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Globalization

04/02/08 Globalization_ Overview 1


Globalization
✦What is globalization?
✦Driving forces
✦Measures
✦Effects
✦Response: Policies and Institutions

04/02/08 Globalization_ Overview 2


What is Globalization ?

✦The increased freedom and capacity of individuals and firms to:


 undertake economic transactions with residents of other
countries
operate on a global scale [ all country and region specific
considerations take back seat, so are others like culture, religion
and other societal parameters]
Either the country specific demand is not important, or that is
taken care of
04/02/08 Globalization_ Overview 3
Ricardo__ 1817__ Comparative advantage

 Trade brings mutual advantage even where one nation has


absolute advantage in both products.
 Each country should specialise in the product it can produce
more efficiently compared to other products it produces.
 That is the product in which it has a comparative advantage.

04/02/08 Globalization_ Overview 4


Comparative advantage
 England produces cloth with 100 units of labor and wine
with 120 units of labor.
 Portugal produces cloth with 90 units of labor and wine
with 80 units of labor.
 If they trade, England gets wine for equivalent of 100 units
of labor.
 Portugal gets cloth for equivalent of 80 units of labor.

 Both are better off despite Portugal’s absolute advantage in
both products.

04/02/08 Globalization_ Overview 5


Vernon’s Product Cycle Theory
(1960s)
 Countries with vast financial capital and highly specialised
human capital enjoy comparative advantage in research
and development stage of product innovation.

 For example, Japan and Holland with VCR.

 Later, countries with lower manufacturing costs acquire


comparative advantage.
 Stages___
 Innovation __ Standardization __ mass production __
adoption by other countries as comparative advantage
dictates

04/02/08 Globalization_ Overview 6


Factor mobility
 Advances in communications and transportation increase
mobility of financial capital, technology, human capital, and
people.
 Specialization & comparative advantage influenced by savings
rates, investment in human capital (education and R&D), public
infrastructure (transportation and communication systems) and
government policies on education, health care and taxes.
 Government policy can shape comparative advantage.

04/02/08 Globalization_ Overview 7


Driving Forces of Globalization

✦A reduction in official obstacles/barriers for


conducting business with foreigners
✦Fast reduction and convergence of transaction costs associated with
doing this business

04/02/08 Globalization_ Overview 8


Operations of Multinational Enterprise [ MNE]

 MNEs creating global marketplace?


 MNEs’ foreign operations becoming more vulnerable to competition in
their home markets
 Individual MNEs disperse different parts of their operations to narrow
set of locations around the world because of:
 National advantages in factors of production key to the “where to
produce?” decision
 Labor, land, capital, energy, expertise

 Global web of suppliers


 Stake of foreign governments in MNE operations

04/02/08 Globalization_ Overview 9


MNE
 An international business is any firm that engages in
international trade or investment
 An MNE engages in international investment over which it
has managerial control
 International business involves managing across:
 Differences in cultures, political, legal and economic
systems and levels of economic development
 Such differences endure in spite of globalization trends
 International managers confronted with a greater range of
complexity

04/02/08 Globalization_ Overview 10


Example__ Johnson & Johnson__ Position now

 Founded in New Brunswick, New Jersey in 1886.


 Family owned until listed on NYSE in 1944.
 Products
 Johnson’s Baby Powder in 1893.
 Band-Aid in 1921
 Tylenol became a consumer product in 1960.
TODAY__
 Approximately 110,600 employees, more than 50,000 in the United States
 More than 200 operating companies
 Operations in 57 countries
 Sells products in more than 175 countries.
 Worldwide Sales in 2003 were $41.9 billion.
 Net Earnings for 2003 were $7.2 billion.
 Sales have increased each year for 71 consecutive years.
 Johnson & Johnson Vision Care Inc., is the world leader in contact lenses.

04/02/08 Globalization_ Overview 11


Examples of price decline in
transport and communication

✦Between the early 1980's and 1996 real sea freight costs fell 70%.
✦Real air freight costs have fallen 3-4% a year over a long period.
✦Real costs of international phone calls fell 4% a year in the developing
countries in the 1990's and 2% a year in the industrial countries.

04/02/08 Globalization_ Overview 12


Cost of a 3-Minute Telephone Call,
New York to London
(Constant 1990, U.S. $)

350

300

250

200

150

100

50

0
1930 1940 1950 1960 1970 1980 1990
$0.30

04/02/08 Globalization_ Overview 13


Examples of Innovation Driving
Improved Quality/ Lower Cost

Containerization easier tracking


less pilferage/losses
faster port services

Electronic data easier tracking


interchange faster delivery
(better scheduling)
just-in-time inventory
management

Fiber optics Lower costs


04/02/08 Globalization_ Overview 14
Average Air Transport Revenue
per Passengers Mile
(in 1990 US dollars)

0.8

0.7

0.6
0.5

0.4

0.3

0.2
0.1

0
1930 1940 1950 1960 1970 1980 1990
04/02/08 Globalization_ Overview 15
Average Tariffs
in Industrial Countries

50
40%
40

30

20 15%

10 4.5%

0
Post. War 1960's Now
04/02/08 Globalization_ Overview 16
Average MFN Import Tariffs in
Large Developing Countries

34

24

14

1984-87 1991-93 Uruguay Round


04/02/08 Globalization_ Overview Commitment 17
Measures of Globalization

✦Trade integration
✦Financial integration
✦Global production networks

04/02/08 Globalization_ Overview 18


Trade to GDP Ratios Rose Dramatically over the Last
Decade
(Export plus import as a percentage of GDP)

percentage

55

50

45

40 Developing countries

35

30 High-income OECD
25

20
1970
04/02/08
1975 1980 1985 1990
Globalization_ Overview
1995 2000 2005
19
Trade to PPP GDP,
1986 and 1996
(percent)

70
1986 1996
60

50

40

30

20

10

0
E.Asia ECA LAC MNA
Globalization_ Overview
S.Asia SSA High income
20
04/02/08
Net Private Flows to Developing Countries, 1990-96
(in billions of US$)

US$ billions
300

250

200

150
Official flows
100

50

0
04/02/08
1990 1991 1992 1993
Globalization_ Overview
1994 1995 1996 21
Gross private capital flows
as % of PPP GDP,
1986 and 1996

25

1986 1996
20

15

10

0
04/02/08 E.Asia ECA LAC Globalization_
MNAOverview S.Asia SSA High income 22
Ratio of FDI to GDP (%) 1970-95

Developing
1.5

World
1

0.5 OECD

0
80

94
70

72

74

76

78

82

84

86

88

90

92
04/02/08 Globalization_ Overview 23
Developing Countries
and Foreign Direct Investment:
Filtering for low FDI to GDP ratios, 1990-94

45
Number of countries

FDI>1%
of
GDP

12
49 at war
28
FDI<1% 37 high
of deficits
GDP of which not or
at war inflation 5<0% growth

9
4

FDI/GDP War Macro instability Per capita


income
04/02/08 Globalization_ Overview 24
Global Production Networks

MNEs Local Firms

•Proprietary Technology
•Management Know-How •Low Labor Cost
•Global Brands
•Local Knowledge
•Global Distribution
•Scale •Domestic Distribution

•Direct Ownership
•Joint Venture
•Licensing
•Franchising
•Supplier Agreement
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Special Characteristics of MNE

✦Many studies have shown that firms which engage in global production
enjoy unique, difficult to replicate assets--usually technology or
differentiation
✦Many studies have also shown that foreign firms usually pay higher
wages, have higher productivity, and greater export orientation--their
difficult to replicate assets enable that
✦Certain parts of the world have become magnets for GPN (global
production network) in recent years--the Mexico-US. border; Guandong,
adjoining Hong Kong; parts of Poland; parts of Malaysia; the Bombay and
Bangalore region in India--this is where growth rates are often hitting 10% a
year--and where the upgrading to higher value-added activities is occurring
most rapidly

04/02/08 Globalization_ Overview 26


Effects of Globalization

✦Growth
✦Adjustment costs and inequality

04/02/08 Globalization_ Overview 27


Openness and Growth
 Coastal regions grew faster--cheaper to transport by
Adam Smith
(1776) water and engage in division of labor
Sachs & Warner
(1995) After adjusting for PCI and other factors, open

Ben David economies grew 2-5% faster than slow economies
(90s)  About 7-8 papers on the issue of convergence and its
relation to growth
* In general, no convergence
* Shows that, over 1929-84: PCI in 48 US states
converged systematically to that in NY state
* States that had half the average US income in 1929
grew 1% faster than the average. NY state (richest)
grew about 1% slower than average, at 0.7%
* EU early years--little K&L flows--saw systematic
convergence; half-life of the income gap to the average
country fell from 75 years in 1900-1933 to 13 years in
1959-68
Sebastian Edwards
(1998) Using trade policy indicators in study of 93 countries
04/02/08 finds that openness induces
Globalization_ Overview faster total factor 28
productivity growth.
Adjustment costs and inequality
 Workers in protected sectors of the economy may lose
their jobs as grade liberalization proceeds
 Wage inequality may increase as a result of diffusion of
more capital/science-based production that favor skilled
over unskilled labor

04/02/08 Globalization_ Overview 29


Financial Misery Index since July 2, 1997
(mean of changes in currency, stock market, interest rates)

Indonesia

Philippines

Thailand

Brazil
Better off Worse off
China

Argentina

Poland

Hungary

-20 0 20 40 60 80
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Response to Globalization:
Policies

✦Macroeconomic stability
✦Liberalization of trade / prices / factor markets / FDI
✦Privatization
✦Orderly liberalization of capital flows
✦Better access to international markets / technology / infrastructure
✦Safety nets to ease adjustment costs

04/02/08 Globalization_ Overview 31


Response to Globalization:
Institutions

✦Efficient public administration


✦Promote and enhance competition
✦Enforcement of rights / contracts
✦Regulatory framework for private provision of infrastructures
✦Institutions to facilitate the adoption of standards and norms
✦Sound financial systems

04/02/08 Globalization_ Overview 32

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