Chapter 1 – Globalization

- Globalization: the shift toward a more integrated and

interdependent world economy.
o Globalization of markets - the merging of historically
distinct and separate national markets into one huge global
marketplace
 Creating a global market - by offering the same basic
product worldwide
 National markets vs global markets - consumer tastes
and preferences, distribution channels, culturally
embedded value systems, business systems, and legal
regulations.
 Most global of markets are for industrial goods and
materials (aluminum, oil, and wheat; industrial products
such as microprocessors, DRAMs (computer memory
chips), and commercial jet aircraft; computer software;
and financial assets from U.S. Treasury bills to
Eurobonds and futures on the Nikkei index or the euro)
that serve universal needs the world over, not markets
for consumer products
 If a firm moves into a nation not currently served by its
rivals, many of those rivals are sure to follow to prevent
their competitor from gaining an advantage.
 As firms follow each other around the world, they
bring with them many of the assets that served
them well in other national markets— their
products, operating strategies, marketing
strategies, and brand names—creating some
homogeneity across markets.
o Globalization of production: 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).
 lower their overall cost structure or improve the quality
or functionality of their product offering, thereby
allowing them to compete more effectively
 Early outsourcing efforts were primarily confined to
manufacturing activities, however, modern
communications technology, particularly the Internet,
allowed outsourcing service activities to low-cost
producers in other nations.
  Global products - outsourcing of productive activities
to different suppliers results in the creation of products
that are global in nature
 impediments include formal and informal barriers to
trade between countries, barriers to foreign direct
investment, transportation costs, issues associated with
economic and political risk, and the sheer managerial
challenge of coordinating a globally dispersed supply
chain
o barriers to cross-border trade and investment are declining;
o perceived distance is shrinking due to advances in
transportation and telecommunications technology;
o material culture is starting to look similar the world over;
o and national economies are merging into an interdependent,
integrated global economic system.
o proponents of increased trade argue that cross-cultural
engagement and trade across country borders is the future
and that returning back to a nationalistic perspective is the
past
o nationalistic argument rests in citizens wanting their country
to be sovereign, self- sufficient as much as possible, and
basically in charge of their own economy and country
environment.
o Firms can expand their revenues by selling around the world
and/or reduce their costs by producing in nations where key
inputs, including labor, are cheap.
- Emergence of Global Institutions
o needed to help manage, regulate, and police the global
marketplace and to promote the establishment of
multinational treaties to govern the global business system.
o created by voluntary agreement between individual nation-
states, and their functions are enshrined in international
treaties.
o World Trade Organization:
 Formerly the General Agreement on Tariffs and Trade
(GATT)
 primarily responsible for policing the world trading
system and making sure nation-states adhere to the
rules laid down in trade treaties signed by WTO member
states
  responsible for facilitating the establishment of
additional multinational agreements among WTO
member states.
 promoted the lowering of barriers to cross-border trade
and investment
o International Monetary Fund
 established to maintain order in the international
monetary system
 lender of last resort to nation-states whose
economies are in turmoil and whose currencies are
losing value against those of other nations.
 IMF loans come with strings attached, however; in return
for loans, the IMF requires nation-states to adopt specific
economic policies aimed at returning their troubled
economies to stability and growth.
 sparked controversy
 policy recommendations are often inappropriate;
others maintain that by telling national
governments what economic policies they must
adopt, the IMF, like the WTO, is usurping the
sovereignty of nation-states.
o World Bank
 sister institution of IMF
 to promote economic development
 focused on making low-interest loans to cash-strapped
governments in poor nations that wish to undertake
significant infrastructure investments (such as building
dams or roads).
o United Nations
 preserving peace through international cooperation and
collective security.
 Members of UN agree to accept the obligations of the
UN Charter
 UN Charter - an international treaty that
establishes basic principles of international
relations
 4 Purposes of UN:
1. to maintain international peace and security
2. to develop friendly relations among nations
3. to cooperate in solving international problems and in
promoting respect for human rights
4. to be a center for harmonizing the actions of nations
 one of its central mandates is the promotion of higher

standards of living, full employment, and conditions of
economic and social progress and development
 works closely with other international institutions
such as the World Bank
 eradicating poverty and improving the well-being
of people everywhere are necessary steps in
creating conditions for lasting world peace
o Group of Twenty (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
 originally established to formulate a coordinated policy
response to financial crises in developing nations
 in 2008 and 2009 it became the forum through which
major nations attempted to launch a coordinated policy
response to the global financial crisis

- Drivers of Globalization
o decline in barriers to the free flow of goods, services, and
capital
o technological change in communication, information
processing, and transportation technologies
o Internation Trade - when a firm exports goods or services to
consumers in another country
o Foreign Direct Investment - when a firm invests resources
in business activities outside its home country.
o Tariff (barrier of trade)- to protect domestic industries from
foreign competition
 Consequence: “beggar thy neighbor” retaliatory trade
policies - countries progressively raising trade barriers
against each other
 This depressed the world demand and contributed
to the Great Depression
o General Agreement on Tariffs and Trade (GATT)
 advanced industrial nations of the West com mitted
themselves after World War II to progressively reducing
barriers to the free flow of goods, services, and capital
among nations
 first round: went into effect in 1948
 Most recent negotiations to be completed:
Uruguay Round - further reduced trade barriers;
 extended GATT to cover services as well as
manufactured goods; provided enhanced
protection for patents, trademarks, and copy
rights; and established the World Trade
Organization to police the international trading
system
- forecast is also that world trade will continue to increase more
rapidly than world production for the foreseeable future.
- While we produce more goods and services today compared with
before, a far greater proportion of that production is being traded
across national borders than at any time in modern history.
- the pressure from customers to make available any goods and
services anywhere for their needs and wants has been facilitated by
country governments removing restrictions on imports to their
countries.
o driving both the globalization of markets and the globalization
of production.
o The lowering of barriers to international trade enables firms to
view the world, rather than a single country, as their market.
o The lowering of trade and investment barriers also allows
firms to base production at the optimal location for that
activity.
- increased number of trade agreements that have been implemented
in the world
o regional trade agreements – more than 2 countries involved
o as regional trade agreements in force increase year-by-year,
so does world trade across country borders at the same pace.
 trade at least between the countries in a trade
agreement has been a strong reason for the increase
overall in world trade
- 2 implications important for the global marketplace
1. sustainability - the United Nations established the Millennium
Development Goals to reduce the number of people who live in
extreme poverty by 2015
 In September 15, MDG was ratified to the Sustainable
Development Goals that set targets to end poverty, protect
the planet, and ensure prosperity for all countries by 2030
as part of a new sustainability agenda
2. world trade has been growing faster than world GDP
 more firms are dispersing parts of their production process
to different locations around the globe to drive down
production costs and increase product quality
  economies of the world’s nation-states are becoming ever
more intertwined. As trade expands, nations are becoming
increasingly dependent on each other for important goods
and services.
 the world has become significantly wealthier in the last two
decades
- Role of Technological Change
o Where the lowering of trade barriers made globalization of
markets and production a theoretical possibility,
technological changes made it a tangible reality.
o Communications:
 Microprocessors – single most important innovation
since WW II which enabled the explosive growth of high-
power, low-cost computing, vastly increasing the
amount of information that can be processed by
individuals and firms.
 encode, transmit, and decode the vast amount of
information that flows along these electronic
highways
 Moore’s Law – the cost of microprocessors continues to
fall, while their power increases, predicting that the
power of microprocessor technology doubles and its cost
of production falls in half every 18 months
o Internet of Things (IoT):
 Internet - first web browser was introduced
 developed into the information backbone of the
global economy
 rolls back some of the constraints of location,
scale, and time zones
 allows businesses, both small and large, to expand
their global presence at a lower cost than ever
before
o Transportation Technology:
 the development of commercial jet aircraft and super
freighters and the introduction of containerization
 containerization - simplifies transshipment from
one mode of transport to another
o significantly lowering the costs of shipping
goods over long distances
- Implications for the Globalization of Production
o Technological advancements make it possible for a firm to
create and then manage a globally dispersed production
system, further facilitating the globalization of production.
- Implications for the Globalization of Markets
o Low-cost global communications networks are helping create
electronic global marketplaces
o reduced the cultural distance between countries and is
bringing about some convergence of consumer tastes and
preferences.
o the media are primary conveyors of culture; as global media
develop, we must expect the evolution of something akin to a
global culture
- Stock of Foreign Direct Investment - the total cumulative value
of foreign investments as a percentage of the country’s GDP.
- Multinational Enterprise (MNE) - any business that has
productive activities in two or more countries.
o rise of non-U.S. multinationals
o growth of mini-multinationals
 due to the rise of Internet which help lower the barriers
that small firms face in building international sales
 International business is conducted not just by large
firms but also by medium-size and small enterprises.
- Large segments of the population in many countries believe that
globalization has detrimental effects on living standards, wage
rates, and the environment
- falling barriers to international trade destroy manufacturing jobs in
wealthy advanced economies such as the United States and western
Europe. Critics argue that falling trade barriers allow firms to move
manufacturing activities to countries where wage rates are much
lower.
- “exporting jobs” to low-wage nations and contributing to higher
unemployment and lower living standards in their home nations
- Supporters of globalization reply that critics of these trends miss the
essential point about free trade agreements—the benefits outweigh
the costs.
o free trade will result in countries specializing in the production
of those goods and services that they can produce most
efficiently, while importing goods and services that they
cannot produce as efficiently.
- weak growth rate in real wage rates for unskilled workers owes far
more to a technology-induced shift within advanced economies
o growing income inequality is a result of the wages for skilled
workers being bid up by the labor market and the wages for
unskilled workers being discounted. In fact, evidence suggests
that technological change has had a bigger impact than
 globalization on the declining share of national income
enjoyed by labor
o solution to the problem of slow real income growth among the
unskilled is to be found not in limiting free trade and
globalization but in increasing society’s investment in
education to reduce the supply of unskilled workers.
- tougher environmental regulations and stricter labor standards go
hand in hand with economic progress.
o as countries get richer, they enact tougher environmental and
labor regulations. Because free trade enables developing
countries to increase their economic growth rates and become
richer, this should lead to tougher environmental and labor
laws
o As an economy grows and income levels rise, initially pollution
levels also rise. However, past some point, rising income
levels lead to demands for greater environmental protection,
and pollution levels then fall.
o XPN: Carbon dioxide emissions, rising steadily with higher-
income levels
 Solution: carbon tax - put a price on carbon-intensive
energy generation
 should be revenue neutral, with increases in
carbon taxes offset by reductions in income or
consumption taxes as to not harm economic
growth
o If the violator refuses to comply with the ruling, the WTO
allows other states to impose appropriate trade sanctions on
the transgressor
 the power of supranational organizations such as the
WTO is limited to what nation-states collectively agree
to grant.
 the United Nations and the WTO exist to serve the
collective interests of member states, not to subvert
those interests. Supporters of supranational
organizations point out that the power of these bodies
rests largely on their ability to persuade member states
to follow a certain action. If these bodies fail to serve the
collective interests of member states, those states will
withdraw their support and the supranational
organization will quickly collapse.
- Globalization and the World’s Poor
o Many of the world’s poorest countries have suffered from
totalitarian governments, economic policies that destroyed
 wealth rather than facilitated its creation, endemic corruption,
scant protection for property rights, and pro longed civil war.
o A complicating factor is the rapidly expanding populations in
many of these countries. Without a major change in
government, population growth may exacerbate their
problems.
o Highly Indebted Poorer Countries (HIPCs) - trapped in a cycle
of poverty and debt that inhibits eco nomic development
 large-scale debt relief is needed for the world’s poorest
nations to give them the opportunity to restructure their
economies and start the long climb toward prosperity
 new democratic governments in poor nations should not
be forced to honor debts that were incurred and
mismanaged long ago by their corrupt and dictatorial
predecessors.
 debt relief must be matched by wise investment in
public projects that boost economic growth (such as
education) and by the adoption of economic policies
that facilitate investment and trade
- Managing in the Global Marketplace
o International business - any firm that engages in
international trade or investment
 Does not necessarily need to be a multinational
enterprise but multinationals enterprise are
international businesses
 All a firm has to do is export or import products from
other countries
 managing an international business differs from that of
managing a purely domestic business in many ways 
more complex
 Countries differ in their cultures, political systems,
economic systems, legal systems, and levels of
economic development.
 Differences among countries require that an
international business vary its practices country
by country.
 adopt the appropriate policies and strategies for
coping with them
 managing an international business is different from
managing a purely domestic business for at least four
reasons: (1) countries are different, (2) the range of
problems confronted by a manager in an international
business is wider and the problems themselves more
complex than those confronted by a manager in a
domestic business, (3) an international business must
find ways to work within the limits imposed by
government intervention in the international trade and
investment system, and (4) international transactions
involve converting money into different currencies.