Chapter 1
Globalization
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Learning Objectives
LO 1-1Understand what is meant by the term globalization.
LO 1-2Recognize the main drivers of globalization.
LO 1-3Describe the changing nature of the global economy.
LO 1-4Explain the main arguments in the debate over the impact of globalization.
LO 1-5Understand how the process of globalization is creating opportunities and challenges for management practice.
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What Is Globalization? 1 of 3
Learning Objective 1-1 Understand what is meant by the term globalization.
The Globalization of Markets
Falling barriers to cross-border trade and investment
Global tastes
Benefits small and large companies
Significant differences between national markets
Products that serve universal needs are global
Competitors may not change among nations
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Globalization refers to the shift toward a more integrated and interdependent world economy
The globalization of markets refers to the merging of historically distinct and separate national markets into one huge global marketplace.
What Is Globalization? 2 of 3
The Globalization of Production
Sourcing goods to take advantage of differences in cost and quality of factors of production
Early outsourcing was confined to manufacturing
Technology now used for outsourcing
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The globalization of production refers to the sourcing of goods and services from locations around the globe to take advantage of national differences in the cost and quality of factors of production (such as labor, energy, land, and capital).
What Is Globalization? 3 of 3
The Globalization of Production continued
Robert Reich and “global products”
Impediments
Formal and informal barriers to trade
Transportation costs
Political and economic risk
Coordination
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The Emergence of Global Institutions 1 of 6
General Agreement on Tariffs and Trade (GATT)
World Trade Organization
International Monetary Fund
The World Bank
The United Nations
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General Agreement on Tariffs and Trade (GATT) International treaty that committed signatories to lowering barriers to the free flow of goods across national borders and led to the WTO.
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The Emergence of Global Institutions 2 of 6
The World Trade Organization
Polices the world trading system
Ensures nation-states adhere to the rules
Facilitates multinational agreements among members
164 nations account for 98 percent of world trade
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World Trade Organization The organization that succeeded GATT as a result of the successful completion of the Uruguay Round of GATT negotiations.
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The Emergence of Global Institutions 3 of 6
The International Monetary Fund
Established to maintain order in the international monetary system
Lender of last resort
Requires nation-states to adopt specific economic policies aimed at returning their economies to stability and growth
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The International Monetary Fund International institution set up to maintain order in the international monetary system.
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The Emergence of Global Institutions 4 of 6
The World Bank
Promotes economic development
Focused on making low-interest loans to cash-strapped governments in poor nations that wish to undertake significant infrastructure investments
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World Bank International institution set up to promote general economic development in the world’s poorer nations.
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The Emergence of Global Institutions 5 of 6
The United Nations
Peace through international cooperation and collective security
193 countries
UN Charter – four basic purposes
Maintain international peace and security
Develop friendly relations among nations
Cooperate in solving international problems and in promoting respect for human rights
Be a center for harmonizing the actions of nations
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United Nations (UN) An international organization made up of 193 countries headquartered in New York City, formed in 1945 to promote peace, security, and cooperation.
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The Emergence of Global Institutions 6 of 6
Group of Twenty (G20)
Finance ministers and central bank governors of the 19 largest economies in the world, plus representatives from the European Union and the European Central Bank
Represents 90 percent of global GDP and 80 percent of international global trade
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Group of Twenty (G20)
Established in 1999, the G20 comprises the finance ministers and central bank governors of the 19 largest economies in the world, plus representatives from the European Union and the European Central Bank.
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Drivers of Globalization 1 of 4
Learning Objective 1-2 Recognize the main drivers of globalization.
Declining Trade and Investment Barriers
1920s-30s: Barriers to international trade and foreign direct investment
High tariffs resulted in retaliatory trade policies
GATT lowered barriers
Uruguay Round
Established World Trade Organization (WTO)
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International trade occurs when a firm exports goods or services to consumers in another country.
Foreign direct investment occurs when a firm invests resources in business activities outside its home country.
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Drivers of Globalization 2 of 4
Knowledge Society and Trade Agreements
The value of world trade in merchandised goods has grown consistently faster than the growth rate in the world economy since 1950.
Trade across country borders is 2.6 times higher than world production.
Knowledge society has produced more informed consumers, driving demand.
Removal of restrictions to FDI
More trade agreements
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Figure 1.1 Value of world trade, world production, number of regional trade agreements in force, and world population from 1960 to 2020 (index 1960 = 100).
Sources: World Bank, 2017; World Trade Organization, 2017; United Nations, 2017.
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Figure 1.2 Comparisons of world trade and world population; world trade and number of regional trade agreements; world population and world production; and world population and world trade (index 1960 = 100).
Sources: World Bank, 2017; World Trade Organization, 2017; United Nations, 2017.
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Drivers of Globalization 3 of 4
Role of Technological Change
Communications
Development of the microprocessor
Moore’s Law
Internet of things
Half the world’s population uses the Internet
Global e-commerce sales over $2 trillion
The Internet is an equalizer
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Moore’s law predicts that the power of microprocessor technology doubles and its cost of production falls in half every 18 months).
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Drivers of Globalization 4 of 4
Role of Technological Change continued
Transportation technology
Commercial jet travel, superfreighters, and containerization
Implications for the globalization of production
Has become more economical
Worldwide communications network
Implications for the globalization of markets
Convergence of consumer tastes and preferences
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The Changing Demographics of the Global Economy 1 of 6
Learning Objective 1-3 Describe the changing nature of the global economy.
The Changing World Output and World Trade Picture
U.S. has experienced a relative decline reflecting the faster economic growth of several other economies
China and BRIC countries growing more rapidly
Developing nations may account for more than 60 percent of world economic activity by 2025
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The Changing Demographics of the Global Economy 2 of 6
The Changing Foreign Direct Investment Picture
Non-U.S. firms are increasingly investing across national borders
Desire to disperse production activities to optimal locations and to build a direct presence in major foreign markets
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stock of foreign direct investment (FDI) refers to the total cumulative value of foreign investments as a percentage of the country’s GDP.
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Figure 1.3 Share of FDI stock outward as a percentage of GDP.
Sources: OECD data 2017, FDI stocks.
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Figure 1.3 shows how the stock of foreign direct investment by the United States, China, Japan, United Kingdom, European Union countries, Developed Economies, and the World changed between 1995 and today.
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Figure 1.4 FDI inflows (in millions of dollars)
Source: United Nations Conference on Trade and Development, World Investment Report 2017. (Data for 2018–2020 are forecast.)
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The Changing Demographics of the Global Economy 3 of 6
The Changing Nature of the Multinational Enterprise
Non-U.S. multinationals
In 2003, 38.8 percent of the world’s 2000 largest multinationals were U.S. firms
By 2017, 27 percent of the top 2000 global firms are now U.S. multinationals, a drop of 236 firms
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A multinational enterprise (MNE) is any business that has productive activities in two or more countries.
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The Changing Demographics of the Global Economy 4 of 6
The Changing Nature of the Multinational Enterprise continued
The rise of mini-multinationals
Medium- and small-sized businesses
Internet is lowering barriers
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The Changing Demographics of the Global Economy 5 of 6
The Changing World Order
Former communist countries present export and investment opportunities
Signs of growing unrest and totalitarianism
China moving to industrial superpower
Latin America debt and inflation are down, more private investors, expanding economies
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The Changing Demographics of the Global Economy 6 of 6
Global Economy of the Twenty-First Century
Barriers to the free flow of goods, services, and capital have been coming down
Strengthened by the widespread adoption of liberal economic policies by countries that had firmly opposed them
Globalization is not inevitable
Countries may pull back
Risks are high
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A multinational enterprise (MNE) is any business that has productive activities in two or more countries.
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The Globalization Debate 1 of 7
Learning Objective 1-4 Explain the main arguments in the debate over the impact of globalization.
Antiglobalization Protests
1999 protests at WTO meeting
Detrimental effects on living standards, wage rates, and the environment.
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The Globalization Debate 2 of 7
Globalization, Jobs, and Income
Critics of globalization argue:
Falling trade barriers allow firms to move manufacturing activities to countries where wage rates are much lower
Destroy manufacturing jobs in wealthy advanced economies
Services also being outsourced
Contributing to higher unemployment and lower living standards in their home nations
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The Globalization Debate 3 of 7
Globalization, Jobs, and Income continued
Supporters argue:
Benefits outweigh the costs
Free trade will result in countries specializing in the production of goods and services that they can produce most efficiently, while importing goods and services that they cannot produce as efficiently
As a result, the whole economy is better off
Companies can reduce their cost structure, and consumers benefit
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The Globalization Debate 4 of 7
Globalization, Jobs, and Income continued
Data suggests the share of labor in national income has declined
Share of national income by skilled labor has increased
Unskilled labor experienced a fall in income, but not necessarily standard of living due to economic growth
The weak growth rate in real wage rates for unskilled workers is likely due to a technology-induced shift within advanced economies
Technological change has a bigger impact than globalization on declining share of national income enjoyed by labor
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The Globalization Debate 5 of 7
Globalization, Labor Policies, and the Environment
Critics argue:
Labor and environmental regulations
Lack of regulation can lead to abuse
Adhering to regulations increases costs
As countries get richer, they enact tougher environmental and labor regulations
Supporters argue:
Tougher environmental regulations and stricter labor standards go hand in hand with economic progress
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Figure 1.6 Income levels and environmental pollution
Source: C. W. L. Hill and G. T. M. Hult, Global Business Today (New York: McGraw-Hill Education, 2018).
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While the hump-shaped relationship depicted in Figure 1.6 seems to hold across a wide range of pollutants—from sulfur dioxide to lead concentrations and water quality—carbon dioxide emissions are an important exception, rising steadily with higher-income levels.
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The Globalization Debate 6 of 7
Globalization and National Sovereignty
Critics argue:
Shift of power from national governments toward supranational organizations
WTO, EU, United Nations
Supporters argue:
The power of supranational organizations is limited to what nation-states collectively agree to grant
These organizations exist to serve the collective interests of member states
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The Globalization Debate 7 of 7
Globalization and the World’s Poor
Critics argue:
Gap between the rich and poor nations has gotten wider
Totalitarian governments
Poor economic policies
Corruption and lack of property rights
Expanding populations in developing countries
Debt burdens
Supporters argue:
The best way to change the situation is to lower barriers to trade and investment and promote free market policies
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Managing in the Global Marketplace
Learning Objective 1.5 Understand how the process of globalization is creating opportunities and challenges for business managers.
Managers
Managing an international business differs from managing a purely domestic business
Need to vary practices from country to country
More complex decisions required
Need to understand the international trading and investment system, currency exchange
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An international business is any firm that engages in international trade or investment.
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Appendix of Image Long Descriptions
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Appendix 1 Figure 1.1 Value of world trade, world production, number of regional trade agreements in force, and world population from 1960 to 2020 (index 1960 = 100).
A line graph shows world trade, world population, world production, and regional trade agreements from 1960-2020. As regional trade agreements increase year-by-year, so does world trade across country borders at the same pace.
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Appendix 2 Figure 1.2 Comparisons of world trade and world population; world trade and number of regional trade agreements; world population and world production; and world population and world trade (index 1960 = 100).
World trade and world population are both rising, but world trade has risen much faster since about 1972.
World trade and number of regional trade agreements have risen in tandem since about 1970.
World population and world production have risen on a mostly parallel path.
World population and world trade shows that as world population had steadily risen, world trade passed it in about 2004 and has since far exceeded it.
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Appendix 3 Figure 1.4 FDI inflows (in millions of dollars)
Figure 1.4 illustrates two important trends—the sustained growth in cross-border flows of foreign direct investment that has occurred since 1990 and the increasing importance of developing nations as the destination of foreign direct investment.
FDI inflows in developing countries have exceeded those in developed countries in every year since 1990.
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