Because learning changes everything.

Globalization
Chapter 1

© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
 Learning Objectives
1-1 Understand what is meant by the term globalization.
1-2 Recognize the main drivers of globalization.
1-3 Describe the changing nature of the global economy.
1-4 Explain the main arguments in the debate over the
impact of globalization.
1-5 Understand how the process of globalization is creating
opportunities and challenges for management practice.

© McGraw Hill, LLC 2

 What Is Globalization?
Globalization refers to the shift toward a more integrated
and interdependent world economy.
The Globalization of Markets: The merging of historically
distinct and separate national markets into one huge global
marketplace.
• 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, such as oil.
• Competitors may not change among nations.

© McGraw Hill, LLC 3

 What Is Globalization?
The Globalization of Production: Sourcing goods and services from
locations around the globe to take advantage of differences in cost and
quality of factors of production.
• Factors of production include labor, energy, land, capital.
Robert Reich suggests “global products.”
Impediments prevent optimal dispersion of activities:
• Formal and informal barriers to trade.
• Barriers to foreign direct investment.
• Transportation costs.
• Political and economic risk.
• Challenge of coordinating globally dispersed supply chain.

Ex. Boeing outsources to foreign suppliers. Consider Boeing’s 777 first introduced in 1995: Eight Japanese suppliers make
parts for the fuselage, doors, and wings; a supplier in Singapore makes the doors for the nose landing gear; three suppliers in
Italy manufacture wing flaps; and so on. In total, some 30 percent of the 777, by value, is built by foreign companies.

© McGraw Hill, LLC 4

 The Emergence of Global Institutions
Over the past 75 years, a number of important global
institutions have been created to help manage, regulate, and
police global marketplace.
• General Agreement on Tariffs and Trade (G A T T).
• World Trade Organization (W T O).
• International Monetary Fund (I M F).
• World Bank.
• United Nations (U N).

• All these institutions were created by voluntary agreement

between individual nation-states, and their functions are
enshrined in international treaties.

© McGraw Hill, LLC 5

 The Emergence of Global Institutions
World Trade Organization (WTO) was preceded by the
General Agreement on Tariffs and Trade (GATT), which
was an international treaty that committed signatories to
lowering barriers to the free flow of goods across national
boarders.
• Polices the world trading system.
• Ensures nation-states adhere to the rules.
• Facilitates multinational agreements among members.
• As of 2021,164 nations that account for 98 percent of
world trade were WTO members.

© McGraw Hill, LLC 6

 The Emergence of Global Institutions
During the past two decades, for example, the IMF has lent
money to the governments of troubled states including
Argentina, Indonesia, Mexico, Russia, South Korea,
Thailand, and Turkey. The IMF took a proactive role in
helping countries cope with some of the effects of the 2008–
2009 global financial crisis.
International Monetary Fund (IMF)
• Established to maintain order in the international monetary
system.
• Often seen as the lender of last resort.
• In return for loans, requires nation-states to adopt specific
economic policies aimed at returning their economies to
stability and growth.
© McGraw Hill, LLC 7
 The Emergence of Global Institutions
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.

© McGraw Hill, LLC 8

 The Emergence of Global Institutions
United Nations (UN)
Promotes peace through international cooperation and
collective security.
193 member countries.
UN Charter has 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.

© McGraw Hill, LLC 9

 The Emergence of Global Institutions
Group of Twenty (G20)
• Comprises 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.

© McGraw Hill, LLC 10

 Drivers of Globalization
Declining Trade and Investment Barriers
19 20s to 19 30s: Many barriers to international trade and foreign direct
investment.
• International trade: when a firm exports goods or services to
consumers in another country.
• Foreign direct investment (F D I): when a firm invests resources in
business activities outside its home country.

GATT lowered barriers.

• Uruguay Round extended GATT and established WTO. The Uruguay
Round further reduced trade barriers; extended GATT to cover
services as well as manufactured goods; provided enhanced
protection for patents, trademarks, and copyrights; and established the
World Trade Organization to police the international trading system.

© McGraw Hill, LLC 11

 Drivers of Globalization
Declining Trade and Investment Barriers continued
Between 1960 and 2020, the value of the world economy increased 9 times, while
the value of international goods increased 19.7 times.
• Trade in goods and services and the value of foreign direct investment have all
been growing faster than world output.
• More firms dispersing production process to different locations around the
globe.
• Economies of the world’s nation-states are becoming more intertwined.
• World has become significantly wealthier in the past two decades.

The COVID-19 global pandemic has had a significant impact upon global supply
chains, forcing many companies to rethink their globalization strategy. Some
companies are reportedly considering moving production closer to home on the
theory that local production is less likely to be disrupted by the current pandemic, or
other adverse events such as future pandemics, war, terrorism, trade disputes, and
the like.
© McGraw Hill, LLC 12
 Figure 1.1 Value of World Merchandised
Trade and World Production 1960 to 2021
Figure 1.1 charts the growth in the value of
world merchandise trade and world production
between 1960 and 2020 (the most recent year
for which data are available). The data are
adjusted to take out the effect of inflation and is
indexed at a value of 100 in 1960 to allow for an
“apples to apples” comparison. What you can
see from the chart is that between 1960 and
2020 the value of the world economy (adjusted
for inflation) increased 9 times, while the value
of international trade in merchandised goods
increased 19.7 times. This actually
underestimates the growth in trade, because
trade in services has also been growing rapidly
in recent decades.

It should be noted that the decline in global

trade and output in 2020 that can be seen in
Figure 1.1 was due primarily to the economic
impact of the COVID-19 global pandemic.

Access the text alternative for slide images

© McGraw Hill, LLC 13
 Drivers of Globalization

Role of Technological Change Communications.

Over the past 30 years, global Development of the microprocessor single
communications have been most important innovation since World War
revolutionized by developments in II.
satellite, optical fiber, wireless
Moore’s law predicts that the power of
technologies, and of course the internet.
microprocessor technology doubles and its
cost of production falls in half every 18
months.
The internet.
• More than half of the world’s population uses the internet.
• Global e-commerce sales close to $4 trillion.
• The internet enables enterprises to coordinate and control a
globally dispersed production system.

14
© McGraw Hill, LLC
 Drivers of Globalization
Role of Technological Change continued
Transportation technology.
• Commercial jets, superfreighters, and containerization
have all “shrunk the globe.”
Implications for the globalization of production:
• Locating production in geographically separate locations
has become more economical.

Implications for the globalization of markets:

• Cultural distance has been reduced and has brought some
convergence of consumer tastes and preferences.

© McGraw Hill, LLC 15

 The Changing Demographics of the Global
Economy
The Changing World Output and World Trade Picture
1960s: U.S. accounted for 38.3 percent of world output.
2020: U.S. accounted for 24.7 percent of world output.
This reflects the faster economic growth of several other
economies, particularly China.
• China and BRIC countries growing more rapidly.
• Developing nations may account for more than 60 percent
of world economic activity by 2030.

© McGraw Hill, LLC 16

 The Changing Demographics of the Global
Economy 2

The Changing Foreign Direct Investment Picture

As barriers to the free flow of goods and services fell, non-
U.S. firms increasingly invested across national borders.
• Desire to disperse production activities to optimal locations
and to build a direct presence in major foreign markets.
• Outward stock of foreign direct investment (FDI): the total
cumulative value of foreign investments by firms domiciled
in nations outside of that nation’s borders.

© McGraw Hill, LLC 17

 Figure 1.2 FDI Outward Stock Outward as
a Percentage of GDP

Access the text alternative for slide images

© McGraw Hill, LLC 18
 Figure 1.3 FDI Inflows (in Millions of
Dollars), 1990 to 2020

Access the text alternative for slide images

© McGraw Hill, LLC 19
 The Changing Demographics of the Global
Economy
The Changing Nature of the Multinational Enterprise
Multinational enterprise (MNE) is any business that has
productive activities in two or more countries.
Non-U.S. multinationals.
• In 2003, 38.8 percent of the world’s 2,000 largest
multinationals were U.S. firms.
• By 2019, 28.8 percent of the top 2,000 global firms were
U.S. multinationals, a drop of 201 firms.

© McGraw Hill, LLC 20

 Figure 1.4 National Share of the Largest
2,000 Multinational Corporations in 2019

Access the text alternative for slide images

© McGraw Hill, LLC 21
 The Changing Demographics of the Global
Economy
The Changing Nature of the Multinational Enterprise
continued
The rise of mini-multinationals.
• Growth in the number of medium- and small-sized
businesses.
• Internet is lowering barriers that smaller firms faced in
international trade.

© McGraw Hill, LLC 22

 The Changing Demographics of the Global
Economy
The Changing World Order
Former communist countries present export and investment
opportunities.
• Signs of growing unrest and commitment to market-based
economic systems cannot be assumed.
• Risks of doing business in these countries are high.
China moving to industrial superpower.
In Latin America debt and inflation are down, more private
investors, expanding economies.

© McGraw Hill, LLC 23

 The Changing Demographics of the Global
Economy
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 opposed them.
Globalization is not inevitable:
• Countries may pull back.
• Risks are high.

© McGraw Hill, LLC 24

 The Globalization Debate 1

Antiglobalization Protests
Began with 1999 protests at WTO meeting in Seattle.
Protestors now typically show up at major meetings of global
institutions.
Protestors believe globalization causes detrimental effects on
living standards, wage rates, and the environment.

© McGraw Hill, LLC 25

 The Globalization Debate 2

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.

© McGraw Hill, LLC 26

 The Globalization Debate 3

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.

© McGraw Hill, LLC 27

 The Globalization Debate
Globalization, Jobs, and Income continued
Data suggests the share of labor in national income has
declined over the past two decades.
• 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.
© McGraw Hill, LLC 28
 The Globalization Debate
Globalization, Labor Policies, and the Environment
Critics argue:
• Labor and environmental regulations increase
manufacturing costs.
• Lack of regulation can lead to abuse.
• Firms move production to nations that do not have
regulations.
Supporters argue:
• Tougher environmental regulations and stricter labor
standards go hand in hand with economic progress.
• Free trade leads to less labor exploitation and less pollution.

© McGraw Hill, LLC 29

 The Globalization Debate
Globalization and National Sovereignty
Critics argue:
• Shift of power away from national governments toward
supranational organizations.
• WTO, EU, UN.

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.

© McGraw Hill, LLC 30

 The Globalization Debate
Globalization and the World’s Poor
Critics argue the gap between the rich and poor nations has
gotten wider—but has been due to:
• Totalitarian governments.
• Poor economic policies.
• Corruption and lack of property rights.
• Expanding populations in developing countries.
• Debt burdens.
Supporters suggest lowering barriers to trade and investment
and promoting free market policies.

© McGraw Hill, LLC 31

 Figure 1.6 Percentage of the World’s Population
Living in Poverty During 1981 to 2015

Access the text alternative for slide images

© McGraw Hill, LLC 32
 Managing in the Global Marketplace
Managing International Business
Any firm that engages in international trade or investment is
international.
Managing international business differs from managing
purely domestic business.
• Countries are different.
• Range of problems is wider and problems more complex.
• Must find ways to work within limits imposed by
government.
• Transactions involve converting money into different
currencies.

© McGraw Hill, LLC 33