Globalization

What is Globalization?

• The shift toward a more integrated and interdependent world economy

• Two components:– The globalization of markets – The globalization of production

Globalization of Production

• Vizio flat panel TV is – designed in a small office in California– assembled in Mexico– From• panels made in South Korea• electronic components made in China • microprocessors made in the U.S.

Not just Manufacturing…

• Globalization of production has historically been about manufacturing

• Increasingly companies are using modern communications to outsource service activities to low-cost nations

Globalization of Markets

• In the past, each country had its own companies in many industries and its own products

• Think of the restaurants here in Wilkes County…would this be the same back in the 1950’s?

Today everyone knows…

• Nintendo• Starbucks• Coca-Cola• Ikea• McDonalds• Samsung

But the most global markets are for standard goods

• Aluminum• Wheat• Microprocessors• Aircraft• For many consumer end-products, huge

differences still exist among national markets Entertainment, food, clothing

Drivers of Globalization

• Two factors underlie globalization• “Decline in barriers to the free flow of goods,

services, and capital” that has occurred since the end of World War II

• Technological change

Declining Trade and Investment Barriers

• During the 1920s and 30s, many of nations erected formidable barriers to international trade and foreign direct investment

• Advanced industrial nations of the West committed themselves after World War II to removing barriers to the free flow of goods, services, and capital between nations.

Average Tariff Rates on Manufactured Products

1913 1950 1990 2002

France 21% 18% 5.9% 4%

Germany 20% 26% 5.9% 4%

Italy 18% 25% 5.9% 4%

Japan 30% ---- 5.3% 3.8%

Holland 5% 1% 5.9% 4%

Sweden 20% 9% 4.4% 4%

UK ---- 4% 5.9% 4%

US 44% 14% 4.8% 4%

The Role of Technology

• Lowering of trade barriers made globalization possible;

• Technology has made it a transforming movement

Globalization is acceleration of trends of the last 10,000 years

• People lived for 250,000 years in hunter-gatherer bands

• Rise of agriculture 10,000 years ago led to rise of empires and nation-states

• Science and enlightenment after 1680 produced global trade and empires

• Free trade and tech after 1980produced globalization

The Emergence of Global Institutions

• Notable global institutions include• the World Trade Organization (WTO) which is

responsible for policing the world trading system and ensuring that nations adhere to the rules established in WTO treaties– In 2008, 151 nations accounting for 97% of world trade

were members of the WTO• the International Monetary Fund (IMF) which

maintains order in the international monetary system

The Changing Roles of Countries in the Global Economy

• In the 1960s:• The U.S. dominated the world economy and the

world trade picture• U.S. multinationals dominated the international

business scene• About half the world-- the centrally planned

economies of the communist world-- was off limits to Western international business Today, much of this has changed.

The Changing World Out put and World Trade Picture

• In the early 1960s, the U.S. was the world's dominant industrial power accounting for about 40.3% of world manufacturing output

• By 2007, the U.S. accounted for only 20.7%• Other developed nations experienced a

similar decline

The Globalization DebatePros Cons

-Lower prices for goods and services -Destroys manufacturing jobs in wealthy nations

-Economic Growth -Wage rates of unskilled in advanced countries decline

-Increase in consumer income -Companies move to countries with fewer labor and environment regulations

-Creates jobs (for many) -Loss of sovereignty

-Countries specialize in production of goods and services that are produced most efficiently

-Homogenized cultures

Managing an international business is different

• Countries are different• International transactions involve converting

money into different currencies• Range of problems in an international business

is wider and problems are more complex• International business must cope with different,

conflicting government rules and systems• Different strategic approaches required

Key terms

• An international business: any business with international sales, sourcing, or investment

• A multinational business: any business with productive activities in 2 or more countries

• A global business: a business that takes a global approach to production and sourcing (Coca-Cola, Intel)

The Emergence of Global Institutions

• the World Bank which promotes economic development

• the United Nations (UN) which maintains international peace and security, develops friendly relations among nations, cooperates in solving international problems and promotes respect for human rights, and is a center for harmonizing the actions of nations