Topic 1

Globalization
Outline
A. Globalization
B. Evidence of Globalization
C. Drivers of Globalization
D. Globalization of Markets
E. Globalization of Production
F. Emergence of Global Institutions
G. Globalization & Multi-national Enterprise (MNE)
H. Globalization Debate

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A. Globalization
 Shift towards a more integrated & interdependent
world economy.

 Reduction of transportation and communications costs.

 Breaking down of artificial barriers to flows of goods and

services, capital, knowledge and people across borders.

 Closer integration of countries and people of the world.

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B. Evidence of Globalization

 International trade occurs when a firm exports

goods or services to consumers in another
country.
 Foreign direct investment occurs when a firm
invests resources in business activities outside its
home country.

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B. Evidence of Globalization
 World trade volume:

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Trade is calculated as average of exports and imports (Source: WTO)
B. Evidence of Globalization
Outward FDI as % of GDP

Source: https://ourworldindata.org/charts
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 B. Evidence of Globalization
FDI Inflows (1990-2022)

Source: https://unctad.org/data-visualization/global-foreign-direct-investment-flows-over-
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last-30-years
 B. Evidence of Globalization
FDI Outflows (1990-2022)

Source: https://unctad.org/data-visualization/global-foreign-direct-investment-flows-over-
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last-30-years
B. Evidence of Globalization
Share of Share of
Share of World World
World Output Output Exports
Country in 1960 (%) Today (%) Today (%)
United States 38.3 24.0 8.2

Germany 8.7 4.6 7.1

France 4.6 3.2 2.8
Italy 3.0 2.4 2.4
United 5.3 3.3 2.3
Kingdom
Canada 3.0 2.0 2.2
Japan 3.3 6.0 3.6
China NA 15.2 11.1
Changing Demographics of Global
Economy
 Increase the flow of foreign direct investment
from developing nations. Examples: China and India.
 Growth of multi-national enterprises (MNEs) in
developing nations.
 Developing nations currently account for 45% of
the world economic activity.
 The Rise of “Mini-Multinationals” involved in
international trade and investment (Impacts of the
Internet)

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Changing Demographics of Global
Economy
National Share of Largest Multinational Corporations
(Forbes top 2000 multinational corporations)

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C. Drivers of Globalization
 Falling trade & investment barriers
Average Tariff Rate:

Remark:
Rise of non-tariff
barriers after
2020: National
Security
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C. Drivers of Globalization
 Technological changes
 Telecommunications & microprocessors.
 Decreasing costs of adopting IT in production and sale => speed
up adoptions of IT by MNEs => driving globalization.
 The Internet.
 Less than 1 million users in 1990 to over 3.8 billion users in 2017
(over half of the world population).
 Convergence of consumer preferences; Easier for buyers and
sellers to find each other (globalization of market).
 Lower the cost of coordination & control in global production
(globalization of production).
 Example: Dell computer (online order and procurement).
 Example: Sending MRI scans from US hospitals to India for
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diagnosis (outsourcing medical services).
C. Drivers of Globalization
Decline of transport and communication costs relative to 1930

Source: https://ourworldindata.org/charts
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C. Drivers of Globalization
 Technological changes (continue)
 Transportation technology
 Reduces the time needed to get from one location to
another.
 Example: commercial jet aircrafts, container ocean
shipping, lower cost of shipping by air, improved
refrigeration technology.
 Between 1920 and today in the US, the average
ocean freight and port charges per ton fell from $95
to $29.
 The shipping cost of a $700 TV set was only $10.

 Between 1955 and today, the average air transport

cost per ton-kilometer fell by 80%. 15
D. Globalization of Markets
 Distinct & separate markets merging into a
global marketplace
 Process:
Low-cost communication Reducing cultural distance
Low-cost transportation between countries

Examples: iPhone, Coca Cola Convergence of consumer taste

& preferences

Emergence of global market Firms produce standardized

for consumer products products
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D. Globalization of Markets
 Benefits:
Global
Produce standardized Economies of Scale
Advertising
products & services Economies of Scope
(media)

 Economies of scale: per-unit cost of production falls with

output volume.
 Global market => Larger output.
 Economies of scope: per-unit cost of marketing and
promotion falls with product variety.
 Global market => Larger product variety.
 More effective sales and marketing efforts.

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D. Globalization of Markets
 National differences still exist:

• Significant national differences

• Customizing marketing and
still exist in many dimensions:
operation strategies to match
culture, government intervention,
country-specific conditions
business systems, etc.

 Examples:
 McDonald’s (standardization and customization)
 Starbucks (customization, location strategy)

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Example: Starbucks
 Localization of product: Green tea in Taiwan and
Japan.
 Food and in-store seating is much more important in
China and Japan => larger stores located in less
expensive locations.
Take-away order is more common in the US: =>
smaller stores located in prime business districts.

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E. Globalization of Production
 Multi-national Enterprises (MNEs)
 Purchase (via import) / produce (via FDI) goods &
services from different locations around the world.
 Making use of national differences in the cost & quality
of factors of production (labor, land, capital)
 Developing a global web of suppliers as a source of
competitive advantage (Lenovo’s ThinkPad laptop
computers)
 “Where to produce” depending on the country’s factors
of production

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Example: Lenovo
Global production of ThinkPad laptop computers:

- Designed in the U.S.

- Central processing units (CPU) from the U.S.
- Keyboards, wireless card, hard drives from China, Thailand,
Malaysia
- Display screen and memory chips from South Korea, Japan.
- Components shipped to assembly plants in Mexico and China.

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E. Globalization of Production
 Benefits:
 Location economies: firms locate in countries where there
is a possibility of reducing the production costs.
 Enhancing scale economies through location economies.
 Diversifying investments and risks.
 First-mover advantages (first mover => larger market
share => larger economies of scale).
 Results:
 Emergence of Foreign Direct Investment (FDI)
 Growth of multi-national enterprises (MNEs)
 Example: Toyota’s investment in U.S.

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F. Emergence of Global Institutions

World Trade Organization (WTO) International Monetary Fund (IMF)

• Succeeded GATT • Established in 1944
• Established in 1995 • Maintains order in international
• Polices the world trading system monetary system
(solve disputes, promote free trade) (lender of last resort → set policy)

World Bank (WB) United Nations (UN)

• Established in 1944 • Established in 1945
• Promotes economic development • Maintains international peace &
(make loans → infrastructure) security (Security Council)

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F. Emergence of Global Institutions
Trade openness Index around 2001
(China joined WTO in December 2001)
0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

-0.1

-0.2

-0.3

-0.4 China
Index

Japan
-0.5

-0.6

-0.7

-0.8

-0.9

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Note: Completely closed: Index = -1 Completely open: Index = 0
G. Globalization & MNE
 Multi-national enterprise (MNE) is:
 any business that has productive activities in two or
more countries
 the principle agent for the international transfer of
economic resources
 Examples: capital, technology, management skills, marketing
know-how
 Alternative terminologies
 Transnational Corporation (TNC)
 Multinational Corporation (MNC)
 Example:
 Starbucks, Lenovo, Dell, Lenovo, Toyota.
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G. Globalization & MNE
 Four Stages of development of MNC

1. Seek foreign markets

2. Invest production facilities abroad

(Foreign Direct Investment)

3. Spread of geographic
market of foreign production

4. Export of goods back to

original country from
foreign subsidiaries

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G. Globalization & MNE
 Why Do Businesses Become International?
Proactive (Pull) Factors

Increase global Yield greater

market share economies of scale
Satisfy demand for a Generate greater profits
unique product or service by reducing costs of
from a foreign market acquiring resources
Spread risk by Satisfy managerial
diversifying sources targets, ambitions
of sales and inputs and commitment
Take advantage Examples:
of tax benefits Nike and Lenovo
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G. Globalization & MNE
 Why Do Businesses Become International?
Over production at home A saturated domestic market
(selling excess stock)

Increase costs at home Declined domestic sales

Reactive
(Push)
Competitive pressures in Factors For strategic reasons:
the domestic market following competitors

Unused managerial or Prolong the life-cycle of

production capacity at home products ageing at home

Example: HK’s manufacturing companies in the 80s

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H. Discussion: Globalization Debate
Is the shift toward a more integrated and
interdependent global economy a good
thing?
 Experts believe globalization promotes greater
prosperity in the global economy, more jobs, and
lower prices for goods and services
 Others feel that globalization is not beneficial.
 Anti-globalization Protestors fear globalization has
detrimental effects on living standards, wages, and
the environment. 29
H. Discussion: Globalization Debate
 Falling trade barriers destroy manufacturing jobs in
wealthy economies (U.S. and western Europe).
 Service activities increasingly outsourced to
nations with lower labor costs.
 Outsourcing allows a company to reduce its cost
structure and reduce prices.
 In most countries, real income levels increased for
all.
 Supporters of globalization say benefits outweigh
the costs.
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H. Discussion: Globalization Debate
 Share of labor in national income has
declined.
 Attributed to the falling in unskilled labor’s
income share (vis-à-vis skilled labor and
capitalists).
 Gap between poorest and richest segments of
society has widened.
 Many advanced economies report shortage
of highly skilled workers and an excess of
unskilled workers. 31
H. Discussion: Globalization Debate
 Critics argue that the lack of labor and environmental
regulations in less developed countries attract
investment.
 Adhering to environmental regulations increases costs of
manufacturing.
 Supporters argue that tougher regulations come with
economic progress.
 Studies show a “hump-shaped” relationship between
income levels and pollution levels.

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H. Discussion: Globalization Debate

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H. Discussion: Globalization Debate
Joseph Stiglitz’s ideas about global institutions:
1) Globalization can be re-structured to realize greater benefits
and minimize social costs.
2) International economic institutions (IMF, World Bank, WTO,
etc.) can be reformed.
3) Washington Consensus have shortcomings. Economic
policies should be designed by local people in each country
who are more sensitive to the needs and concerns of their
own country.
Note: Washington Consensus: A consensus among IMF and the World Bank
on development policies for developing nations. It focuses on
privatization (selling off government assets), deregulation of the private
sector (reducing rules and regulations) and market liberalization
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(eliminating trade and investment barriers).
H. Discussion: Globalization Debate
Joseph Stiglitz’s ideas about economic reform:
1) Without appropriate legal structures (enforcement) and
market institutions (pricing), privatization often resulted in
expropriation of state assets (by oligarch who have good
relationship with the government), e.g., the 1990s economic
reform in Russia.
2) Without well-functioning market institutions, capital account
liberalization may cause speculation and market instability.
3) During economic crisis, IMF’s ‘Structural Adjustment
Policies’ imposed on developing nations cutback their
spending on education and health.
H. Discussion: Globalization Debate
Joseph Stiglitz’s ideas about innovation system and
environmental protection:
Patents, Profits and People:
 The patent system create incentives to innovate but also create monopoly
power that obstructs technological advancement.
Possible solution: “Prize system” for innovation – encourage research and
development without creating monopoly power.

Natural resources in developing nations:

 Developing nations need to sell their natural resources for a fair price and
invest for future economic growth (e.g., health and education).

Saving the Planet:

 Global regulations to restrict activities that harm the environment. Poor
countries are entitled to compensation for maintaining their biodiversity.
H. Discussion: Globalization Debate

Total donations received for biodiversity conservation, 2002 to 2020

Note: Constant 2020 US$

Source: https://ourworldindata.org/charts