Chapter 1

Globalization

What is Globalization?
The shift toward a more integrated and interdependent world economy Two components:
The globalization of markets The globalization of production

Globalization of Production
Toyota Etios
designed in a small office in Japan assembled in India From
panels made in South Korea electronic components made in China microprocessors made in the U.S.

Not just manufacturing

Globalization of production has historically been about manufacturing Increasingly companies are using modern communications to outsource service activities to low-cost nations

Globalization of markets
In the past, each country had its own companies in many industries and its own products

Today everyone knows

Nintendo Starbucks Coca-Cola McDonalds Samsung

But the most global markets are for standard goods

Aluminum Wheat Microprocessors Aircraft For many consumer end-products,

huge differences still exist among national markets

Food, clothing, entertainment

Drivers of Globalization
Two factors underlie globalization
Decline in barriers to the free flow of goods, services, and capital that has occurred since the end of World War II Technological change

Declining Trade and Investment Barriers

During the 1920s and 30s, many of nations erected formidable barriers to international trade and foreign direct investment Advanced industrial nations of the West committed themselves after World War II to removing barriers to the free flow of goods, services, and capital between nations.

Average Tariff Rates on Manufactured Products

France Germany Italy Japan Holland Sweden UK US 1913 21 % 20 % 18 % 30 % 5% 20 % -44 % 1950 18 % 26 % 25 % -1% 9% 4% 14 % 1990 5.9 % 5.9 % 5.9 % 5.3 % 5.9 % 4.4 % 5.9 % 4.8 % 2002 4.0 % 4.0 % 4.0 % 3.8 % 4.0 % 4.0 % 4.0 % 4.0 %

Affects of Lowering Trade Barriers

Figure 1.1: Volume of World Trade and World Production, 1950-2004
3100 2600

Index 1950=100

2100 1600 1100 600 100

19 50

19 54

19 58

19 62

19 66

19 70

19 74

19 78

19 82

19 86

19 90

19 94

19 98

Total Merchandise Exports

World Production

20 02

The Role of Technology

Lowering of trade barriers made globalization possible; technology has made it a transforming movement

Internet Usage Growth

Figure 1.3: Internet Users per 1000 People, 19902003
700.00 600.00

Internet Users per 1000 people

500.00 400.00 300.00 200.00 100.00 0.00

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

Japan

United States

European Monetary Union

World

2003

The Emergence of Global Institutions

Notable global institutions include the World Trade Organization (WTO) which is responsible for policing the world trading system and ensuring that nations adhere to the rules established in WTO treaties
the International Monetary Fund (IMF) which maintains order in the international monetary system

In 2008, 151 nations accounting for 97% of world trade were members of the WTO

The Emergence of Global Institutions

the World Bank which promotes economic development the United Nations (UN) which 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

The Changing Roles of Countries in 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 Today, much of this has changed.

The Changing World Output and World Trade Picture

In the early 1960s, the U.S. was the world's dominant industrial power accounting for about 40.3% of world manufacturing output By 2007, the U.S. accounted for only 20.7% Other developed nations experienced a similar decline

The Changing Nature of the Multinational Enterprise

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

The Globalization Debate

Pro
Lower prices for goods and services Economic growth Increase in consumer income Creates jobs (for many) Countries specialize in production of goods and services that are produced most efficiently

Con
Destroys manufacturing jobs in wealthy nations Wage rates of unskilled in advanced countries decline Companies move to countries with fewer labor and environment regulations Loss of sovereignty Homogenized cultures

Managing in the Global Marketplace

Much of this course is concerned with managing an international business
i.e., any business with international
sales, sourcing, or Investment

Managing an international business is different

Countries are different International transactions involve converting money into different currencies Range of problems in an international business is wider and problems are more complex International business must cope with different, conflicting government rules and systems Different strategic approaches required

Key terms
An international business any business with international sales, sourcing, or investment A multinational business any business with productive activities in 2 or more countries A global business a business that takes a global approach to production and sourcing (Coca-Cola, Intel)