Week 1 – Global business today

1. Introduction

The world economy today is characterized by fewer self-contained national economies with high barriers to
cross-border trade and investment; a more integrated global economic system with lower barriers to trade and
investment; an increase in foreign exchange transactions, with over $5 trillion in foreign exchange transactions
daily; growth of sales of services sold across national borders, with over $19 trillion of goods and $5 trillion
of services being sold across national borders; the establishment of international institutions (such as the World
Trade Organisation (WTO), the International Monetary Fund (IMF), the United Nations (UN), just to name a
few).

Globalization is reflected in the declining barriers to cross-trade and investment, advances in transportation
and telecommunications. Today’s world reflects globalization which is characterised by declining barriers to
cross-border trade and investment, advances in transportation and telecommunications, a material culture that
is similar all over the world, and national economies merging into an integrated global economic system.

This week’s notes will explore what is meant by the term globalisation, discuss drivers of globalisation, and
the changing nature of the global economy, explain the main arguments in the debate over the impact of
globalization and discuss how the process of globalization is creating opportunities and challenges for business
managers.
1.1 Topic Learning Outcomes

During this topic you should be able to achieve the following learning outcomes:

LO1. Understand what is meant by the term globalisation

LO2. Recognize the main drivers of globalisation

LO3. Describe the changing nature of the global economy

LO4. Explain the main arguments in the debate over the impact of globalisation

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 LO5. Understand how the process of globalisation is creating opportunities and challenges for management
practice

2. What is globalization

Globalization refers to the trend towards a more integrated and interdependent world economy (Guy, 2009;
Johnson & Turner, 2003).

There are two key facets of globalization:

• The globalization of markets

• The globalization of production

The Globalization of Markets involves the merging of historically distinct and separate national markets into
one huge global marketplace. The globalization of markets is driven by the argument that in many markets
today, the tastes and preferences of consumers in different nations are converging upon some global norm.
Brands such as Coca Cola, McDonald’s, IKEA, Starbucks, Apple support this argument.

The Globalization of Production involves the sourcing of goods and services from locations around the globe
to take advantage of national differences in the cost and quality of factors of production (labour energy, land,
and capital). Globalization of production allows firms to lower their overall cost structure and improve the
quality or functionality of their product to compete more effectively. Boeing offers an example with the
company only undertaking engineering design, marketing and sales, final assembly, while everything else is
outsourced globally (although the company is currently rethinking this strategy). Early outsourcing was
primarily adopted by manufacturing firms, but today, modern communications technology allows companies
to outsource services.
Although we are experiencing a more integrated global economy, there are certain impediments to
globalization. Those involve: (i) Formal and informal trade barriers, (ii) Barriers to foreign direct investment,
(iii) Transportation costs, (iv) Economic and political risk, (v) Managerial challenge.

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3. The emergence of global institutions
As a result of globalization, various global institutions have emerged to manage, regulate, and police the global
marketplace and to promote the establishment of multinational treaties to govern the global business system.
Some examples of global institutions are:
The World Trade Organization (WTO): the role of the WTO is to police the world trading system and ensure
nations adhere to the rules established in WTO treaties. More specifically, the WTO offers a framework for
trade negotiations and agreements, which govern trade between the member states, it offers a framework for
the implementation and monitoring of these trade agreements and offers mechanisms and procedures for
dispute settlement between member states regarding the infringement of the trade agreements. In addition, the
WTO framework offers member states provisions for building trade capacity. This is particularly relevant to
developing countries and emerging economies. The WTO works with and maintains an open dialogue with
various stakeholders in order to promote global trade (WTO, n.d.). Trade among WTO member nations is
governed by the General Agreement on Tariffs and Trade (GATT) which is a framework that governs the
rule of trade. The WTO counts 162 members which account for 98% of world trade (2016).

The International Monetary Fund (IMF): the role of the IMF is to promote order in the international
monetary system and to act as a lender of last resort. According to the IMF (2021):

The International Monetary Fund, or IMF, promotes international financial stability and monetary
cooperation. It also facilitates international trade, promotes employment and sustainable economic growth,
and helps to reduce global poverty. The IMF is governed by and accountable to its 190 member countries.

The World Bank: the role of the World Bank is to promote economic development using low-interest loans.
According to the World Bank (2021):

The World Bank Group works in every major area of development. We provide a wide array of financial
products and technical assistance and we help countries share and apply innovative knowledge and solutions
to the challenges they face.

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 The United Nations (UN): the role of the United Nations is to maintain international peace and security, to
develop friendly relations among nations and to promote respect for human rights. The UN is a centre for
harmonizing the actions of nations counting 193 member countries.

[...] the United Nations can take action on issues confronting humanity int eh 21 century, such as peace and
security, climate change, sustainable development, human rights, disarmament, terrorism, humanitarian and
health emergencies, gender equality, governance, food production and more (UN, n.d.)

The Group of 20 (G20):

The G20 is the international forum that brings together the world’s major economies. Its members account for
more than 80% of the world GDP, 75% of global trade and 60% of the population of the planet (G20, n.d.)

Finance ministers and central bank governors of the 19 largest world economies participate in G20 summits
and it was G20 was established as a response to the 1997 economic crisis. Following the 2008-2009 financial
crisis, participation in the G20 increased to include Heads of State and Government (G20, n.d.).

4. Drivers of Globalisation

Globalization is not new, and it has been part of human history. Examples of international competition and
cross-country arrangements go back even to Roman empire history where the emperor Tiberius imposed the
first known import quota on textiles as a response to the great imports of silk from China (Yergin, D. &
Stanislaw, J., 200x). Today we are experiencing massive globalization of the world economy, with two key
factors driving the move toward greater globalization (Stiglitz, 2002):

• The decline in barriers to the free flow of goods, services, capital and knowledge
• Technological change and the reduction in transportation and communication costs

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Declining Trade and Investment Barriers

International trade takes place when a firm exports goods or services to consumers in another country.

Foreign direct investment takes place when a firm invests resources in business activities outside its home
country.

During the 1920s and 1930s, many nations put up barriers to international trade to protect domestic industries.
But after WWII, advanced Western countries reduced barriers to international trade, through signing
agreements such as the General Agreement on Tariffs and Trade (GATT), through participating in initiatives
such as the Uruguay Round, which largest trade negotiation after the singing of the original GATT in 1947
(WTO, 2021b) and the establishment of the WTO. In Table 1.1 below you can see an example of the
development of average tariff rates on manufactured products as a percentage of value which demonstrates the
drop of average tariffs as a result of international trade agreements and of the globalization of trade.

Table 1.1 Average Tariff Rates on Manufactured Products as Percentage of Value

1913 1950 1990 2014

France 21% 18% 5.9% 1.5%

Germany 20 26 5.9 1.5

Italy 18 25 5.9 1.5

Japan 30 -- 5.3 1.3

Holland 5 11 5.9 1.5

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 Sweden 20 9 4.4 1.5

United Kingdom -- 23 5.9 1.5

United States 44 14 4.8 1.5

Source: The 1913–1990 data are from “Who Wants to Be a Giant?,” The Economist: A Survey of the
Multinationals, June 24, 1995, pp. 3–4. The 2014 data are from World Development Indicators 2015, World
Bank.

Today, we produce more goods and services than ever before but a greater proportion being traded across
national borders. Consumers are more knowledgeable about products and services, which drives demand. The
volume of world trade is growing faster than GDP. This is a result of more companies dispersing parts
production, economies becoming even more intertwined and the world becoming significantly wealthier. As
an illustration, figure 1.1. below shows the steady increase in the value of world trade and world production
between 1950 and 2014.

Figure 1.1 Value of World Trade and World Production 1950-2014

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Source: World Trade Organization, 2016

Figure 1.2 below demonstrates the world’s 20 top exporting countries and the value of trade in U.S. dollars
and Figure 1.3 shows the world outlook of the total value of imports in 2017.

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Figure 1.2 Top 20 export countries in 2019

Source: Statista (2021)

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Figure 1.3 Total value of imports in 2017 – World outlook

The Role of Technological Change

Since World War II, there have been major advances in communication, information processing, and
transportation. Technological evolution in telecommunications and integrated circuit technology (Moore’s
Law) has led to the development of increasingly sophisticated communication technologies and increased
information processing potentials. The advancement of the internet is transforming the way we connect with
others, with 3.97 billion internet users worldwide (Statista, 2020). Containerization systems and advances in
transportation technology have transformed the way products are transported globally and have reduced

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 transportation costs. These technological advancements have created implications both for the Globalization
of Production as well as for the Globalization of Markets.

Implications for the Globalization of Production:

 Lower transportation costs

 Geographically dispersed production system more economical
 Allow firms to better respond to customer demands

Implications for the Globalization of Markets:

 Low-cost communication networks help create an electronic global marketplace

 Low-cost transportation makes it economical to ship products around the world
 A reduction in cultural distance
 A convergence of consumer tastes and preferences

Improved transportation has shrunk the globe and commercial jet travel has reduced the time needed to get
from one location to another, effectively shrinking the globe.

5. The Changing Demographics of the Global Economy

In the 1960s the U.S. dominated the world economy, world trade, and world FDI. U.S. At that time, the U.S.
was the dominant industrial power accounting for 38.3% of the world manufacturing output. Multinational
Enterprises (MNEs) dominated the international business scene, and about half the world – the centrally
planned economies of the communist world – was off-limits to Western international business. Today, much
of this has changed. By 2014, the U.S. accounted only for 22.4% of the world manufacturing output and
Germany, France and the UK had a similar decline. Today we are experiencing rapid economic growth in
countries like China, India, Russia, and Brazil and a further decline by the U.S. is likely to take place. Table

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1.2 shows how the share of the total stock accounted for by U.S. firms declined from about 38 percent in 1960
to 24.4 percent in 2014.

Table 1.2 The changing demographics of World output and trade

Country Share of World Output Share of World Output Share of World Exports
1960 (%) 2014 (%) 2015 (%)

United States 38.3 22.4 9.2

Germany 8.7 5.0 8.4

France 4.6 3.6 3.1

Italy 3.0 2.8 2.9

United Kingdom 5.3 3.0 2.7

Canada 3.0 2.3 2.7

Japan 3.3 5.9 3.9

China NA 13.3 13.2

Sources: Output data from World Bank database, 2016. Trade data from WTO Statistical Database, 2015

The outlook of Foreign Direct Investment is also changing. The share of world output generated by developing
countries has been steadily increasing since the 1960s. The stock of foreign direct investment (total
cumulative value of foreign investments) generated by rich industrial countries is declining. Cross-border flows
of foreign direct investment are rising and the largest recipient of FDI is China, followed by Brazil, Mexico,
and India.

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As shown in Figure 1.4, the rise in the share of FDI stock accounted for by developing nations reflects a
growing trend for firms from these countries to invest outside their borders. In 2012, firms based in developing
nations accounted for 18.7 percent of the stock of foreign direct investment, up from around 1 percent in 1980.
Firms based in Hong Kong, South Korea, Singapore, Taiwan, India, Brazil, and mainland China accounted for
much of this investment.

Figure 1.4 Percentage share of total FDI stock

Source: C. W. L. Hill and G. T. M. Hult, International Business: Competing in the Global Marketplace. (New
York, NY: McGraw-Hill Education, 2017).

Figure 1.5 FDI Inflows 1980-2014

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 Source: C. W. L. Hill and G. T. M. Hult, International Business: Competing in the Global Marketplace. (New
York, NY: McGraw-Hill Education, 2017).

Figure 1.5: The chart illustrates two important trends – the sustained growth in cross-border flows of foreign
direct investment that occurred during the 1990s and the increasing importance of developing nations as the
destination of foreign direct investment. Throughout the 1990s, the amount of investment directed at both
developed and developing nations increased dramatically, a trend that reflects the increasing
internationalization of business corporations. A surge in foreign direct investment from 1998 to 2000 was
followed by a slump from 2001 to 2003, associated with a slowdown in global economic activity after the
collapse of the financial bubble of the late 1990s and 2000. The growth of foreign direct investment resumed
in 2004 and continued through 2007, when it hit record levels, only to slow again in 2008 and 2009 as the
global financial crisis took hold.

6. The Changing Nature of the Multinational Enterprise

A multinational enterprise (MNE) is any business that has productive activities in two or more countries.
Since the 1960s: There has been a rise in non-U.S. multinationals and there has been a rise in mini-
multinationals. These mini-multinationals are small and medium-sized businesses that are increasingly

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involved in international trade and investment. This increasing involvement of the mini-multinationals has
been made possible by advancements in internet usage and technology, which lower barriers that small and
medium firms face in building international sales. By 2012, the largest nonfinancial multinationals were found
in U.S., Britain, France, Germany and Japan.

Figure 1.6 National share of largest multinationals 1973 and 2012

Source: C. W. L. Hill and G. T. M. Hult, International Business: Competing in the Global Marketplace. (New
York, NY: McGraw-Hill Education, 2017).

As Figure 1.6 shows, in 1973, 48.5 percent of the world’s 260 largest multinationals were U.S. firms. The
second-largest source country was the United Kingdom, with 18.8 percent of the largest multinationals. Japan
accounted for 3.5 percent of the world’s largest multinationals at the time. A large number of U.S.
multinationals reflected U.S. economic dominance in the three decades after World War II, while a large
number of British multinationals reflected that country’s industrial dominance in the early decades of the
twentieth century. Figure 1.7 below lists the world’s top 10 multinationals in 2006 and 2016. As you can see

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 the share of U.S and UK multinationals has dropped and multinationals from Other countries have experienced
a significant increase.

Figure 1.7 Top 10 Multinationals

7. The Changing World Order

After 1989 the World has experienced the collapse of communism in Eastern Europe, which has created greater
export and investment opportunities. At the same time, political unrest experienced in various countries and
territories across the globe is increasing risk. At the same time, the economic development in China creates
huge opportunities despite the continued government control in the country. On the other hand, Chinese firms
are creating competition in the global market. The free-market reforms in Latin America are opening new
markets and new sources of materials and production, but at the same time, economic and political risk remains
high.

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 The Global Economy of the 21st Century is a more integrated economy with new opportunities for firms, but
political and economic disruptions can throw plans into disarray.

8. The Globalisation debate

When considering globalization, it is important to ask the following question: Is the shift toward a more
integrated and interdependent global economy a good thing?

Many experts believe that globalization is promoting greater prosperity in the global economy, more jobs, and
lower prices for goods and services. Others feel that globalization is not beneficial and are questioning the
benefits of globalization. In fact, various antiglobalisation protests are organised, with an example being the
WTO protest in December 1999 in Seattle, which turned into a violent protest (Seattle.gov, 1995).

Those who challenge and question the benefits of globalization fear that globalization has detrimental effects
on living standards, jobs, wages, and the environment. Relevant to the impact of globalization on jobs, and
income contestants of globalization argue that falling trade barriers destroy manufacturing jobs in wealthy
economies (U.S. and western Europe). There is fear that service activities increasingly outsourced to nations
with lower labour costs. However, theory and evidence are suggesting that these fears are exaggerated.
Supporters of globalisation argue that the benefits of globalization outweigh the costs. Outsourcing allows
companies to reduce their cost structure and as a result, they can reduce prices which is beneficial for
consumers. Also, many advanced economies report shortage of highly-skilled workers and an excess of
unskilled workers calling for movement of skills/people across countries. Also, OECD studies show that while
the gap between poorest and richest segments of society has widened, in most countries, real income levels
have increased for all, including poorest segment. Relevant to labour policies and the environment, the critics
of globalisation express concerns about the lack of regulations in less developed countries and question MNEs
adherence to environmental regulations as this increases their costs of manufacturing. Supporters of
globalization on the other hand argue that globalization is leading to harmonization of regulatory standards and
economic progress. As Figure 1.8 is demonstrating, student show a hump-shaped relationship between income
levels and pollution levels. At a certain point, rising income levels lead to demands for greater environmental

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protection. The hump-shaped graph holds across a wide range of pollutants from sulphur dioxide to lead
concentrations and water quality but carbon dioxide emissions are an important exception – they rise steadily
with higher income levels.
Figure 1.8 Income levels and environmental pollution

Source: Hill, C. W. L.; Hult, G. T. M., International Business: Competing in the Global Marketplace. New
York, NY: McGraw-Hill Education, 2017.

Also, critics of globalization express concerns about national sovereignty and worry that economic power is
shifting away from national governments and toward supranational organizations such as the WTO, the
European Union (EU), and the UN. In favour of globalization, supporters argue that the power of these
organizations is limited to what nation-states collectively agree to grant. These international organisations must
be able to persuade members states to follow certain actions to support causes such as … … but without the
support of members, the organizations have no power.

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 Finally, critics of globalization argue that the gap between the rich and the poor has gotten wider and the
benefits of globalization have not been shared equally. However, many of the world’s poorest nations are under
totalitarian regimes, which suffer from endemic corruption, have few property rights, are involved in a war,
and are burdened by high debt. Also, the role of international organisations, such as the UN is supportive to
economic and human development goals for the world, through the pursual and promotion of initiatives such
as the United Nations Sustainable Development Goals (UN, n.d.b).

9. Managing in the global marketplace

International business is any firm that is engaged in international trade or investment. International business
is different from domestic business for four reasons: Countries are different in terms of the economic, political,
cultural environment. The range of issues when a business is operating internationally is wider and the
problems are more complex. International businesses must find ways to work within governmental limits. Also,
transactions involve converting money into different currencies. Managing international business differs from
managing purely domestic business and international business must vary its practices country by country.
Issues pertaining to international business entail greater complexity and there is need to understand rules
governing international trade and investment.

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References

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Johnson, D. & Turner, C. (2003) International Business. Themes and issues in the modern global economy.
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