Chapter 1

GLOBALIZATION

INB 372 Lecture

By: Ms. Adina Malik (ALK)

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Learning
Objectives
•Understand what is meant by the
term globalization
•Components of globalization
•Recognize the main drivers of
globalization
•Emergence of global institutions
• Explain the main arguments in
the debate over the impact of
globalization
•Understand how the process of
globalization is creating
opportunities and challenges for
business managers

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 What is Globalization?
 It is a process by which
 barriers to cross-border trade and investments are declining,
 perceived distance is shrinking due to advances in
transportation and telecommunication technologies,
 material culture is starting to look similar the world over; and
 national economies are merging into an interdependent,
integrated global economic system.

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 What is Globalization?
Interdependent:
Independently India has IT trained workforce but they do not have the
capital to establish giant firms like Microsoft.
Again independently USA has capital but they lack cheap IT trained
workforce. So, the countries will be better off being interdependent.
Integration:
USA invests in India and thus ensures capital flow in India. India ensures
supply of cheap IT trained workforce which is needed to produce
software.

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 What is the Globalization of
Markets?
 It is the merging of historically distinct and separate national markets into
one huge global marketplace.
 E.g. Consumer products such as Citigroup credit cards, Coca Cola &
PepsiCo soft drinks, Sony PlayStation video games, McDonald’s
Hamburger, Starbucks coffee, General Motors & Toyota, etc.
 E.g. markets for industrial goods and materials such as aluminium, oil,
wheat, computer software, etc.
 It no longer makes sense to talk about the “German market” or the
“American market”
 Instead, there is the “global market”

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Reasons for Globalization of Markets
 falling trade barriers make it easier to sell internationally
 consumers’ tastes and preferences are converging on some global
norm
 firms promote the trend by offering the same basic products
worldwide
 Coca-Cola, McDonalds and Sony all sell standardized products.

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 Implications for the Globalization
of Markets
 Low-cost transportation made it more economical to ship products
around the world, thereby helping to create global markets.
 Low cost of transportation has increased movement of people between
countries which reduced the cultural distance among people and created
convergence of taste and preferences.
 Low-cost global communications network such as WWW are helping to
create electronic global market places.
 Global communication network and global media like, CNN, MTV etc. also
contributed for the convergence.
 E.g. McDonald’s in China, Gap Jeans in Paris, E-bay
 E.g. Equador supplies roses to New York

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 What is the Globalization of
Production?
 It refers to sourcing goods and services from locations around the globe
to take advantage of national differences in the cost and quality of
factors of production (such as labor, energy, land and capital).
 This helps to
 Gain cost advantage by producing in locations where cost of
production factors is low
 Improve the quality or functionality of the products, thus
differentiating them
 E.g. USA outsource some radiology work to India
 E.g. Car- designed in Germany, assembled in Mexico with components
made in US and Japan, fabricated from Korean steel and Malaysian
rubber

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Implications for the Globalization of
Production
 As transportation costs associated with the globalization of production
declined, companies can now select geographically separate locations
which are more economical.
 These developments make it possible for a firm to create and then
manage a globally dispersed production system.
 E.g. Web allows:
 Hospitals in Chicago send MRI scans to India for analysis
 Accounting offices in San Francisco outsource routine tax
preparation work to accountants in Philippines

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 Drivers of Globalization
1. Declining Trade and Investment Barriers
Previously there were,
• High tariff rate on each others goods and services to protect domestic
industries from foreign competition. High tariff lead to high price of
foreign goods which prevent these goods to compete with local goods.

• Governments used to provide subsidies to important local industries. This

reduced the cost of production of domestic goods. Consequently, foreign
products could not compete. For e.g. RMG, Textile, Jute & Agricultural
sectors in Bangladesh.

• Due to lack of international business activities, countries which were poor

became poorer. Such strategies are called ‘Beggar thy neighbour policy’.

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 Drivers of Globalization
 Moreover, high tariff on foreign goods depressed the world demand and
contributed to the Great Depression of the 1930s.

 After World War II, formation of General Agreement on Tariffs and Trade
(GATT) contributed towards the reduction of barriers and ensured free flow
of goods between nations. Eight rounds of negotiations among member
states (now numbering 153) have worked to lower the barriers.

 Uruguay Round held in December 1993, to further reduce trade barriers.

Doha round in late 2001 also contributed for reduction of barriers and
subsidies, particularly in agricultural sector. During 1913 to 2005 tariff rates
reduced to 3.9% from 44%.

 Countries have opened their markets to FDI.

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Drivers of Globalization
2. The Role of Technological Change
The lowering of trade barriers made globalization of markets and
production a theoretical possibility. Technological change has made
it a tangible reality.

Microprocessors and Telecommunications

The single most important innovation has been the development of
microprocessor which enabled the explosive growth of
 high power, low cost computing
 recent advances in telecommunication technology, satellite, optical
fiber, wireless technology, world wide web and internet.
 telecommunication cost between London and New York has reduced
from $244.65 to $3.32 during 1930 to 1990.

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 Drivers of Globalization
3. Internet and World Wide Web:
Development in Internet increased the scope of e-
business.
It makes buyers and sellers to find each other.
It allows businesses, both small and large, to expand
their global presence at a lower cost.

4. Transportation technology:
The beginning of commercial jet travel, by reducing
the time needed to get from one location to another,
has effectively shrunk the globe.
 Containerization has revolutionized the
transportation business, significantly lowering the
costs of shipping goods over long distances.
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 Why Do We Need Global
Institutions?
Institutions
 help manage, regulate, and monitor the global marketplace
 promote the establishment of multinational treaties to govern the
global business system

Examples include
 the General Agreement on Tariffs and Trade (GATT)
 the World Trade Organization (WTO)
 the International Monetary Fund (IMF)
 the World Bank
 the United Nations (UN)
 the The Group of Twenty (G20)

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 Global Institutions
GATT: The General Agreement on Tariffs and Trade (GATT) was a multilateral
agreement regulating international trade. 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.

World Bank:
 Established in 1944 by 44 nations at the Bretton Woods Conference
 Established to promote economic development
 Focused on making low-interest loans to cash-strapped governments in
poor nations that wish to undertake significant infrastructure investments
(building dams, roads, etc.)

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 Global Institutions
International Monetary Fund (IMF):
 Created alongside the World Bank, in 1944
by 44 nations at the Bretton Woods
Conference
 Established to maintain order in the
international monetary system
 Often seen as the lender of the last resort
to nation states whose currencies are losing
value against those of other nations
 In return of the loans, IMF requires the
nation states to adopt specific economic
policies aimed at returning their troubled
economies to stability and growth
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 Global Institutions
United Nations (UN):
 Established in October 24, 1945 by 51 countries
 Committed to preserve peace through
international cooperation and collective security
 Promotion of higher standard of living, full
employment condition; economic and social
progress and development.
 Four purposes: To maintain international peace
and security, to develop friendly relations among
nations, to cooperate in solving international
problems and in promoting respect for human
rights; center for harmonizing the actions of
nations
 193 member countries

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 Global Institutions
G20:
 The Group of Twenty (also known as the G-20 or G20) is an international forum for
the governments and central bank governors from 20 major economies. 19
individual countries plus the European Union (EU) is represented by the European
Commission (EC) and by the European Central Bank (ECB)

 The G20 was formally established in September 1999 when finance ministers and
central bank governors of seven major industrial countries met in Washington, D.C.
in the aftermath of the financial crisis of 1997-1998. The aim of studying, reviewing,
and promoting high-level discussion of policy issues pertaining to the promotion of
international financial stability.

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 The Globalization Debate
Anti-Globalization Protests
Negative
Anti globalization groups protest because globalization creates,

Job losses

Downward pressure on the wage rates of unskilled workers

Environmental degradation

The cultural imperialism of global media and multinational enterprises

In Seattle, the WTO was meeting to try to launch a new round of talks to cut barriers
to cross-border trade and investment in December 1999. There was violent protest by
the anti globalization groups, where 40,000 protesters marched against globalization.

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 The Globalization Debate
Anti-Globalization Protests
Positive
 Globalization improves the living standard.
 International chains like McDonalds and Starbucks are now available
almost at every location.

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 The Globalization Debate
Globalization, Jobs and Income
Negative

 MNCs shifted their production to low cost locations where wage rate is
low. As a result, the demand of labor reduced in the USA. This resulted in
job losses and reduction of wage rate in USA.
 Advanced economies are becoming technology-oriented. So the demand
of unskilled workers is reducing in advanced economies creating an excess
supply of unskilled labor. Thus, growing income inequality is a result of
the wages for skilled workers being bid up by the labor market and the
wage of unskilled workers being discounted.

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 The Globalization Debate
Globalization, Jobs and Income
Positive
 However, benefits outweigh cost of globalization. When MNCs go to LDC,
they improve the living standards of the people of host country creating
employment and supplying world class products. As a result of such
economic growth, host country buys other products from the home
country.
 E.g. USA and China (Medicine and textile).
 Globalization encourages countries to specialize in products which they
can produce most efficiently. This improves the world output and overall
economic condition of the world.
 Supporters of globalization argue that during 1987-1994 the income gap
actually reduced by 5.5%.
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 The Globalization Debate
Globalization, Labour Policies and the Environment
Negative
 LDCs lack adequate regulations to protect labour and the environment
from abuse by the corrupts. Free trade leads to an increase in pollution and
result in firms from advanced nations exploiting the labour of less developed
nations.
 Supporters of anti-globalization argued that NAFTA might stimulate US
manufacturing firms moving to Mexico and then pollute the environment,
employ child labour and ignore workplace safety.

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 The Globalization Debate
Globalization, Labour Policies and the Environment

Positive
 The supporters of free trade argue that tougher environmental
regulations and stricter labor standards go hand in hand with economic
progress. So free trade enables developing countries to increase their
economic growth and become richer which in turn strengthen the
regulations.
 International free trade agreements protect countries from exploitation.
E.g. NAFTA protects Mexico from being exploited by the US firms.

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 The Globalization Debate
Globalization and National Sovereignty
Negative
 World Trade Organization (WTO), the European Union and the United
Nations—these supranational organizations impose policies on the
democratically elected governments of the nation-states. Thus the
independent economies are transferring their economic power away
from national governments towards these organizations.
 WTO monitor the trade policies and activities of its 150 member
states who are signatory to the GATT. The arbitration panel can issue a
ruling instructing a member state to change trade policies that violate
GATT regulations. This is regarded as interference by the protesters of
globalization.

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 The Globalization Debate
Globalization and National Sovereignty
Positive
 Supporters say that WTO and such other organizations generate
collective decision which reflects the opinion of all the member states. If
these bodies fail to serve the collective interest of member states, those
states will withdraw their support and the supranational organization will
collapse. In this view, the real power still resides with individual nation–
states.

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 The Globalization Debate
Globalization and the
World’s Poor
Negative
Due to globalization the gap
between the rich and poor nations
of the world has gotten wider. In
1870, the average income per capita
in the world’s 17 richest nations was
2.4 times that of all other countries.
In 1990, the same group was 4.5
times as rich as the rest.

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 The Globalization Debate
Globalization and the World’s Poor
Positive
Due to globalization some world’s poorer nations are now observing
economic growth like, South Korea, Thailand and Malaysia.
However, some states are still poor and the reasons for their poverty are
purely internal like dictator government, economic policies that destroy
wealth, insufficient protection of property rights, and war or political unrest,
for e.g. African nations.

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 How Does The Global Marketplace
Affect Managers?
Managing an international business is different from managing
a domestic business for at least four reasons:

 countries are different

 the range of problems confronted in an international business is wider
and the problems more complex than those in a domestic business
 firms have to find ways to work within the limits imposed by
government intervention in the international trade and investment
system
 international transactions involve converting money into different
currencies

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 Question!
IS GLOBALIZATION
GOOD OR BAD?

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