V SEMESTER International Business

Module 3 :Globalization/ MNCs and International Business

Meaning Definitions and features, Advantages and disadvantages Essential conditions
of Globalization with reference to Production, Markets and Technology, Globalization
and India. GATT and WTO in brief.

Course Objectives for the module

• To enable students to explore the various global market entry modes.

Course Outcomes for the module

• Identify the critical issues in International Business.

• Interpret how the international business environment influences business
practice.
• Learn to critically analyse the risk and opportunities presented for businesses
that operate in the global arena and develop basic business proposals to
communicate this information for decision-making.
• Compare different modes of engagement with international markets and explore
the interconnectedness between these and the economic, legal, governmental,
political, regulatory, cultural and other environments in which expanding
companies operate

Introduction
Globalisation

➢ Globalization, as a term, is very often used to refer to integration of national

economies into the international economy through trade, foreign direct
investment, capital flows, migration, and spread of technology.
➢ The process of globalization had its origins in Europe, through the Portuguese,
Spanish, Dutch, French, and English territorial and maritime expansion into
all habitable continents, and included the discovery and colonization of the
New World.
➢ The term "globalization" was popularized by Theodore Levitt, a professor at
the Harvard Business School.
➢ Levitt has been erroneously credited with coining the term in 1983, but the
word "globalization" can be traced back to 1944.
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➢ The term has been used by economists since 1981, however its concepts did not
permeate popular consciousness until the latter half of the 1990s.

Globalisation

• Globalisation refers to the integration of markets in the global economy, leading to

the increased interconnectedness of national economies. Markets where
globalisation is particularly common include financial markets, such as capital
markets, money and credit markets, and insurance markets, commodity markets,
including markets for oil, coffee, tin, and gold, and product markets, such as
markets for motor vehicles and consumer electronics. The globalisation
of sport and entertainment is also a feature of the late 20th and early 21st
centuries.
• Globalisation envisages a borderless world or seeks the world as a global village.
It may be attributed by the accelerated flow of goods, people, capital, information,
and energy across borders, often enabled by technological developments.
• However, isolationism forced by Covid-19 pandemic has paused the growth of
globalisation in the world. Though the pandemic has hastened globalisation’s
decline, protectionism has been increasing since the global financial crisis 2008.
• The increased unemployment, growing inequality and anaemic growth in the
aftermath of the global financial crisis, particularly in the developed world, are the
main reasons for the rise of protectionism all across the globe.
• In this context, there is a debate all around the world regarding the sustainability
of globalisation in the future.

Essentials of Globalization
• Removal of quotas and tariffs.
• Liberalisation of Government rules and regulations.
• Freedom to business and industry.
• Removal of bureaucratic formalities and procedures.
• Adequate infrastructure.
• Competition on the basis of quality, price, delivery and customer service.
• Autonomy to public sector undertakings.
• Incentives for research and development.
• Administrative and Government support to industry.
• Development of money markets and capital markets.

Rise of Globalization
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▪ Origin of Modern Globalisation: What today is referred to as globalisation,

started with the end of the Cold war and the disintegration of the Soviet Union
in 1991.

▪ Driving Factors: Globalisation was the offshoot of two systems — democracy and
capitalism — that emerged victorious at the end of the Cold War.

o These ideas were transmitted across the world through free trade and
increased inter-country movement of capital and labour.

o The idea that all countries should unequivocally move towards democracy
underpinned with capitalism was packaged in policies commonly referred
to as the Washington Consensus or neo-liberalism.

▪ Politics of Globalisation: Politically, it refers to increasing global governance via

international institutions or growing alignment of national policies.

o It involves both benefits (such as coordinated crisis strategies) and costs

(such as less national self-determination), too.

o A liberal democracy combined with free-market capitalism was the best

way to organise society.

▪ Developing-Developed Countries Collaboration: The partnership between the

developed and the developing countries based on three planks.

o First was offshoring of manufacturing and low-end services jobs to

developing countries.

o Second, developed countries run large trade deficits by acting as the market
for the increased output of developing countries.

o Third, developing countries financing the trade deficit of the developed

countries by accumulating large foreign exchange reserves.

Decline of Globalisation since 2008

The global financial crisis was a turning point, as it struck at the twin foundations
of liberal democracy and free-market capitalism.

▪ Suppression of liberal democracy: The malaise of slow economic growth, wealth

inequality and rising unemployment provided a perfect breeding ground for
political leaders to appeal for nationalism as the solution to political and economic
ills.
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The economic rise of China under an authoritarian regime also raised doubts over
the efficacy of liberal democracy in solving pressing domestic challenges.

• Perils of neo-liberal doctrine: While the free-market ideology has been

fighting a battle of credibility since it took the maximum blame for the 2008
crisis, free trade policies have now been severely impacted due to Covid-19.
• The pandemic has not only exposed the fragility of highly optimised supply
chains that spread across countries but has also shown such inter-country
supply chains to be a threat to national security.

The Three major components of globalisation and the effects of

COVID-19 on these:
• Free movement of goods and elimination of trade obstructions: Data by World
Trade Organisation (WTO) for 2020 shows that there has been a 9.2% decline in
world merchandise trade when compared to 2019. These alarming figures are
testimony to the fact that many countries are unable to meet demand and supply.
• Free flow of capital: The pandemic has had a profound impact on the
movement of capital. Cross-border movement was halted due to the lockdown.
This lack of capital movement resulted in the depreciation of the Rupee. Despite
the initial hesitation about reviving the global economy, data shows that things
might be looking up.
• Transfer of technology: COVID-19 has widened the gap between nations with
technological advancements and those lacking in it. Transfer of goods,
particularly capital goods has been impacted. This was inherently felt in the field
of modern medical equipment which is required to treat coronavirus.
Nevertheless, technology such as big data and artificial intelligence, stepped in to
gauge the spread of the infection in China and ways to prevent it. Data sharing
facilitated the process of developing a vaccine and mapping the mutation of the
virus.

ADVANTAGES OF GLOBALIZATION

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1. Economic Growth

It’s widely believed that increased globalization leads to greater economic growth for
all parties. There are several reasons why this might be the case, including:

•Access to labour: Globalization gives all nations access to a wider labour pool.
Developing nations with a shortage of knowledge workers might, for
example, “import” labour to kickstart industry. Wealthier nations, on the
other hand, might outsource low-skill work to developing nations with a
lower cost of living to reduce the cost of goods sold and pass those savings on
to the customer.
• Access to jobs: This point is directly related to labour. Through globalization,
developing nations often gain access to jobs in the form of work that’s been
outsourced by wealthier nations. While there are potential pitfalls to this (see
“Disproportionate Growth” below), this work can significantly contribute to
the local economy.
• Access to resources: One of the primary reasons nations trade is to gain access
to resources they otherwise wouldn’t have. Without this flow of resources
across borders, many modern luxuries would be impossible to manufacture or
produce. Smartphones, for example, are dependent on rare earth metals found
in limited areas around the world.
• The ability for nations to “specialize”: Global and regional cooperation allow
nations to heavily lean into their economic strengths, knowing they can trade
products for other resources. An example is a tropical nation that specializes
in exporting a certain fruit. It’s been shown that when nations specialize in the
production of goods or services in which they have an advantage, trade
benefits both parties.
2. Increased Global Cooperation

For a globalized economy to exist, nations must be willing to put their differences aside
and work together. Due to this, increased globalization has been linked to a reduction—
though not an elimination—of conflict.

3. Increased Cross-Border Investment

According to the course Global Business, globalization has led to an increase in cross-
border investment. At the macroeconomic level, this international investment has been
shown to enhance welfare on both sides of the equation.

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The country that’s the source of the capital benefits because it can often earn a higher
return abroad than domestically. The country that receives the inflow of capital benefits
because that capital contributes to investment and, therefore, to productivity. Foreign
investment also often comes with, or in the form of, technology, know-how, or access to
distribution channels that can help the recipient nation.
DISADVANTAGES OF GLOBALIZATION

1. Increased Competition

When viewed as a whole, global free trade is beneficial to the entire system. Individual
companies, organizations, and workers can be disadvantaged, however, by global
competition. This is similar to how these parties might be disadvantaged by domestic
competition: The pool has simply widened.

With this in mind, some firms, industries, and citizens may elect governments to pursue
protectionist policies designed to buffer domestic firms or workers from foreign
competition. Protectionism often takes the form of tariffs, quotas, or non-tariff barriers,
such as quality or sanitation requirements that make it more difficult for a competing
nation or business to justify doing business in the country. These efforts can often be
detrimental to the overall economic performance of both parties.

2. Disproportionate Growth

Globalization can introduce disproportionate growth both between and within nations.
These effects must be carefully managed economically and morally.

Within countries, globalization often has the effect of increasing immigration.

Macroeconomically, immigration increases gross domestic product (GDP), which can be
an economic boon to the recipient nation. Immigration may, however, reduce GDP per
capita in the short run if immigrants’ income is lower than the average income of those
already living in the country.

Additionally, as with competition, immigration can benefit the country as a whole

while imposing costs on people who may want their government to restrict
immigration to protect them from those costs. These sentiments are often tied to and
motivated—at least in part—by racism and xenophobia.

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3. Environmental Concerns

Increased globalization has been linked to various environmental challenges, many of

which are serious, including:

•
Deforestation and loss of biodiversity caused by economic specialization and
infrastructure development
• Greenhouse gas emissions and other forms of pollution caused by increased
transportation of goods
• The introduction of potentially invasive species into new environments
While such issues are governed by existing or proposed laws and regulations,
businesses have made environmental concerns and sustainability a priority by, for
example, embracing the tenets of the triple bottom line and the idea of corporate social
responsibility.

Components of Globalization
 Globalization of Market

 Globalization of Production

 Globalization of Technology

Globalization of Markets

Globalization of markets refers to the process of integrating and merging of the

distinct world markets into a single market. This process involves the identification
of some common norm, value, taste, preference and convenience and slowly enables
the cultural shift towards the use of common product or service.

Features of Globalization of markets

➢ The size of the company need not to be large to create a global market. Even
small companies can create a global market .
➢ The distinction of global market are still prevailing even after the globalization
of market. These distinction require the companies to formulate different
strategies for each market.
➢ Most of the foreign markets are the markets for non consumer goods like
machinery, equipments, raw material, software etc.

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➢ The global business firms compete with each other frequently in different
national markets including their home markets.
Reasons for Globalization of Market

➢ Large scale industrialization enabled mass production.

➢ Companies in order to reduce the risk diversify the portfolio of countries.
➢ To cater to the demand for their product in foreign market.
➢ Companies globalize markets in order to increase their profits and achieve
company goals.

Reasons for Globalization of Production:

• Imposition of restrictions on imports by the foreign countries forces the MNCs to

establish manufacturing facilities in other countries.
• Availability of high quality raw materials and components in other countries.
• Availability of inputs at low cost in foreign countries.
• Availability of skilled human resources at low cost.
• Liberal labour laws in the foreign countries.
• To reduce cost of transportation and easy logistics management.
• Facility of exporting to other neighbouring foreign countries.
• To design and produce the products as per the varying tastes of consumers in
foreign countries.

The process of globalization of production helps the companies to design the following
strategies:

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• Low cost leadership

• Superior quality
• Superior Speed.

GLOBALIZATION WITH REFERENCE TO TECHNOLOGY

Definition

Archibugi and Michie (1995, 1997) identified three separate processes that are
generally subsumed under the catch-all expression “globalization of technology”.
According to them the term has three connotations:

➢ International exploitation of national technological capabilities;

➢ International technology alliances; and
➢ Globalization of innovation across countries

Globalization of Technology Means

➢ The global exploitation of technologies through patents and licenses.

➢ The global sourcing of research and development (R&D) through alliances
and joint ventures with foreign companies or universities.
➢ The global production of R&D through overseas subsidiaries.

The Three Dimensions of Globalization of Technology

Category Manifestation Indicator

International • Domestic enterprises • International trade in

exploitation of • Exports of high technology high tech products
national products
• Quantum of FDI inflows
technological • Relocation of production
and outflows
capabilities abroad
• Exports of disembodied • Number of licensing
technology through the agreements
medium of licensing
agreements between foreign
and domestic firms

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International • Firms expand their non- • Number and form of

technology alliances equity agreements to share scientific and technical
(collaboration across costs and risks of industrial agreements on strategic
borders among both R&D technology partnering
public and business
institutions to
exchange and
develop know-how)

Generation of • MNCs establish their R&D • Degree of R&D financed

Innovation across units abroad from abroad.
more than one
• Patenting activities of
country
MNCs attributable to
research in foreign
locations

International Technology Alliances

➢ Industrial firms increasingly have sought global research partnerships as a

means of strengthening their core competencies and expanding into
technology fields considered critical for maintaining market share.
➢ Technological complementarily and reduction of the innovation period are
primary catalysts for entering into a core technology alliance; market entry
and production-related factors are more relevant in technologically less
advanced or mature markets.
➢ Though difficult to define in very precise terms, there is widespread
consensus that: strategic alliances are not primarily direct investments but not
arm’s-length relationships either and; the notion of alliances assumes the
existence of distinctive or relatively independent agents. Their growth of
alliances was very fast during the 1980s but involved predominantly
companies from the US, Western Europe and Japan.

These new forms of agreements are not replacing but actually complementing and
expanding traditional foreign direct investment (FDI).
Globalization of Innovation is on the Increase:

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➢ Share of foreign affiliates in domestic manufacturing R&D

➢ Share of domestic industrial R&D financed from foreign sources
➢ Cross-border ownership of innovations
Cross-border Ownership of Innovations
Cross-border ownership of patents reflects the inventive activity of foreign affiliates
of MNCs. On average, 8% of inventions made were owned by a foreign resident in
the mid-1990s, against 6% in the mid- 1980s. For almost all countries, both
ownership of invention abroad and foreign control of domestic inventions have
increased.

Ownership of inventions made abroad is high in small open countries such as the
Netherlands and Switzerland. These two countries and the United States are the
largest owners of patents covering foreign inventions

MARKETS FOR TECHNOLOGY

➢ Implicit in the "globalization” argument is another one, namely that markets

for technologies exist and that with globalization the barriers to entry into this
market are being lowered, leading to increased competition among the so-
called technology suppliers.
➢ This state of affairs of increased competition is said to be beneficial to
developing countries as they are supposed to be able not only to benefit from
increased access to, say, state-of-the-art technology but also to obtain it in
terms of better terms and conditions

Technology Transactions

➢ "Technology transactions can take different forms, from pure licensing of well
defined intellectual property, to complicated collaborative agreements which
may well include the further development of the technology, or its realization
from scratch". Though transactions in technology can also occur through
mergers and acquisitions and through the mobility of people.
➢ It is seen that non-market forms of technology transfer are on the increase.
This means that increasingly technologies are being transferred through the
intra-firm route.

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➢ To illustrate, parent companies are selling technologies more to their affiliates

and conversely less to unaffiliated firms. Recent data clearly substantiates this
point

Globalization and India

Effect of globalization on Indian society
Globalization has several aspects and can be political, cultural, social, and economic, out
of which financial integration is the most common aspect. India is one of the fastest-
growing economies in the world and is predicted to reach the top three in the next
decade.
India’s massive economic growth is largely due to globalization which was a
transformational change that didn’t occur until the 1990s. Since then, the
country’s gross domestic product (GDP) has grown at an exponential rate.
Impact of globalization on the Indian economy
Overall, globalization has improved various aspects of India, like:
• International trade relations
• Economy
• Technology and communication
• Corporate world
• Social and cultural expansion
The reduction of export subsidies and import barriers enabled free trade that made the
Indian market attractive to the international community. The untapped potential of the
nascent Indian market was opened to the global market and the significant changes
were made to its industrial, financial, and agricultural sectors:

Industrial sector: It saw a massive influx of both foreign capital investments’ India
became a favorite offshore market for pharmaceutical manufacturing, chemical, and
petroleum industries. This brought advanced technologies and processes that helped in
the modernization of the Indian industrial sector.

Financial sector: Prior to globalization and privatization, India’s financial sector had
been mismanaged by a combination of corrupt and inept government officials. The
privatization of the financial space created a much more dynamic financial services
sector.

Agricultural sector: India still has a largely agrarian society, with a significant majority
of the country’s population depending on this sector either directly or indirectly for

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their livelihood. The new technological capabilities of farmers have increased helping
drive global exports of Indian products such as tea, coffee, and sugar.

The betterment of these sectors has brought about an increase in national income,
employment, exports, and GDP growth.

Advantages of globalization for India

1. The increasing globalization of India has access to markets of the country to

foreign companies seeking to invest and operate within the massive Indian
market.
2. Increase in employment opportunities.
3. Initially, globalization gave foreigners access to an inexpensive, robust
labor force. But as the country has progressed, the labor force has grown
more skilled and educated over time. Now India has the largest diaspora
living abroad.
4. For foreign investors considering the economy as a whole, India offers a
well-diversified export basket. This has been highlighted in the Economic
Survey of India as well.

The cultural impact of globalization on Indian society

The process of globalization increased access to television and other entertainment
sources over the years. Even in the rural areas satellite television has an established
market. In the cities, Internet facility is everywhere and it is being extended to rural
areas also through schemes like Smart Cities Mission.

There is an increase in the global food chain and restaurants in the urban areas of India.
Multiple movie halls, big shopping malls, and high-rise residential are seen in every
city.

The entertainment sector in India has now obtained a global market. After economic
liberalization, Bollywood expanded its area and showed a major presence on the global
scale. Bollywood movies are quite famous in Middle Eastern and many African
countries as well.

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• Western styles began to be incorporated into Bollywood films to expand the

outreach.
• As these new cultural ideologies began to permeate the Indian population, the
Indian urban population was pushed to re-evaluate their traditional Indian
cultural ideology.
• Bollywood movies are also distributed and accepted at the international level.
Big international companies like Walt Disney, 20th Century Fox, and Columbia
Pictures are investing in this sector.
• Similarly, famous International brands such as Armani, Gucci, Nike, and Omega
are also making investments in the Indian market with the changing of fashion
statement of Indians.

Effects of Globalization on Indian Education:

• There is a profound effect observed in the educational sector due to globalization
such as the literacy rate becoming high.
• Foreign Universities are collaborating with different Indian Universities now,
expanding the reach for Indian students.
• The Indian educational system embraced globalization through Information
technology and it offers opportunities to evolve new paradigms shifts in
developmental education.
• The shift from largely uneducated to an industrial society to an information
society has gradually taken shape.
• Globalization promotes new tools and techniques such as E-learning, Flexible
learning, Distance Education Programs, and Overseas training.
• Many government schemes like the ‘New Education Policy’ are pushing for a
more global education system to make Indian students from every walk of life at
par with the global community.

Challenges of globalization in Indian society

• Economically, for a large market like India is harder to maintain a free,

convertible, and open access enabled transnational market.
• Globalization also means growing interdependence in other nations- this
can issues like misdistribution of resources. The parity between
underdeveloped, developing, and developed remains status quo in many
cases.

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• The universalization of information technology has boons but also banes, in

terms of cybercrimes and other darknet activities. The increase in the
number of cyberattacks in India is proof of this.
• Globalization does have a great effect on the ecologies and environments of
nations that need safeguards that lessen the negative effects rather than
exploiting them without regard to such concerns.
• The negative effects of globalization on the Indian Industry are that with
the coming of technology the number of labor required is decreased and
this resulted in increasing unemployment, especially in the arena of the
pharmaceutical, chemical, manufacturing, and cement industries.
• There are a few challenges for companies due to globalization such
as Migration, relocation, labour shortages, competition, and changes in
skills and technology.

De-globalisation/ Reverse Globalisation

Concept of De-globalisation/ Reverse Globalisation

According to Walden Bello and Focus on the Global South, who coined the term
"deglobalisation", the objective is not to withdraw from the global economy, but rather
to trigger a process of restructuring the world economic and political system so as to
strengthen local and national economies instead of weakening them.

De-globalisation questions the integration process dominated by the logic of capital and
the supposed rationality of the economy that erodes the decision-making capacity of the
people and States. Deglobalising means starting to think and build an integration
process based on the needs of peoples, nations, communities and ecosystems.

Deglobalisation does not oppose trade nor the exchange of products or services, but
proposes that trade is not done at the expense of the communities, the local and
national economies and the diversity of its products whether agricultural or industrial.

What are the indicators of deglobalization/ Reverse Globalisation?

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Apart from rise of right wing parties across globe, which is political manifestation of
deglobalization, economic indicators show that post 2008 economic slowdown de-
globalization is becoming the norm.

• Trade: With global demand weak, and many nations erecting import barriers,
trade is slumping. Measured as a share of global gross domestic product, trade
doubled from 30 percent in 1973 to a high of 60 percent in 2008. But it faltered
during the crisis and has since dropped to 55 percent.
• The flow of capital - mainly bank loans - is retreating even faster. Frozen by the
financial crisis and squeezed afterward by new regulations, capital flows have
since slumped to just under 2 percent of G.D.P. from a peak of 16 percent in 2007.
• The flow of people is slowing, too. Despite the flood of refugees into Europe, net
migration from poor to rich countries decreased to 12 million between 2011 and
2015, down by four million from the previous five years.

What are the reasons for deglobalisation/ Reverse Globalisation?

There are several reasons behind this trend today. Some of them are:

• Unequal distribution of benefits of globalization, rising inequalities, job loss

especially in developed countries.
• MNCs across the countries and workers from developing countries benefitted
the most leading to perception that workers from developing countries have
stolen jobs from developed countries. This led to demands of stricter visa regime
and relocation of industries.
• Global slowdown exacerbated the above mentioned situation and led to increase
in demand for protectionist measures across globe.
• Rise of ISIS, increased instances of terrorist attacks and emerging security threats
across globe. Immigration crisis further accentuated the security situation and as
it is happening at the time of economic slowdown thus leading to anti-immigrant
stand.
• Rise of populist leaders globally re-enforces the trend

Principles of De-globalization/ Reverse Globalisation by Walden Bello

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➢ Production for the domestic market rather than production for export markets
must again become the center of gravity of the economy.
➢ The principle of subsidiary should be enshrined in economic life by encouraging
production of goods at the level of the community and at the national level if this
can be done at reasonable cost in order to preserve community.
➢ Trade policy - that is, quotas and tariffs - should be used to protect the local
economy from destruction by corporate-subsidized commodities with artificially
low prices.
➢ Industrial policy - including subsidies, tariffs, and trade - should be used to
revitalize and strengthen the manufacturing sector.
➢ Long-postponed measures of equitable income redistribution and land
redistribution (including urban land reform) must be implemented to create a
vibrant internal market that would serve as the anchor of the economy and
produce local financial resources for investment.
➢ De-emphasizing growth, emphasizing upgrading the quality of life, and
maximizing equity will reduce environmental disequilibrium.
➢ The power and transportation systems must be transformed into decentralized
systems based on renewable sources.
➢ A healthy balance must be maintained between the country's carrying capacity
and the size of its population.
➢ Environmentally congenial technology must be developed and diffused in both
agriculture and industry.
➢ A gender lens must be applied in all areas of economic decision making so as to
ensure gender equity.
➢ Strategic economic decisions must not be left to the market or to technocrats.
Instead, the scope of democratic decision-making in the economy should be
expanded so that all vital economic issues - such as which industries to develop
or phase out, what proportion of the government budget to devote to agriculture,
etc. - become subject to democratic discussion and choice. This will entail the
demystification of economics and a return to its origins as political economy and
moral economy.
➢ Civil society must constantly monitor and supervise the private sector and the
state, a process that should be institutionalized.

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➢ The property complex should be transformed into a "mixed economy" that

includes community cooperatives, private enterprises, and state enterprises, and
excludes transnational corporations.
➢ Centralized global institutions like the IMF and the World Bank should be
replaced with regional institutions built not on free trade and capital mobility
,but on principles of cooperation that, to use the words of Hugo Chavez in
describing the Bolivarian Alternative for the Peoples of Our Americas (ALBA),
"transcend the logic of capitalism."

General Agreement on Tariffs and Trade (GATT)

The General Agreement on Tariffs and Tradewas the first worldwide multilateral free
trade agreement. It was in effect from June 30, 1948 until January 1, 1995. It ended when
it was replaced by the more robust World Trade Organization.

Purpose
The purpose of GATT was to eliminate harmful trade protectionism. That had sent
global trade down 65 percent during the Great Depression. By removing tariffs, GATT
boosted international trade. It restored economic health to the world after the
devastation of World War II.
Member Countries
The original 23 GATT members were Australia, Belgium, Brazil, Burma (now
Myanmar), Canada, Ceylon, Chile, China, Cuba, Czechoslovakia (now Czech Republic
and Slovakia), France, India, Lebanon, Luxembourg, Netherlands, New Zealand,
Norway, Pakistan, Southern Rhodesia (now Zimbabwe), Syria, South Africa, the United
Kingdom and the United States. The membership increased to 100 countries by 1993.

Three Provisions
GATT had three main provisions. The most important requirement was that each
member must confer most favoured nation status to every other member. That means
all members must be treated equally when it comes to tariffs. It excluded the special
tariffs among members of the British Commonwealth and customs unions. It permitted
tariffs if their removal would cause serious injury to domestic producers.
Second, GATT prohibited restriction on the number of imports and exports. The
exceptions were:
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• When a government had a surplus of agricultural products.

• If a country needed to protect its balance of payments because its foreign
exchange reserves were low.
• Developing countries that needed to protect fledgling industries.

In addition, countries could restrict trade for reasons of national security. These
included protecting patents, copyrights and public morals.

Pros
• For 47 years, GATT reduced tariffs. This boosted world trade 8 percent a year
during the 1950s and 1960s. That was faster than world economic growth. Trade
grew from $332 billion in 1970 to $3.7 trillion in 1993.
• It was seen as such a success that many more countries wanted to join. By 1995,
there 128 members, generating at least 80 percent of world trade.
• By increasing trade, GATT promoted world peace. in the 100 years before GATT,
the number of wars was ten times greater than the 50 years after GATT. Before
World War II, the chance of a lasting trade alliance was only slightly better than
50/50.
• By showing how free trade works, GATT inspired other trade agreements. It set
the stage for the European Union. Despite the EU's problems, it has prevented
wars between its members.
• GATT also improved communication by providing incentives for smaller
countries to learn English, the language of the world's largest consumer market.
This adoption of a common language reduced misunderstanding. It also gave
less developed countries a competitive advantage. English gave them insight into
the developed country's culture, marketing and product needs.
Cons

• Low tariffs destroy some domestic industries, contributing to high

unemployment in those sectors. Governments subsidized many industries to
make them more competitive on a global scale. U.S. and EU agriculture were
major examples. In the early 1970s, the textile and clothing industries were
exempted from GATT. When the Nixon Administration took the U.S. dollar off

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the gold standard in 1973, it lowered the value of the dollar compared to other
currencies. That further lowered the international price of U.S. exports.
• By the 1980s, the nature of world trade had changed. GATT did not address the
trade of services. That allowed them to grow beyond any one country's ability to
manage them.
• Like other free trade agreements, GATT reduced the rights of a nation to rule its
own people. The agreement required them to change domestic laws to gain the
trade benefits. For example, India had allowed companies to create generic
versions of drugs without paying a license fee. This helped more people afford
medicine. GATT required India to remove this law. That raised the price of drugs
out of reach for many Indians.

WTO FACT FILE

Location: Geneva, Switzerland
Established: 1 January 1995
Created by: Uruguay Round negotiations (1986-94)
Membership: 164 members representing 98 per cent of world trade
Budget: 197 million Swiss francs for 2022
Secretariat staff: 623
Head: Ngozi Okonjo-Iweala (Director-General)
Functions

➢ Administering WTO trade agreements

➢ Forum for trade negotiations
➢ Handling trade disputes
➢ Monitoring national trade policies
➢ Technical assistance and training for developing countries
➢ Cooperation with other international organizations

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Goods
It all began with trade in goods. From 1947 to 1994, GATT was the forum for
negotiating lower customs duty rates and other trade barriers; the text of the General
Agreement spelt out important rules, particularly non-discrimination.
Since 1995, the updated GATT has become the WTO’s umbrella agreement for trade in
goods. It has annexes dealing with specific sectors such as agriculture and textiles, and
with specific issues such as state trading, product standards, subsidies and actions
taken against dumping.
Services
Banks, insurance firms, telecommunications companies, tour operators, hotel chains
and transport companies looking to do business abroad can now enjoy the same
principles of freer and fairer trade that originally only applied to trade in goods.
These principles appear in the new General Agreement on Trade in Services (GATS).
WTO members have also made individual commitments under GATS stating which of
their services sectors they are willing to open to foreign competition, and how open
those markets are.
Intellectual property
The WTO’s intellectual property agreement amounts to rules for trade and investment
in ideas and creativity. The rules state how copyrights, patents, trademarks,
geographical names used to identify products, industrial designs, integrated circuit

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layout-designs and undisclosed information such as trade secrets — “intellectual

property” — should be protected when trade is involved.
Dispute settlement
The WTO’s procedure for resolving trade quarrels under the Dispute Settlement
Understanding is vital for enforcing the rules and therefore for ensuring that trade
flows smoothly. Countries bring disputes to the WTO if they think their rights under
the agreements are being infringed. Judgements by specially-appointed independent
experts are based on interpretations of the agreements and individual countries’
commitments.
The system encourages countries to settle their differences through consultation. Failing
that, they can follow a carefully mapped out, stage-by-stage procedure that includes the
possibility of a ruling by a panel of experts, and the chance to appeal the ruling on legal
grounds. Confidence in the system is borne out by the number of cases brought to the
WTO — around 300 cases in eight years compared to the 300 disputes dealt with during
the entire life of GATT (1947–94).
Policy review
The Trade Policy Review Mechanism’s purpose is to improve transparency, to create a
greater understanding of the policies that countries are adopting, and to assess their
impact. Many members also see the reviews as constructive feedback on their policies.
All WTO members must undergo periodic scrutiny, each review containing reports by
the country concerned and the WTO Secretariat.

Comparison Chart
BASIS FOR GATT WTO
COMPARISON
Meaning GATT can be described as a set of rules, WTO is an international
multilateral trade agreement, that came organization, that came into
into force, to encourage international existence to oversee and
trade and remove cross-country trade liberalize trade between
barriers. countries.
Institution It does not have any institutional It has permanent institution
existence, but have a small secretariat. along with a secretariat.
Participant Contracting parties Members
nations
Commitments Provisional Full and Permanent
Application The rules of GATT are only for trade in The rules of WTO includes
goods. services and aspects of

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intellectual property along with

the goods.
Agreement Its agreement are originally multilateral, Its agreements are purely
but plurilateral agreement are added to it multilateral.
later.
Domestic Allowed to continue Not allowed to continue
Legislation
Dispute Slow and ineffective Fast and effective
Settlement
System

New Era of Supply Chain bottlenecks and its impact on Globalization

Global supply chain disruptions have exacerbated in last 2-3 years, owing to a ‘perfect
storm’ of multiple developments that converge to question the very model of
globalisation that the world has followed since the 1970s. Global companies, including
automakers, footwear manufacturers, and mobile phone producers, have had to cut
down production and the ripple impact is being felt across sectors and geographies.
With the advent of the Omicron mutation, further disruptions may be in store.

The range of factors causing global supply chain disruptions is extensive, and these
have led to supply gaps in products such as household essentials, computer chips, cars,
and so on, and are combining to increase input costs, delivery timelines, and logistics
costs, and even disrupt festival plans that typically involve higher consumer purchases.

Shipping Issues

The global shipping industry is in the throes of unprecedented log jams. In October
2021, almost 600 container ships were waiting for berths outside ports, and port
turnaround time in key ports had doubled. Shipping freight costs have
surged According to Moody’s, 77% of the world’s largest ports face backlogs.

The issues here are many:

• Surge in shipping demand following global recovery;

• Port slowdowns due to Covid-19 restrictions;
• Shortage of port workers and other workers;
• Typhoons and
• Impact of stuck ship in the Suez in March 2021.

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• Russia – Ukraine War

Supply Bottlenecks

During the pandemic period over 2020, many manufacturers across the world had cut
down their production and reduced orders for intermediate goods and raw materials.
Once recovery commenced, the strength of suppressed demand rising again caught
them on the back foot. This led to supply bottlenecks in critical inputs – particularly
microchips and shipping containers.

Microchips further saw a rise in demand owing to higher purchases of electronic items
such as laptops and phones as working professionals and students shifted to virtual
interactions during Covid times. The lead time between ordering chips and their
delivery was estimated at 21 weeks in August 2021 compared to six weeks in July 2021.
As chips require investments of US$ 10-12 billion and a long period to set up new
manufacturing facilities, the shortage could continue despite the fact that governments
have earmarked funds for investing in setting up new production centres.

Similarly, with ships being stranded at ports, containers too are stuck and in short
supply. Container production – carried out almost entirely in China - had been cut back
in the pre-pandemic period, due to the slowdown in world trade, The average price for
a standard 40-foot container made in China went up by two-thirds over 2020.

While China was one of the first economies to begin recovering after a short shutdown
in the early part of 2020, the third quarter GDP (gross domestic product) growth rate in
2021 fell to 4.9% from 7.9% in the second quarter of 2021, below expectations, in part
due to energy shortages and policies to curb the real estate sector. China’s
manufacturing contracted in September 2021 owing to multiple factors, including
regulatory measures in many sectors of the economy.

Energy shortages led to the shutdown of many factories in China. Curbs on imports of
Australian coal, pressure to reduce carbon emissions, and rising export demand have
led to power cuts across China. With slower manufacturing growth in the world’s
largest manufacturing and exporting country, supply chain bottlenecks in many parts
of the world have also suffered from uneven linkages.

Labour Supply and Energy Issues

Truck-driver and port-worker shortage in the US has intensified the backlog of

clearances at its ports impacting the entire global supply chain. There was a gap of

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61,000 between required and available truck drivers in 2019, which has since gone
up due to new regulations on alcohol- and drug-related tests. As a result, worker costs
in truck transport have risen significantly, and ports have seen a surfeit of stuck
containers.

Similarly, EU and Asian countries are also experiencing tight labour markets as workers
are dropping out of the workforce. In the first quarter of 2021, the Eurozone had 2.6
million fewer active workers than in the pre-pandemic period. In Vietnam, about 1.3
million workers returned to their hometowns in July-September 2021 due to the impact
of the pandemic.

Gas prices in the EU and the UK have risen about four times since the start of 2021,
affecting sectors such as fertilisers and steel. Petroleum prices too are on a rising track,
with Brent crude oil reaching its highest since 2018 in mid-October 2021 due to a shift
from high priced gas, and expectations of an increase in aviation demand, apart from
overall demand increases in line with economic recovery. Coal shortages are placing
pressures on energy as well, in countries like China and India.

Prevailing concepts of supply chain thinking are outdated

Trade in goods has peaked; virtual trade is on the rise. Over the past century, many
people, companies and countries have benefited from globalization and increased trade
across nations. During the period of Industrialization, global trade grew from four
percent of GDP in 1842 to 14% in 1913, facilitated by free movement of goods, people,
and capital (Exhibit 1). However, this period ended with increased protectionism.
Following the world wars, we saw two significant periods of globalization. The first
wave, during 1945-1980, was facilitated by international barriers coming down and
rising global cooperation through agreements and collaborative organizations like the
General Agreement on Tariffs and Trade, the World Trade Organization, Bretton
Woods, the World Bank, the International Monetary Fund, and the World Health
Organization. The second wave occurred from 1980-2008 during a period of rapid
urbanization, the emergence of the BRICs (Brazil, Russia, India, and China), the global
investment boom, and the commodity super cycle. Notably, the post-war period was
one of exceptionally strong growth that created a largely benign trade environment,
enabling companies to make commercial – and specifically, supply chain – decisions
based almost solely on economic terms that maximized margins and efficiency.

EXHIBIT 1 : For Decades, Companies Have Built Supply Chains by Taking Advantage of
Globalization to Increase Efficiencies

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Data as at December 31, 2019. Source: World Bank, United Nations, IMF, [Link], Fouquin and Hugot (CEPII 2016), Haver,
KKR Global Macro & Asset Allocation analysis.

Thinking of supply chains simply in terms of distribution of manufactured goods,

however, no longer fits with global economic trends and the shift in importance to
services. Indeed, we believe that global trade in goods has peaked for the near-term, at
the least.

Trade cycles tend to be correlated to investment cycles, as increasing amounts of

equipment and commodities are required to build homes, factories, and cities (Exhibit
2). In the past 150 years, there have been three such super cycles driven by urbanization
in the U.S., Japan, Korea, and now China.

Exhibit 2

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Within mature economies, domestic consumption is a more important driver of growth

than trade. That trend is now starting to play out in China and is reflected explicitly in
Chinese economic policy. Moreover, consumption itself is shifting. Within goods,
incorporation of data and computing technology is blurring the line between goods and
services. Think, for example, of a smart TV that builds a user profile or a smart car that
optimizes user experience based on driving habits.

Global trade in services is also evolving from back-office tasks such as call centers and
accounting to consumer interfaces in areas such as online gaming, streaming video, and
online shopping. All of these factors mean that services - not goods - will be the main
driver of globalization going forward.

Trade barriers are also going up. While there have been some significant expansions of
regional trade agreements in recent years (e.g., RCEP and CPTTP), on balance, trade
policies have been more restrictive than liberalizing. Notably, as shown in Exhibit 3,
that divergence started well before the trade wars of the Trump era, although recent
years have seen a sharp escalation, led by China, Germany, the U.S, Italy, France, and
Korea.

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The arrival of the age of digitization is also changing the global landscape, including the
exchange of services. Initially, it was business process offshoring (BPO) of services to
India and the Philippines. Today, for example, Netflix and Amazon Prime Video have
gone global via virtual data channels without physically crossing borders. Such cross-
border services inevitably bring about questions around data security and storage
location. Ironically, while protectionist policies restrict key drivers of globalization,
individuals are hooked on globalization. This is particularly true for millennials and
Generation Z’s who are globally connected in most all aspects of life. The tension
between nationalism and protectionism on the one hand, and a population that lives
and breathes on being free to connect with people, information, and ideas globally on
the other, is resulting in unpredictable policies impacting various parts of supply
chains.

Geopolitical Trends and Supply Chains

Geopolitical factors are on the rise. As globalization enters a new era, we are likely
going to see increased geopolitical, economic, and natural disaster drivers that push
toward more integration in some areas and less in others. There are several geopolitical
trends intersecting to pressure commercial decision-making on supply chains that have

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elevated counter-globalization forces and undermined assumptions of ever-greater

integration.

Increases in economic nationalism. Politics in countries around the world are

increasingly being influenced by rising levels of nationalist and populist sentiments,
driven by economic dissatisfaction, growing inequality, and lack of trust in institutions.
This burgeoning dissatisfaction with the status quo is manifesting itself in nationalist-
populist governments that embrace more domestically-oriented economic policies that
are inconsistent with international supply chains. Such sentiments are amplified
through mass penetration of social media, which allows unprecedented dissemination
of viewpoints and avenues for popular mobilization.

Increased risk of transnational threats. A more virtually and physically interconnected,

digitized, and urbanized world is at the same time more susceptible to a range of
transnational threats, such as climate change, pandemics, cyberattacks, and terrorism.
While the threat of climate change has generally pushed toward more international
cooperation, the COVID-19 pandemic has strained international cooperation as
countries have focused on national priorities and securing supply chains. These
transnational threats do not recognize international borders and can have economy-
wide impacts. They demand global solutions at a time that such solutions are harder to
achieve.

Prevailing concepts of global supply chains are outdated

Over the past century, companies have structured their supply chains to maximize
efficiencies created by globalization, to source and develop new markets, and to reduce
input costs, labour in particular, to maximize margins. In the early decades of global
supply chain development, businesses were hyper-focused on extracting efficiencies,
and even as supply chains grew increasingly complex, the focus on profit maximization
largely prevailed (Exhibit 4). In some circumstances, these long, complex supply chains
led to six-month lead times for components, as companies used software to optimize for
a small set of variables, relied on just-in-time logistics and manufacturing, single-
sourced suppliers, and traded and re-traded across large distances, creating opacity in
the actual sourcing of critical inputs.

However, the global environment has changed. The number of non-economic shocks —
hurricanes, tsunamis, epidemics/pandemics, and political/geopolitical developments —
has risen, putting long complex supply chains at risk (Exhibit 5). As the events of 2020 -

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22 have illustrated, the prevailing complex model that focused primarily on maximizing
profits and margins, is inadequate.

EXHIBIT 4

Companies Rely on Complex, Multi-Tiered, and Interconnected Networks…

Data as at December31, 2019. Source: Bloomberg Supply Chain database, McKinsey “Risk, resilience, and rebalancing
in global value chains” dated August 2020.

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EXHIBIT 5 -…Which Are Fragile in a World of Heightened Non-Economic Shocks

Data as at December 31, 2019. Note: excludes infectious disease outbreaks. Source: EMDAT (2020): OFDA/CRED International
Disaster Database, Université catholique de Louvain – Brussels – Belgium, [Link]/natural-disasters.

While long complex supply chains have yielded efficiency, in the changing global
environment they present clear challenges. Specifically, they are:

Too fragile from natural disasters delaying delivery of single source inputs to customs
delays, practical vulnerabilities of the outdated supply chain model were under
increasing scrutiny well before the pandemic. Global economic lockdowns, shuttered
industries, Wars and closed borders resulting from the pandemic have magnified
already existing vulnerabilities in the dominant supply chain model.

Insufficiently aware of diverse new risks. Traditional supply chain thinking has tended
to silo production and delivery of goods or services as an independent process from
other essential business inputs. Yet, optimization of supply chains themselves, as well
as the global reach of the businesses they serve, has also relied on broader globalization
trends. Key here were business inputs including the multi-decade trend toward freer
global movement of capital and investment, increased labor integration across the value

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chain from basic manufacturing to high-tech research, and cross-border development

and utilization of technology. More recently, global data transfer has risen in
prominence as improved computing power and internet speed has transformed data
into a critical business input. Thinking of supply chains as an independent process may
blind businesses to vulnerabilities in key inputs.

Exhibit 6

Ripple Effects from Russia-Ukraine War Test Global Economies

Impacts from the conflict are forcing companies to recalibrate and, in some cases,
wholly reconsider their long-standing supply chain and partner ecosystems.

The Russia-Ukraine war is having an outsized impact on the global supply chain,
impeding the flow of goods, fueling dramatic cost increases and product shortages, and
creating catastrophic food shortages around the world.

The upheaval to the supply and demand of goods is exacerbating the already untenable
human toll of the conflict, which shows no signs of abating.

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The February 2022 Russian invasion of Ukraine may have been the straw that broke the
camel’s back, but it was hardly the only contributing factor to the current global supply
chain crisis. Significant supply chain disruptions started bubbling up during the heat of
the trade wars in 2018 and 2019 and were pushed into new territory over the course of
the COVID-19 pandemic, continuing to this day.

While the main focus remains as it should on the tragedy of human loss and the
destruction of Ukrainian territory, the Russian invasion has triggered sanctions and
other obstacles that have hampered critical logistics and trade route operations.

The resulting ripple effects are threatening the supply of key food resources like wheat
and raising the possibility of a global famine.

Simultaneously, disruption to the flow of electronics, raw materials, and parts supplies
emanating out of China and other locales has seriously impeded global trade positions,
forcing companies to recalibrate and in some cases, wholly reconsider their long-
standing supply chain and partner ecosystems.

Food supply in crisis

One of the most alarming supply chain issues resulting from the Russia-Ukraine war is
food shortages, particularly acute in low-income countries in Africa. Ukraine and
Russia account for about a third of the world’s wheat and a quarter of barley
production, not to mention some 75% of the sunflower oil supply — all critical
commodities for keeping humans fed.

Ukraine and Russia account for about a third of the world’s wheat production as well as
about 75% of the sunflower oil supply.

The combination of Russian sanctions, blocked Ukrainian ports, and the inability of
Ukrainian farmers to work the fields is creating a perfect storm that requires
governments and businesses to find new ways to collaborate to head off a humanitarian
crisis.

China – Europe routes disrupted

The state of transportation routes connecting China with Europe is another casualty of
the Russian invasion. Surging gas prices are increasing freight costs for all modes of
transportation. The train route connecting the regions, which became highly
competitive during the height of COVID-19, especially for industries valuing shorter
lead times such as automotive and electronics, is now stalled. This is especially true for

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the primary corridor that traverses Russia, Belarus, and Poland before continuing on to
Germany, France, and other European countries.

While some companies are redirecting product traffic to an alternative train route, most
are shifting back to ocean freight mode.

New Semiconductor Crisis

Ukraine supplies about 50% of the world’s neon gas, which is used to produce
semiconductor chips. Governments and large corporations are now scrambling to
obtain alternative supplies, but the supply is tightening and prices have dramatically
increased.

Car Assembly Crisis

The Ukraine war’s surprisingly large impact on European car manufacturing has
highlighted the risk associated with the current global supply chain. For example,
Volkswagen and BMW have been closing assembly lines in Germany due to the
shortage of wiring harnesses manufactured in Ukraine by the German company Leoni.
And tire manufacturer Michelin has recently announced it could close some plants in
Europe due to logistics issue created by Russia’s invasion of Ukraine. There is no doubt
that the European car companies will take a hard look at the risks associated with
international suppliers and consider buying more locally, even if this requires
additional price increases. This could provide an opportunity for Europe to strengthen
its internal manufacturing sector.

To conclude, the challenges to global supply chains are going to increase for the
foreseeable future.
Reference Questions Not necessary reflecting in exams -2 Marks
1. What is Globalization?
2. Define Globalization.
3. Mention any 2 advantages and disadvantages of Globalization.
4. Mention the components of Globalization.
5. What is Globalization of Markets?
6. What is Globalization of Production?
7. What is Globalization of Technology?
8. Mention the dimensions of Globalization of Technology.
9. Who popularized the word Globalization through an article in Harvard Business Review?
10. Who is the current Director-General of WTO?

Section B- 4 Marks

1. Briefly explain the advantages of Globalization.

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2. Briefly explain the disadvantages of Globalization.

3. Briefly explain the concept of Globalization of Markets.
4. Briefly explain the concept of Globalization of Production.
5. Briefly explain the concept of Globalization of Technology.
6. Write a short note on Globalization.
7. Write a short note on GATT.
8. Write a short note on WTO .
9. Differentiate between GATT and WTO.
10. Brief explain the essentials of Globalization.
11. What are the factors aiding globalization?
12. Briefly discuss the economic impact of globalization in India.
13. Briefly discuss the socio-cultural impact of globalization in Indian Society.
14. Why has globalization increased in the past few years?
15. Briefly explain the 3 dimensions of globalization of technology.
16. Briefly explain the functions of WTO.
17. Briefly explain the impact of globalization on Cinema.

References for the Chapter:

• International Business- Subba Rao
• International Business – N. Badi
• International Business Environment: Francis Cherumilam
• International Trade- M.L Jhingan
• [Link]
• [Link]
[Link]
• [Link]/1983/05/the-globalization-of-markets/ar/
• [Link]
• [Link]
• [Link]
• [Link]
• [Link]
• [Link]
• [Link]
pandemic/[Link]
• [Link]
• [Link]
• [Link]
[Link]
• [Link]

Note: Modules are the guidelines for learning the syllabus. For further detail reference, refer the
recommended reference books.

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