International Business Ch1 Notes

Case Study: Outsourcing Legal Work

Sacha Baron Cohen, comedian, was sued someone claimed Cohen
defamed her during a sketch in the Da Ali G Show.
Suit was dismissed nothing on the show could be considered factual,
rather comedy.
Majority of legal prep work done by 6-member team of lawyers and
legal assistants in India.
Without outsourcing, mounting a defence for this suit wouldnt have
been economic. Defendants wouldve paid plaintiff to avoid legal fees,
despite lack of merit.
Indian attorneys trained in US law doing majority of legal work was less
expensive than settling out of court.
Legal outsourcing growing in the Philippines and India. Of $180billion
spent in US on legal services, $1billion is outsourced. Growth rate 20-
30% annually
Due to increased legal fees 1998-2009, hourly rates increased 65%
Routine tasks outsourced contracts drafted, reviewing documents
etc.
2008-09 GFC clients rebelled against use of fresh law graduates
doing grunt work billed at steep rates push for outsourcing to
decrease rates. US lawyers $100-500, India $20-60/h.
Pangea3 benefitted from this trend. Founded 2004, headquarters in
Mumbai and NYC, with 650 staff.
o Indian universities produce stream of lawyers trained in common
law legal tradition India inherited form the British, which also
underlies American law.
o Speak good English
o 10-12hr time difference work done overnight
responsiveness
o Serves corporations and US law firms. 75% business from
Fortune 1000 companies, 25% law firms.
o Helps law firms and companies improve efficiency and minimize
their business and legal risks by having routine, labour-intensive
legal work that requires a low degree of judgement done in
India.
o Market opportunity to expand from $1billion today, to $5billion by
decades end.



LO1. Understand what is meant by the term globalization.

Globalization

Past 30 years, fundamental shift occurred in world economy.
Away from self-contained national economies, isolated by barriers to
cross-border trade and investment, distance, time zones, language,
differences in government regulation, culture and business systems.
Towards declined barriers to trade, perceived distance shrinking due to
transport and telecommunication advances, homogeneity of material
culture, national economies becoming interdependent, integrated
global economic systems.
Shift towards a more integrated and interdependent world economy.

Globalization of Markets

Merging of historically distinct and separate national markets into one
global marketplace.
Falling barriers to cross-border trade easier to sell internationally.
Argued consumer taste is converging internationally, aiding the global
market.
Firms e.g. McDonalds, Coca-Cola, Sony PlayStation are both
benefactors and facilitators of trend same product worldwide
global market.
Small multinationals play major role, not just giants in USA, 98%
firms that export are small businesses (less than 100 people), and
share of total US exports grown over past decade to 20%.
Firms with less than 500ppl accounted for 97% all US exporters, and
30% of all exports by value.
Germany (worlds largest exporter) 98% small/midsize companies
have exposure to international markets, through exports or
international production.
Significant differences still exist among national markets consumer
tastes and preferences, distribution channels, culturally embedded
value systems, business systems, legal frameworks etc.
customization of marketing, product feature, operation practises.
Global markets more for industrial goods and materials (e.g. oil,
microprocessors, commercial jet aircraft, software) that consumer
products national difference in preference are a brake to
globalisation
Same firms are competitors globally e.g. Coca-Cola vs. PepsiCo, or
Ford vs. Toyota. One rival entering a new market ensures the other
will to prevent competitor having an advantage.
Firms bring assets that worked well elsewhere products, marketing,
brand names etc. Therefore uniformity not diversity global market,
not American market or Indian market

Globalization of Production

Sourcing of goods and services globally to take advantage of national
differences in the cost and quality of factors of production (labour,
energy, land, capital)
Lowers overall cost structure and/or improves quality/functionality
more competitive
Early outsourcing confined to manufacturing (e.g. Boeing and Vizio).
New outsourcing takes advantage of telecommunications technology,
esp. Internet, to outsource service activities to low-cost producers.
o E.g. radiology work to India MRI scans read at night when US
doctors sleep, results ready in the morning.
o IBM & Microsoft use Indian engineers to perform test functions
on US designed software. Time difference corrected code
transmitted over secure connections ready for work next day.
o Call centres customer service
o Health care transcription of American medical files 34,000 in
Philippines in 2008. Outsourcing admin tasks could reduce US
health care costs by $70 billion.
Dispersing value-creation activities can compress time and lower costs.
production of global products
Barriers to total global production: barriers to FDI, transport costs,
economic and political risk.

Boeing
E.g. Boeing 787 commercial jet airliner 65% total value aircraft
outsourced to foreign companies, 35% of which goes to 3 major
Japanese companies.
Rationale:
o Best quality in the world global suppliers better product
winning greater share of total orders for aircraft than rival Airbus
Industries.
o Increases chances of receiving orders from airlines based in
countries that supply.
Vizio and Flat Panel TVs
Taiwan, Korea, Japan produce glass panels cut in Mexico,
combined with electronics from Asia and the US, assembled US for
retail.
Flat panel TV technology invented in 1960s in US by RSA RSA, rival
Westinghouse and Xerox didnt pursue Japanese Sharp invested,
started selling first plat panels in 1990s. Japanese recession --? South
Korea invested e.g. Samsung. Asian crisis hit Korea Taiwanese
took over. Today, Chinese companies also manufacturing.
Efficient manufacturers take advantage of globally dispersed supply
chains make and sell low cost, high quality TVs. E.g. Vizio.
Vizio (Taiwanese) sales from $0 to $2billion from 2002-2008. In
2009, largest US market with 21.7% share.
Has less than 100 employees for sales, design, customer service
outsources engineering, manufacturing and logistics.
Scour the globe for cheapest manufacturers and components.
Sell most stock to large discount retailers e.g. Costco. Good order
visibility form retailers + tight management of global logistics 3 week
inventory turn-over = 2x as fast as competitors major cost savings.

Global Institutions

As markets globalize, institutions needed to
o Help manage, regulate and police the global marketplace;
o Promote the establishment of multinational treaties to govern the
global business system.
Organizations created by voluntary agreement between nation-states
o General Agreement on Tariffs and Trade (GATT)
o World Trade Organization (WTO)
o International Monetary Fund (IMF)
o World Bank
o United Nations (UN)

WTO (like predecessor GATT)
Primarily responsible for policing world trading system
Makes sure nation-states adhere to rules laid down in trade treaties
signed by WTO member states.
Responsible for facilitating establishment of additional multinational
agreements between member states.
Promotes lower barriers to cross-border trade and investment
members try to create an open global business system.
2011 153 nations that accounted for 97% world trade were members
large influence

IMF (1944 by 44 nations)
Purpose: to maintain order in the international monetary system
Stated objectives: to stabilise international exchange rates and
facilitate development
188 member countries
Member countries contribute to a pool from which other countries with
a payment imbalance may borrow from temporarily.
Designed to prevent disruption to the international financial system that
would occur through a country failing to meet its commitments to other
nations.
Past 2 decades money to Thailand, Argentina, Indonesia, Mexico,
Russia, South Korea, Turkey.
Role in coping with 2008-09 GFC
Loans are conditional must adopt specific economic policies aimed at
returning troubled economy to stability & growth.
o Able to renegotiate terms of debt on behalf of nations in financial
difficulties to prevent further problems, impose conditions
(stabilisation programme) on financial assistance structural
adjustment changes fundamental conditions of the economy
to make it more competitive.

World Bank (1944 by 44 nations)
Purpose: to promote economic development
Comprises 2 institutions owned by 187 member countries
International Bank for Reconstruction and Development and the
International Development Association
Less controversial than IMF focused on making low-interest loans to
cash-strapped governments to aid developing countries to achieve
development and reduce poverty helping countries to develop and
environment for investment, jobs and sustainable growth promoting
economic growth through investment
Criticism loans often result in greater debt (cycle), represents 187
countries but run by small group of rich countries, and has
contradictory roles politically must meet demands of donors and
borrowers, and practically, must be neutral and specialise in aid and
loans.

United Nations (1945 by 51 nations)
To preserve peace through international cooperation and collective
security.
193 member countries
Members accept UN Charter 4 main principles:
o Maintain international peace and security;
o Develop friendly relations among nations;
o Cooperate in solving international problems and in promoting
respect for human rights;
o Be a centre for harmonizing the actions of nations.
Central mandates promotion of higher living standards, full
employment, conditions of economic and social progress and
development.

G20 (1999)
Finance ministers and central bank governors of the 19 largest
economies, plus representatives from the EU and European Central
Bank.
Original purpose: to formulate a coordinated policy response to
financial crises in developing nations.
2008-09: became forum where major nations attempted to launch
coordinated policy response to GFC.

LO2. Recognize the main drivers of globalization.

Drivers of Globalization

Definitions:
International
trade
When a firm exports goods or services to consumers in
another country.
FDI When a firm invests resources in business activities outside of
its home country.

Two macro factors underlie the trend towards greater globalization

1. Declining Trade and Investment Barriers
Lower barriers to trade & investment mean firms can
View the world as their market
Base production in the optimal location for that activity.

Decline in barriers to free flow of goods, services and capital since end
WWII.
1920s-30s many nations erected strong barriers to international trade
and FDI. E.g. high tariffs on imports of manufactured goods.
Aim of tariffs: to protect domestic industry from foreign competition.
o Consequence - countries raised barriers against each other
depressed world demand Great Depression (1930s)
Post WWII removal of barriers to the free flow of goods, services
and capital between nations General Agreement on Tariffs and
Trade (GATT)
In GATT, 8 rounds of negotiations between members worked to lower
barriers. Uruguay Round (most recent, 1993) further reduced,
extended GATT to cover services as well as manufactured goods;
provided enhanced protection for patents, trademarks and copyrights;
and established WTO to police international trading system.
o Result: average tariff rates have fallen significantly since 1950
and now stand at about 4%.


2001 WTO launched another round (Doha Agenda) aimed at
cutting tariffs on industrial goods, services and agricultural products;
phasing out subsidies to agricultural producers; reducing barriers to
cross-border investment; and limiting the use of antidumping laws.
o Stalled in 2011 major opposition from key nations
o Biggest gain to be made re agricultural product discussion
Current tariff rate 40%
Rich nations spend $300billion p.a. on subsidies
Poor nations have most to gain from reduced tariffs and
subsidies gives access to developed markets.
Countries opening markets to FDI
o UN - 90% of 2,700 changes made worldwide between 1992-
2009 in laws governing FDI created more favourable
environment
o Drives globalization of markets and production
WTO data volume of world merchandise trade has grown faster than
the world economy since 1950.
o 1970-2010 volume expanded more than 30-fold, outstripping
expansion of world production (10-fold). Includes manufactured
goods, agricultural goods and mining products, not services)
Since mid 1980s, international trade of services has grown. Accounts
for 20% of value of all international trade now.
o Driven by telecommunication advances outsource services
globally.
Slow growth in trade during 2000-2009 reflects GFC drop.
o 2009 Global economy contracted by 2.3% as the crisis in the
US from subprime mortgage lending markets affected the world.
o Volume merchandise trade dropped 12.2% - largest decline
since WWII, due to drop in consumer demand and possibly the
inability to finance international trade due to tight credit
conditions.
o Rebounded 2010, with WTO forecast 14.5% growth in volume.
FDI playing an increasing role in global economy.
o Average yearly outflow of FDI increased from $25 billion (1975)
to $1.8 trillion (2007)
o Drop to $1.1 trillion (2009 & 2010) - GFC, recover 2011
o General trend past 30 years FDI outflows accelerated faster
than growth in world trade and world output. E.g. 1992-2008
FDI flow increased 8x, world trade 1.5x and world output 0.45x.
Globalization of markets and production growth of world trade, FDI,
imports home markets under attach from competitors.
o E.g. Japan US Apple and Proctor & Gamble expanding.
o E.g. US Japanese automobile firms taken market share from
General Motors.

2. Technological Change
Technological change means
Lower transportation costs helps create global markets
Lower information and communication costs
Low-cost global communications networks helps create an
electronic global marketplace
Global communications networks and global media creates a
worldwide culture, and global market for consumer products

Technological change reality of globalization, facilitated by lowering
trade barriers.
Internet, transport technologies, WWW etc. global audience

Microprocessors and Telecommunications
Microprocessor growth of high-power, low-cost computing
increasing amount of info that can be processed by firms/individuals.
Past 30 years developments in satellites, optical fibre, wireless,
Internet all rely on microprocessor to encode, transmit and decode
information that flows along electronic highways.
Costs fall, power increases Moores Law predicts the power of
microprocessor technology doubles and cost of production falls in half
every 18 months cost of global communication decreases, lowering
cost of coordinating and controlling global organizations.

Internet and World Wide Web
1990 less than 1 million users
1995 50 million
2011 2.3 billion users
Information backbone of global economy. In US, e-commerce retail
sales reached $165 billion (2010), up from nothing in 1998.
Works as equalizer roles back constraints of location, scale and time
zones time-space convergence.

Transport Technology
Reduced time to cover distances for most of history, speed and
efficiency of transport were low, costs of overcoming friction of distance
were high
Movement over land slow and difficult before railways
Major breakthrough: invention and application of steam power; use of
iron and steel for trains, railway tracks and ocean vessels
Mid-late 20
th
C acceleration in process of time-space convergence
introduction of commercial jet aircraft, superfreighters,
containerisation (intermodal transportation simplifies shipment
between transport modes)
Jet aircraft and development of TNCs are connected 1950s
Containerization revolutionized transport low operating costs over
long distances major development in intermodal transport
Used since 18thC, but not until after World War II that became widely
used and not until the 1960's that size was standardized easier
transfer between trains, ships, lorries
Since 1980 no. of containers has quadrupled.
1920-1990 average ocean freight and port charges per ton of US
export and import cargo fell from $95 to $29.
Cost of shipping freight per ton-mile on railroads in the US fell from
3.04cents (1985) to 2.3cents (2000) due to use of containers
(intermodal)
Falling cost of airfreight by 2000s, air shipments = 28% of the value
of US trade, up from 7% (1965)

Implications
Globalization of Production Globalization of Markets
Low transport costs
dispersal of production to
separate locations is more
economical.
Costs of information
processing and communication
decreased possible to
create and manage a globally
dispersed production system.
Low cost airfreight air
transport speeds up delivery of
critical components to meet
unanticipated demand shifts
without delaying shipment of
final product to consumers.
Modern communications
outsource customer service
e.g. India.
Jet aircraft aids worldwide
operations for businesses.
Max 1 day to travel overseas
for international operations
oversee a globally dispersed
production system.
Low cost communication
networks (Internet)
electronic marketplaces.
Low cost transport
economical to ship products
globally, helping create global
markets.
Low cost jet travel
movement of people across
countries reduces cultural
distance convergence of
consumer taste.
Global communication
networks global
consumer/worldwide culture.

LO3. Describe the changing nature of the global economy.

Changing Demographics of the Global Economy

Dramatic change in demographics of the world economy in the last 30
years.
1960s demographics
o US dominance in world economy and world trade
o US dominance in world FDI
o Dominance of large, multinational US firms in international
business
o Half the globe (centrally planned economies of the communist
world) was off-limits to Western international business.

Changing World Output and World Trade Picture
Early 1960s US dominant industrial power. 1963 40.3% world
economic activity (GDP) 24.1% in 2009 (GNI). Similar trend in
Germany, France, UK etc.
Not an absolute decline, but relative decline they still grew, but so did
other emerging economies, especially Asia.
1963-2009, Chinas share of world output increased from NA to 8.2%,
surpassing Japan in 2010 (becoming worlds second largest economy.
Similar trend in Japan, Thailand, Malaysia, Taiwan and South Korea
End of 1980s US position as worlds leading exporter was
threatened. US dominance over past 30 years in export markets
waned. Japan, Germany and NICs including China & South Korea
taken larger share.
o 1960s US accounted for 20% world exports manufactured
goods.
o 2010 down to 8.6%, behind Chinas 10.6%
Emerging economies (China, India, Brazil) grow further relative
decline in share of world output and exports accounted for by MEDCs
Forecasts predict rapid rise in share of world output by developing
nations (China, India, Russia, Indonesia, Thailand, Mexico etc.), and
commensurate decline in share enjoyed by industrialized countries
(GB, Germany, US, Japan)
Trends continue China economy becomes larger than US on
purchasing power parity (PPP) basis, and Indias approaches
Germanys.
World Bank LEDCs account for more than 60% of world economic
activity by 2020. MEDCs currently account for more than 55% 38%
Suggested shift in economic geography under way.

Changing FDI Picture
US dominance in 1960s 66.3% FDI flows, then British (10.5%),
Japanese were 8
th
(2%)
US dominance European talk, especially France, of limiting inward
investment by US firms.
As barriers to flow of goods, services and capital decreased, and other
countries increased their share of world output, non-US firms invested.
Motivation desire to disperse production activities to optimal
locations, and build direct presence in major foreign markets.
1970s Japanese and European firms shifted labour-intensive
manufacturing operations to developing nations (low labour costs)
Japanese invested in North US and Europe hedge against
unfavourable currency movement and possible imposition of trade
barriers.
o E.g. Toyota increased investment in car production facilities in
US & Europe in 1980s. Believed a stronger Jap Yen would
price Jap car exports out of foreign markets, therefore
production in most important foreign markets, as opposed to
exports from Japan, made sense.
Consequence share of total stock accounted for by US firms
declined from 38% (1980) to 23% (2008), whereas Frances and
developing nations shares increased. Reflects trend for firms from
these countries (US, UK, Germany, Netherlands, Japan, France) to
invest outside their borders.
2009 firms based in developing nations 14.1% of stock of FDI. Up
from 1.1% (1980). Mainly in Hong Kong, South Korea, Singapore,
India, China.
Noticeable sustained growth in cross border flows of FDI in the 1990s,
at both developed and developing nations. Reflects increasing
internationalization of businesses. Surge form 1998-2000 followed by
slump 2001-20013 (slowdown in economic activity after collapse of
financial bubble).
FDI resumed 2004-2007, hit record levels, then slowed in 2008-09
(GFC).
China largest recipient of FDI 2004-09 received $60billion to
$100billion in inflows a year.

Changing Nature of Multinational Enterprise
Definitions:
Multinational
enterprise
Any business that has productive activities in two or more
countries.

Two trends in the demographics of the MNE since 1960s:

1. Rise of non-US multinationals
Relative decline in the dominance of US firms in the global marketplace
1960s US firms accounted for 2/3 of FDI, therefore reasonable to
assume MNEs would be mainly US enterprises.
o 1973 48.5% of worlds 260 largest MNEs were US firms
reflected US economic dominance for 30yrs post WWII.
o Second UK (18.8%) reflected countrys industrial
dominance in early 20
th
century.
o Japan 3.5%
2008 19 worlds 100 largest nonfinancial MNEs were US firms; 13
French; 13 German; 14 British; 10 Japanese.
Largest MNEs still dominated by firms from developed economies. But
7 firms from developing economies have entered top 100 by 2008.
Largest = Hutchison Whampoa (Hong Kong, rank 22)
Developing nation firms expected to emerge as competitors in global
markets, shifting axis of world economy away from N. America and
Europe.

2. Growth of mini-multinationals
Most international trade and investment conducted by large firms, but
many medium and small business becoming increasingly involved.
Rise of Internet lowers barriers that small firms face in building
international scales.
E.g. Lubricating Systems, Inc. of Kent, Washington.
o Manufactures lubricating fluids for machine tools, employs 25
people, generates sales of $6.5million.
o $2illion sales are generated by exports to Japan, Israel, UAE
o Joint venture with German company to serve European market.

Changing World Order
Soviets & Communist States
1989-1991 democratic revolutions swept Communist world
Communist governments in the Soviet Union and Eastern Europe
collapsed SU into 15 independent republics, Czechoslovakia into 2
states, Yugoslavia into civil war, then 5 states.
Former Communist nations of Europe & Asia shared commitment to
democratic politics and free market economies.
o Were closed to Western international business for 50yrs.
o Now open opportunity for export/investment.
o Growing unrest and totalitarian tendencies still seen in many
Eastern European and Central Asian states e.g. Russia signs
of shifting back to greater state involvement in economic activity
and authoritarian government risks in doing business are
high, so are returns.
China
China moves progressively toward greater free market reforms.
If current trends continue for 20 years, China may move from
developing world to industrial superpower status faster than Japan did.
If their GDP per capita grows by average 6-7% (slower than 8% growth
in last 10yrs), then by 2020, average national income per capita of
$13,000 (equivalent to Spain today).
FDI increased from $2billion (1983) to $100billion (2010)
New firms are capable competitors could take global market share
from Western and Japanese enterprises presents opportunities and
threats for established international business.
Latin America
Democracy and free market reforms evident.
Were ruled by dictators who saw Western business as imperialism
domination restricted FDI.
Poorly managed economies low growth, high debt, hyperinflation all
discouraged FDI.
Changed in past 2 decades debt and inflation down, governments
sold state-owned enterprises to private investors, FDI welcomed.
Attractive market for exports and site for FDI
But some countries e.g. Venezuela, showed shifts back to greater state
involvement, and FDI less welcome than in 1990s. Here, governments
seize control of oil and gas fields from foreign investors and limit rights
of foreign energy companies to extract oil/gas from their land.
Hence, high opportunity and high risk.

Global Economy of the 21
st
Century
Large changes past 25 years decreased barriers to free flow of
goods, services, and services.
Volume of cross-border trade and FDI has grown more rapidly than
global output indicates national economies are more closely
integrated into single, interdependent global economic system.
Move to global economy strengthened by widespread adoption of
liberal economic policies by countries that had firmly opposed them.
Suggests Czech Republic, Mexico, Brazil, China etc. may build
powerful market-oriented economies in next 20 years.
o State-owned business privatized
o Widespread deregulation adopted
o Markets opened to completion
o Commitment to removing barriers to cross-border
trade/investment
Globalization is not necessarily inevitable
o Countries may pull back from recent commitment to liberal
economic ideologies.
o Signs of retreat from liberal economic ideology in Russia. If
permanent/widespread, global economy based on free market
principles may not occur as quickly.
Globalization brings risks
o Financial crisis that swept through Southeast Asia in late 1990s
showed this, then to Russia and Brazil. Threatened to plunge
economies of developed world, including US, into a recession.
o 2008-09 recent financial crisis started in financial sector of
America where banks were too liberal in lending policies to
homeowners. Moved around world, plunged global economy
into deepest recession since 1980s.
o Interconnected world severe crisis in one region impacts entire
world.

LO4. Explain the main arguments in the debate over the impact of
globalization.

Globalization Debate

Argued that falling barriers to international trade and investment will
drive the global economy to prosperity.
Supporters believe increased trade and cross-border investment will:
o Lower prices for goods and services
o Result in greater economic growth (stimulus)
o Will raise incomes of consumers
o Help create jobs in countries that participate in global trade
system

Antiglobalization Protests

Critics worry globalization will cause
o Job losses
o The cultural imperialism of global media and MNEs seen to be
dominated by the interests and values of the US.
o Downward pressure on the wage rates of unskilled workers
o Environmental degradation
Anti-globalization protestors now regularly show up at most major
meetings of global institutions, after the failure to reach agreement at a
WTO meeting in Seattle.
Protesting Globalisation in France
1999 10 men went to Millau (central France) and vandalized a
McDonalds restaurant under construction $150,000 damage.
Protest against unfair American trade policies. The EU banned imports
of hormone-treated beef form the US due to possible health problems.
WTO state EU ban wasnt allowed under trading rules. If EU didnt lift
it, they would face retaliation.
EU failed to comply US government imposed 100% tariff on imports
of some EU products e.g. foie gras, mustard, Roquefort cheese.
Anti-globalization movement in France protested loss of national
sovereignty and unfair trade policies, invasion of French culture by
alien US values (McDonalds)
France favoured location for FDI - $450 billion between 2006-2009.

Globalization, Jobs and Income

Jobs
Critics argue that falling barriers to international trade destroy
manufacturing jobs in wealthy advanced economies (US, Europe)
o Entry of China, India and Eastern European states into global
trading system, with global population growth pool of global
labour quadrupled 1985-2005, mostly after 1990.
o This expansion in labour force, with expanding international
trade, wouldve depressed wages in developed nations.
o E.g. US Harwood Industries, clothing manufacturer. Moved
operations ($9hr pay) to Honduras (48 cents/hr pay) wages of
poorer Americans fallen significantly.
o Exportation of service jobs to low-wage nations contributes to
higher unemployment and lower living standards in home
nations.
Supporters of globalisation contend that the benefits of this trend
outweigh the costs.
o Countries will specialize and produce what they can most
efficiently, and import what they cant.
o Some job loss in particular industries, but economy benefits.
E.g. importing textiles from China lower prices for
clothes in the US consumers spend more money on
other items. And increased income in China helps
Chinese to purchase more US produced products (e.g.
pharmaceuticals, Boeing jets, Intel-based computers etc.)
o Outsourcing services to low-wage countries e.g. India, can
reduce cost structure and thereby prices. As prices fall,
Americans spend more money on other goods and services.
Increase in income in the developing countries allows people to
purchase more US goods and services, helping create jobs in
the US.
Income
Over past 2 decades, share of labour in national income has declined
more pronounced in Europe and Japan than US and UK.
But skilled labour share has increased fall in labour share due to fall
in share of unskilled labour.
Earnings gap between workers in skilled and unskilled sectors has
widened 25% over past 2 decades shows unskilled labour in
developed nations has declined a lto.
Living standards havent necessarily decreased for unskilled workers in
developed nations economic growth has offset fall fall in share of
national income, raising living standards.
OECD study despite gap widening between richest and poorest,
income levels have increased for all. 1985-2008 income increased by
1.7% annually among member states.
Globalisation critics argue decline in unskilled wage rates is due to
migration of low-wage manufacturing jobs overseas decreased
demand for unskilled workers.
Supporters claim the weak growth rate in real wage rates for unskilled
workers is due to a technology-induced shift within advanced
economies. Shift from turning up jobs to ones that require
skills/education.
o Advanced economies reporting shortage of highly skilled
workers, surplus of unskilled.
o Growing income inequality due to wages for skilled workers
being pushed up by the labour market, and wages for unskilled
being discounted.
o Suggests solution to slow real income growth among unskilled is
to increase education investment and reduce unskilled workers,
not stopping globalisation or limiting free trade.

Globalization, Labour Policies, and the Environment

Critics argue that firms avoid costly efforts to adhere to labour and
environmental regulations, that would otherwise put them at a
competitive disadvantage, by moving production to countries where
these regulations dont exist or arent enforced.
Free trade increased pollution firms from advanced nations
exploiting labour of LEDCs.
o Argument used to oppose 1994 formation of NAFTA (North
American Free Trade Agreement) between Canada, Mexico and
the US.
Idea of US firms moving to Mexico to pollute, employ
child labour, ignore workplace safety and health issues,
for higher profits.
Supporters argue tougher environmental regulations and stricter labour
standards come with economic progress.
o Therefore, by creating wealth and incentives for enterprises to
produce technological innovations, free trade and market
system could make it easier to cope with pollution and
population growth.
o Pollution levels rising in LEDCs, falling in MEDCs. US carbon
monoxide concentration and sulphur dioxide pollutants
decreased 60% between 1978 and 1997, lead increased 98%.
Hump shape trend as economy grows and income rises, initially
pollution rises. Then rising incomes demand for environmental
protection, pollution levels fall. Except in case of CO2.
o Solution: agree to limit carbon emissions.
o Unsuccessful despite 1992 Earth Summit, 1992 Kyoto
agreement, and Copenhagen, 2009.
o Because largest emitters (US & China) wont change. China
doesnt wish to adopt tighter controls. In US, political divisions
impede tight legislation on climate change being made.
Supporters of free trade show ties between free trade agreements and
tougher environmental and labour laws in LEDCs.
o NAFTA only passed after signed agreements that committed
Mexico to tougher enforcement of environmental protection.

Globalization and National Sovereignty

Global economy shifts power away from national governments toward
supranational organizations (WTO, EU, UN)
Unelected bureaucrats impose policies on democratically elected
governments of nation-states, undermining sovereignty, and limiting a
nations control.
WTO arbitrates trade disputes between 153 states. Arbitration panel
can issue a ruling instructing a member state to change trade policies
that violate GATT regulations. No compliance other countries able
to impose trade sanctions.
Supports of globalization argue that the power of organizations is
limited to what nations-states collectively agree to grant. Power of
organization lies in ability to get countries to agree, and serve the
collective.
Fail to serve collective withdraw collapse. Therefore, states hold
power.

Globalization and the Worlds Poor

Critics argue that despite benefits of free trade and investment, the gap
between rich and poor has increased.
1870 average income per capita in worlds 17 richest nations was
2.4x higher than other countries
1990 same group was 4.5x the rest.
Despite some LEDCs capable of rapid periods of economic growth
(e.g. Thailand, Malaysia), there are strong forces for stagnation among
poorest.
o of countries with GDP less than $1000per capita in 1960 had
growth rate less than 0 from 1960-1995, and 1/3 less than
0.05%.
o Causes: endemic corruption, totalitarian government, economic
policies that destroyed wealth, war, population growth etc.
LEDCs Held back by debt. 40 highly indebted poorer countries
(HIPCs), where 85% of the value of the economy is debt burden, and
cost of serving government debt consumed 15% countrys export
earnings little to invest in education, health care etc. cycle of
poverty.
Globalization supporters claim the best way to improve LEDC situation
is to reduce barriers to trade and investment, and implement economic
policies based on free market economies, and to receive debt
forgiveness for debts incurred by totalitarian regimes.
Debt relief programs must be matched by investment in public projects
to boost economic growth (e.g. education) to have a lasting effect, and
by the adoption of economic policies that facilitate trade and
investment.
Rich nations help by reducing barriers to importation of products from
LEDCs, especially tariffs on agricultural products and textiles.
WTO estimates if MEDCs eradicated subsidies to agricultural produces
and removed tariff barriers to trade in agriculture, it would raise global
economic welfare by $128 billion, with $30 billion to LEDCs.

LO5. Understand how the process of globalization is creating
opportunities and challenges for business managers.

Definitions:
International
business
Any firm that engages in international trade or investment.

Managing an international business differs from managing a domestic
business because:
Countries are different culture, political systems, economic systems,
legal, economic development.
Range of problems confronted in an international business is wider and
the problems more complex than in a domestic business. E.g. where
in the world to produce activities to minimize cost and maximize value
added, if its ethical to adhere to lower labour and environmental
standards etc.
How to best coordinate and control globally dispersed production.
Decide which foreign markets to enter, and the appropriate mode for
each country.
Firms must find ways to work within the limits imposed by government
intervention in the international trade and investment system.
Governments often intervene to regulate cross-border trade and
investment must develop strategies and policies for these
interventions.
International transactions involve converting money into different
currencies. Exchange rates vary with economic conditions, so must
develop policies to deal with exchange rate movements.