International Management

Chapter 1 Globalization

• Globalization refers to the shift toward a more integrated and interdependent world economy.  
• World is moving away from self-contained national economies toward an interdependent, integrated global economic system

o Barriers to cross-border trade and investment are declining.

o Perceived distance is shrinking due to advances in transportation and telecommunications technology.

o Material culture is starting to look similar over the world.

o National economies are merging into an interdependent and integrated global economic system.

What is The Globalization of Markets?

• Separate national markets are merging
• It no longer makes sense to talk about the “Singapore market” or the “American market” θ Instead, there is the “global market”
• Falling trade barriers make it easier to sell globally
• Consumers’ tastes and preferences are converging on some global norm
• Firms promote the trend by offering the same basic products worldwide

• The most global markets currently are not markets for consumer products.

• National differences in tastes and preferences are still often important enough to act as a brake on globalization. θ But markets for industrial goods and materials that serve a universal need the world over. o Oil, aluminum, wheat, microprocessors, DRAMs, commercial jet aircraft, computer software and financial assets from U.S. Treasury bills to eurobonds and futures on the Nikkei Index.

What Is The Globalization of Production?

• The sourcing of goods and services from locations around the globe to capitalize on national differences in the cost and quality of factors of production like land, labor, and capital.
• Companies can - Lower their overall cost structure.

                -Improve the quality or functionality of their product offering

Why Do We Need Global Institutions?

• Institutions

o Help manage, regulate, and police the global marketplace.

o Promote the establishment of multinational treaties to govern the global business system.

• E.g. General Agreement on Tariffs and Trade (GATT)

♣ The World Trade Organization (WTO)

♣ The International Monetary Fund (IMF)

♣ The World Bank

♣ The United Nations (UN)

What Do Global Institutions Do?

• The World Trade Organization (former GATT)

 o Polices the world trading system

o Makes sure that nation-states adhere to the rules laid down in trade treaties

o Promotes lower barriers to trade and investment

• The International Monetary Fund (1944) maintains order in the international monetary system
• The World Bank (1944) promotes economic development θ 
• The United Nations (1945)

o Maintains international peace and security

o Develops friendly relations among nations

o Cooperates in solving international problems and in promoting respect for human rights

o Is a center for harmonizing the actions of nations

What Is Driving Globalization?

• The decline in barriers to the free flow of goods, services, and capital that has occurred since the end of World War II

♣ Since 1950, average tariffs have fallen significantly

♣ Countries have opened their markets to FDI

• Technological change

♣ Microprocessors and telecommunications: PC

♣ The Internet and World Wide Web: Amazon.com

♣ Transportation technology : Sears, Roebuck & Co.

What Does Globalization Mean For Firms?

• Lower barriers to trade and investment mean firms can

o View the world, rather than a single country, as their market

o Base production in the optimal location for that activity

• Technological change means

♣ lower transportation costs - firms can disperse production to economical, geographically separate locations • help create global markets ◊ Jet aircraft and containerization

♣ lower information processing and communication costs - firms can create and manage globally dispersed production and distribution systems

♣ Dell uses the internet for global coordination and control.

♣ Low cost global communications networks - help create an electronic global marketplace: global e-commerce.

♣ Can create a worldwide culture, and a global market for consumer products

The Changing Demographics Of The Global Economy

Four trends are important:

♣ The Changing World Output and World Trade Picture

♣ The Changing Foreign Direct Investment Picture

♣ The Changing Nature of the Multinational Enterprise

♣ The Changing World Order

How Has World Output And World Trade Changed?

• By 2008, the United States accounted for just over 20% of world economic activity
• The share of world output accounted for by developing nations is rising and is expected to account for more than 60% of world economic activity by 2020

How Has Foreign Direct Investment Changed Over Time?

• Today, the United States accounts for less than one-fifth of worldwide FDI flows
• In contrast, the share of FDI accounted for by developing countries has risen θ Developing countries, especially China, have also become popular destinations for FDI

What Is A Multinational Enterprise?

• A multinational enterprise (MNE) is any business that has productive activities in two or more countries

Is An Interdependent Global Economy A Good Thing?

• Supporters believe that increased trade and crossborder investment mean

♣ Lower prices of goods and services to consumers

♣ Greater economic growth

♣ Higher consumer income, and more jobs

• Critics worry that globalization will cause

-Job losses

♣ Environmental degradation

♣ The cultural imperialism of MNEs

How Does Globalization Affect Jobs And Income?

• Critics argue that falling barriers to trade are destroying manufacturing jobs in advanced countries

♣ Shortage of skilled labor vs. Excess unskilled labor

♣ Technology-induced shift vs. Shift to overseas

• Supporters contend that the benefits of this trend outweigh the costs

♣ Countries will specialize in what they do most efficiently and trade for other goods—and all countries will benefit