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Global Business Today6e
by Charles W.L. Hill
McGraw-Hill/Irwin Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
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Chapter 1
Globalization
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Introduction
In the world economy today, we see
a shift away from self-contained nationaleconomies with high barriers to cross-border
trade and investmenta move toward a more integrated global
economic system with lower barriers to tradeand investment
about $3 trillion in foreign exchange transactions
taking place everydayover $12 million of goods and some $3 trillion of
services being sold across national borders
the establishment of international institutions
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1-4
Introduction
The effects of this trend can be seen
in the cars people drive
in the food people eatin the jobs where people work
in the clothes people wear
in many other ways
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What Is Globalization?
Question:What is globalization?
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What Is Globalization?
Globalization refers to the trend towardsa more integrated global economicsystem
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Question
The trend away from distinct nationaleconomic units and toward one hugeglobal market is known as
a) Internationalization
b) Economic integration
c) Globalization
d) Privatization
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What Is Globalization?
Two key facets of Globalization are:1.the globalization of markets
2.the globalization of production
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The Globalization of Markets
The globalization of markets refers to themerging of historically distinct andseparate national markets into one huge
global marketplaceIn many markets today, the tastes and
preferences of consumers in differentnations are converging upon some global
normExamples of this trend include Coca
Cola, Starbucks, Sony PlayStation, andMcDonalds hamburgers
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The Globalization of Production
The globalization of production refers to thesourcing of goods and services from locationsaround the globe to take advantage of national
differences in the cost and quality of factors ofproduction (land, labor energy, and capital)
The goal for companies is to lower their overallcost structure or improve the quality or
functionality of their product and gaincompetitive advantage
Examples of companies doing this includeBoeing and Vizio
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The Emergenceof Global Institutions
Several global institutions have emerged to
help manage, regulate, and police theglobal market place
promote the establishment ofmultinational treaties to govern the globalbusiness system
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The Emergenceof Global Institutions
Notable global institutions includetheWorld Trade Organization (WTO)
which is responsible for policing the world
trading system and ensuring that nationsadhere to the rules established in WTOtreatiesIn 2008, 151 nations accounting for 97% of
world trade were members of the WTO
the International Monetary Fund (IMF)which maintains order in the internationalmonetary system
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The Emergenceof Global Institutions
the World Bank which promoteseconomic development
the United Nations (UN) which maintains
international peace and security,develops friendly relations amongnations, cooperates in solvinginternational problems and promotesrespect for human rights, and is a center
for harmonizing the actions of nations
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Question
Which of the following is not an example ofa global institution?
a)The Federal Reserve
b)The International Monetary Fund
c)The World Bank
d)The World Trade Organization
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Drivers of Globalization
Question: What is driving the movetoward greater globalization?
There are two macro factors underlyingthe trend toward greater globalization
1. declining trade and investment
barriers2. technological change
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Question
Coca-Cola, Sony Playstations, andMcDonalds hamburgers are all examples
of
a) American products
b) Global products
c) Industrial products
d) National products
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Declining Tradeand Investment Barriers
International tradeoccurs when a firmexports goods or services to consumersin another country
Foreign direct investment (FDI)occurswhen a firm invests resources inbusiness activities outside its homecountry
During the 1920s and 1930s, manynations erected barriers to internationaltrade and FDI to protect domesticindustries from foreign competition
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Declining Tradeand Investment Barriers
After WWII, advanced Western countries beganremoving trade and investment barriers
Under GATT (the forerunner of the WTO), over
100 nations negotiated further decreases intariffs and made significant progress on anumber of non-tariff issues
Under the WTO, a mechanism now exists for
dispute resolution and the enforcement of tradelaws, and there is a push to cut tariffs onindustrial goods, services, and agriculturalproducts
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Declining Tradeand Investment Barriers
Lower trade barriers enable companiesto view the world as a single market andestablish production activities in optimal
locations around the globe
This has led to an acceleration in thevolume of world trade and investment
since the early 1980s
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Declining Tradeand Investment Barriers
Growth in World Merchandise Trade andProduction, 1950 - 2006
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Question
Which organization provides a mechanismfor dispute resolution and the enforcementof trade laws?
a) The UN
b) The IMF
c) The WTO
d) The World Bank
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The Role ofTechnological Change
The lowering of trade barriers madeglobalization of markets and production atheoretical possibility, technological
change made it a tangible reality
Since World War II, there have beenmajor advances in communication,
information processing, andtransportation
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The Role ofTechnological Change
The development of the microprocessor haslowered the cost of global communication andtherefore the cost of coordinating and controllinga global organization
Web-based transactions have grown fromvirtually zero in 1994 to $250 billion in 2007 inthe U.S. alone, and Internet usage is up fromfewer than 1 million users in 1990 to 1.3 billion
users in 2007Commercial jet aircraft and super freighters and
the introduction of containerization have greatlysimplified trans-shipment from one mode oftransport to another
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The Role ofTechnological Change
Question: What are the implications oftechnological change for the globalizationof production?
Lower transportation costs make ageographically dispersed production
system more economical and allow firmsto better respond to internationalcustomer demands
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The Role ofTechnological Change
Question: What are the implications of
technological change for the globalization ofmarkets?
Low cost communications networks have helpedcreate electronic global marketplaces
Low cost transportation have enabled firms to
create global markets, and have facilitated themovement of people from country to countrypromoting a convergence of consumer tastesand preferences
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The Changing Demographicsof the Global Economy
In the 1960s:the U.S. dominated the world economy
and the world trade picture
the U.S. dominated world FDIU.S. multinationals dominated the
international business sceneabout half the world-- the centrally
planned economies of the communistworld-- was off limits to Westerninternational business
Today, much of this has changed.
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The Changing World Outputand World Trade Picture
In the early 1960s, the U.S. was theworld's dominant industrial poweraccounting for about 40.3% of world
manufacturing output
By 2007, the U.S. accounted for only20.7%
Other developed nations experienced asimilar decline
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The Changing World Outputand World Trade Picture
Rapid economic growth is now beingexperienced by countries such as China,Thailand, and MalaysiaFurther relative decline in the U.S. share of
world output and world exports seems likelyForecasts predict a rapid rise in the share of
world output accounted for by developingnations such as China, India, Indonesia,Thailand, and South Korea, and a decline in the
share by industrialized countries such as Britain,Japan, and the United StatesSo companies may find both new markets and
new competitors in the developing regions of theworld
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The Changing World Output andWorld Trade Picture
The Changing Demographics of WorldGDPand Trade
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The Changing ForeignDirect Investment Picture
The share of world output generated bydeveloping countries has been steadilyincreasing since the 1960s
The stock of foreign direct investment(total cumulative value of foreigninvestments) generated by rich industrialcountries has been on a steady declineThere has been a sustained growth in
cross-border flows of foreign directinvestmentThe largest recipient of FDI has beenChina
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The Changing ForeignDirect Investment Picture
Percentage Share of Total FDI Stock, 1980- 2006
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The Changing ForeignDirect Investment Picture
FDI Inflows, 1988 - 2007
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Question
Which of the following statements is true?
a)The U.S. has been accounting for an increasingshare of world trade in recent years
b)The U.S. has been accounting for an increasingshare of world foreign direct investment in recentyears
c)The U.S. has been accounting for an increasingshare of world output in recent years
d)The share of world trade accounted for by Chinahas been increasing in recent years
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The Changing Nature ofthe Multinational Enterprise
A multinational enterprise is anybusiness that has productive activitiesintwo or more countries
Since the 1960s,
there has been a rise in non-U.S.multinationals
there has been a rise in mini-multinationals
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The Changing Nature ofthe Multinational Enterprise
The globalization of the world economy hasresulted in a decline in the dominance of U.S.firms in the global marketplace
In 1973, 48.5 % of the worlds 260 largestMNEs were U.S. firms
By 2006, just 24 of the worlds 100 largest
non-financial MNEs were from the U.S., 13
were from France, 12 from Germany, 12were from Britain, and 9 were from Japan,and 7 of the worlds largest 100 MNEs were
from developing economies
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The Changing Nature ofthe Multinational Enterprise
While most international trade andinvestment is conducted by large MNEs,many small and medium-size firms are
expanding internationallyThe Internet has made it easier for
many smaller companies to build
international sales
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The Changing World Order
Today, many markets that had been closed toWestern firms are open
The collapse of communism in EasternEurope has created a host of export andinvestment opportunities
Economic development in China has createdhuge opportunities despite continuedCommunist control
Free market reforms and democracy in LatinAmerica have created opportunities for newmarkets and new sources of materials andproduction
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The Global Economyof the Twenty-First Century
A more integrated global economypresents new opportunities for firms, butit can also result in political and economic
disruptions that may throw plans intodisarray
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The Globalization Debate
Question: Is the shift toward a moreintegrated and interdependent globaleconomy a good thing?
Many experts believe that globalization ispromoting greater prosperity in the globaleconomy, more jobs, and lower prices for
goods and servicesOthers feel that globalization is not
beneficial
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Antiglobalization Protests
Question: What are the concerns of criticsof globalization?
Anti-globalization protesters now turn upat almost every major meeting of a globalinstitution
Protesters fear that globalization isforever changing the world in a negativeway
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Globalization, Jobs, and Income
Critics of globalization worry that jobs inadvanced economies are being lost to low-wagenations
Supporters of globalization disagree, claimingthat the benefits of free trade outweigh its costsWhile some jobs may be lost, the economy
as a whole is better off
Supporters argue that free trade will result in
countries specializing in the production of thosegoods and services that they can produce mostefficiently, while importing goods and servicesthat they cannot produce as efficiently, and thatin doing so, allcountries will gain
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Globalization, Labor Policies,and the Environment
Critics of globalization argue that that freetrade encourages firms from advancednations to move manufacturing facilitiesoffshore to less developed countries with lax
environmental and labor regulationsSupporters of free trade point out thattougher environmental regulation and stricterlabor standards go hand in hand witheconomic progress and that as countries getricher as a result of globalization, they raisetheir environmental and labor standards
Free trade does not lead to more pollutionand labor exploitation, it leads to less
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Globalization andNational Sovereignty
Critics of globalization worry that economicpower is shifting away from nationalgovernments and toward supranationalorganizations such as the WTO, the European
Union (EU), and the UNSupporters of globalization argue that the power
of these organizations is limited to what nation-states collectively agree to grant
The organizations must be able to persuademembers states to follow certain actions
Without the support of members, theorganizations have no power
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Globalization and the Worlds Poor
Critics of globalization argue that the gapbetween rich and poor has gotten wider andthat the benefits of globalization have not beenshared equally
Supporters of free trade suggest that theactions of governments have made limitedeconomic improvement in many countries
Many of the worlds poorest nations are
under totalitarian regimes, suffer fromendemic corruption, have few property rights,are involved in war, and are burdened byhigh debt
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Managing in the Global Marketplace
Question: What does the shift toward aglobal economy mean for managerswithin an international business?
Managing an international business (anyfirm that engages in international trade orinvestment) differs from managing adomestic business in four key ways
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Managing in the Global Marketplace
1. Countries differences require companiesto vary their practices country by country
2. Managers face a greater and morecomplex range of problems
3. International companies must workwithin the limits imposed bygovernmental intervention and the globaltrading system
4. International transactions requireconverting funds and being susceptibleto exchange rate changes
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