Globalization Study Notes

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.

What Is Globalization?

1. The Globalization of Markets

  • Merging of historically distinct and separate national markets into one global marketplace.

    • Falling barriers to cross-border trade and investment.

    • Emergence of global tastes.

    • Benefits both small and large companies.

    • Notable differences between national markets.

    • Products that serve universal needs, such as oil, are considered global.

    • Competitors may not change among nations.

2. The Globalization of Production

  • Sourcing goods to take advantage of differences in cost and quality of factors of production: labor, energy, land, and capital.

    • Early outsourcing primarily involved manufacturing.

    • Modern communications technology has further enabled outsourcing for service activities.

3. The Globalization of Production Continued

  • Robert Reich's concept of "global products".

    • Impediments to optimal dispersion of activities include:

    • Formal and informal barriers to trade.

    • Barriers to foreign direct investment.

    • Transportation costs.

    • Political and economic risk.

    • Challenges in coordinating a globally dispersed supply chain.

The Emergence of Global Institutions

1. Institutions for Managing Global Marketplace

  • Institutions are necessary to help manage, regulate, and police the global marketplace, including:

    • General Agreement on Tariffs and Trade (GATT).

    • World Trade Organization (WTO).

    • International Monetary Fund (IMF).

    • World Bank.

    • United Nations (UN).

2. World Trade Organization (WTO)

  • Responsibilities:

    • Policing the world trading system.

    • Ensuring nation-states adhere to global rules.

    • Facilitating multinational agreements among members.

    • As of 2021, covered 164 nations representing 98% of world trade.

3. International Monetary Fund (IMF)

  • Established for maintaining order in the international monetary system:

    • Functions as the lender of last resort.

    • Requires nations to adopt specific economic policies for economic stability in exchange for loans.

4. World Bank

  • Promotes economic development and provides low-interest loans to governments in developing nations for infrastructure projects.

5. United Nations (UN)

  • Promotes peace through international cooperation and collective security:

    • Composed of 193 member countries.

    • UN Charter has four basic purposes:

    • Maintaining international peace and security.

    • Developing friendly relations among nations.

    • Cooperating in solving international problems and promoting respect for human rights.

    • Centralizing harmonization of nation actions.

6. Group of Twenty (G20)

  • Consists of finance ministers and central bank governors from the 19 largest economies, plus representatives from the EU and ECB.

    • Represents 90% of global GDP and 80% of international trade.

Drivers of Globalization

1. Declining Trade and Investment Barriers

  • Historical context: 1920s to 1930s saw many barriers to international trade and foreign direct investment (FDI).

    • International trade: export of goods/services to consumers in another country.

    • Foreign direct investment (FDI): investment of business resources outside one's home country.

    • GATT played a role in lowering barriers and led to the establishment of WTO.

2. The Growth of Global Economies

  • From 1960 to 2020, the value of the world economy grew ninefold, while international goods' value grew 19.7-fold.

    • Trade in goods/services and the value of FDI increased faster than world output.

    • More firms dispersing production processes globally, creating intertwined economies.

    • The global economy has substantially grown wealthier within the last two decades.

3. Role of Technological Change

  • Communications:

    • Development of the microprocessor is considered the most significant innovation since WWII.

    • Moore’s Law: predicts that microprocessor power doubles while production costs decrease by half every 18 months.

  • Internet:

    • Over half of the global population uses the Internet.

    • Global e-commerce sales near $4 trillion.

    • The Internet serves as an equalizing force in global trade.

4. Transportation Technology

  • Advances in commercial jets, superfreighters, and containerization have facilitated globalization:

    • Economic feasibility of locating production in different geographic areas.

    • Reduction in cultural distance and convergence of consumer tastes/preferences.

The Changing Demographics of the Global Economy

1. World Output and Trade Changes

  • Historical shifts:

    • 1960s: U.S. accounted for 38.3% of world output.

    • 2020: U.S. accounted for 24.7% due to faster growth in China and BRIC countries.

    • Developing nations projected to represent over 60% of world economic activities by 2030.

2. Changes in Foreign Direct Investment

  • As barriers to trade diminished, non-U.S. firms increasingly invested across borders for optimal production locations and direct presence in significant markets.

  • Outward stock of FDI: Total cumulative foreign investments by firms based outside a nation’s borders.

3. Changing Nature of the Multinational Enterprise (MNE)

  • An MNE is a business with productive activities in two or more countries.

    • 2003: 38.8% of the largest 2,000 multinationals were U.S. firms.

    • By 2019, that figure dropped to 28.8%, showing a shift in global enterprise dynamics.

4. Rise of Mini-Multinationals

  • Growth in medium and small-sized businesses has been facilitated by the Internet lowering international trade barriers.

5. Changing World Order

  • Export and investment opportunities from former communist countries:

    • Risks are significant and ongoing unrest is possible.

    • China: Positioning itself as an industrial superpower.

    • Latin America: Decreased debt and inflation, attracting more private investors with expanding economies.

6. Global Economy of the 21st Century

  • Decreasing barriers to goods, services, and capital:

    • Widespread adoption of liberal economic policies among previously resistant nations.

    • Globalization is not guaranteed; nations may retract, posing significant risks.

The Globalization Debate

1. Antiglobalization Protests

  • Originated from the protests at the 1999 WTO meeting in Seattle.

    • Protestors argue that globalization negatively affects living standards, wage rates, and environmental conditions.

    • Evidence suggests that such fears may be overstated.

2. Globalization's Impact on Jobs and Income

  • Critics argue falling trade barriers enable firms to outsource jobs to lower-wage countries, destroying manufacturing positions in richer economies.

    • Services are also outsourced, increasing unemployment and deteriorating living conditions domestically.

  • Supporters contend that benefits of globalization outweigh drawbacks:

    • Free trade promotes efficiency, specialization, and overall economic growth.

    • Cost reductions for firms result in consumer price benefits.

3. Income Distribution Trends

  • Data indicates that the labor share in national income has declined over two decades:

    • Skilled labor's share has increased.

    • Unskilled labor experienced lowered income but not necessarily lower living standards due to economic growth.

    • The slower growth in real wages for unskilled workers has technological changes as a more significant cause than globalization.

4. Labor Policies and Environmental Impact

  • Critics emphasize that labor and environmental regulations elevate manufacturing costs, potentially leading to exploitation in nations without such regulations.

    • Supporters argue that increased economic progress correlates with stricter labor standards and environmental protections, reducing exploitation and pollution.

5. National Sovereignty Concerns

  • Critics claim the shift in authority towards supranational entities undermines national governments.

    • Supporters argue that the powers of these organizations are dependent upon the agreements made by nation-states.

6. Global Inequities

  • Concerns regarding the widening gap between wealthy and poor nations attributed to:

    • Totalitarian regimes, poor governance, rampant corruption, lack of property rights, high population growth, and debt burdens.

    • Proponents suggest promoting free market policies and lowering trade barriers.

Managing in the Global Marketplace

Managing International Business

  • Any firm engaged in international trade or investment is considered international.

  • Distinctions in managing international versus domestic businesses include:

    • Cultural differences between countries.

    • Broader range of issues and more complex problems to resolve.

    • Necessity to operate within governmental limitations.

    • Exchange of currencies complicates transactions.