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Part 1: Introduction and Overview
Chapter 1: Globalization
Source: ©Kevork Djansezian/Getty Images News/Getty Images
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Learning Objectives
1-1 Understand what is meant by the term globalization.
1-2 Recognize the main drivers of globalization.
1-3 Describe the changing nature of the global economy.
1-4 Explain the main arguments in the debate over the impact of globalization.
1-5 Understand how the process of globalization is creating opportunities and challenges for management practice.
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Opening Case: GM and Its Chevrolet Supercar, The Corvette ZR1
Eight distinctive automotive brands under GM umbrella
GM operates on 5 continents and has a strong presence in China
Chevrolet-branded vehicles sold in all markets worldwide
Corvette introduced in 1953 with ZR1 model reintroduced in 2019
Testament to global branding and staying power
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Introduction
The world economy today
Fewer self-contained national economies
More integrated global economic system with lower barriers to trade and investment
Transformation is called globalization
The volume of goods, services, and investments crossing national borders has expanded faster than world output for more than half a century
Globalization offers business opportunities
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For businesses, this globalization process has produced many opportunities. Firms can expand their revenues by selling around the world and/or reduce their costs by producing in nations where key inputs, including labor, are cheap. The global expansion of enterprises has been facilitated by generally favorable political and economic trends. As globalization unfolds, it is transforming industries and creating anxiety among those who believed their jobs were protected from foreign competition.
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What Is Globalization? 1
Globalization: shift toward a more integrated and interdependent world economy
Two key facets of globalization
Globalization of markets
Globalization of production
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LO 1-1 Understand what is meant by the term globalization.
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What Is Globalization? 2
The Globalization of Markets
The merging of historically distinct and separate national markets into one huge global marketplace
In many markets, the tastes and preferences of consumers in different nations are converging on some global norm, creating a global market
Examples: Coca-Cola, McDonald’s, IKEA, Starbucks, Apple
The most global of markets are for industrial goods and materials that serve universal needs around the world
Aluminum, oil, wheat, microprocessors
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What Is Globalization? 3
The Globalization of Production
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, energy, land, and capital)
Lower overall cost structure
Improvement of the quality or functionality of a product to compete more effectively
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Did You Know?
Did you know why your iPhone was assembled in China? It’s not what you might think.
Click to play video
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What Is Globalization? 4
The Globalization of Production continued
Early outsourcing was primarily for manufacturing
Today, modern communications technology allows companies to outsource services
Impediments to globalization
Formal and informal trade barriers
Barriers to foreign direct investment
Transportation costs
Economic and political risk
Managerial challenge for coordinating a globally dispersed supply chain
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The Emergence of Global Institutions 1
Global Institutions
Manage, regulate, and police the global market place
Promote the establishment of multinational treaties to govern the global business system
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The Emergence of Global Institutions 2
World Trade Organization (WTO)
Polices world trading system and ensures nations adhere to the rules established in WTO treaties
Succeeded the General Agreement on Tariffs and Trade (GATT)
164 nations accounted for 98 percent of world trade (2017)
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Can the International Court of Justice Be Effective?
The International Court of Justice (www.icj-cij.org) is the principal judicial organ of the United Nations (UN). Of the six principal organs of the UN, it is the only one not located in New York (United States); instead, the seat of the Court is at the Peace Palace in The Hague (Netherlands). The court’s role is to settle, in accordance with international law, legal disputes submitted to it by countries and to give advisory opinions on legal questions referred to it by authorized United Nations organs and specialized agencies. But how effective can the UN International Court of Justice really be in the global marketplace with its many legal systems?
Source: www.icj-cij.org/en/court.
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The Emergence of Global Institutions 3
International Monetary Fund (IMF)
Maintains order in the international monetary system
Lender of last resort
Requires nation-states to adopt specific economic policies in return for loans
World Bank
Promotes economic development using low-interest loans
Seen as less controversial than IMF
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The Emergence of Global Institutions 4
United Nations (UN)
Maintains international peace and security
Develops friendly relations among nations
Promotes cooperation in solving international problems
Promotes respect for human rights
A center for harmonizing the actions of nations
Includes 193 member countries
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The Emergence of Global Institutions 5
Group of Twenty (G20)
Comprised of finance ministers and central bank governors of the 19 largest world economies plus the EU
Represents 90 percent of global GDP
Became a forum for a coordinated policy response to the financial crisis of 2008 and 2009
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Drivers of Globalization 1
Two macro factors driving the move toward greater globalization
Decline in barriers to free flow of goods, services, and capital
Technological change
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LO 1-2 Recognize the main drivers of globalization.
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Drivers of Globalization 2
Declining Trade and Investment Barriers
International trade occurs when a firm exports goods or services to consumers in another country
Foreign direct investment occurs when a firm invests resources in business activities outside its home country
During 1920s and 1930s, many nations put up barriers to international trade to protect domestic industries
After WWII, advanced Western countries reduced barriers
GATT, Uruguay Round, and WTO
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Table 1.1 Average Tariff Rates on Manufactured Products as Percentage of Value
Country
1913
1950
1990
2020
France
21 percent
18 percent
5.9 percent
1.6 percent
Germany
20
26
5.9
1.6
Italy
18
25
5.9
1.6
Japan
30
—
5.3
1.4
Netherlands
5
11
5.9
1.6
Sweden
20
9
4.4
1.6
United Kingdom
—
23
5.9
1.6
United States
44
14
4.8
1.6
Sources: The 1913 to 1990 data are from “Who Wants to Be a Giant?” The Economist: A Survey of the Multinationals, June 24, 1995, pp. 3–4. The 2020 data are estimated based on data from the World Development Indicators, World Bank.
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Drivers of Globalization 3
Declining Trade and Investment Barriers continued
Knowledge Society and Trade Agreements
World trade is predicted to increase more rapidly than world production for the foreseeable future
Produce more today and more of it traded across national borders
Consumers are more knowledgeable, which drives demand
Countries have been reducing restrictions to foreign investment and trade
Implications of fast-paced volume of world trade
More companies dispersing parts production
Economies of nation-states becoming more intertwined
World becoming significantly wealthier
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The globalization of markets and production and the resulting growth of world trade, foreign direct investment, and imports all imply that firms are finding their home markets under attack from foreign competitors.
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Figure 1.1 Value of World Trade, World Production, Number of Regional Trade Agreements and World Population 1960 to 2020
Sources: World Bank, 2019; World Trade Organization, 2019; United Nations, 2019.
Access the text alternative for these images.
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Figure 1.2 Comparisons of World Trade and World Population; World Trade and Number of Regional Trade Agreements; World Population and World Production; and World Population and World Trade
Sources: World Bank, 2019; World Trade Organization, 2019; United Nations, 2019.
Access the text alternative for these images.
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Drivers of Globalization 4
Role of Technological Change
Communications
Since World War II, microprocessor created explosive growth of high-power, lost-cost computing
Microprocessors also advanced telecommunications
Moore’s Law: as costs of microprocessors fall, their power increases
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Drivers of Globalization 5
Role of Technological Change continued
Internet of Things
In 2017, 3.8 billion users (51 percent of global population)
Makes it easier for buyers and sellers to find each other
Transportation Technology
Commercial jets, superfreighters
Containerization
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Containerization has revolutionized the transportation business, significantly lowering the costs of shipping goods over long distances. Because the international shipping industry is responsible for carrying about 90 percent of the volume of world trade in goods, this has been an extremely important development.
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Drivers of Globalization 6
Role of Technological Change continued
Implications for the Globalization of Production
Lower transportation costs makes geographically dispersed production system more economical
Allows firms to better respond to customer demands
Implications for the Globalization of Markets
Low cost communication networks create electronic global marketplace
Low cost transportation makes shipping products around the world economical
Reduced cultural distance
Converging consumer tastes and preferences
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Despite these trends, we must be careful not to overemphasize their importance. While modern communications and transportation technologies are ushering in the “global village,” significant national differences remain in culture, consumer preferences, and business practices.
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The Changing Demographics of the Global Economy 1
Early 1960s
U.S. dominated the world economy, world trade
U.S. dominated world FDI
U.S. MNEs dominated international business
About half the world was off limits to Western international business
Today, much has changed
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LO 1-3 Describe the changing nature of the global economy.
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The Changing Demographics of the Global Economy 2
The Changing World Output and World Trade Picture
Early 1960s
U.S. was dominant in industrial power, accounting for about 38 percent of world manufacturing output
By 2018
U.S. accounts for only 15.8 percent
Germany, France, the U.K., and Canada had similar decline
Rapid economic growth now in countries like China, India, Russia, and Brazil
Further relative decline by the U.S., Germany, and Japan; U.K. is likely
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Table 1.2 Changing Demographics of World Output and World Exports
Country
Share of World Output 1960 (%)
Share of World Output Today (%)
Share of World Exports Today (%)
United States
38.3
15.8
8.2
Germany
8.7
3.4
7.1
France
4.6
2.3
2.8
Italy
3.0
1.9
2.4
United Kingdom
5.3
2.4
2.3
Canada
3.0
1.4
2.2
Japan
3.3
4.3
3.6
China
NA
17.1
11.1
Sources: Output data from World Bank database, 2019. Trade data from WTO Statistical Database, 2019.
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The Changing Demographics of the Global Economy 3
The Changing Foreign Direct Investment Picture
World output generated by developing countries steadily increasing since 1960s
Stock of foreign direct investment (total cumulative value of foreign investments) generated by rich industrial countries declining
Cross-border flows of foreign direct investment rising
Largest developing country recipients of FDI are China, Mexico, and Brazil
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Figure 1.3 Share of FDI Stock Outward as a Percentage of GDP
Sources: OECD data 2017, FDI stocks.
Access the text alternative for these images.
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Figure 1.4 FDI Inflows (in millions of dollars)
Source: United Nations Conference on Trade and Development, World Investment Report 2018. (Data for 2019–2020 are forecast.)
Access the text alternative for these images.
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The Changing Demographics of the Global Economy 4
The Changing Nature of the Multinational Enterprise
A multinational enterprise (MNE) is any business that has productive activities in two or more countries
Since the 1960s, a rise of non-U.S. multinationals and growth of mini-multinationals
Non-U.S. Multinationals
Large number of U.S. multinationals reflects U.S. economic dominance
Today, world economy shifting away from North America and Western Europe
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Figure 1.5 National Share of Largest Multinational Corporations
Source: Forbes Global 2000 in 2003 and 2017.
Access the text alternative for these images.
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The Changing Demographics of the Global Economy 5
The Changing Nature of the Multinational Enterprise continued
The Rise of Mini-Multinationals
More small- and medium-size businesses (mini-multinationals) involved in international trade and investment
Internet lowers barriers that smaller firms face in building international sales
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Which Is More Important—Similarities or Differences?
International strategy has seen significant changes in recent years. Multinational enterprises now have to evaluate their core uniqueness and how they can drive their uniqueness to be leveraged in the global marketplace better. For some, such thinking may represent a major shift—to focus on similarities across nations and customers instead of differences. This could be an important shift because companies and their people are trained to look for differences and form strategies based on satisfying the needs of customers with slight or significant differences across the globe. In the future, we may be looking for similarities first and then focusing on the similarities that outweigh the differences in tastes, wants, and needs. Do you agree that focusing on similarities across countries is a better way to developing strategy than focusing on differences?
Source: globalEDGE.msu.edu/content/gbr/gbr7-2.pdf.
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The Changing Demographics of the Global Economy 6
The Changing World Order
Collapse of communism in Eastern Europe
Greater export and investment opportunities, but political unrest is increasing risk
Economic development in China
Huge opportunities despite continued government control, but also new competition from Chinese firms
Free market reforms and democracy in Latin America
New markets and new sources of materials and production, but economic and political risk remains high
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The Changing Demographics of the Global Economy 7
Global Economy of the Twenty-First Century
A more integrated global economy
New opportunities for firms
But, political and economic disruptions can upset plans
The risk of a global financial crisis
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The Globalization Debate 1
Is the shift toward a more integrated and interdependent global economy a good thing?
Experts believe globalization promotes greater prosperity in the global economy, more jobs, and lower prices for goods and services
Others feel that globalization is not beneficial
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LO 1-4 Explain the main arguments in the debate over the impact of globalization.
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The Globalization Debate 2
Antiglobalization Protests
Began with WTO protest in December 1999 in Seattle
Protest turned violent
Protestors fear globalization has detrimental effects on living standards, wages, and the environment
Theory and evidence suggests these fears are exaggerated
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The Globalization Debate 3
Globalization, Jobs, and Income
Falling trade barriers destroy manufacturing jobs in wealthy economies (U.S. and western Europe)
Service activities increasingly outsourced to nations with lower labor costs
Supporters say benefits outweigh the costs
Outsourcing allows a company to reduce its cost structure and reduce prices
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The Globalization Debate 4
Globalization, Jobs, and Income continued
Share of labor in national income has declined
Attributed to a fall in unskilled labor
Gap between poorest and richest segments of society has widened
In most countries, real income levels increased for all
Many advanced economies report shortage of highly skilled workers and an excess of unskilled workers
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The Globalization Debate 5
Globalization, Labor Policies, and the Environment
Critics argue that the lack of labor and environmental regulations in less developed countries attract investment
Adhering to environmental regulations increases costs of manufacturing
Supporters argue that tougher regulations lead to economic progress
Tougher regulations come with economic progress
Studies show a hump-shaped relationship between income levels and pollution levels
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Figure 1.6 Income Levels and Environmental Pollution
Source: C. W. L. Hill and G. T. M. Hult, Global Business Today (New York: McGraw-Hill Education, 2018).
Access the text alternative for these images.
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The Globalization Debate 6
Globalization and National Sovereignty
Critics worry economic power is shifting away from national governments and toward supranational organizations such as the WTO, the European Union, and the UN
Supporters say the power of these organizations is limited to what nation-states collectively agree to grant
Must be able to persuade members states to follow certain actions
Without the support of members, the organizations have no power
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The Globalization Debate 7
Globalization and the World’s Poor
Critics argue the gap between rich and poor is wider and the benefits of globalization not shared equally
Many poor nations are under totalitarian regimes, suffer from endemic corruption, have few property rights, are involved in war, have rapidly expanding populations, are burdened by high debt
No money to invest in public infrastructure
Debt relief movements
Rich nations gave to World Bank and IMF
Reduce import barriers from poor nations
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Managing in the Global Marketplace
International business is any firm that is engaged in international trade or investment
Managing international business differs from managing domestic business
Practices vary country by country
Issues are more complex
Need to understand rules governing international trade and investment
Need to convert currency
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LO 1-5 Understand how the process of globalization is creating opportunities and challenges for management practice.
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Summary
In this chapter, we have
Understood what is meant by the term globalization.
Recognized the main drivers of globalization.
Described the changing nature of the global economy.
Explained the main arguments in the debate over the impact of globalization.
Understood how the process of globalization is creating opportunities and challenges for management practice.
©McGraw-Hill Education
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Accessibility Content: Text Alternatives for Images
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Figure 1.1 Value of World Trade, World Production, Number of Regional Trade Agreements and World Population 1960 to 2020, Text Alternative
Data given for world trade, world population, world production, and regional trade agreements from 1960 to 2020. As regional trade agreements increase year-by-year, so does world trade across country borders at the same pace. Both world production and population increase gradually, while world trade and regional trade increase rapidly after year 2000.
Return to slide containing original image.
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Figure 1.2 Comparisons of World Trade and World Population; World Trade and Number of Regional Trade Agreements; World Population and World Production; and World Population and World Trade, Text Alternative
World trade and world population are both rising, but world trade has risen much faster since about 1972.
World trade and number of regional trade agreements have risen in tandem since about 1970.
World population and world production have risen on a mostly parallel path.
World population and world trade shows that as world population had steadily risen, world trade passed it in about 2004 and has risen rapidly since.
Return to slide containing original image.
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Figure 1.3 Share of FDI Stock Outward as Percentage of GDP, Text Alternative
Data given are approximate.
United States: 17 percent in 1995, 38 percent today.
China: 1 percent in 1995, 10 percent today.
Japan States: 3 percent in 1995, 27 percent today.
United Kingdom: 22 percent in 1995, 49 percent today.
European Union: 16 percent in 1995, 49 percent today.
Developed economies: 14 percent in 1995, 44 percent today.
World: 12 percent in 1995, 34 percent today.
Return to slide containing original image.
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Figure 1.4 FDI Inflows, Text Alternative
Throughout the 1990s, the amount of investment for both developed and developing countries increased steadily to just under $500,000 in 1997.
A surge in foreign direct investment went from 1998 to 2000, ending at a high of $1,400,000. This surge was followed by a slump from 2001 to 2003, falling to less than $600,000.
Foreign direct investment grew again from 2004 to 2007, when it hit record levels of $1,800,000.
The inflows slowed again in 2008 and 2009, ending at just over $1 million. It rose again to just over $1,500,000 but hit a slump again in 2013 in 2014, ending at $1,350,000.
In 2020, foreign direct investment hit $2,500,000.
From 1990 to 2002, the majority of the foreign direct investment was for developed countries. From 2003 onward, the share for developing countries continually increased, accounting for about one third in 2007 and one half in 2014. The amount has remained steady (approximately $750,000), while foreign direct investments for developed countries have increased steadily in the last five years.
Return to slide containing original image.
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Figure 1.5 National Share of Largest Multinational Corporations, Text Alternative
Data given are approximate.
United States: 38.8 percent in 2003, 25 percent today.
Japan: 16.6 percent in 2003, 10 percent today.
United Kingdom: 6.6 percent in 2003, 5 percent today.
Other: 38 percent in 2003, 55 percent today.
Return to slide containing original image.
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Figure 1.6 Income Levels and Environmental Pollution, Text Alternative
There is an inverted U-shaped relationship between income and pollution levels of other pollutants. At the midpoint of income per capita, which is $8,000, pollution levels are at the highest point and then fall back down as the income rises.
A line cuts across the graph showing carbon dioxide emissions rising steadily as income per capita gets higher.
Return to slide containing original image.
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