IBchap01

International Business An Asian Perspective

By

Charles W.L. Hill

Chow-Hou Wee

Krishna Udayasankar

Chapter 1

Globalization

Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

INTRODUCTION

In the world economy today, we seefewer self-contained national economies with high

barriers to cross-border trade and investmenta more integrated global economic system with

lower barriers to trade and investmentover $4 trillion in foreign exchange transactions

dailyover $12 million of goods and $3.3 trillion of

services being sold across national bordersthe establishment of international institutions

You’ve probably heard the term globalization on the news, or at your job, or perhaps you’ve read about globalization in the newspaper or on a web site. But what does it really mean? We can define globalization as the shift away from self-contained national economies that are closed to cross-border trade towards a more integrated and interdependent world economy where millions of dollars of goods and services are traded daily.

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What Is Globalization?The world is moving away from self-

contained national economies toward an interdependent, integrated global economic system

Globalization refers to the shift toward a more integrated and interdependent world economy

Two key facets of globalization are: the globalization of markets the globalization of production

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 the U.S., 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.

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What Is The Globalization of Markets?

Globalization of markets - the merging of historically distinct and separate national markets into one huge global marketplace

It no longer makes sense to talk about the “German market” or the “American market”

Instead, there is the “global market” falling trade barriers make it easier to sell globally In many markets today, the tastes and preferences of

consumers in different nations are converging upon some global norm

firms promote the trend by offering the same basic products worldwide

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.

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The Globalization of Markets

Coca Cola, Starbucks, Sony PlayStation, and McDonald’s hamburgers, IKEA furniture

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. And, as the companies benefit from these global opportunities, they also promote even greater globalization.

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.

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What Is The Globalization of Production?

Globalization of production - 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 (labor, land, and capital)

Goal: Companies can..lower their overall cost structure improve the quality or functionality of their

product and gain competitive advantageBoeing and Vizio

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.

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What Is Driving Globalization?

1. Declining trade and investment barriers 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 and are now at 4 percent

countries have opened their markets to FDI

2. Technological change microprocessors and telecommunications the Internet and World Wide Web transportation technology

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.

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, since1950, 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.

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Declining Trade And Investment Barriers

Average Tariff Rates on Manufactured Products as Percent of Value

Declining Trade and Investment Barriers

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

During the 1920s and 1930s, many nations erected barriers to international trade and FDI to protect domestic industries from foreign competition

It wasn’t always so easy to trade with other countries. During the 1920s and 1930s, many countries erected barriers to the free flow of goods across borders, and also limited the ability of firms to invest. When a firm invests resources in business activities outside its home country, we say foreign direct investment or FDI has taken place.


After WWII, advanced Western countries began removing trade and investment barriers

Under GATT (the forerunner of the WTO), over 100 nations negotiated further decreases in tariffs and made significant progress on a number of non-tariff issues

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

At the end of World War II, nations, learning from mistakes made in the 1920s and 1930s, worked toward removing barriers that prevented the free flow of goods, services, and capital between countries. The process was formalized using the General Agreement on Tariffs and Trade, or GATT.

The GATT was replaced by the WTO which, like the GATT, provides a forum for dispute resolution and the enforcement of trade laws, and has set new goals for further reducing trade barriers on industrial goods, services, and agricultural products.

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Lower barriers to trade and investment mean firms canview the world, rather than a single country, as

their marketbase production in the optimal location for that

activityThis has led to an acceleration in the volume of

world trade and investment since the early 1980s

The Role of Technological Change

Since World War II, there have been major advances in communication, information processing, and transportation The microprocessor - lowered the cost of global

communication and the cost of coordinating and controlling a global organization

U.S. web-based transactions - $133 billion in 2008 1.6 billion Internet users in 2009 Commercial jet aircraft and super freighters and the

introduction of containerization - simplify trans-shipment from one mode of transport to another

The role of technological change has also been critical to 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 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.

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—a quarter of the world’s population!

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.

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Question: What are the implications of technological change for the globalization of production?

Answer: Lower transportation costs make a geographically

dispersed production system more economical and allow firms to better respond to international customer demands

Lower information processing and communication costs - firms can create and manage globally dispersed production systems

What does all of this mean? These technological innovations have facilitated the globalization of production. 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.

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Question: What are the implications of technological change for the globalization of markets?

Answer:Low cost communications networks help create

electronic global marketplacesLow cost transportation enable firms to create global

markets, and facilitate the movement of people from country to country promoting a convergence of consumer tastes and preferences

The globalization of markets has also been facilitated by these technological innovations which have helped create global, electronic marketplaces. Ecuador for example, has become a global supplier of roses thanks to falling transportation costs that make it possible to ship flowers while they’re still fresh. 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.

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What Is A Multinational Enterprise?

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

Since the 1960s: there has been a rise in non-U.S. multinationalsthere has been a rise in mini-multinationals

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.

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The Changing Multinational Enterprise

Globalization has resulted in a decline in the dominance of U.S. firms in the global marketplace In 1973, 48.5 % of the world’s 260 largest MNEs were U.S.

firms By 2008, just 19 of the world’s 100 largest non-financial

MNEs were from the U.S., 13 were from France, 13 from Germany, 14 were from Britain, and 10 were from Japan

Small and medium-size firms are now expanding internationally easier to build international sales via the Internet

In the 1960s, global business activity was dominated by large, U.S. multinational firms. Today, however, things have shifted significantly. 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.

We have also seen an increase in the number of small and medium-sized multinationals, or 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. Lenovo even 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.

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The Global Economy in the 21st Century

The world is moving toward a more integrated global economic systemnew opportunities for firms but, political and economic disruptions can throw plans into

disarray

Globalization is not inevitable there are signs of a retreat from liberal economic ideology in

Russia

Globalization brings risks the financial crisis that swept through South East Asia in the late

1990s the recent financial crisis that started in the U.S. in 2008, and

moved around the world

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.

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The Globalization Debate

Question: Is the shift toward a more integrated and interdependent global economy a good thing?

Answer:Supporters believe that increased trade and cross-

border investment mean lower prices for goods and servicesgreater economic growthhigher consumer income, and more jobs

Others feel that globalization is not beneficial

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.

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Antiglobalization Protests Question: What are the concerns of critics of globalization?

Answer: Critics worry that globalization will cause

job losses environmental degradation the cultural imperialism of global media and MNEs

Anti-globalization protesters now regularly show up at most major meetings of global institutions

Protesters fear that globalization is forever changing the world in a negative way

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How Does Globalization Affect Jobs And Income?

Critics argue that falling barriers to trade are destroying manufacturing jobs in advanced countries Critics claim jobs in advanced economies are being lost

to low-wage nationsSupporters claim while some jobs may be lost,

the economy as a whole is better off 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, and that in doing so, all countries will gain

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 the U.S. where workers might earn $9 per hour to countries like Honduras where wages are less than 50 cents per hour.

Critics believe that this leads to falling wages and living standards in the U.S.

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.

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How Does Globalization Affect Labor Policies And The Environment?

Critics argue that firms avoid costly efforts to adhere to labor and environmental regulations by moving production to countries where such regulations do not exist, or are not enforced

Supporters claim that tougher environmental and labor standards are associated with economic progress

as countries get richer as a result of globalization, they raise their environmental and labor regulations

free trade does not lead to more pollution and labor exploitation, it leads to less

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.

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How Does Globalization Affect National Sovereignty?

Critics worry economic power is shifting away from national governments and toward supranational organizations such as the WTO, the European Union (EU), and the UN

Critics argue that unelected bureaucrats have the power to impose policies on the democratically elected governments of nation-states

Supporters claim that the power of these organizations is limited to what nation-states agree to grant the organizations must be able to persuade members states

to follow certain actions without the support of members, the organizations have no

power

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.

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How Is Globalization Affecting The World’s Poor?

Is the gap between rich nations and poor nations is getting wider?

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

Supporters claim that the best way for the poor nations to improve their situation is to reduce barriers to trade and investment implement economic policies based on free market

economies receive debt forgiveness for debts incurred under

totalitarian regimes

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.

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