Global Business Today

by Charles W.L. Hill

and G. Tomas M. Hult

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 Introduction and Overview

Chapter 1: Globalization

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

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 Introduction
The world economy today
 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
Over $5 trillion in foreign exchange transactions daily
Over $19 trillion of goods and $5 trillion of services being
sold across national borders
The establishment of international institutions

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 Introduction
Today’s world reflects globalization
 Declining barriers to cross-border trade and investment
 Advances in transportation and telecommunications
 Material culture similar all over the world
 National economies merging into integrated global
economic system

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 Introduction
Globalized world is exemplified by everyday scenarios,
such as
 driving a car assembled in Mexico with components
from various countries,
 communicating through a Finnish-designed cell
phone assembled in Texas,
 enjoying coffee at a globally recognized Starbucks
managed by immigrants.

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 Introduction
Globalization has also led to the emergence of both
supporters and critics.
 Expansion of revenues and reduce costs by accessing cheap
labor and materials worldwide
 Concerns about job security, environmental issues, and
cultural homogenization

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 What Is Globalization?
 Globalization refers to the trend towards a more
integrated and interdependent world economy
 Two key facets of globalization
 The globalization of markets
 The globalization of production

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 What Is Globalization?
The Globalization of Markets
 The merging of historically distinct and separate national
markets into one huge global marketplace
 In many markets today, the tastes and preferences of
consumers in different nations are converging upon some
global norm exemplified by iconic products like
 Coca Cola, McDonald’s, Starbucks, Apple

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 What Is Globalization?
The Globalization of Markets
 It is crucial not to overstate the idea that national markets
are disappearing entirely in favor of a global market.
National markets still exhibit significant differences in
various aspects, including
 consumer preferences,
 distribution channels,
 cultural values,
 business practices,
 legal regulations.

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 What Is Globalization
The Globalization of Market
 The most globally integrated markets today are markets for
industrial goods and materials that serve universal needs
worldwide. These encompass markets for
 commodities like aluminum, oil, and wheat,
 industrial products such as microprocessors and computer
memory chips, software,
 financial assets ranging from U.S. Treasury bills to Euro
bonds.

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 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 (land, labor, and
capital)
 Lower overall cost structure
 Improve the quality or functionality of the product to
compete more effectively
 Boeing only undertakes engineering design, marketing and
sales, final assembly – everything else is outsourced
globally
 Software companies like IBM and Microsoft use Indian
engineers for testing and debugging software.

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 Did You Know?

Did you know why your

iPhone was assembled in
China?

https://www.youtube.com/
watch?v=Otpu2uwWIOM

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 What Is Globalization
The Globalization of Production
 Early outsourcing was primarily for manufacturing
 Today, modern communications technology allows
companies to outsource services
 Obstacles to globalization
 Trade barriers
 Barriers to foreign direct investment
 Transportation costs
 Economic and political risk

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 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
 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)
 162 nations accounted for 98% of world trade (2016)

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 The Emergence of Global Institutions
 International Monetary Fund (IMF)
 Promotes order in the international monetary system
 Lender of last resort
 The World Bank
 Promotes economic development using low-interest loans

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 The Emergence of Global Institutions
 The United Nations (UN)
 Maintains international peace and security
 Develops friendly relations among nations
 193 member countries
 Promotes respect for human rights
 Is a center for harmonizing the actions of nations
 The Group of 20 (G20)
 Finance ministers and central bank governors of 19 largest
world economies
 A forum for a coordinated policy response to the financial
crisis of 2008-2009

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 Drivers of Globalization
Two factors driving the move toward greater
globalization
 Decline in barriers to free flow of goods, services, and
capital
 Technological change

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 Drivers of Globalization
Declining Trade and Investment Barriers
 International trade: when a firm exports goods or services
to consumers in another country
 Foreign direct investment: 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

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 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
Sweden 20 9 4.4 1.5
United -- 23 5.9 1.5
Kingdom
United States 44 14 4.8 1.5
Sources: 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.

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 Drivers of Globalization
Declining Trade and Investment Barriers
 We produce more goods and services than ever before but
a greater proportion being traded across national borders
 Consumers more knowledgeable which drives demand
 Volume of world trade growing faster than GDP
 More companies expanding parts production
 Economies are becoming even more integrated
 World has become significantly wealthier

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

Source: World Trade Organization, 2016.

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 Drivers of Globalization
The Role of Technological Change
 Since World War II, there have been major
advances in communication, information
processing, and transportation
Microprocessors and Telecommunications
 Moore’s Law
 the power of microprocessor technology doubles
and its cost of production falls in half every 18
months
The Internet
 Currently, 3.3 billion users (46% of global population)
 promoting e-commerce and enabling businesses to
expand their global presence efficiently.
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 Drivers of Globalization
The Role of Technological Change
Transportation Technology
 Containerization, commercial jet aircraft,
superfreighters

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 Drivers of Globalization
The Role of Technological Change
Implications for the Globalization of Production
 Lower transportation costs
 Digitalization of work processes allows work to be
performed wherever it is most efficient.
 Allow firms to better respond to customer demands

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 Drivers of Globalization
The Role of Technological Change
Implications for the Globalization of Markets
 Low cost communication networks help create
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

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 The Changing Demographics of the Global
Economy
 In the 1960s:
 U.S. dominated the world economy, world trade, and world
FDI
 U.S. MNEs dominated the international business scene
 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

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 The Changing Demographics of the Global
Economy
The Changing World Output and World Trade Picture
 Early 1960s:
 U.S. - dominant industrial power accounting for about 38.3%
of world manufacturing output
 By 2014:
 U.S. accounted for only 22.4%
 Germany, France, and the U.K. had a similar decline
 Rapid economic growth now in countries like China, India,
Russia, and Brazil
 Further relative decline by the U.S. is likely

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 Table 1.2 The Changing Demographics of World
Output and Trade
Share of World Share of World Share of World
Country Output 1960 (%) Output 2014 (%) Exports 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.

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 The Changing Demographics of the Global
Economy
The Changing Foreign Direct Investment Picture
 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
 The largest recipient of FDI is China, followed by Brazil,
Mexico, and India

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 Figure 1.2 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).

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 Figure 1.3 FDI Inflows 1980-2014

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

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 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: There has been a rise in non-U.S.
multinationals and there has been a rise in mini-
multinationals
 By 2012, largest nonfinancial multinationals were found in
U.S., Britain, France, Germany and Japan

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 Figure 1.4 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).

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 The Changing Demographics of the Global
Economy
The Changing Nature of the Multinational Enterprise
continued
 The Rise of Mini-Multinationals
 More small and medium-sized businesses involved in
international trade and investment
 lowers barriers that small and medium firms face in building
international sales

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 The Changing Demographics of the Global
Economy
The Changing World Order
 The 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

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 The Changing Demographics of the Global
Economy
The Global Economy of the 21st Century
 A more integrated global economy
 New opportunities for firms
 But, political and economic disruptions may change plans.

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 The Globalization Debate
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

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 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

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 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 company to reduce its cost structure
and as a result, can reduce prices

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 The Globalization Debate
Globalization, Jobs, and Income
 OECD studies show that while gap between poorest and
richest segments of society has widened, in most
countries, real income levels have increased for all,
including poorest segment
 Many advanced economies report shortage of highly-
skilled workers and an excess of unskilled workers

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 The Globalization Debate
Globalization, Labor Policies, and the Environment
 Lack of regulations in less developed countries
 Adhering to environmental regulations increases costs of
manufacturing
 Supporters argue that tougher regulations lead to
economic progress
 Studies show a hump-shaped relationship between
income levels and pollution levels

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 Figure 1.5 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.

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 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 (EU), and the UN
Supporters argue that the power of these organizations is
limited to what nation-states collectively agree to grant
 The organizations must be able to persuade members states
to follow certain actions
 Without the support of members, the organizations have no
power

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 The Globalization Debate
Globalization and the World’s Poor
 Critics argue the gap between rich and poor has gotten
wider and the benefits of globalization have not been
shared equally
 Many of the world’s poorest nations are under totalitarian
regimes, suffer from endemic corruption, have few property
rights, are involved in war, and are burdened by high debt
 United Nations adopted Millennium Goals
 Eight economic and human development goals for the world

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 Managing in the Global Marketplace
 International business is any firm that engaged in
international trade or investment
 Managing international business differs from managing purely
domestic business
 International business must vary its practices country by
country
 International business issues greater in complexity
 Need to understand rules governing international trade and
investment

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 Managing in the Global Marketplace
International business different for four reasons
 Countries are different
 Range of problems is wider and problems more complex
 Must find ways to work within governmental limits
 Transactions involve converting money into different
currencies

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 Summary
In this chapter we have
 Explored what is meant by the term globalization.
 Identified 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.
 Discussed how the process of globalization is creating
opportunities and challenges for business managers.

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 Any Questions?

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