Globalization: Drivers, Institutions, and the Global Economy Demographics

Opening Case: Detroit Bikes and the Reality of Global Sourcing

• Case Overview: By the year $2018$, approximately $95 \%$ of bicycles sold in the United States were assembled in China. Additionally, about $65 \%$ of the component parts used in these bicycles were produced in China.

• Consumer Impact: American consumers have historically benefited from this outsourcing through significantly lower prices for finished goods.

• Detroit Bikes Profile: This company represents an exception to the dominant outsourcing trend. However, they have faced significant struggles regarding local production and sourcing components locally.

• Impact of Trade Policy: The implementation of tariffs and the subsequent trade war in $2018$ acted as a mixed blessing for Detroit Bikes. While it theoretically protected domestic industry, it resulted in severe supply chain disruptions.

• Pricing Strategies: While Detroit Bikes is attempting to avoid raising prices for consumers, many other companies in the industry claim they have no choice but to pass increased costs onto the buyer.

Understanding Globalization

• Definition of Globalization: A fundamental shift toward a more integrated and interdependent world economy.

• The Two Facets of Globalization:

  • The Globalization of Markets: The process of merging historically distinct and separate national markets into one massive global marketplace.

  • Convergence of Tastes: In many industries, the tastes and preferences of consumers in different nations are beginning to converge toward a global norm.

  • Global Market Examples: Companies like Coca-Cola, McDonald’s, IKEA, Starbucks, and Apple serve as primary examples of brands operating in a global market.

  • Industrial Goods: The most "global" markets exist for industrial goods and materials that meet universal needs, such as aluminum, oil, wheat, and microprocessors.

  • The Globalization of Production: This involves the sourcing of goods and services from various locations around the world to capitalize on national differences in the cost and quality of factors of production.

  • Factors of Production: These include labor, energy, land, and capital ($K$).

  • Objectives: The primary goals are to lower the overall cost structure and improve the quality or functionality of the product to compete more effectively with international rivals.

Factors and Impediments in Global Production

• Historical Evolution: Early outsourcing efforts were primarily focused on manufacturing. In the modern era, advanced communications technology allows companies to outsource diverse services as well.

• Impediments to Globalization:

  • Formal and informal barriers to international trade.

  • Barriers to Foreign Direct Investment (FDI).

  • High transportation costs.

  • Economic and political risks associated with foreign operations.

  • The managerial challenge of coordinating a complex, globally dispersed supply chain.

The Emergence of Global Institutions

• Purpose of Institutions: These organizations manage, regulate, and police the global marketplace while promoting multinational treaties to govern the global business system. They are created via voluntary agreements between nation-states.

• World Trade Organization (WTO):

  • Responsible for policing the world trading system and ensuring nation-states follow rules established in WTO treaties.

  • It succeeded the General Agreement on Tariffs and Trade (GATT).

  • As of $2020$, it had $164$ member nations, accounting for $98 \%$ of world trade.

• International Monetary Fund (IMF):

  • Functions to maintain order in the international monetary system.

  • Acts as a "lender of last resort" to nation-states in economic crisis.

  • Requires nation-states to adopt specific economic policies as a condition for receiving loans.

• World Bank:

  • Focuses on promoting economic development using low-interest loans. It is generally viewed as less controversial than the IMF.

• United Nations (UN):

  • Committed to international peace and security based on the UN Charter.

  • Promotes friendly relations among nations, international problem-solving, and respect for human rights.

  • Comprised of $193$ member countries.

• Group of Twenty (G20):

  • Includes finance ministers and central bank governors of the $19$ largest world economies, the European Union (EU), and the European Central Bank (ECB).

  • Represents $90 \%$ of global Gross Domestic Product (GDP).

  • Served as a forum for a coordinated response to the global financial crisis of $2008$ and $2009$.

Macro Drivers of Globalization

• The Two Main Drivers:

  1. The decline in barriers to the free flow of goods, services, and capital.

  2. Technological change.

• Trade and Investment Definitions:

  • International Trade: Occurs when a firm exports goods or services to consumers in another country.

  • Foreign Direct Investment (FDI): Occurs when a firm invests resources in business activities outside its home country.

• Evolution of Trade Barriers:

  • During the $1920s$ and $1930s$, many nations erected trade barriers to protect domestic industries.

  • Post-WWII, advanced Western nations reduced these barriers through GATT, the Uruguay Round, and the formation of the WTO.

Statistics on Tariffs and Trade Volume

• Average Tariff Rates on Manufactured Products (Percentage of Value):

  • France: $1913: 21 \%$, $1950: 18 \%$, $1990: 5.9 \%$, $2018: 3.9 \%$.

  • Germany: $1913: 20 \%$, $1950: 26 \%$, $1990: 5.9 \%$, $2018: 3.9 \%$.

  • Italy: $1913: 18 \%$, $1950: 25 \%$, $1990: 5.9 \%$, $2018: 3.9 \%$.

  • Japan: $1913: 30 \%$, $1950: —$, $1990: 5.3 \%$, $2018: 2.5 \%$.

  • United States: $1913: 44 \%$, $1950: 14 \%$, $1990: 5.7 \%$, $2018: 3.1 \%$.

• Trade Growth: Sale of foreign affiliates of multinational corporations reached $\$27 \text{ trillion}$ by $2019$.

• Implications of Trade Growth:

  • Increased dispersal of parts production.

  • Intertwined national economies.

  • Increased global wealth.

• Global Shifts: The financial crisis of $2008-2009$ and the COVID-19 pandemic have created calls for more trade barriers and have significantly impacted global supply chains.

The Role of Technological Change

• Communications and Microprocessors: The microprocessor has enabled high-power, low-cost computing and advancements in telecommunications.

  • Moore’s Law: Predicts that as the cost of microprocessors falls, their power increases.

• The Internet: In $2019$, there were $4.5 \times 10^9$ users ($58 \%$ of the global population). It reduces constraints related to location, scale, and time zones.

• Transportation Technology: Innovations such as commercial jets, superfreighters, and containerization have significantly lowered shipping costs.

• Implications:

  • Production: Dispersed production becomes more economical; firms can react faster to demand shifts.

  • Markets: Electronic global marketplaces are established; cultural distance is reduced; consumer tastes converge.

Changing Demographics of the Global Economy

• Historical Context (Early 1960s):

  • The U.S. dominated world economy, world trade, and world FDI.

  • U.S. Multinational Enterprises (MNEs) dominated international business.

  • Roughly half of the world was closed to Western business.

• Modern Picture (World Output):

  • U.S. share of world manufacturing output: fell from $38.3 \%$ in $1960$ to approximately $24.0 \%$ today.

  • Germany, France, the U.K., and Canada have seen similar relative declines.

  • Countries like China, India, Russia, and Brazil are experiencing rapid growth.

  • China’s economy is projected to potentially surpass the U.S. within a decade.

• Foreign Direct Investment (FDI) Trends:

  • FDI stock from rich industrial countries is declining as a percentage of the total.

  • Cross-border FDI flows are rising.

  • Major developing recipients: China, Mexico, and Brazil.

• Multinational Enterprises (MNEs):

  • Rise of non-U.S. multinationals and "mini-multinationals" (small and medium-sized businesses).

  • The Internet enables smaller firms to build international sales with fewer barriers.

The Globalization Debate

• Arguments for Globalization: Promotes prosperity, creates jobs, and lowers prices for consumers.

• Arguments against Globalization (Antiglobalization):

  • Jobs and Income: Critics argue falling barriers destroy manufacturing jobs in wealthy nations and that service jobs are being outsourced. Supporters argue that the benefits of lower costs and prices outweigh these losses.

  • Income Inequality: The gap between the poorest and richest segments of society has widened, often attributed to a fall in demand for unskilled labor in advanced economies.

  • Labor and Environment: Critics claim firms invest in countries with fewer regulations to save costs. Supporters argue that economic growth leads to tougher regulations.

  • Pollution vs. Income Relationship: Studies suggest a hump-shaped relationship where pollution increases with income until a certain threshold (approx. $\$8,000 \text{ per capita}$) and then decreases as nations adopt cleaner technologies.

  • National Sovereignty: Concerns that power is shifting from elected governments to supranational organizations (WTO, EU, UN). Supporters argue these bodies only have the power that member states grant them.

  • The World’s Poor: Many poor nations struggle due to totalitarianism, corruption, lack of property rights, or high debt.

  • Debt Relief: Specifically for "highly indebted poorer countries" (HIPCs).

Managing in the Global Marketplace

• Definition of International Business: Any firm engaged in international trade or investment.

• Management Challenges:

  • Practices vary significantly by country.

  • Issues are more complex than in domestic business.

  • Managers must navigate varied international trade rules and regulations.

  • Managing currency conversion and foreign exchange risks is essential.

• შემთხვევის მიმოხილვა: 2018 წლისათვის აშშ-ს მყიდველების მიერ გაყიდული ველოსიპედების დაახლოებით 95% არის აშენებული ჩინეთში. გარდა ამისა, დაახლოებით 65% იმ კომponente ნაწილების, რომლებიც ამ ველოსიპედებში გამოიყენება, წარმოებული ჩინეთშია.

• მყიდველის გავლენა: ამერიკულმა მომხმარებლებმა ისტორიაში სარგებელი მიიღეს ამ ავტორიტეტით, რაც გამოიხატებოდა დასრულებული საქონლის მნიშვნელოვნად სემათი ფასებით.

• დეტროიტის ველოსიპედების პროფილი: ეს კომპანია წარმოადგენს ჩანაცვლების მაგალითს საყოველთაო მძღანური ტრადიციის მიმართ. თუმცა, მათ დიდ პრობლემებთან მრავალ ნათესავობის და ადგილობრივი ნაწარმის შესაძლო მიზეზების შესახებ.

• ვაჭრობის პოლიტიკის გავლენა: 2018 წელს გამოსატანმა ტარიფებმა და შემდგომმა სავაჭრო ომმა ერთგვარი დაცვა მისცა ადგილობრივ ინდუსტრიას, თუმცა, ეს გამოიწვია სერიოზული საწარმოო ჯაჭვის შეფერხებები.

• ფასები: მიუხედავად იმისა, რომ დეტროიტის ველოსიპედები ცდილობენ მოერიდონ ფასების ზრდას მომხმარებლებისათვის, მრავალი სხვა კომპანია ინდუსტრიაში ამბობს, რომ მათ არ შეუძლიათ გაიტანონ გაიზრდილი ხარჯები მყიდველზე.