2013-10-30

Globalization & Economic Geography

Ramsin Yakob, PhD ramsin.yakob@liu.se IEI/Linkpings Universitet

What is Globalization or the Globalization process?

What is International Business or the Internationalization process?

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Globalization vs International Business

Globalization: Globalisation is essentially a process driven by economic forces. Its immediate causes are: the spatial reorganisation of production, international trade and the integration of financial markets. International Business: Is concerned with the manager's challenge to coordinate and organize resources despite large variations in their national origins within the boundaries of a single firm that span their economic activity across borders.
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Is distance dead or does geography still matter?

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Reinforcing pattern or new geographical map

- Is the world spiky or flat?

The business challenges: How do we make sense of our environment on a macro-, meso-, and/or micro scale?

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The Macro scale, a global triad: concentration of world GDP and exports

the world economy as organized around a tripolar, macro regional structure Do we see the emergence/ extension of new important players?

The global map of service production and growth

The global map of manufacturing production and growth

The global map of agriculture services and growth

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The Meso scale Transborder clusters and corridors

Economic activity that crosses, or sometimes aligns with, national boundaries

What other important areas do we know off?

!nited states and Me"ico: Border activity

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#merging urban corridors in #ast $sia

Mega-Regions of #urope

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Mega-Regions of %orth $merica

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Mega- Regions of $sia

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The Micro scale Localized o!!unities

- We live in cities, towns, and villages. Economic activity is ultimately in specific places

&ocation still matters'

o!parative disadvanta"e can be eroded throu"h "lobal sourcin"#

The endurin" co!petitive advanta"es in a "lobal econo!y lies increasin"ly in local thin"s $ knowled"e% relationships% !otivation $ that distant rivals cannot !atch

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Three levels of mar(ets

Capital Market

I%T#R%$TI)%$&*G&)B$&
Capital Flows

Conflict of national policies (locational policies)

R#GI)%$& Goods & Services Markets

R#GI)%$&

R#GI)%$&

Integration, harmonization and protection, regional policies

Labour Services Labour Markets National employment, Training and fiscal policies

%ational

%ational

%ational

%ational

%ational

%ational

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What characterizes the world economy of today?

&# '# *# ,# -# /# 2#

The e!er"ence of intellectual capital as the key wealth creatin" asset Increasin" "lobalization of econo!ic activity (transport% co!!unication% trade barriers) +lliance capitalis! Growth in developin" and transition econo!ies driven by do!estic de!and and hi"h co!!odity prices .low expansion of "lobal trade (followin" financial crisis) 0apid industrialization with "rowin" ine1uality in +sia Inco!e distribution

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Changing Pattern of Economic activity Inward FDI, Million US $

Changing Pattern of Economic activity Outward FDI, Million US $

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Multinational Corporations (MNC):

The driving engines of internationalization and Globalization

+h, do M%-s. #"ist/ The #clectic 0aradigm - a framewor( for e"plaining the e"istence of M%-.s 3wnership $ 0esources and capabilitites "ive advanta"e Localization $ for co!parative advanta"e Internalization $ carryin" out certain activities internally

Why do firms invest abroad?

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T10# )2 23I*M)TI4#

Variables influencing the location of value added activities (1970s)

Variables influencing the location of value added activities (2000s - )

Resource 5ee(ing

Availability, price and quality of natural resources. Infrastructure to enable resources to be exploited, and products arising from them to be exported. Government restrictions on FDI and/or capital. Investment incentives (tax holidays). Mainly domestic and occasionally adjacent regional markets, Real wage costs, material costs, transport costs, non-tariff trade barriers

As in the 1970s. Local partners for upgrading quality of resources and processing and transportation of output. Availability of local partners to jointly promote knowledge and/or capital intensive resource exploitation. Example: A German company opening a plant I Slovakia to produce and re-export to Germany.

Mar(et 5ee(ing

Large and growing markets. Availability and price of skilled professional labour. Presence and competitiveness of related firms (e.g. suppliers). Quality of national and local infrastructure. Macroeconomic and macro-organizational policies of host governments. Close presence to users in knowledge-intensive sectors. Example: Automotive MNCs have invested heavily in China As in the 1970s but more emphasis on wage and material costs. Increased role of governments in removing economic obstacles and facilitating upgrading of HR (training and education). Availability of specialized spatial clusters (industrial parks). Example: Global sourcing As in the 1970s, but growing importance due to geographical dispersion of knowledge-based assets. Opportunities offered for exchange of localized tacit knowledge, ideas and interactive learning. Access to different cultures, institutions and systems; and different consumer demands and preferences. Example: Acquiring key local firms, R&D, Human Capital, Market knowledge etc..

#fficienc, 5ee(ing

Mainly production cost related (labour, materials, machinery). To engage in trade in intermediate and final products. Export processing zones. Investment incentives (tax breaks, grants, subsidized land). Availability of knowledge-related assets and markets necessary to protect or enhance ownership specific advantages. Institutional variables influencing ease or difficulty of which such assets can be acquired by foreign firms.

5trategic $sset 5ee(ing

Changing Motives for Foreign Direct Investment (FDI)

The growth of strategic asset-seeking FDI

Less concerned with exploiting existing and owned specific advantages More concerned with protecting or augmenting existing advantages
The changing locational preference

A deepening of value chain activities and propensity to engage in higher order activities Downstream activities (inputs) are becoming more knowledge intensive

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Global Value Chains Framework

Key Variable Complexity of Transactions Ability to Codify Transactions Capability in the Supply-Base
Degree of explicit coordination and power asymmetry

Governance Type

Market

LOW

HIGH

HIGH LOW

Modular

HIGH

HIGH

HIGH

Relational
HIGH LOW HIGH

Captive
HIGH HIGH

LOW

Hierarchy
HIGH LOW LOW

HIGH

Firm Value Chain (business unit level)

Single Company:

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Global Value Chains

Single Company: Position in the Value Chain

(industry level)

Raw Mtrls Base Manufac

!pstream -ompon6 5ervice 5upplier

)rig6 #7uip6 Manuf

3ownstre 5ervice

2inal -onsump6 Goods

$, -

$, B, -

3, 8, 9, %

International Standard Industrial Classification (UN)

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Single Company: Position in the Value Chain (industry level)

Factor Intensity

High Medium Low

Resource #nerg, &abour -apital Tech6 :nowledge Infrastruc

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Single Company: Position in the Value Chain (industry level)

Factor Intensity

High Medium Low

Resource #nerg, &abour -apital Tech6 :nowledge Infrastruc

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Single Company: Position in the Value Chain (industry level)

Factor Intensity

High Medium Low

Resource #nerg, &abour -apital Tech6 :nowledge Infrastruc

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Choice of Parameters: Foreign Market

Sectoral

Regional

Individual

Choice of Parameters: Foreign Market

Factor

Market

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Choice of Parameters: Foreign Market

Supply

Unemployment

Choice of Parameters: Foreign Market

Public Dept

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Choice of Parameters: Foreign Market

Libor (currency?)

Euroibor

ational

Choice of Parameters: Foreign Market

!rade

"urrent #ccount

Payment

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Choice of Parameters: Foreign Market

!rade Pattern

FDI$Pattern

Macroeconomic Concerns: Foreign Market

Crucial Importance

Highly Relevant

Relevant

Partly Relevant

Irrelevant

Econ. growth

Inflation

Labour

Budget balance

Interest rate

External balance

Exchange rate

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Macroeconomic Concerns: Foreign Market

Crucial Importance

Highly Relevant

Relevant

Partly Relevant

Irrelevant

Econ. growth

Inflation

Labour

Budget balance

Interest rate

External balance

Exchange rate

Macroeconomic Concerns: Foreign Market

Crucial Importance

Highly Relevant

Relevant

Partly Relevant

Irrelevant

Econ. growth

Inflation

Labour

Budget balance

Interest rate

External balance

Exchange rate

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Geographical Position in the production system

Foreign

Supply
Domestic

Domestic

Foreign

Market

Geographical Position in the production system

Foreign

Supply
Domestic

Domestic

Foreign

Market

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Geographical Position in the production system

Foreign

Supply
Domestic

Domestic

Foreign

Market

Geographical Position in the production system

Foreign

Supply
Domestic

Domestic

Foreign

Market

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The Global Challenge: Integrating environmental factors with organizational factors and strategy
#nvironmental 2actor
The macro-environment e.g. Political (and legal) forces, Economic forces, Socio-cultural forces, and Technological forces. These are known as PEST factors

Organisational Factors and Strategy

The internal environment
e.g. staff (or internal customers), office technology, wages and finance, etc. Also: Competencies, capabilities and resources

The micro-environment e.g. our external customers, agents and distributors, suppliers, our competitors, etc.

Expanding markets Location Economies Experience Effects Leveraging Subsidiary Skills

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www.liu.se

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