The Global Economy

Global EconomyCommon to buy clothing anywhere in US which has a tag labeled, Made in Malaysia, China or Sri Lanka Simple observation reminds us that our consumption of goods has a strong international characterIncreasingly true to speak not only of national economies but a larger, highly inter-connected and interdependent- GLOBAL ECONOMYBefore discussing basic mechanisms of industrialization and economic change within Third World, important to look at the broader global industrial environment within which these nations are forced to compete

Setting the Stage: Origins of the Global EconomySince 1970s world economy hit by turbulent forcesUnemployment in western countriesTraditional industries (iron and steel) have declinedLDCs bearing huge financial debts which threaten drive for developmentTrading tensions have emerged between industrial countries and the newly industrializing countries

Causes of These Conditions?

Some argue that continuing OPEC escalation of oil prices through limited production is root causeHad some effect but too simple an answerMore profound changes in world economic structure were underway before thisIncreasingly growing consensus that world economy has become more volatile, complex and tightly connectedCountries affected by what is happening abroad and at larger geographical scale

Internationalization of Trade and LaborAs with Japanese autos, American computers and Taiwanese calculators there is an emergence of a new international division of laborBasically a change in geographical pattern of specialization at the global scale-constantly changing and very dynamicExample: movement of textile and shoe production from Indonesia to China

International Division of LaborDivision of labor has taken on spatial dimensions- some areas come to specialize in certain types of economic activityAt broad scale : industrialized countries --- manufactured goods while non-industrialized countries --- raw materials However this simple pattern no longer existsNow much more complex structure involving fragmentation of many processes and their geographical relocation on a global scale

Forces Surrounding Global System of ProductionThese five factors are affecting production patterns:1. Trans-national or multi-national corporations (MNCs)-firms that operate in many nationsIncreasingly these firms have local production points and suppliers that operate across national boundaries providing and securing labor, capital and other resources from a variety of places and which have become very powerful and important influences in the global economy

Sequential Model of TNC DevelopmentStage I- Serve domestic market onlyStage II- Export to overseas markets through independent channels (sales agents)Stage III- Establish sales outlets in overseas markets by acquiring local firm and/or setting up new facilityStage IV- Establish production facility overseas by acquiring local firm and/or setting up new facility

Geographical Growth of a Multinational CorporationCenterNationOther NationTariffBasic EnterprisePenetration of a National MarketPenetration of Foreign MarketsMultinational Corporation1234FactoryDistribution centerRepresentative

Forces Surrounding Global System of Production2. National governments- through their industrial, trade and foreign policies especially liberalization policiesLiberalization refers to the way in which policies facilitate transactions (trade and sales) of a variety of products and servicesDeregulation refers to the easing of taxation, entry and pricing of products or services dictated by government policy Privatization refers to the ownership of former public sector operations and firms by private corporations and enterprises

Forces Surrounding Global System of Production3. Enabling Technologies- transport, communications, production and organizational improvementsExplosion of enhanced transport and communication services such as air cargo, integrators offering definite time delivery (FedEx and UPS), electronic mail and electronic data interchange (EDI)Advanced inventory management such (just-in-time (JIT)) and new systems of distribution such as third party logistics (3PL)

Moving storageunitsDelivery units forpartsDelivery units forfinished goodsWarehouseOld warehouse beforeJust-in-TimeFACTORYAssembly and warehousingplaceProduction UnitJust-in-Time and its LogisticMoving storageunitsAssembly Line

% of Products Shipped for Just-in-Time Manufacturing

Forces Surrounding Global System of Production4. Shifts in Market Conditions and DemandEconomic cycles affect markets and production, e.g. the Asian financial crisisDramatic shifts in demand affect over time influence type of good being produced and production schedulesApplication of new technology can mean product obsolescence These changes can be described in part through product life cycle

Product Life CycleEssence of PLC is that growth in sales of product follows systematic path, from initial introduction to market through development, growth, maturity, decline and obsolescence

Product Life CycleSalesStage 1Stage 2Stage 3MonopolyCompetitionResearch anddevelopmentMaturityDeclineFirst competitorsMass productionInnovating firmCompetitorsGrowthStage 4PromotionIdeaDecline ofproduction

Cellular Phones of NokiaEvolution of basic Cellular phones are an example of a product which is especially applicable to the notion of the product life cyclephone to color enhancement to camera and email device

LondonNew YorkLos AngelesSingaporeHong KongTokyoTelecommunicationsSpaceTimeHinterlandStock Market Opening PeriodGlobal Financial Centers

Global Production Chains and NetworksProduction Chain: Materials > Procurement > Transformation > Marketing and Sales >Distribution > ServiceDefinition: transactionally linked sequence of functions where each stage adds value to the process of goods and services productionTwo aspects important: coordination and regulation and geographical configurationProduction chains may be very localized but increasingly are global in scale to take advantage of international division of labor

KIA Auto Parts FlowAssembled in S Korea KIA Sorrento clear example of global supply chainUses 30K parts from all around worldParts shipped from places as diverse as Wales and Mexicobut very riskyWar in Iraq and piracy in Malacca StraitsDemonstrate surprising adaptability due to advance planning, multiple sourcing of parts and ability to shift routes on short notice

KIA Auto Parts FlowCommunicates regularly with suppliers-at least once a weekOrder several months in advanceIf necessary use air freight instead of sea freightGreater demand forced KIA to air freight airbags from Swedish company which makes them in the U.S.Greater expense of trans-Pacific flight better than slowing down production line

*Source: T. Hsu, FedEx, 1998.*Adapted from: Harrington and Warf (1995) p. 216.