UNIT-1UNIT-1

►GLOBALIZATIONGLOBALIZATION►TRADE PATTERNSTRADE PATTERNS

THEORIESTHEORIES

1.1.IPLCIPLC

2.2.FACTOR MOBILITYFACTOR MOBILITY

COMPARISON OF IPLC AND FACTOR MOBILITYCOMPARISON OF IPLC AND FACTOR MOBILITY THEORIES.THEORIES.

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GlobalizationGlobalization

1.1. A holistic approach covers the following A holistic approach covers the following aspects:aspects:

a.a. EconomicEconomic

b.b. FinancialFinancial

c.c. PoliticalPolitical

d.d. CulturalCultural

All the above aspects/factors interact with All the above aspects/factors interact with each other.each other.

[See Joshi (2011), fig.1.3, p.9][See Joshi (2011), fig.1.3, p.9]

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2.2. Economic globalization has the following Economic globalization has the following five major components/aspects: five major components/aspects:

a.a. ProductionProduction

b.b. MarketsMarkets

c.c. CompetitionCompetition

d.d. TechnologyTechnology

e.e. Corporations & IndustryCorporations & Industry

All the components work in an interactive manner.All the components work in an interactive manner.[See Joshi (2011), fig.1.5, p.13][See Joshi (2011), fig.1.5, p.13]

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3.1. 3.1. Factors that give impetus to globalization or movers: Factors that give impetus to globalization or movers: a.a. Economic liberalizationEconomic liberalizationb.b. Technical break through Technical break through

► ManufacturingManufacturing► TransportationTransportation► Information & Communication.Information & Communication.

c.c. Multilateral institutions. Multilateral institutions. d.d. Interventional economic integration.Interventional economic integration.e.e. Move towards free market systems.Move towards free market systems.f.f. Rising R&D costs.Rising R&D costs.g.g. Advents in logistic management.Advents in logistic management.h.h. Emergence of global customer segments. Emergence of global customer segments.

3.2. Factors that restrain globalization or restraining factors: 3.2. Factors that restrain globalization or restraining factors: a.a. Regulatory controls Regulatory controls b.b. Emerging new trade barriers.Emerging new trade barriers.c.c. Cultural factorsCultural factorsd.d. NationalismNationalisme.e. Wards and civil disturbances.Wards and civil disturbances.f.f. Management myopia. Management myopia.

How much globalization proceeds/progresses depends on the relative How much globalization proceeds/progresses depends on the relative strength of factors in 3.1 and 3.2.strength of factors in 3.1 and 3.2.

[See Joshi (2011), fig.1.6, pg.16][See Joshi (2011), fig.1.6, pg.16]

3. Movers and Restraining Factors:3. Movers and Restraining Factors:

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GlobalizationGlobalization: : A TYPICAL MODERN IMAGEA TYPICAL MODERN IMAGE

Conspicuously seen in terms of Conspicuously seen in terms of WesternizationWesternization Americanization Americanization

Some of the popular examples are:Some of the popular examples are: Walmartization Walmartization Cocacolination Cocacolination DisneyficationDisneyfication Mc DonalizationMc Donalization

1. 1. Walmartization*Walmartization* 2. 2. CocacolinationCocacolinationWalmart – US Retail Chain Walmart – US Retail Chain Perceived as an invasion of Perceived as an invasion of cultural cultural Walmart EffectWalmart Effect values. values. Keeping small competitors outKeeping small competitors out Driving down wagesDriving down wages Keeping inflation lowKeeping inflation low Keeping productivity highKeeping productivity high

It has a conservative image as reflected in It has a conservative image as reflected in Firm cutting down costsFirm cutting down costs Favoring policy ofFavoring policy of

► Cutting down taxes Cutting down taxes ► Keeping welfare state competitive Keeping welfare state competitive

* * See Charles Fishman: Walmart EffectSee Charles Fishman: Walmart Effect

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3. Walmartization3. Walmartization See George Ritzer (1995)See George Ritzer (1995)[MacDonaldization of Society][MacDonaldization of Society]

Four Dimensions of fast food restauranFour Dimensions of fast food restaurant: t: i.i. Efficiency: Best mode of production with little scope of individuality. Efficiency: Best mode of production with little scope of individuality. ii.ii. Calculability: Quantifiable Objective : Calculability: Quantifiable Objective :

- Sale- Sale- Focus on Quantity (big MAC, not so much quality)- Focus on Quantity (big MAC, not so much quality)

iii.iii. Predictability: Uniform Production Process.Predictability: Uniform Production Process.iv.iv. Control: Substitution of non-human technologies for human labour.Control: Substitution of non-human technologies for human labour.

(System of “Iron Cage” – same principle governs all Institutions).(System of “Iron Cage” – same principle governs all Institutions).

Criticism: Criticism: (a)(a) Irrationality – Every worker performs highly rationalized task leading Irrationality – Every worker performs highly rationalized task leading

to workers’ “Burn Out”. to workers’ “Burn Out”. (b)(b) Deskilling: Workers perform repetitive tasks – cheap training of Deskilling: Workers perform repetitive tasks – cheap training of

workers. workers can be replaced easily. workers. workers can be replaced easily.

4. Disneyfication4. Disneyfication What is signified? Society dedicated to What is signified? Society dedicated to i.i. ThemesThemesii.ii. Huge consumptionHuge consumptioniii.iii. Emotion based labor.Emotion based labor.

(also signifies a diluted version of original form)(also signifies a diluted version of original form)9

INTERNATIONAL PRODUCT LIFE CYCLE THEORY (IPCL)INTERNATIONAL PRODUCT LIFE CYCLE THEORY (IPCL)

ISSUES:ISSUES:

1.1. Do international markets follow a cyclical Pattern? Do international markets follow a cyclical Pattern? Why? What does it explain?Why? What does it explain?

- - Shift in markets.Shift in markets.

- - Shift in production location.Shift in production location.

2.2. What factors are behind the phenomenon? Does it What factors are behind the phenomenon? Does it explain trade patterns?explain trade patterns?

- - Level of innovation and technology.Level of innovation and technology.

-- Quantum & Quality of Resources.Quantum & Quality of Resources.

-- Size of market.Size of market.

-- Competitive structure.Competitive structure.1010

IPCL: Four Stages:IPCL: Four Stages:

What Determines these stages?What Determines these stages?► Difference/gap in technology between Difference/gap in technology between

countries/economies. countries/economies. ► Ability (purchasing power) of customers.Ability (purchasing power) of customers.► Preferences of customers. Preferences of customers.

Innovation:Innovation: What Makes it Effective?What Makes it Effective?► If domestic market is big – economies of scale – cost If domestic market is big – economies of scale – cost

efficiency – international competition – (US, China, India): efficiency – international competition – (US, China, India): Big markets but their innovative capacity and technology Big markets but their innovative capacity and technology levels differ. levels differ.

► Innovation but no big domestic market:Innovation but no big domestic market: How to achieve economies of scale? Set up marketing and How to achieve economies of scale? Set up marketing and

production facilities outside the country.production facilities outside the country.

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What are the critical factors for expanding into international What are the critical factors for expanding into international market? market?

► Innovative capacity, level of technologyInnovative capacity, level of technology► Scope of economiesScope of economies► Achieving economies of scaleAchieving economies of scale

► The innovating firm starts looking for establishing production The innovating firm starts looking for establishing production base in other high income countries.base in other high income countries.

► When this is successful, these countries (where production When this is successful, these countries (where production base is established) start exporting to the innovating country.base is established) start exporting to the innovating country.

► International competition increasesInternational competition increases

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Stages of International Product Life Cycle.Stages of International Product Life Cycle.

See exhibit and interpretSee exhibit and interpret::

In each column, start moving down and interpret against the row In each column, start moving down and interpret against the row title. Try matching the movements of three types of curves.title. Try matching the movements of three types of curves.

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Stage 1: Introduction:-Stage 1: Introduction:-

Advanced countries – Innovation for new product.Advanced countries – Innovation for new product. Lot of resources required for R&D.Lot of resources required for R&D. Initially price of new product is high.Initially price of new product is high. Hence search for markets for new product in high income countries. Hence search for markets for new product in high income countries.

Stage 2: Growth:-Stage 2: Growth:- Search for other developed markets for exports. Search for other developed markets for exports. Globalization Globalization Trade patternsTrade patterns

TheoriesTheories IPLCIPLC Factor MobilityFactor Mobility Comparison. Comparison.

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Note & Interpret: Note & Interpret: (i)(i) Opposite movements of curves representing high Opposite movements of curves representing high

income countries.income countries.

(ii)(ii) Testes and preferences change in low income Testes and preferences change in low income countries also. They too start importing new product. countries also. They too start importing new product.

Stage 3: Maturity:Stage 3: Maturity:► By now technical know-how is known to many countries. By now technical know-how is known to many countries.

The innovating country starts setting up production The innovating country starts setting up production facility in the third world (low income developing) facility in the third world (low income developing) economies by taking advantage of low wages in the economies by taking advantage of low wages in the latter. latter.

► Imports of low income countries decline as the domestic Imports of low income countries decline as the domestic production of this product increases. production of this product increases.

Stage 4: Decline:Stage 4: Decline:► What is the marketing strategy at this stage? Production What is the marketing strategy at this stage? Production

shifts even to least developing countries – innovating shifts even to least developing countries – innovating country imports from these countriescountry imports from these countries

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Examples: Examples:

i.i. UK was largest manufacturer and exporter of bicycles. UK was largest manufacturer and exporter of bicycles. Bicycle industry declined in UK. This industry emerged in Bicycle industry declined in UK. This industry emerged in low income countries, including India. low income countries, including India.

ii.ii. Developed countries shift environmentally hazardous Developed countries shift environmentally hazardous industries to low income countries. industries to low income countries.

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Criticism of IPCL Theory: Criticism of IPCL Theory:

It explains the emerging pattern of international market. This It explains the emerging pattern of international market. This was ok earlier. Now information about prices, technology and was ok earlier. Now information about prices, technology and preferences travels across the globe. The product may be preferences travels across the globe. The product may be launched by the innovating country simultaneously in several launched by the innovating country simultaneously in several countries. countries.

[Discuss Maruti Suzuki case. Japanese company, Suzuki, is an [Discuss Maruti Suzuki case. Japanese company, Suzuki, is an innovating company. The latter established manufacturing base innovating company. The latter established manufacturing base in India. India first imported Maruti Suzuki Standard -800 Model. in India. India first imported Maruti Suzuki Standard -800 Model. After the product gained maturity and popularity, Maruti Suzuki After the product gained maturity and popularity, Maruti Suzuki Exports Cars to several developed and semi developed Exports Cars to several developed and semi developed countries. The time has come when India may also base countries. The time has come when India may also base manufacturing facilities in other least developing countries].manufacturing facilities in other least developing countries].

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Theory of Competitive AdvantageTheory of Competitive Advantage Porter–Diamond Theory:Porter–Diamond Theory:

(Michael Porter, 1990, (Michael Porter, 1990, The competitive advantage of nationsThe competitive advantage of nations).).

Main focus is on Main focus is on Domestic Environment.Domestic Environment. Contrast it with IPCL. – which lays emphasis on Contrast it with IPCL. – which lays emphasis on

innovation/invention and looks forward to off-shore innovation/invention and looks forward to off-shore investment/production.investment/production.

Diamond? See four blocks/diamonds The interaction of these Diamond? See four blocks/diamonds The interaction of these explains and determines the trade competitive advantage of a explains and determines the trade competitive advantage of a country. See arrows in diagram. country. See arrows in diagram.

4 Diamonds – Blocks:4 Diamonds – Blocks:a)a) Factor input – Natural & Creaed Factor input – Natural & Creaed

b)b) Demand conditions.Demand conditions. Greater is the sophistication in demand conditions, more demanding Greater is the sophistication in demand conditions, more demanding

the consumer is – product quality – better service – change in the consumer is – product quality – better service – change in preferences – (Global exposure…). preferences – (Global exposure…).

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c)c) Related and supporting industries Related and supporting industries Development of ancillary industry (as in auto industry).Development of ancillary industry (as in auto industry). Strong supply chain management.Strong supply chain management. Development of industrial clustersDevelopment of industrial clusters. .

For example: For example:

IT – Banglore,IT – Banglore,

Textiles – TirupurTextiles – Tirupur

Metal Handicraft – MoradabadMetal Handicraft – Moradabad

d) Firm Strategy, Structure & Rivalryd) Firm Strategy, Structure & Rivalry Transformation of family enterprise. Transformation of family enterprise. Competition policyCompetition policy Incentive structureIncentive structure Global exposureGlobal exposure Domestic rivalry (competition?)Domestic rivalry (competition?)

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SummarySummary IPCLIPCL:: Explains Sifts in Explains Sifts in

Trade PatternsTrade Patterns Manufacturing baseManufacturing base

Theory of competitive advantageTheory of competitive advantage: To explain national competitiveness, it : To explain national competitiveness, it focuses on: focuses on: Environmental factors (factor conditions)Environmental factors (factor conditions) Demand conditionsDemand conditions Related supporting industriesRelated supporting industries Firm strategy, structure, etc.Firm strategy, structure, etc. Degree of competition (Rivalry, etc).Degree of competition (Rivalry, etc).

Merit of above theoretical models: Merit of above theoretical models:

They help provide basis for: They help provide basis for: Principles for regulatory framework. Principles for regulatory framework. Preparing trade promotion strategies to national as well as international Preparing trade promotion strategies to national as well as international

Govt./Bodies. The relative advantage may vary across countries.Govt./Bodies. The relative advantage may vary across countries.

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DISCUSS TWO CASE STUDIES ATTACHED DISCUSS TWO CASE STUDIES ATTACHED

CASE STUDY 1CASE STUDY 1

►CHIP INDUSTRYCHIP INDUSTRY

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CASE STUDY 2CASE STUDY 2

►Factor mobility :TCS-case studyFactor mobility :TCS-case study

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►Daniels et.al Daniels et.al

See page no. 247-259See page no. 247-259

Factor mobility theoryFactor mobility theory

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►Biggest change being observed is the Biggest change being observed is the demographic one.demographic one.

► By 2050 – 033 countries will have lower By 2050 – 033 countries will have lower population than their present population population than their present population due to lower fertility ( lower than due to lower fertility ( lower than population ranging from 14% to 22%.)population ranging from 14% to 22%.)

►On the other hand, eight countries will On the other hand, eight countries will account for 50% of world population.account for 50% of world population.

Supplementary notesSupplementary notes

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► Labor mobility across countries likely to be Labor mobility across countries likely to be faster in coming decades than now.faster in coming decades than now.

► Why factors move?Why factors move?

►CapitalCapital

Long term movement-FDILong term movement-FDI Shifting manufacturing base Shifting manufacturing base Shifting services industry base Shifting services industry base Reform capital account convertibilityReform capital account convertibility Political stability Political stability Investor friendly policiesInvestor friendly policies

ConsequencesConsequences

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►200 million ( approx 3% of worlds 200 million ( approx 3% of worlds population) have migrated not population) have migrated not uniformly all over the world. uniformly all over the world.

►USA got high migration ( 11 % of USA got high migration ( 11 % of population of USA is made up population of USA is made up immigrants )immigrants )

Two – third’s of UAE population Two – third’s of UAE population consists of temporary workers .consists of temporary workers .

► Indonesian labor migrates to Malaysia Indonesian labor migrates to Malaysia (huge- 10 times wage differential)(huge- 10 times wage differential)

peoplepeople

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►Singapore transformed from low-wage Singapore transformed from low-wage ►Labor-intensive to high-wage capital Labor-intensive to high-wage capital

intensive economy ( due to high capital intensive economy ( due to high capital inflow )inflow )

►Trade and factor mobility Trade and factor mobility Factor movementFactor movement From abundant area to scare area. From abundant area to scare area.

(eg,maxicon labor to USA.)(eg,maxicon labor to USA.) ComplementarityComplementarityComplementary products-needs equipment. Complementary products-needs equipment.

This happens through foreign investment.This happens through foreign investment.

Impact Impact

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►Services growing much faster than Services growing much faster than manufacturing .manufacturing .

( change in consumption pattern in fast ( change in consumption pattern in fast growing economies)growing economies)

Many services can be provided by small Many services can be provided by small scale units.scale units.

They have flexibility in labor employment They have flexibility in labor employment too.too.

Flexible and small scale Flexible and small scale populationpopulation

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