a range of
social and public services to the most underserved low-income groups.

Global partnerships and initiatives: Together with the World Health Organization, the World Bank
administers the International Health Partnership (IHP+). IHP+ is a group of partners committed to
improving the health of citizens in developing countries.
Climate change: The World Bank doubled its aid for climate change adaptation from $2.3bn (£1.47bn)
in 2011 to $4.6bn in 2012. The planet is now 0.8 °C warmer than in pre-industrial times. It says that 2 °C
warming will be reached in 20 to 30 years.

Food security:

 Global Food Security Program: Launched in April 2010, six countries alongside the Bill and
Melinda Gates Foundation have pledged $925 million for food security. To date, the program has
helped 8 countries, promoting agriculture, research, trade in agriculture, etc.
 Launched Global Food Crisis Response Program: Given grants to approximately 40 nations for
seeds, etc. for improving productivity.
 In process of increasing its yearly spending for agriculture to $6 billion–$8 billion from earlier $4
billion.
 Runs several nutrition program across the world, e.g., vitamin A doses for children, school meals,
etc.

Training wings:

 The World Bank Institute (WBI) creates learning opportunities for countries, World Bank staff
and clients, and people committed to poverty reduction and sustainable development. WBI's work
program includes training, policy consultations, and the creation and support of knowledge
networks related to international economic and social development.
 The Global Development Learning Network (GDLN) is a partnership of over 120 learning
centers (GDLN Affiliates) in nearly 80 countries around the world. GDLN Affiliates collaborate
in holding events that connect people across countries and regions for learning and dialogue on
development issues.
 A Justice Sector Peer-Assisted Learning (JUSTPAL) Network was launched in April 2011 by
the Poverty Reduction and Economic Management (PREM) Department of the World Bank's
Europe and Central Asia (ECA) Region. The JUSTPAL objective is to provide an online and
offline platform for justice professionals to exchange knowledge, good practices and peer-driven
improvements to justice systems and thereby support countries to improve their justice sector
performance, quality of justice and service delivery to citizens and businesses.

Country assistance strategies: As a guideline to the World Bank's operations in any particular country, a
Country Assistance Strategy is produced, in cooperation with the local government and any interested
stakeholders and may rely on analytical work performed by the Bank or other parties.

Clean Air Initiative: Clean Air Initiative (CAI) is a World Bank initiative to advance innovative ways to
improve air quality in cities through partnerships in selected regions of the world by sharing knowledge
and experiences.

Open data initiative: The World Bank collects and processes large amounts of data and generates them
on the basis of economic models. These data and models have gradually been made available to the
public in a way that encourages reuse, whereas the recent publications describing them are available as
open access under a Creative Commons Attribution License, for which the bank received the SPARC
Innovator 2012 award.

World Bank Grants: Grants are provided by World Bank to member countries for:

 Road transport
 Social/ welfare services
 Electrical transmission/ distribution
 Public finance management
 Rail transport
 Rural development
 Urban development and management
 Business support services and institutions
 Energy policy and administrative management
 Agricultural water resources
 De-centralization and support to subnational government
 Disaster prevention and preparedness
 Sanitation - large systems
 Water supply - large systems
 Health policy and administrative management

Criticisms

The World Bank has long been criticized by non-governmental organizations, such as the indigenous
rights group Survival International, and academics, including its former Chief Economist Joseph Stiglitz,
Henry Hazlitt and Ludwig Von Mises.

Policy Criticism: Henry Hazlitt argued that the World Bank along with the monetary system it was
designed within would promote world inflation and "a world in which international trade is State-
dominated" when they were being advocated. Stiglitz argued that the so-called free market reform
policies that the Bank advocates are often harmful to economic development if implemented badly, too
quickly ("shock therapy"), in the wrong sequence or in weak, uncompetitive economies.

Governance: One of the strongest criticisms of the World Bank has been the way in which it is governed.
While the World Bank represents 188 countries, it is run by a small number of economically powerful
countries. These countries (which also provide most of the institution's funding) choose the leadership and
senior management of the World Bank, and so their interests dominate the bank. Titus Alexander argues
that the unequal voting power of western countries and the World Bank's role in developing countries
makes it similar to the South African Development Bank under apartheid, and therefore a pillar of global
apartheid.

Another source of criticism has been the tradition of having an American head the bank, implemented
because the United States provides the majority of World Bank funding. "When economists from the
World Bank visit poor countries to dispense cash and advice", observed The Economist in 2012, "they
routinely tell governments to reject cronyism and fill each important job with the best candidate available.
It is good advice. The World Bank should take it."
Policies on Poor: The effect of structural adjustment policies on poor countries has been one of the most
significant criticisms of the World Bank. The 1979 energy crisis plunged many countries into economic
crisis. The World Bank responded with structural adjustment loans, which distributed aid to struggling
countries while enforcing policy changes in order to reduce inflation and fiscal imbalance. Some of these
policies included encouraging production, investment and labor-intensive manufacturing, changing real
exchange rates and altering the distribution of government resources. Structural adjustment policies were
most effective in countries with an institutional framework that allowed these policies to be implemented
easily. For some countries, particularly in Sub-Saharan Africa, economic growth regressed and inflation
worsened. The alleviation of poverty was not a goal of structural adjustment loans, and the circumstances
of the poor often worsened, due to a reduction in social spending and an increase in the price of food, as
subsidies were lifted.

By the late 1980s, international organizations began to admit that structural adjustment policies were
worsening life for the world's poor. The World Bank changed structural adjustment loans, allowing for
social spending to be maintained and encouraging a slower change to policies such as transfer of
subsidies and price rises.

Fairness of assistance conditions: Some critics are of the opinion that the World Bank Group's loans and
aid have unfair conditions attached to them that reflect the interests, financial power and political
doctrines (notably the Washington Consensus) of the Bank and, by extension, the countries that are most
influential within it. Among other allegations, Klein says the Group's credibility was damaged "when it
forced school fees on students in Ghana in exchange for a loan; when it demanded that Tanzania privatize
its water system; when it made telecom privatization a condition of aid for Hurricane Mitch; when it
demanded labor 'flexibility' in Sri Lanka in the aftermath of the Asian tsunami; when it pushed for
eliminating food subsidies in post-invasion Iraq".

Sovereign immunity: The World Bank requires sovereign immunity from countries it deals with.
Sovereign immunity waives a holder from all legal liability for their actions. It is proposed that this
immunity from responsibility is a "shield which The World Bank wants to resort to, for escaping
accountability and security by the people." As the United States has veto power, it can prevent the World
Bank from taking action against its interests.

The changes were brought about with the goal of making voting more universal in regards to standards,
rule-based with objective indicators, and transparent among other things. Now, developing countries have
an increased voice in the "Pool Model", backed especially by Europe. Additionally, voting power is based
on economic size in addition to International Development Association contributions.

Managing in the Global Marketplace:

An international business is any firm that engages in international trade or investment. A firm does not
have to become a multinational enterprise, investing directly in operations in other countries, to engage in
international business, although multinational enterprises are international businesses. All a firm has to do
is export or import products from other countries. As the world shifts toward a truly integrated global
economy, more firms, both large and small, are becoming international business. What does this shift
toward a global economy mean for managers within an international business? As their organizations
increasingly engage in cross-border trade and investment, it means managers need to recognize that the
task of managing an international business differs from that of managing a purely domestic business in
many ways. At the most fundamental level, the differences arise from the simple fact that countries are
different.

Countries differ in their cultures, political systems, economic systems, legal systems and levels of
economic development. Despite all the talk about the emerging global village, and despite the trend
toward globalization of markets and production, differences between countries require that an
international business vary its practices country by country. Marketing a product in Brazil may require a
different approach than marketing the product in Germany; managing U.S. workers might require
different skills than managing Japanese workers; maintaining close relations with a particular level
of government may be very important in Mexico and irrelevant in Great Britain; the business strategy
pursued in Canada might not work in South Korea; and so on. Managers in an international business must
not only be sensitive to these differences, but they must also adopt the appropriate policies and strategies
for coping with them. A further way in which international business differs from domestic business is the
greater complexity of managing an international business.

Globalization, Labor Policies and the Environment:

A source of concern is that free trade encourages firms from advanced nations to move manufacturing
facilities to less developed countries that lack adequate regulations to protect labor and the environment
from abuse by the unscrupulous. Globalization critics often argue that adhering to labor and
environmental regulations significantly increases the costs of manufacturing enterprises and puts them at
a competitive disadvantage in the global marketplace vis-à-vis firms based in developing nations that do
not have to comply with such regulations. Firms deal with this cost disadvantage, the theory goes, by
moving their production facilities to nations that do not have such burdensome regulations or that fail to
enforce the regulations they have.

If this is the case, one might expect free trade to lead to an increase in pollution and result in firms from
advanced nations exploiting the labor of less developed nations. This argument was used repeatedly by
those who opposed the 1994 formation of the North American Free Trade Agreement (NAFTA) between
Canada, Mexico, and the United States. They painted a picture of U.S. manufacturing firms moving to
Mexico in droves so that they would be free to pollute the environment, employ child labor, and ignore
workplace safety and health issues, all in the name of higher profits.

Supporters of free trade and greater globalization express doubts about this scenario. They argue that
tougher environmental regulations and stricter labor standards go hand in hand with economic progress.
In general, as countries get richer, they enact tougher environmental and labor regulations. Since free
trade enables developing countries to increase their economic growth rates and become richer, this should
lead to tougher environmental and labor laws. In this view, the critics of free trade have got it backward –
free trade does not lead to more pollution and labor exploitation, it leads to less. By creating wealth and
incentives for enterprises to produce technological innovations, the free market system and free trade
could make it easier for the world to cope with problems of pollution and population growth. Indeed,
while pollution levels are rising in the world’s poorer countries, they have been falling in developed
nations.

Globalization and National Sovereignty:

Another concern voiced by critics of globalization is diat today’s increasingly interdependent global
economy shifts economic power away from national governments and toward supranational organizations
such as the World Trade Organization, the European Union, and the United Nations. As perceived by
critics, unelected bureaucrats now impose policies on the democratically elected governments of nation-
states, thereby undermining the sovereignty of those states and limiting the nation-state’s ability to control
its own destiny.

The World Trade Organization is a favorite target of those who attack the headlong rush toward a global
economy. As noted earlier, the WTO was founded in 1994 to police the world trading system established
by the General Agreement on Tariffs and Trade. The WTO arbitrates trade disputes between the member
states that are signatories to the GATT. The arbitration panel can issue a ruling instructing a member state
to change trade policies that violate GATT regulations. If the violator refuses to comply with the ruling,
the WTO allows other states to impose appropriate trade sanctions on the transgressor. As a result,
according to one prominent critic, U.S. environmentalist and consumer rights advocate Ralph Nader:

[...] Under the new system, many decisions that affect billions of people are no longer made by local or
national governments but instead, if challenged by any WTO member nation, would be deferred to a
group of unelected bureaucrats sitting behind closed doors in Geneva (which is where the headquarters
of the WTO are located). The bureaucrats can decide where or not people in Califomia can prevent the
destruction of the last virgin forests or determine if carcinogenic pesticides can be banned from their
foods; or whether European countries have the right to ban dangerous biotech hormones in meat ... At
risk is the very basis of democracy and accountable decision making [...]

In contrast to Nader’s rhetoric, many economists and politicians maintain that the power of supranational
organizations such as the WTO is limited to that which nation- states collectively agree to grant. They
argue that bodies such as the United Nations and the WTO exist to serve the collective interests of
member states, not to subvert those interests. Supporters of supranational organizations point out that the
power of these bodies rests largely on their ability to persuade member states to follow a cer tain action. If
these bodies fail to serve the collective interests of member states, those states will withdraw their support
and the supranational organization will quickly collapse. In this view, real power still resides with
individual nation-states, not supranational organizations.

Globalization and World Power:

It has become the new truth of the early twenty-first century that the Western world we have known is
fast losing its pre-eminence to be replaced by a new international system shaped either by the so-called
BRICS comprising Brazil, Russia, India, China and South Africa, the ‘rest’, or more popularly by that
very broadly defined geographical entity known as Asia. This at least is how many economists, historians
and students of world politics are now viewing the future of the larger international system.

Please form your opinion on how world power is shifting due to the process of globalization!

Trends in Globalization Process:

To understand the trends in globalization, it is very essential to understand who are the players involved
in the same. It is widely known that international financial institutions are the key players in the entire
gamut of globalization.
For better understanding, let us have a brief look at the historical background that actually led to the
formation of these powerful institutions. To start with, the post-Second World War period of international
trade came under the influence of a new system called Bretton Woods System.

The Great Depression of 1929 completely shattered the international monetary system that led to the
formation of monetary blocs and lack of international collaboration. To bring about an improvement in
the monetary conditions, the Allied Forces in the year 1944 met at Bretton Woods to create a new
monetary order.

During the deliberations it was decided that, hence forth, governments would act responsibly in
managing the international fiscal system. The United States of America that emerged as a dominant
power assumed the responsibility of managing, for establishing post-war economic order that prevents
economic nationalism and encourages free trade and increased interaction among nations.

Thus, this Anglo-American plan approved at Bretton Woods became a first collective international
monetary order that would provide basis for growing international trade and economic growth along
with political harmony. This Bretton Woods conference was the base for the establishment of two
institutions, viz., the International Monetary Fund and International Bank for Reconstruction and
Development (IBRD) or popularly known as World Bank.

The IMF and IBRD, known as Bretton Wood Brothers were established in 1946. Later in the year 1947,
the General Agreement on Tariffs and Trade (GATT) was formed and in the year 1995, the World Trade
Organization was formed which was the culmination of prolonged negotiations within the framework of
GATT.

During the 1950s, two crucial developments concerning the world financial institutions took place in the
global economy. The first one was the growth of regional economic subsystems and the second, the
growth of multi-national corporations or MNCs that function across national boundaries. Within the
capitalistic countries there was a tendency towards formation of regional economic groups like the
European Union in the early 1990s and Association of South East Asian Nations (ASEAN).

The growth of MNCs provided scope for increased economic activity and emergence of transnational
corporations as well. As most of these MNCs are US-based they completely dominated the entire global
economy and began to create a complex interdependence. This also created problems for economies in
the field of investment, capital movement and technology.

With the passage of time there were more and more comments about a new theme called anti-
globalization. This anti-globalization sentiment did not emerge just in developing countries. Even
underdeveloped countries raised their voice against globalization. The first anti-globalization sentiments
were expressed during the 1970s against multinational companies like ITT in Chile, Nestle all around the
world, Citibank in South Africa, and Union Carbide in India and Coca-Cola in Guatemala and so on. It
was felt that unrestricted globalization is in many ways responsible for problems like nagging poverty and
uneven development, and creates grave infrastructural mismatches.

At the economic level, the term “globalization” can be used to describe a process that leads to an
intensification of international economic relations as natural and man-made barriers fall. The
globalization process developed particular momentum in the early 1990s. It is not only characterized by
declining transportation costs and tariffs, but was also given a substantial boost by the integration of
China, India and the economies of Central and Eastern Europe into the world economy. This has resulted
in a much greater abundance of labor for companies that are active on the global stage.

New opportunities, in terms of more efficient resource allocation and therefore higher per capita incomes,
started to emerge. Faster integration was also promoted by new methods of production driven by
technological change. It had become easier to split production into various sub-processes, so labor-
intensive parts of the production chain could be outsourced abroad. This “fragmentation” made cross-
border trading in intermediate goods an increasingly significant feature of international trade.

The marked change in global supply and demand conditions has not only brought economies closer
together, it has also made relations more complex:

 Over the past 20 years, world trade has expanded by an average of 6.5 percent a year,
significantly outstripping growth in global economic output, just as international capital flows
did. So the degree of openness has increased in many countries.
 The weight of the emerging markets in the global economy has become significantly more
prominent.
 Globally active financial institutions and a whole range of derivatives have moved the financial
markets closer together, resulting in the emergence of more complex relationships, in addition to
those caused by global production chains.

Overall, this is why shocks in major economies now have a greater and longer-lasting impact on the
system as a whole.

Financial crisis highlights potential for tension

Globalization not only creates opportunities, it also carries risks. The varying pace of change in the three
key areas of international economic relations (economic, financial, and exchange rate policy) has proved
problematic. Although autonomous centers of growth have emerged in the global economy, there are still
marked differences in the development stage of the individual financial systems. This helps to explain
why the USD is still the dominant reserve currency.

Trends in Globalization

There are several major trends pertaining to globalization:

 Population trends - Decreasing population in developed countries, while increasing population

in developing countries, and increased life expectancy
 Science and technology - Includes the Internet and other computer components as well as GPS,
genetically modified food, etc.
 Increasing integration and interdependence - Includes all areas of economic life as well as an
increasing exchange of products and services across national borders through trade
 Governance - How national and international laws govern the economic activity and
transnational institutions.
These trends are often interdependent and cannot be easily separated. The various factors associated with
trends in globalization, has been shown to affect population growth. In addition, advances in technology
can have significant impacts on society. Technology has allowed global commercial transactions to take
place at increasingly faster rates and at greater volumes across national borders. This has also led to other
challenges regarding global commerce, which involve the complex coordination, interaction and
compliance of current international and domestic laws.

Regional Trading Blocs – The TRIAD:

A trade bloc is a type of intergovernmental agreement, often part of a regional intergovernmental

organization, where regional barriers to trade, (tariffs and non-tariff barriers) are reduced or eliminated
among the participating states.

Economist Jeffrey J. Scott of the Peterson Institute for International Economics notes that members of
successful trade blocs usually share four common traits: similar levels of per capita GNP, geographic
proximity, similar or compatible trading regimes, and political commitment to regional organization.

Advocates of worldwide free trade are generally opposed to trading blocs, which, they argue, encourage
regional as opposed to global free trade. Whereas other economists believe that free trade is in the interest
of every country, because it would create more feasible opportunities by turning indigenous resources into
goods and services that are both currently in demand and will be in demand in the future by consumers.

Trade blocs can be stand-alone agreements between several states (such as the North American Free
Trade Agreement (NAFTA)) or part of a regional organization (such as the European Union). Depending
on the level of economic integration, trade blocs can fall into different categories, such as: preferential
trading areas, free trade areas, customs unions, common markets and economic and monetary unions.

Advantages and Disadvantages

Advantages

 Foreign Direct Investment: An increase in foreign direct investment results from trade blocs
and benefits the economies of participating nations. Larger markets are created, resulting in lower
costs to manufacture products locally.
 Economies of Scale: The larger markets created via trading blocs permit economies of scale. The
average cost of production is decreased because mass production is allowed.
 Competition: Trade blocs bring manufacturers in numerous countries closer together, resulting
in greater competition. Accordingly, the increased competition promotes greater efficiency within
firms.
 Trade Effects: Trade blocs eliminate tariffs, thus driving the cost of imports down. As a result,
demand changes and consumers make purchases based on the lowest prices, allowing firms with
a competitive advantage in production to thrive.
 Market Efficiency: The increased consumption experienced with changes in demand combines
with a greater amount of products being manufactured to result in an efficient market.

Disadvantages
  Regionalism vs. Multinationalism: Trading blocs bear an inherent bias in favor of their
participating countries. For example, NAFTA, a free trade agreement between the United States,
Canada and Mexico, has contributed to an increased flow of trade among these three countries.
Trade among NAFTA partners has risen to more than 80 percent of Mexican and Canadian trade
and more than a third of U.S. trade, according to a 2009 report by the Council on Foreign
Relations.
 Loss of Sovereignty: A trading bloc, particularly when it is coupled with a political union, is
likely to lead to at least partial loss of sovereignty for its participants. For example, the European
Union, started as a trading bloc in 1957 by the Treaty of Rome, has transformed itself into a far-
reaching political organization that deals not only with trade matters, but also with human rights,
consumer protection, greenhouse gas emissions and other issues only marginally related.
 Concessions: No country wants to let foreign firms gain domestic market share at the expense of
local companies without getting something in return. Any country that wants to join a trading
bloc must be prepared to make concessions. For example, in trading blocs that involve developed
and developing countries, such as bilateral agreements between the U.S. or the EU and relatively
poor Asian, Latin American or African countries, the latter may have to allow multinational
corporations to enter their home markets, making some local firms uncompetitive.
 Interdependence: Since trading blocs increase trade among participating countries, the countries
become increasingly dependent on each other. A disruption of trade within a trading bloc as a
result of a natural disaster, conflict or revolution may have severe consequences for the
economies of all participating countries.

Triad: World’s most economically developed regions – Europe, Asia-Pacific and North America (Kenichi
Ohmae, 1985).

 International business activity has increased tremendously among the triad nations.

 One of the major areas of triad trade is automobiles, which provides an excellent example of the
economic interrelationships that exits between triad members.

 FDI and trade are at all-time high, MNCs continue to account for the most.

 ‘Californianization’ of the young within the Triad

o Forming a massive lifestyle related international consumer segment identifiable as such

in totally different parts of the world.

o In India, the market for consumer durables and demand for international brands has
grown as an unprecedented rate.

Strategies, Choices for firms to enter international environment:

International business is a term used to collectively describe all commercial transactions (private and
governmental, sales, investments, logistics, and transportation) that take place between two or more
nations. It refers to all those business activities which involves cross border transactions of goods,
services, resources between two or more nations. Transaction of economic resources include capital,
skills, people etc. for international production of physical goods and services such as finance, banking,
insurance, construction etc., Usually, private companies undertake such transactions for profit;
governments undertake them for profit and for political reasons.

The conduct of international operations depends on companies' objectives and the means with which they
carry them out. The operations affect and are affected by the physical and societal factors and the
competitive environment.

As large product manufacturing companies continue to grow their global reach and bring their products to
consumers in new countries, they learn lessons about different business strategies that need to be
implemented to create a successful selling campaign.

Multi-domestic Company Characteristics

A company that follows a multi-domestic strategy fits its products to each country in which it does
business. The product features are tailored to the local domestic environment, taking into account
different food preferences, religious customs and other characteristics that define the locality. Companies
choose to follow this strategy because their products will be better received by local customers, rather
than seen as something unusual that is produced by a foreign company.

Transnational Companies

Transnational companies also sell their products in multiple countries across the globe. This strategy
differs, however, in the way the product is marketed in each country. A transnational product keeps its
same characteristics, regardless of the country in which it is sold. The product does not change according
to local customs or preferences, so that the product sold in Asia or Mexico is exactly the same as the
version sold in the United States or Europe.

International Companies

An international business company or international business corporation (IBC) is an offshore company

formed under the laws of some jurisdictions as a tax neutral company which is usually limited in terms of
the activities it may conduct in, but not necessarily from, the jurisdiction in which it is incorporated.
While not taxable in the country of incorporation, an IBC or its owners, if resident in a country having
"controlled foreign corporation" rules for instance can be taxable in other jurisdictions.

Features

Characteristics of an IBC vary by jurisdiction, but will usually include:

 exemption from local corporate taxation and stamp duty, provided that the company engages in
no local business (annual agent's fees and company registration taxes are still payable, which are
normally a few hundred U.S. dollars per year)
 preservation of confidentiality of the beneficial owner of the company
 wide corporate powers to engage in different businesses and activities
  abrogation or restriction of the requirement to demonstrate corporate benefit
 the ability to issue shares in either registered or bearer form (although many countries have
restricted or eliminated bearer shares now)
 an abrogation of any requirements to appoint local directors or officers
 provision for a local registered agent or registered office

Multinational Companies

A multinational corporation or worldwide enterprise is a corporate organization that owns or controls

production of goods or services in one or more countries other than their home country.

Toyota is one of the world's largest multinational corporations with their headquarters in Toyota City,
Japan.

A multinational corporation (MNC) is usually a large corporation incorporated in one country which
produces or sells goods or services in various countries. The two main characteristics of MNCs are their
large size and the fact that their worldwide activities are centrally controlled by the parent companies.

 Importing and exporting goods and services

 Making significant investments in a foreign country
 Buying and selling licenses in foreign markets
 Engaging in contract manufacturing—permitting a local manufacturer in a foreign country to
produce their products
 Opening manufacturing facilities or assembly operations in foreign countries

MNCs may gain from their global presence in a variety of ways. First of all, MNCs can benefit from the
economy of scale by spreading R&D expenditures and advertising costs over their global sales, pooling
global purchasing power over suppliers, and utilizing their technological and managerial know-how
globally with minimal additional costs. Furthermore, MNCs can use their global presence to take
advantage of underpriced labor services available in certain developing countries, and gain access to
special R&D capabilities residing in advanced foreign countries.

Global Companies

In informal circles, a global company and multinational company both refer to a company that operates in
more than one country. Before the 20th century, a global enterprise was one that operated in one country
and traded in the far reaches of the world. For instance, the East India Company was one of the largest
companies in the world and operated out of Britain from the 1500s to the 1700s.

A business trying to transition into the global economy should employ people that understand the culture
into which the company plans to expand. Global companies often offer the same product in different
countries, but translate or modify a product's logo and packaging to meet local tastes. A company trying
to globalize should also reorganize its management structure and supply chain.