Global Economy
• Common to buy clothing anywhere in US which has a tag labeled, ‘Made in Malaysia,
China or Sri Lanka’
• Simple observation reminds us that our consumption of goods has a strong international
character
• Increasingly true to speak not only of national economies but a larger, highly inter-
connected and interdependent- GLOBAL ECONOMY
• Before discussing basic mechanisms of industrialization and economic change within
Third World, important to look at the broader global industrial environment within
which these nations are forced to compete
Setting the Stage: Origins of the Global Economy
• Since 1970s world economy hit by turbulent forces
• Unemployment in western countries
• Traditional industries (iron and steel) have declined
• LDCs bearing huge financial debts which threaten drive for development
• Trading tensions have emerged between industrial countries and the newly
industrializing countries
Causes of These Conditions?
• Some argue that continuing OPEC escalation of oil prices through limited production is
root cause
• Had some effect but too simple an answer
• More profound changes in world economic structure were underway before this
• Increasingly growing consensus that world economy has become more volatile, complex
and tightly connected
• Countries affected by what is happening abroad and at larger geographical scale
Internationalization of Trade and Labor
• As with Japanese autos, American computers and Taiwanese calculators there is an
emergence of a “new international division of labor”
• Basically a change in geographical pattern of specialization at the global scale-constantly
changing and very dynamic
• Example: movement of textile and shoe production from Indonesia to China
International Division of Labor
• Division of labor has taken on spatial dimensions- some areas come to specialize in
certain types of economic activity
• At broad scale : industrialized countries ---à manufactured goods while non-
industrialized countries ---à raw materials
• However this simple pattern no longer exists
• Now much more complex structure involving fragmentation of many processes and
their geographical relocation on a global scale
Forces Surrounding Global System of Production
• These five factors are affecting production patterns:
• 1. Trans-national or multi-national corporations (MNCs)-firms that operate in many
nations
• Increasingly these firms have local production points and suppliers that operate across
national boundaries providing and securing labor, capital and other resources from a
variety of places and which have become very powerful and important influences in the
global economy
Sequential Model of TNC Development
• Stage I- Serve domestic market only
• Stage II- Export to overseas markets through independent channels (sales agents)
• Stage III- Establish sales outlets in overseas markets by acquiring local firm and/or
setting up new facility
• Stage IV- Establish production facility overseas by acquiring local firm and/or setting up
new facility
Geographical Growth of a Multinational Corporation
Forces Surrounding Global System of Production
• 2. National governments- through their industrial, trade and foreign policies especially
liberalization policies
• Liberalization refers to the way in which policies facilitate transactions (trade and sales)
of a variety of products and services
• Deregulation refers to the easing of taxation, entry and pricing of products or services
dictated by government policy
• Privatization refers to the ownership of former public sector operations and firms by
private corporations and enterprises
• 3. Enabling Technologies- transport, communications, production and organizational
improvements
• Explosion of enhanced transport and communication services such as air cargo,
integrators offering definite time delivery (FedEx and UPS), electronic mail and
electronic data interchange (EDI)
• Advanced inventory management such (just-in-time (JIT)) and new systems of
distribution such as third party logistics (3PL)
• 4. Shifts in Market Conditions and Demand
• Economic cycles affect markets and production, e.g. the Asian financial crisis
• Dramatic shifts in demand affect over time influence type of good being produced and
production schedules
• Application of new technology can mean product obsolescence
• These changes can be described in part through product life cycle
Product Life Cycle
• Essence of PLC is that growth in sales of product follows systematic path, from initial
introduction to market through development, growth, maturity, decline and
obsolescence
Cellular Phones of Nokia
• Evolution of basic Cellular phones are an example of a product which is especially
applicable to the notion of the product life cycle
• phone to color enhancement to camera and email device
Global Production Chains and Networks
• Production Chain: Materials > Procurement > Transformation > Marketing and Sales
>Distribution > Service
• Definition: transactionally linked sequence of functions where each stage adds value to
the process of goods and services production
• Two aspects important: coordination and regulation and geographical configuration
• Production chains may be very localized but increasingly are global in scale to take
advantage of international division of labor.