IBA 550 TEST 1

Globalization

The growing interconnectedness and interdependence of social, political, and economic environments on a global scale.

Market Globalization

The ongoing economic integration and increasing interdependence between national economies.

Drivers of Globalization

Factors that facilitate trade and economic globalization

Macro-drivers

Reduction of barriers to trade and investment

Technological advances

Reduction of barriers to trade and investment

• Political cooperation

• Removal of taxes

• Decreased restrictions on foreign-owned businesses

Technological advances

• • Communications and shipping

    • 1950 it was $20 to call from London to New York

    • Today it is virtually $0 (zoom)

  • Increased efficiency of trade

    • Inter-modal shipping containers

    • Shipping iPhones via plane vs sea.

    • Cost is 54 cents vs 1.2

    • Time is 30 days vs 15 hours

GDP

Gross Domestic Product, representing the total value of all goods and services produced in a specific geographic region.

Other Drivers

• Political reform – adoption of free markets

• Emerging markets

• Integration of world financial markets (SWIFT network – messaging between banks and financial institutions to securely send info)

Natural Environment (Pros/Cons & Societal Impact / Winners and Losers)

• Rich countries can move production to companies with less law and less minimum wage

• Poor countries have weaker regulations

• More manufacturing = More consumption

• Less environmentally friendly practices

Jobs and Income (Pros/Cons & Societal Impact / Winners and Losers)

• Argument: Manufacturing jobs are moved overseas

• Counter: Countries on average are getting more wealthy. This made for a pay increase in skilled workers and in the workers in the countries of poverty.

The Poor (Pros/Cons & Societal Impact / Winners and Losers)

• Argument: Widening the wealth gap

• Counter: Some of the poorest countries have inequality due to their government not globalizing

National Sovereignty (Pros/Cons & Societal Impact / Winners and Losers)

• WTO – World trade org

• Argument – Too much power has been granted to super national orgs (having power that transcends national boundaries).

• Counter: These organizations serve the collective interests and rely on persuasion instead of laws

CAGE Framework

A model encompassing Cultural, Administrative, Geographic, and Economic factors that influence international trade and business interactions.

Cultural

• Language

• Religion

• Values – individualism vs collectivism (China, Korea, & Japan)

• Social Norms

Administrative

• Political environment

• Colonial link

• Trade agreements

• Political hostility

• Corruption

Geographic

• Physical distance

• Time zones

• Land borders

• Climate

• Topography

• Infrastructure

Economic

• Relative wealth between countries

• Similarity in profile

• Market size

• Labor costs

Distance Attributes and % Change in Trade

Distance vs Sensitivity

Paradox of consistency

• The more consistent and profitable a firm is in their home market, the greater challenge it will have in a foreign market (Ex: NFL)

How do companies succeed in international markets

Innovation

Competitive Advantage of Nations Theory

Porter's Diamond model highlighting factors like Factor Conditions, Demand Conditions, Related and Supporting Industries, and Firm Strategy, Structure, and Rivalry that contribute to a nation's competitive advantage.

Factor Conditions

• nations position in factors of production such as skilled labor or infrastructure

  • Labor – (more skilled or less costly)

  • Land

  • Natural resources

  • Capital

  • Infrastructure

  • Specialized knowledge (more developed countries have better education systems)

  • Italy and Japan had disadvantages in terms of location and geography, but this helped them to grow other advantages

Demand Conditions

• Nature of home market demand

  • Home bias to demand

  • Fast food

  • Self checkout

  • Sophisticated Customers – Not just demanding more but demanding how to make it better. Helps more with product innovation. (Toyota in Japan vs the auto company in India)

Related and Supporting Industries

• The presence or absence of supplier industries and other industries that are internationally competitive.

  • Telecommunications

  • Specialized knowledge sharing between industries in the same area

  • Sophisticated suppliers

Firm Strategy, Structure, and Rivalry

• How companies are created, organized, and managed as well as the nature of domestic rivalry

  • Domestic Rivalries – Toyota vs Honda or Apple vs Microsoft.

  • Fit between nature of industry and nature of country – German culture is very planned out and structured. Logical that they fit well with engineering-oriented industries or rapid change like marketing or film.

Porter’s argument towards the government’s influence on markets

• Argues for a limited role with government influence in markets

• Government looks for a quick fix whereas companies invest time and effort in people and growth

• Government’s role is to encourage competition and ensure safety and environmental standards

Industrial Policy

Government interventions and policies aimed at influencing global trade, supporting domestic sectors, and incentivizing R&D and manufacturing investments.

What Businesses Should Do

• Accept or not accept – companies have to determine whether to accept subsidies or not. Some range from meeting a minimum investment to giving the government equity in their company

  • Pfizer – government bought 100 million doses

  • GM – government have more than $50 billion in funding for 60.8% of shares in GM

• Engage and Educate – focusing on educating government officials on competing issues rather than advocating for a certain argument

• Collaborate – Working upstream and downstream partners in the supply chain can lead to commercially successful outcomes that align with policy.

• Understand that these subsidies are not always going to be here so have a strategy plan to survive without them.

The Fall and Rise of Industrial Policy

• There has been skepticism of the government and these “administrative guidance” techniques.

• After US investment failures in the solar panel market, synthetic fuels and the supersonic passenger jetliner, many governments intervened less.

• The past 5 years, this has changed due to global warming and Covid-19.

• Operation warp speed was a federal effort that supported multiple vaccine candidates to speed up development of mRNA vaccines to fight Covid-19. Because the government stepped in, companies were now willing to take larger risks than they would have in the past.

• A more controversial and increasingly common type of intervention focuses on helping specific industries of sectors (Airbus).

• With how incentives have helped the Chinese be the leading manufacturer of EVs, other governments are starting to intervene as well.

• Friend-shoring and industry specific trade alliances add another challenge for global companies.

Industrial Policy Types

• Horizontal

• Vertical

• Supply side

• Demand side

Horizontal

• apply to firms irrespective of their activities, their location or the technologies they use (R&D tax credits)

Vertical

• apply to a specific sector or firm (renewable energy)

Supply-Side

• apply to the costs of R&D or production to favor certain locations or materials (grants, subsidies, tax preferences, and tax credits)

Demand-Side

• apply to the consumer typically affecting domestic consumption of products and increase the size of the market (tax credits for the purchase of an EV & Inflation Reduction Act)