Slide 1

Globalization: Objectives
Globalization
What is it? What are its key causes? Why is it expanding rapidly? What is its impact on: jobs, incomes, labor policies, environmental policies, national sovereignty? How does it affect an international business managers opportunities and challenges?

What is the impact on the world economy of

Foreign direct investment flows Indias economic growth Multinational corporations growth/size

Globalization : Definition
The process by which different parts of the world interact economically, politically, and culturally. Finally, aiming at Economic Integration.

History of Globalization
Sharing between world cultures began 1000s of years ago. In the 19th century cultural sharing exploded.

19th Century
Europeans discover the Americas European Imperialism Industrial Revolution Inventions
Transportation Telephone Telegraph

20th Century
Free market capitalism
End of the Cold War

THE INTERNET
Exchange ideas Transfer $$ Share culture 24/7

Slide 6

Globalization: The Process

World Economy becoming more integrated and interdependent
Accelerating rate of change of this trend

National economies less isolated due to:

Lower cross-border trade and investment barriers Smaller geographic and time (zones) distance Fewer national government regulations Less rigid business systems Lower impact of national culture differences

Slide 7 1-2

Globalization of Markets
Historically distinct and separate markets are emerging into a huge global marketplaces
Mostly not consumer product markets Mostly industrial products Tastes and preferences of consumers converging (??)

MNCs creating global marketplaces? MNCs foreign operations becoming more vulnerable to competition in their home markets

Slide 8 1-3

Globalization of Production
Individual MNCs disperse different parts of their operations to narrow set of locations around the world because of:
National advantages in factors of production key to the where to produce? decision
Labor, land, capital, energy, expertise

Global web of suppliers Stake of foreign governments in MNC operations

Slide 9 1-4

Drivers of Globalization:
Declining Trade and Investment Barriers GATT, WTO; Removal of FDI restrictions/barriers Average Tariff Rates on Manufactured Products
(% value)
1913 1950 France 21 Germany Italy 18 Japan 30 Holland Sweden Britain USA 21 1990 18 20 25 5 20 23 18 2002 5.9 26 5.9 5.3 11 9 5.9 4.8 4.0 5.9 4.0 3.8 5.9 4.4 4.0 4.0 4.0

4.0 4.0

Slide 10

% Growth of Merchandized World Trade & World Output

3000 2500 2000 1500 1000 500 0 1950 1960 1970 1980 1990 1997 2000 2002 2004

1950=100
Trade GDP Volume

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More evidence of Globalization

World trade increased about 20x since 1950 while Global production has increased about 6.5x Between 90 and 00 FDI increased 5x, trade by 2x and world output by 0.2x By 2000:
60,000 parent companies operated away from home markets through 820,000 subsidiaries/affiliates Produced US$14 trillion in global sales, twice the value of global exports US, Japanese, Western European companies the major investors in Europe, Asia, and North America

Slide 12 1-6

Feasibility: Technological Change and Globalization

Globalization of markets and production
the result of lowering of trade barriers enabled by technological change

Telecommunications & microprocessors

High power/low cost computing Increase in information processing capacity

The internet and the world-wide web Transportation technology

Slide 13

Feasibility: The Shrinking Globe

1500 -1840 1850 - 1930 1950s 1960s

Best average speed of horse-drawn coaches and sailing ships, 10 mph.

Propeller Jet Steam locomotives aircraft passenger average 65 mph. 300 - 400 aircraft, Steamships average mph. 500 - 700 36 mph. mph.

Slide 14

Rebalancing of World Output and Trade

% Share of Output World: 63 USA Japan Germany France UK Italy Canada China S. Korea 40.3 5.5 9.7 6.3 6.5 3.4 3.0 n.a. n.a. Output 03 21.1 7.0 4.5 3.2 4.1 3.0 1.9 12.6 1.9 Exports 98 12.7 7.3 10 5.7 4.5 4.5 4.0 3.4 2.5 Exports 03 11 5.7 9.6 5.7 4.7 4.1 3.6 5.0 2.4

Slide 15

Globalization and the MNE

A multinational enterprise (MNE) is any business that has productive activities in two or more countries The national heritage of the largest MNCs
United States Japan United Kingdom France Germany 1976 45% 9 18.8 7.3 8.1 1990 31.5% 12 16.8 10.4 8.9 1997 32.4% 15.7 6.6 9.8 12.7 2000 26% 17 8 13 12

Mini-multinationals now a factor in the world economy

Globalization - Pro
Lower prices for goods and services. Economic growth stimulation. Increase in consumer income. Creates jobs.
Countries specialize in production of goods and services that are produced most efficiently.

Theory of Comparative Advantage

[See Hill, Chap. 4]

David Ricardo: Principles of Political Economy (1817).

Extends free trade argument of Adam Smith

Trade is a positive-sum game.

Efficiency of resource utilization leads to more productivity. Should import even if country is more efficient in the products production than country from which it is buying.
Look to see how much more efficient.

Concentrate production resources only where relatively MOST efficient (e.g. 4x more vs only 1.5x)

Makes better use of resources

unrestricted trade pushes out the Production Possibility Frontier for all

Proponents of Globalization
Increased Employment? Lower Wages More Service Jobs Cheaper Goods (like gas? like cars? like food? like textbooks?)

NAFTA
North American Free Trade Agreement (1993) Removed Tariffs motor vehicles and automotive parts, computers, textiles, and agriculture. US President George H. W. Bush. US President Bill Clinton

GATT
General Agreement on Tariffs and Trade an international agreement Reduced tariffs Favored Nation Status Updated 1947 to 1990s

FREE TRADE MEANS BETTER JOBS

Refocus US jobs
Boeing Microsoft Hollywood

pros and cons of globalization

PRO-GLOBALIZATION Multinational Corporations World Economic Relationships Free Trade cheap goods

ANTI-GLOBALIZATION Exploitation Child labor Third World Protectionism Environmental hazards Poverty

Who benefits from free trade, and who does not? Corporations Real smart people who invent things Real aggressive people who start large companies Communist Governments like China
Poor People in Poor Countries Poor People in the US Non-technical people in the US Manual Labor in the US The Environment Small Farms and Businesses

What could be an ideal economic globalization?

The Solar Economy; Renewable Energy For a Sustainable Global Future. America's ideal of freedom, citizens find the dignity and security of economic independence. Worldwide education and health.

Ralph Naders Argument

Today, much of this economic, political, and technological power is in the hands of global corporations wielding immense influence over our government in very intricate ways. One industry after another, not the least being the mass media, is dominated by increasingly fewer giant companies. The trajectory of this power is to centralize control

Brookings Institute
Economic theory points to two quite robust conclusions about the likely economic impact of offshoring. Overall, off shoring will offer economic gains. American workers, companies, and possibly communities will learn to adjust to a more technological work style in the process. Foreign outsourcing may also accelerate the formation of innovative products and services. Some new and young firms, especially those that rely on information technology, are using highly trained foreign technicians (principally in India and China) to build prototypes of new products and services.

Slide 27

Globalization: Does it cause Prosperity or Impoverishment?

Impact of barrier removal on jobs and incomes
Do jobs move away from wealthy advanced economies in search of lower wage rates?

Impact of trade liberalization on labor policies and the environment

Do manufacturing facilities move to developing countries with weaker labor laws and environmental protection?

Its impact on national sovereignty

WTO, EU, UN: supplanting national governments?

INDIA & CHINA

Benefits of fastgrowing economy. The economic fundamentals of both nations, with their enormous populations of young workers and consumers, point to strong growth for decades under almost every forecast. Problems of fastgrowing economy. Coups, political strife, and bad management. Both China and India need annual growth of at least 8% just to provide jobs for the tens of millions joining the workforce each year.

Outsourcing, Off-shoring, and Globalization

OKLAHOMA The creation of new jobs blue collar and white collar in the third/developing world is just one controversial element of globalization. Small Farms and Dairies in decline.

Slide 30

Managing the Global Marketplace

An international business is any firm that engages in international trade or investment An MNE engages in international investment over which it has managerial control International business involves managing across:
Differences in cultures, political, legal and economic systems and levels of economic development Such differences endure in spite of globalization trends

International managers confronted with a greater range of complexity