Chapter 1: Globalization

Slide 3

You’ve probably heard the term “globalization” before, but what does it mean? Globalization can be defined as the shift towards a more integrated
and interdependent world economy. In other words, the world is moving away from self-contained national economies, toward an interdependent,
integrated global system.

What does this mean? Well, think for a moment about your day so far. Perhaps you work up this morning in a bed made by Sweden’s Ikea, got
dressed in a shirt made in Guatemala and American Levi’s jeans that were produced in China. After putting on your Brazilian made shoes, and
drinking an Italian-style latte, you drove to work in your Japanese Nissan that was manufactured in Tennessee. On the way to your job for a company
that is headquartered in France, but has operations in Singapore, you might have talked to your friend on your Nokia cell phone that was designed in
Finland, about getting together later for Spanish style tapas and Corona beer from Mexico.

As you can see, your day has already been filled with the effects of globalization.

You can think of globalization in terms of the globalization of markets and the globalization of production.

Slide 4

The globalization of markets refers to the merging of historically distinct and separate national markets into one huge global marketplace.

As trade barriers between countries fall, companies like Ikea, Sony, and Coca-Cola are able to sell their product to a global market where consumers
are more and more alike. In fact, in many industries, it’s no longer meaningful to talk about the “German market” or the “American market”.
Instead, there’s just one global market.

Keep in mind though, that the globalization of markets doesn’t mean that consumers are the same everywhere, and differences between markets no
longer exist. National markets are still very relevant, challenging companies to develop different marketing strategies and operating procedures. For
example, as you’ll see in the closing case, General Electric recognizes the importance of responding to local market differences and so has been
working to develop a more international organization that is managed by individuals from around the world who understand local customers. We’ll
talk more about these market differences in later chapters.

What’s making it easier to sell internationally? Falling trade barriers for one thing, and, as we already mentioned, the convergence of consumer
tastes and preferences.

Keep in mind that as companies benefit from these global opportunities, they also promote even greater globalization by offering the same basic
products worldwide.

Slide 5

The second facet of globalization—the globalization of production, refers to the sourcing of goods and services from locations around the globe to
take advantage of national differences in the cost and quality of factors of production like land, labor, and capital.

Companies hope that by sourcing and producing their products in the optimal location, wherever in the world that might be, they will be able to better
compete against their rivals.

Boeing, for example, outsources about 65 percent of its 787 aircraft to foreign companies. About 35 percent of the jet will be made by three Japanese
companies! Boeing believes that this strategy allows it to use the best suppliers in the world, an advantage that will help it win market share over its
rival Airbus Industries.

Even healthcare can be outsourced today! Hospitals now routinely send X-rays via the Internet to be read in India and some insurance companies
even recommend having certain procedures conducted in foreign countries. You can learn more about this phenomenon in the Opening Case on The
Globalization of American Healthcare in your text.

Slide 6

Several global institutions have emerged to manage, regulate, and police the global marketplace, and to promote the establishment of multinational
treaties to govern the global business system.

We’ll talk in more detail about these institutions in later chapters, but for now, let’s take a quick look at some of them.

The key institutions affecting international business are the General Agreement on Tariffs and Trade, or GATT, the World Trade Organization, or
WTO, the International Monetary Fund, or IMF, the World Bank, and the United Nations, or UN.

Let’s take a brief look at each one beginning with the World Trade Organization and its predecessor, the General Agreement on Tariffs and Trade.

Slide 7

The World Trade Organization is responsible for policing the world trading system, and making sure that members adhere to trade treaties.
The 153 nations that account for about 97 percent of the world’s trade are all WTO members, so the organization is very influential in working
toward an open business system where goods can cross national borders without barriers to trade and investment.

The International Monetary Fund, or IMF, and the World Bank were created in 1944.

The goal of the International Monetary Fund is to maintain order in the international monetary system, and as we’ll see in later chapters, the
International Monetary Fund is a significant player in the global economy.

The World Bank promotes economic development by making loans to cash-strapped nations wishing to make significant infrastructure improvements
like building dams or roads.

The United Nations, or UN, was established in 1945.

The United Nations has three goals: to preserve peace through international cooperation, to cooperate in solving problems and in promoting respect
for human rights, and to be a center for harmonizing the actions of nations.

Nearly every country in the world belongs to the UN, and accepts its basic principles of international relations.

Slide 8

What’s driving globalization?

Two macro factors are important: first, the decline in trade and investment barriers since World War II, and second, technological change, specifically
dramatic improvements in communication, information processing, and transportation technologies. Let’s talk about each of these.

First, though, let’s go over a couple of definitions.

International trade occurs when a firm exports goods or services to consumers in another country.

Foreign direct investment (FDI) occurs when a firm invests resources in business activities outside its home country.

At the end of World War II, many advanced nations committed to removing barriers that prevented the free flow of goods, services, and capital
between countries.

They formalized the process through the General Agreement on Tariffs and Trade, or GATT.

Have they been successful? Yes, since 1950, average tariffs have fallen significantly and are now at just four percent.

Foreign direct investment, or FDI, is also rising as countries open their market to firms.

Slide 9

Here you can see how average tariff rates on manufactured products have dropped significantly over time.

Slide 10

What does globalization mean for firms?

Well, low barriers to trade and investment mean that firms can see the world as their market, rather than a single country. Low trade and investment
barriers also mean that firms can locate production facilities in the optimal location, wherever in the world that might be. Production and sales now
take place in multiple markets creating interdependency between countries for goods and services.

We can also look at the role of technological change in the globalization of markets.

Major advances in communication, information processing, and transportation technology have made what had been possibilities into tangible
realities!

The cost of global communication has fallen for example, because advances in telecommunications and information processing help firms coordinate
and control global organizations at a fraction of what it might have cost even a decade ago. The microprocessor that facilitates high-power, low-cost
computing is perhaps the most important of these developments. Dell for example, takes advantage of these innovations to control its globally
dispersed production system. When a customer submits an order via the company’s web site, it’s immediately transmitted to the suppliers of the
various components, wherever they are located in the world. Suppliers have real time access to Dell’s order flows, and can then adjust their
production accordingly. Dell uses inexpensive airfreight to transport its products to meet demand as needed. The company maintains a customer
service operation in India where English speaking personnel handle calls from the U.S.

Indeed, the Internet has made it possible for even small companies to play a role in the global economy. Yet, less than twenty years ago, this
technology didn’t even exist. Growth in Internet usage has gone from fewer than 1 million users in 1990 to more than 1.6 billion users in 2009!

Improvements in transportation such as containerization and the development of super freighters have also facilitated the growth of globalization.
The time it takes people and products to get from one place to another has shrunk, as has the cost. Ecuador has been able to capitalize on falling
transportation costs to become a global supplier of roses.
Similarly, television networks like MTV and CNN are received in many countries and are contributing to the development of a sort of global culture
that transcends national borders.

Slide 11

Let’s move on to look at how the demographics of the global economy have changed over the last 30 years.

There are four trends that are particularly important: the changing world output and world trade picture, the changing foreign direct investment
picture, the changing nature of the multinational enterprise, and the changing world order.

Let’s look at each one.

Slide 12

The first trend is the change in world output and world trade.

In the 1960s, the U.S. dominated the world economy and world trade picture. U.S. multinational companies were powerful, and because of the Cold
War, a significant portion of the world was off limits to the Western companies.

Today, this picture has changed. In 2008, the U.S. accounted for only about 20 percent of world economic activity. Other developed countries saw
their share of global economic activity decline over time as well.

Developing nations saw just the opposite trend—their share of world output is rising, and by 2020, it’s expected that they’ll account for more than 60
percent of world economic activity.

So, countries like China, Thailand, and Indonesia have emerged as global economic players.

Most experts expect that similar trends will continue. Countries like the U.S., the U.K., Germany, and Japan that were among the first to
industrialize, will continue to see their standings in world exports and world output slip, while developing nations like China, India, South Korea, and
Thailand see their economies and role in global trade and investment increase.

Slide 13

As you can see, the U.S., despite its decline, is still the world’s largest exporter. However, China has emerged to challenge the U.S. for this position.

Slide 14

A similar trend is taking place with regard to foreign direct investment. In the 1960s, the U.S. accounted for over 66 percent of worldwide foreign
direct investment flows.

Britain was a distant second with just 10 percent of worldwide investment flows.

Today, investments by developing nations are on the rise, while the stock, or total cumulative value, of foreign investments by rich industrial
countries is falling.

As you might expect from our earlier discussion, developing nations like China have also become important destinations for foreign direct
investment flows. My Dollarstore for example, has been able to take advantage of the emerging middle class in India. The company opened its first
store in Mumbai in 2004, and hasn’t looked back since. The company is modeled after its American stores and sells a variety of American products
including Pop Tarts and Doritos for 99 rupees. Now, its bigger rivals like Wal-Mart and France’s Carrefour are eying the market!

Slide 15

Figure 1.2 shows that the stock of foreign direct investment by the world’s six most important sources has changed significantly from 1980 to 2007.
In particular, notice the decline by the U.S., and the increase by France, and the world’s developing countries.

Slide 16

In Figure 1.3, you can see the growth in cross-border flows of foreign direct investment and also the importance of developing nations as destinations
for investment. These two trends reflect the internationalization of companies that we have discussed.

Slide 17

The global economy has also shifted in terms of the type of companies that are involved.

A multinational enterprise as any business that has productive activities in two or more countries.

Since the 1960s, two important trends have emerged. First, we’ve seen an increase in the number of non-U.S. multinationals.

Multinational firms from France, Germany, Britain, and Japan have become more important, and there has been a notable decline in the role of U.S.
firms. Firms from developing countries such as China and South Korea have also emerged as important players. So, in addition to thinking of
American companies like Ford and Microsoft, we now think of South Korea’s Samsung and Hong Kong’s Hutchison Whampoa.
The second trend is the growth in the number of mini-multinationals. China’s Lenovo for example, acquired IBM’s PC division in 2004, in an effort
to become a global player in the PC industry, and moved its headquarters to the U.S. as part of its strategy.

Traditionally, global markets have been the venue for large firms, but today, thanks to advances in technology like the Internet, international sales can
account for a significant share of revenues for small companies, too.

Slide 18

The final change in demographics is the change in world order.

The collapse of communism has brought about new opportunities in Eastern Europe, and China’s economic development and enormous population
presents huge opportunities for companies.

Mexico and Latin America have also emerged both as new markets, and as source and production locations.

Keep in mind though, that while the growth of these markets creates new opportunities for firms, the growth is also a threat. China, for example, is
now home to a number of companies like Hisense that could become significant players in their global industries. To learn more about Hisense, see
the Management Focus: China’s Hisense – An Emerging Multinational in your text.

Slide 19

What will the global economy look like in the twenty-first century?

Well, as we’ve discussed, the world is moving toward a more global economic system.

Keep in mind though, that this interdependency creates new types of risk like the financial crisis that swept through South East Asia in the late 1990s,
and the more recent financial crisis that began in the United States in 2008, and then affected economies across the globe.

Slide 20

We’ve been talking so far, about the benefits of globalization, but some people worry that the shift toward a more integrated and interdependent
global economy isn’t necessarily a good thing.

Critics worry for example, that globalization will cause job losses, damage the environment, and create cultural imperialism.

Supporters however, argue that globalization means lower prices, more economic growth, and more jobs.

Anti-globalization protesters who fear that globalization is forever changing the world in a negative way now turn up at almost every major meeting
of global institutions like the WTO and IMF.

In some cases, for example in Seattle in 1999, and France in 1999, the protests have been violent.

You can learn more about what occurred in France in the Country Focus in your text. Let’s talk about some of the protesters’ concerns.

Slide 21

How do critics and supporters view globalization and jobs and income?

Critics of globalization worry that jobs are being lost to low-wage nations.

They argue that falling trade barriers are allowing companies to move manufacturing jobs to countries where wage rates are low.

For example, clothing manufacturing has increasingly shifted away from developed nations, such as the U.S., where workers might earn $9 per hour
to countries like Honduras where wages are less than 50 cents per hour.

Critics, particularly those in the U.S. believe that this leads to falling wages and living standards in these countries.

Supporters however, claim that free trade will prompt countries to specialize in what they can produce most efficiently, and to import everything else.

They argue that the whole economy will be better off as a result. In other words, if you can buy an imported shirt that was made for pennies in
Honduras, you’ll have more money to spend on products the U.S. can produce efficiently like computers and software.

Slide 22

How do globalization’s supporters and critics view globalization and labor policies and the environment?

Protesters fear that free trade encourages firms from advanced nations, where there are costly environmental standards, to move manufacturing
facilities offshore to less developed countries with lax environmental and labor regulations.

However, advocates of globalization claim that environmental regulation and stricter labor standards go hand in hand with economic progress, so
foreign direct investment actually encourages countries to raise their standards.

Studies support this claim with the exception of carbon dioxide emissions which appear to rise along with income levels.
Advocates of globalization argue that by tying free trade agreements to the implementation of tougher environmental and labor laws, economic
growth and globalization can occur together with a decrease in environmental pollution.

Slide 23

A third concern raised by critics of globalization is the worry that economic power is shifting away from national governments and towards
supranational organizations like the WTO and the European Union, or EU.

However, globalization’s supporters argue that the power of these organizations is limited to what they are granted by their members. They also point
out that the organizations are designed to promote the collective interests of members, and they won’t gain support for policies that don’t achieve this
goal.

Slide 24

Finally, critics of globalization worry that the gap between rich and poor is growing and that the benefits of globalization haven’t been shared equally.

While supporters of globalization concede the gap between rich and poor has gotten wider, they also contend that it has more to do with the policies
countries have followed than with globalization.

For example, many countries have chosen to pursue totalitarian regimes, or have failed to contain population growth, and many countries have huge
debt loads that are stagnating economic growth.

Slide 25

What does all of this mean for companies?

Well, it means that managing an international business, or any firm that engages in international trade or investment, will be different from managing
a domestic business for several key reasons.

First, countries differ.

Second, the range of problems faced by mangers is greater and more complex.

Third, government intervention in markets creates limitations for companies, as does the global trading system.

Finally, firms must deal with exchange rate changes when they conduct international transactions that require converting funds to other currencies.

Slide 26

Now, let’s see how well you understand the material in this chapter. I’ll ask you a few questions. See if you can get them right. Ready?

The shift toward a more integrated and interdependent world economy is referred to as

a) economic integration

b) economic interdependency

c) globalization

d) internationalization

The correct answer is c.

Slide 27

The merging of historically distinct and separate national markets into one huge global marketplace is known as

a) global market facilitation

b) cross-border trade

c) supranational market integration

d) the globalization of markets

The correct answer is d.

Slide 28

Firms that are involved in international business tend to be

a) large
b) small

c) medium-sized

d) large, small, and medium-sized

The correct answer is d.

Slide 29

Which is not a factor of production?

a) trade

b) land

c) capital

d) energy

The correct answer is a.

Slide 30

The sourcing of good and services from around the world to take advantage of national differences in the cost and quality of factors of production is
called

a) economies of scale

b) the globalization of production

c) global integration

d) global sourcing

The correct answer is b.

Slide 31

Which organization is responsible for policing the world trading system?

a) the International Monetary Fund

b) the United Nations

c) the World Trade Organization

d) the World Bank

The correct answer is c.

Slide 32

What is the single most important innovation to the globalization of markets and production?

a) advances in transportation technology

b) the development of the microprocessor

c) advances in communication

d) the Internet

The correct answer is b.

Slide 33

Which of the following trends is true?

a) the United States is accounting for a greater percentage of world trade than ever before

b) the United States is accounting for a greater percentage of foreign direct investment than ever before

c) the share of world trade accounted for by developing countries is rising

d) the share of foreign direct investment by developing countries is declining

The correct answer is c.

Slide 34

Which of these is not a concern of anti-globalization protesters?

a) globalization raises consumer income

b) globalization contributes to environmental degradation

c) globalization is causing a loss of manufacturing jobs in developing countries

d) globalization implies a loss of national sovereignty

The correct answer is a.