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 chapter
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Globalization

McGraw-Hill/Irwin
Global Business Today, 5e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved.
 Chapter 1: Globalization

INTRODUCTION

Globalization: the trend towards a more integrated global

economic system.

U.S. Census Bureau contains monthly statistics on trade between the U.S. and its
trading parnters.
{http://www.census.gov/foreign-trade/top}

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 Chapter 1: Globalization

Effects of globalization can be seen everywhere:

• the cars people drive

• the food people eat
• the jobs where people work
• the clothes people wear

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 Chapter 1: Globalization

WHAT IS GLOBALIZATION?

Globalization refers to the shift towards a more integrated and

interdependent world economy.

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 Chapter 1: Globalization

Classroom Performance System

The trend away from distinct national economic units and toward
one huge global market is known as

e) Internationalization
f) Economic integration
g) Globalization
h) Privatization

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The Globalization of Markets

Globalization of markets: the fact that in many industries

historically distinct and separate national markets are merging
into one huge global marketplace in which the tastes and
preferences of consumers in different nations are beginning to
converge upon some global norm.

Examples:
Sony Playstation Citicorp credit cards
Coca-Cola McDonald's hamburgers

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The Globalization of Production

Globalization of production: the tendency among many firms to

source goods and services from different locations around the
globe in an attempt to take advantage of national differences in
the cost and quality of factors of production (such as land,
labor, capital, and energy), thereby allowing them to compete
more effectively against their rivals.

Examples:
Boeing Lenovo
Many clothing brands you know

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 Chapter 1: Globalization

THE EMERGENCE OF GLOBAL INSTITUTIONS

Global institutions:

• help manage, regulate, and police the global market place

• promote the establishment of multinational treaties to govern

the global business system

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 Chapter 1: Globalization

Examples of Global Institutions:

• World Trade Organization (WTO): responsible for policing
the world trading system and ensuring that nations adhere to the
rules established in WTO treaties
• International Monetary Fund (IMF): maintains order in the
international monetary system
• World Bank: promotes economic development
• United Nations (UN): maintains international peace and
security, develops friendly relations among nations, cooperates in
solving international problems and promotes respect for human
rights, and is a center for harmonizing the actions of nations

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 Chapter 1: Globalization

Classroom Performance System

Which of the following is not an example of a global institution?

e) The Federal Reserve

f) The International Monetary Fund
g) The World Bank
h) The World Trade Organization

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 Chapter 1: Globalization

DRIVERS OF GLOBALIZATION

Two macro factors underlie the trend toward greater

globalization:

• Declining trade and investment barriers

• The role of technological change

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 Chapter 1: Globalization

Classroom Performance System

Coca-Cola, Sony Playstations, and McDonald’s hamburgers are

all examples of

e) American products
f) Global products
g) Industrial products
h) National products

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 Chapter 1: Globalization

Declining Trade and Investment Barriers

• After WWII, the industrialized countries of the West began the

process of removing barriers to the free flow of goods, services,
and capital between nations

• Under GATT, over 100 nations negotiated further decreases in

tariffs and made significant progress on a number of non-tariff
issues

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 Chapter 1: Globalization

• Under the WTO, a mechanism now exists for dispute resolution

and the enforcement of trade laws, and there is a push to cut
tariffs on industrial goods, services, and agricultural products

• Removal of barriers to trade has contributed to increased

international trade (the export of goods or services to
consumers in another country), world output, and foreign
direct investment (the investing of resources and business
activities outside a firm’s home country)

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 Chapter 1: Globalization

The volume of world trade and investment has accelerated since

the early 1980s.

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 Chapter 1: Globalization

Classroom Performance System

Which organization provides a mechanism for dispute resolution

and the enforcement of trade laws?

e) The UN
f) The IMF
g) The WTO
h) The World Bank

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 Chapter 1: Globalization

The Role of Technological Change

The lowering of trade barriers made globalization of markets and

production a theoretical possibility, technological change made it
a tangible reality.

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 Chapter 1: Globalization

• Microprocessors and Telecommunications: Major advances in

communications and information processing have lowered the cost of global
communication and therefore the cost of coordinating and controlling a global
organization

• The Internet and the World Wide Web: Web-based transactions have grown
from virtually zero in 1994 to nearly $7 trillion in 2004

• Transportation Technology: the most important developments are probably

development of commercial jet aircraft and super freighters and the
introduction of containerization, which greatly simplifies trans-shipment from
one mode of transport to another

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 Chapter 1: Globalization

Implications for the Globalization of Production

• Improvements in transportation technology have enabled firms

to better respond to international customer demands

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Implications for the Globalization of Markets

• Managers today operate in an environment that offers more

opportunities, but is also more complex and competitive than that
of a generation ago

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 Chapter 1: Globalization

THE CHANGING DEMOGRAPHICS OF THE GLOBAL

ECONOMY

In the 1960s:

• the U.S. dominated the world economy and the world trade
picture
• U.S. multinationals dominated the international business scene
• about half the world-- the centrally planned economies of the
communist world-- was off limits to Western international
business

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 Chapter 1: Globalization

The Changing World Output and the Changing World Trade Picture

• In the early 1960s, the U.S. was the world's dominant industrial power
accounting for about 40.3 percent of world manufacturing output
• By 2005 the United States accounted for only 20.1 percent
• Rapid economic growth is now being experienced by countries such as
China, Thailand, and Indonesia
• Further relative decline in the U.S. share of world output and world exports
seems likely
• Forecasts predict a rapid rise in the share of world output accounted for by
developing nations such as China, India, Indonesia, Thailand, and South
Korea, and a decline in the share by industrialized countries such as Britain,
Japan, and the United States

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 Chapter 1: Globalization

The changing picture of world output and trade can be seen in

Table 1.2.

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 Chapter 1: Globalization

The Changing Foreign Direct Investment Picture

• The share of world output generated by developing countries
has been steadily increasing since the 1960s
• The stock (total cumulative value of foreign investments)
generated by rich industrial countries has been on a steady
decline
• There has been a sustained growth in cross-border flows of
foreign direct investment
• The flow of foreign direct investment (amounts invested across
national borders each year) has been directed at developing
nations especially China

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The stock of FDI by the world’s six most important national

sources is shown in Figure 1.2.

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The sustained growth in cross-border flows of FDI and the

emergence of developing nations as important destinations for
FDI can be seen in Figure 1.3.

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 Chapter 1: Globalization

Classroom Performance System

Which of the following statements is true?

e) The U.S. has been accounting for an increasing share of

world trade in recent years
f) The U.S. has been accounting for an increasing share of
world foreign direct investment in recent years
g) The U.S. has been accounting for an increasing share of
world output in recent years
h) The share of world trade accounted for by China has been
increasing in recent years

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 Chapter 1: Globalization

The Changing Nature of Multinational Enterprises

A multinational enterprise is any business that has productive

activities in two or more countries.

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Non-U.S. Multinationals

• Expect the growth of new multinational enterprises (any

business that has productive activities in two or more countries)
from the world's developing nations

The Rise of Mini-Multinationals

• The number of mini-multinationals (small and medium-sized

companies) is on the rise

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 Chapter 1: Globalization

The Changing World Order

• The collapse of communism in Eastern Europe represents a host

of export and investment opportunities for Western businesses
• The economic development of China presents huge
opportunities and risks, in spite of its continued Communist
control
• Mexico and Latin America also present tremendous new
opportunities both as markets and sources of materials and
production

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 Chapter 1: Globalization

The Global Economy of the 21st Century

• Firms must be aware that while the more integrated global

economy presents new opportunities, it also could result in
political and economic disruptions that may throw plans into
disarray

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 Chapter 1: Globalization

THE GLOBALIZATION DEBATE

Is the shift toward a more integrated and interdependent global

economy a good thing?

Anti-globalization Protests

• Anti-globalization protesters now turn up at almost every major

meeting of a global institution
• Protesters fear that globalization is forever changing the world
in a negative way

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 Chapter 1: Globalization

Globalization, Jobs, and Incomes

• Critics of globalization worry that jobs are being lost to low-

wage nations

• Supporters of globalization argue that free trade will result in

countries specializing in the production of those goods and
services that they can produce most efficiently, while importing
goods and services that they cannot produce as efficiently

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 Chapter 1: Globalization

Globalization, Labor Policies, and the Environment

• Critics of globalization argue that that free trade encourages

firms from advanced nations to move manufacturing facilities
offshore to less developed countries with lax environmental and
labor regulations

• Supporters of free trade point out that tougher environmental

regulation and stricter labor standards go hand in hand with
economic progress and that foreign investment often helps a
country to raise its standards

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 Chapter 1: Globalization

Globalization and National Sovereignty

• Critics of globalization worry that economic power is shifting

away from national governments and toward supranational
organizations such as the World Trade Organization (WTO), the
European Union (EU), and the United Nations

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 Chapter 1: Globalization

Globalization and the World’s Poor

• Critics of globalization argue that the gap between rich and poor
has gotten wider and that the benefits of globalization have not
been shared equally

• Supporters of free trade suggest that the actions of governments

have made limited economic improvement in many countries

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 Chapter 1: Globalization

MANAGING IN THE GLOBAL MARKETPLACE

Managing an international business (any firm that engages in

international trade or investment) is different from managing a
domestic business because:

• countries differ
• managers face a greater and more complex range of problems
• international companies must work within the limits imposed by
governmental intervention and the global trading system
• international transactions require converting funds and being
susceptible to exchange rate changes

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 Chapter 1: Globalization

CRITICAL DISCUSSION QUESTIONS

1. Describe the shifts in the world economy over the last 30

years. What are the implications of these shifts for international
businesses based in Great Britain? North America? Hong Kong?

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CRITICAL DISCUSSION QUESTIONS

2. "The study of international business is fine if you are going to

work in a large multinational enterprise, but it has no relevance
for individuals who are going to work in smaller firms."
Evaluate this statement.

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CRITICAL DISCUSSION QUESTIONS

3. How have changes in technology contributed to the

globalization of markets and of production? Would the
globalization of production and markets have been possible
without these technological changes?

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CRITICAL DISCUSSION QUESTIONS

4. "Ultimately, the study of international business is no different

from the study of domestic business. Thus, there is no point in
having a separate course on international business." Evaluate
this statement.

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CRITICAL DISCUSSION QUESTIONS

5. How might the Internet and the associated World Wide Web
impact international business activity and the globalization of the
world economy?

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 Chapter 1: Globalization

CRITICAL DISCUSSION QUESTIONS

6. If current trends continue, China may emerge as the world's

largest economy by 2020. Discuss the possible implications of
such a development for:
• The world trading system.
• The world monetary system.
• The business strategy of today's European and U.S. based
global corporations.
• Global commodity prices.

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CRITICAL DISCUSSION QUESTIONS

7. Read the Country Focus in this chapter on the Ecuadorian rose industry, the answer
the following questions:
a) How has participation in the international rose trade helped Ecuador’s economy and
its people? How has the rise of Ecuador as a center for rose growing benefited
consumers in developed nations who purchase the roses? What do the answers to these
questions tell you about the benefits of international trade?
b) Why do you think that Ecuador’s rose industry only began to take of 20 years ago?
Why do you think it has grown so rapidly?
c) To what extent can the alleged health problems among workers in Ecuador’s rose
industry be laid at the feet of consumers in the developed world and their desire for
perfect Valentine’s Day roses?
d) Do you think governments in the developed world should place trade sanctions on
Ecuador roses if reports of health issues among Ecuadorian rose workers are verified?
What else might they do to improve the situation in Ecuador?

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