Global Corporation

Management

Chapter 1
Globalization
Learning Objectives

1-1 Understand what is meant by the term

globalization.
1-2 Recognize the main drivers of globalization.
1-3 Describe the changing nature of the global
economy.
1-4 Explain the main arguments in the debate over
the impact of globalization.
1-5 Understand how the process of globalization is
creating opportunities and challenges for
management practice.
Introduction

The world economy today

• Fewer self-contained national economies

• More integrated global economic system with lower
barriers to trade and investment
• Transformation is called globalization
• The volume of goods, services, and investments
crossing national borders has expanded faster than
world output for more than half a century
• Globalization offers business opportunities
What Is Globalization?

• Globalization: shift toward a more integrated and

interdependent world economy.

• Two key facets of globalization

• Globalization of markets
• Globalization of production
What Is Globalization?

The Globalization of Markets

• The merging of historically distinct and separate

national markets into one huge global marketplace.
• In many markets, the tastes and preferences of
consumers in different nations are converging on
some global norm, creating a global market.
• The most global of markets are for industrial goods
and materials that serve universal needs around the
world.
Homi- Amazon
What Is Globalization?

The Globalization of Production

• 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 (labor,
energy, land, and capital)
• Lower overall cost structure
• Improvement of the quality or functionality of a
product to compete more effectively
The Globalization of Production
What Is Globalization?

The Globalization of Production

• Early outsourcing was primarily for manufacturing
• Today, modern communications technology allows
companies to outsource services
• Impediments to globalization
• Formal and informal trade barriers

• Barriers to foreign direct investment

• Transportation costs

• Economic and political risk

• Managerial challenge for coordinating a

globally dispersed supply chain

The Emergence of Global Institutions

Global Institutions
• Manage, regulate, and police the global market
place
• Promote the establishment of multinational
treaties to govern the global business system
The Emergence of Global Institutions

World Trade Organization (WTO)

• Polices world trading system and ensures nations
adhere to the rules established in WTO treaties
• Succeeded the General Agreement on Tariffs and
Trade (GATT)
• 164 nations accounted for 98 percent of world
trade (2017)
The Emergence of Global Institutions

International Monetary Fund (IMF)

• Maintains order in the international monetary
system
• Lender of last resort
• Requires nation-states to adopt specific economic
policies in return for loans

World Bank
• Promotes economic development using low-
interest loans
• Seen as less controversial than IMF
The Emergence of Global Institutions

United Nations (UN)

• Maintains international peace and security
• Develops friendly relations among nations
• Promotes cooperation in solving international
problems
• Promotes respect for human rights
• A center for harmonizing the actions of nations
• Includes 193 member countries
The Emergence of Global Institutions

Group of Twenty (G20)

• Comprised of finance ministers and central bank

governors of the 19 largest world economies plus
the EU
• Represents 90 percent of global GDP
• Became a forum for a coordinated policy response
to the financial crisis of 2008 and 2009
Drivers of Globalization

Two macro factors driving the move toward greater

globalization

• Decline in barriers to free flow of goods, services, and

capital
• Technological change
Drivers of Globalization

Declining Trade and Investment Barriers

• International trade occurs when a firm exports

goods or services to consumers in another country
• Foreign direct investment occurs when a firm
invests resources in business activities outside its
home country
• During 1920s and 1930s, many nations put up
barriers to international trade to protect domestic
industries
• After WWII, advanced Western countries reduced
barriers
• GATT, Uruguay Round, and WTO
Table 1.1 Average Tariff Rates on Manufactured
Products as Percentage of Value

Country 1913 1950 1990 2020

France 21 percent 18 percent 5.9 percent 1.6 percent

Germany 20 26 5.9 1.6

Italy 18 25 5.9 1.6

Japan 30 -- 5.3 1.4

Netherlands 5 11 5.9 1.6

Sweden 20 9 4.4 1.6

United Kingdom -- 23 5.9 1.6

United States 44 14 4.8 1.6

Sources: The 1913 to 1990 data are from “Who Wants to Be a Giant?” The Economist: A Survey of the Multinationals, June 24, 1995,
pp. 3–4. The 2020 data are estimated based on data from the World Development Indicators, World Bank.
Drivers of Globalization

Declining Trade and Investment Barriers

• Knowledge Society and Trade Agreements

• World trade is predicted to increase more rapidly
than world production for the foreseeable future
• Produce more today and more of it traded

across national borders

• Consumers are more knowledgeable, which

drives demand
• Countries have been reducing restrictions to

foreign investment and trade

Drivers of Globalization

Implications of fast-paced volume of world trade

• More companies dispersing parts production

• Economies of nation-states becoming more

intertwined
• World becoming significantly wealthier
Figure 1.1 Value of World Trade, World Production, Number
of Regional Trade Agreements and World Population 1960 to
2020

Sources: World Bank, 2019; World Trade Organization, 2019; United Nations, 2019.
Figure 1.2 Comparisons of World Trade and World Population;
World Trade and Number of Regional Trade Agreements;
World Population and World Production; and World
Population and World Trade
Drivers of Globalization

Role of Technological Change

• Communications - Since World War II,

microprocessor created explosive growth of high-
power, lost-cost computing
• Microprocessors also advanced
telecommunications - Moore’s Law: as costs of
microprocessors fall, their power increases
Drivers of Globalization

Role of Technological Change

• Internet of Things - In 2017, 3.8 billion users (51

percent of global population), Makes it easier for
buyers and sellers to find each other
• Transportation Technology - Commercial jets,
Superfreighters, Containerization
Drivers of Globalization

Role of Technological Change

• Lower transportation costs makes geographically
dispersed production system more economical
• Allows firms to better respond to customer demands
• Low cost communication networks create electronic
global marketplace
• Low cost transportation makes shipping products
around the world economical
• Reduced cultural distance
• Converging consumer tastes and preferences
The Changing Demographics of the Global
Economy

Early 1960s
• U.S. dominated the world economy, world trade
• U.S. dominated world FDI
• U.S. MNEs dominated international business
• About half the world was off limits to Western
international business

Today, much has changed

The Changing Demographics of the Global
Economy

The Changing World Output and World Trade Picture

• Early 1960s
• U.S. was dominant in industrial power,

accounting for about 38 percent of world

manufacturing output
• Recently
• Germany, France, the U.K., and Canada had

similar decline
• Rapid economic growth now in countries like

China, India, Russia, and Brazil

• Further relative decline by the U.S., Germany,

and Japan; U.K. is likely

Table 1.2 Changing Demographics of World
Output and World Exports

Share of World Share of World Share of World

Country Output 1960 (%) Output Today (%) Exports Today (%)
United States 38.3 15.8 8.2

Germany 8.7 3.4 7.1

France 4.6 2.3 2.8

Italy 3.0 1.9 2.4

United Kingdom 5.3 2.4 2.3

Canada 3.0 1.4 2.2

Japan 3.3 4.3 3.6

China NA 17.1 11.1

Sources: Output data from World Bank database, 2019. Trade data from WTO Statistical
Database, 2019.
The Changing Demographics of the Global
Economy 3

The Changing Foreign Direct Investment Picture

• World output generated by developing countries
steadily increasing since 1960s
• Stock of foreign direct investment (total
cumulative value of foreign investments) generated
by rich industrial countries declining
• Cross-border flows of foreign direct investment
rising
• Largest developing country recipients of FDI are
China, Mexico, and Brazil
Figure 1.3 Share of FDI Stock Outward as a
Percentage of GDP

Sources: OECD data 2017, FDI stocks.

Figure 1.4 FDI Inflows (in millions of dollars)

Source: United Nations Conference on Trade and Development, World Investment Report
2018. (Data for 2019–2020 are forecast.)
The Changing Demographics of the Global
Economy

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, a rise of non-U.S. multinationals and
growth of mini-multinationals

Non-U.S. Multinationals
• Large number of U.S. multinationals reflects U.S.
economic dominance
• Today, world economy shifting away from North
America and Western Europe
Figure 1.5 National Share of Largest
Multinational Corporations

Source: Forbes Global 2000 in 2003 and 2017.

The Changing Demographics of the Global
Economy

• The Changing Nature of the Multinational Enterprise

continued
• The Rise of Mini-Multinationals
• More small- and medium-size businesses (mini-
multinationals) involved in international trade and
investment
• Internet lowers barriers that smaller firms face in
building international sales
The Changing Demographics of the Global
Economy

The Changing World Order

• Collapse of communism in Eastern Europe
• Greater export and investment opportunities, but
political unrest is increasing risk
• Economic development in China
• Huge opportunities despite continued government
control, but also new competition from Chinese firms
• Free market reforms and democracy in Latin America
• New markets and new sources of materials and
production, but economic and political risk remains
high
The Changing Demographics of the Global
Economy

Global Economy of the Twenty-First Century

• A more integrated global economy

• New opportunities for firms
• But, political and economic disruptions can upset
plans
• The risk of a global financial crisis
The Globalization Debate

Is the shift toward a more integrated and interdependent

global economy a good thing?

• Experts believe globalization promotes greater

prosperity in the global economy, more jobs, and
lower prices for goods and services
• Others feel that globalization is not beneficial
The Globalization Debate

Antiglobalization Protests

• Began with WTO protest in December 1999 in Seattle

• Protest turned violent
• Protestors fear globalization has detrimental effects
on living standards, wages, and the environment
• Theory and evidence suggests these fears are
exaggerated
1999 Seattle WTO protests
The Globalization Debate

Globalization, Jobs, and Income

• Falling trade barriers destroy manufacturing jobs in

wealthy economies (U.S. and western Europe)
• Service activities increasingly outsourced to nations
with lower labor costs
• Supporters say benefits outweigh the costs
• Outsourcing allows a company to reduce its cost
structure and reduce prices
The Globalization Debate

Globalization, Jobs, and Income

• Share of labor in national income has declined

• Attributed to a fall in unskilled labor
• Gap between poorest and richest segments of society
has widened
• In most countries, real income levels increased for all
• Many advanced economies report shortage of highly
skilled workers and an excess of unskilled workers
The Globalization Debate

Globalization, Labor Policies, and the Environment

• Critics argue that the lack of labor and environmental

regulations in less developed countries attract
investment
• Adhering to environmental regulations increases costs
of manufacturing
• Supporters argue that tougher regulations lead to
economic progress
• Tougher regulations come with economic progress
• Studies show a hump-shaped relationship between
income levels and pollution levels
Figure 1.6 Income Levels and Environmental
Pollution

Source: C. W. L. Hill and G. T. M. Hult, Global Business Today (New York: McGraw-Hill
Education, 2018).
The Globalization Debate

Globalization and National Sovereignty

• Critics worry economic power is shifting away from
national governments and toward supranational
organizations such as the WTO, the European Union,
and the UN
• Supporters say the power of these organizations is
limited to what nation-states collectively agree to
grant
• Must be able to persuade members states to follow
certain actions
• Without the support of members, the organizations
have no power
The Globalization Debate

Globalization and the World’s Poor

• Critics argue the gap between rich and poor is wider
and the benefits of globalization not shared equally
• Many poor nations are under totalitarian regimes,
suffer from endemic corruption, have few property
rights, are involved in war, have rapidly expanding
populations, are burdened by high debt
• No money to invest in public infrastructure
• Debt relief movements
• Rich nations gave to World Bank and IMF
• Reduce import barriers from poor nations
Managing in the Global Marketplace

• International business is any firm that is engaged in

international trade or investment
• Managing international business differs from
managing domestic business
• Practices vary country by country
• Issues are more complex
• Need to understand rules governing international
trade and investment
• Need to convert currency
Summary

In this chapter, we have

• Understood what is meant by the term globalization.

• Recognized the main drivers of globalization.
• Described the changing nature of the global economy.
• Explained the main arguments in the debate over the
impact of globalization.
• Understood how the process of globalization is
creating opportunities and challenges for management
practice.