MGT 3660: International Business

Session 2: Globalization

Announcement
Use your name tent Check your team Expect short lectures (50 minutes classes)

Warm-up Quiz
True or False questions
We will discuss these questions afterward.

Learning Objectives
After this session, we can do followings:
Understand what is meant by the term globalization Recognize the main drivers of globalization Describe the changing nature of the global economy Explain the main arguments in the debate over the impact of globalization Understand how the process of globalization is creating opportunities and challenges for business managers

Where We Are
Concepts of globalization
Chapter 1

Country differences
Chapter 2-5

The global trade and investment environment

Chapter 6-9

The strategy and structure of international business

Chapter 13-15

Business operation
Chapter 16-20

Class Activities
Link all 9 dots using four straight lines or fewer, without lifting the pen and without tracing the same line more than once.

Definition of Globalization
Globalization - the shift toward a more integrated and interdependent world economy The world is moving away from self-contained national economies toward an interdependent, integrated global economic system

Globalization of Markets
Historically distinct and separate national markets are merging It no longer makes sense to talk about the German market or the American market Instead, there is the global market
falling trade barriers make it easier to sell globally consumers tastes and preferences are converging on some global norm firms promote the trend by offering the same basic products worldwide

Globalization of Markets
Firms of all sizes benefit and contribute to the globalization of markets
97% of all U.S. exporters have less than 500 employees 98% of all small and mid-sized German companies participate in international markets

Globalization of Production
Firms source goods and services from locations around the globe to capitalize on national differences in the cost and quality of factors of production like land, labor, energy, and capital Companies can
lower their overall cost structure (Reduce cost) improve the quality or functionality of their product offering (Increase product differentiation)

Why Global Institutions

Global institutions
help manage, regulate, and police the global marketplace promote the establishment of multinational treaties to govern the global business system

Examples include
the General Agreement on Tariffs and Trade (GATT) the World Trade Organization (WTO) the International Monetary Fund (IMF) the World Bank the United Nations (UN) the G20

What Global Institutions Do

The World Trade Organization (like its predecessor GATT)
polices the world trading system makes sure that nation-states adhere to the rules laid down in trade treaties promotes lower barriers to trade and investment 154 members in 2011

The International Monetary Fund (1944)

maintains order in the international monetary system lender of last resort for countries in crisis Argentina, Indonesia, Mexico, Russia, South Korea, Thailand, Turkey, Ireland, and Greece

The World Bank (1944)

promotes economic development via low interest loans for infrastructure projects

What Global Institutions Do

The United Nations (1945)
maintains international peace and security develops friendly relations among nations cooperates in solving international problems and in promoting respect for human rights is a center for harmonizing the actions of nations

The G20
forum through which major nations tried to launch a coordinated policy response to the 2008-2009 global financial crisis

Factors Driving Globalization

Declining barriers to the free flow of goods, services, and capital
average tariffs are now at just 4% more favorable environment for FDI global stock of FDI was $15.5 trillion in 2009 facilitates global production

Technological change
microprocessors and telecommunications the Internet and World Wide Web transportation technology

Meaning of Globalization for Firms

Opportunity vs. threats Lower barriers to trade and investment mean firms can
view the world, rather than a single country, as their market base production in the optimal location for that activity

But, firms may also find their home markets under attack by foreign firms Winners take all

Meaning of Globalization for Firms

Technological change means
lower transportation costs help create global markets and allow firms to disperse production to economical, geographically separate locations low cost information processing and communication firms can create and manage globally dispersed production low cost global communications networks help create an electronic global marketplace global communication networks and global media create a worldwide culture and a global consumer product market

Changing Demographics of the Global Economy

Four trends are important:

The changing world output and world trade picture The changing foreign direct investment picture The changing nature of the multinational enterprise The changing world order

World Output and World Trade

In 1960, the U.S. accounted for over 40% of world economic activity, but by 2009, the U.S. accounted for just 24%
a similar trend occurred in other developed countries

In contrast, the share of world output accounted for by developing nations is rising
expected to account for more than 60% of world economic activity by 2020

Foreign Direct Investment (FDI)

In the 1960s, U.S. firms accounted for about two-thirds of worldwide FDI flows
Today, the United States accounts for less than one-fifth of worldwide FDI flows Other developed countries have followed a similar pattern

In contrast, the share of FDI accounted for by developing countries has risen
Developing countries, especially China, have also become popular destinations for FDI

Multinational Enterprise
Multinational enterprise (MNE) - any business that has productive activities in two or more countries Since the 1960s
the number of non-U.S. multinationals has risen the number of mini-multinationals has risen

World Order
Many former Communist nations in Europe and Asia are now committed to democratic politics and free market economies
creates new opportunities for international businesses but, there are signs of growing unrest and totalitarian tendencies in some countries

China and Latin America are also moving toward greater free market reforms
between 1983 and 2010, FDI in China increased from less than $2 billion to $100 billion annually but, China also has many new strong companies that could threaten Western firms

Global Economy of the 21st Century

The world is moving toward a more global economic system But globalization is not inevitable
there are signs of a retreat from liberal economic ideology in Russia

Globalization brings risks

the financial crisis that swept through South East Asia in the late 1990s the recent financial crisis that started in the U.S. in 2007-2008, and moved around the world

Value of Global Economy

Supporters believe that increased trade and cross-border investment mean
lower prices for goods and services greater economic growth higher consumer income, and more jobs

Critics worry that globalization will cause

job losses environmental degradation the cultural imperialism of global media and MNEs

Anti-globalization protesters now regularly show up at most major meetings of global institutions

Impact of Globalization on Jobs and Income

Critics argue that falling barriers to trade are destroying manufacturing jobs in advanced countries Supporters contend that the benefits of this trend outweigh the costs
countries will specialize in what they do most efficiently and trade for other goodsand all countries will benefit

Impact of Globalization on Labor Policies and the Environment

Critics argue that firms avoid the cost of adhering to labor and environmental regulations by moving production to countries where such regulations do not exist, or are not enforced Supporters claim that tougher environmental and labor standards are associated with economic progress
as countries get richer from free trade, they implement tougher environmental and labor regulations

Impact of Globalization on National Sovereignty

Is todays global economy shifting economic power away from national governments toward supranational organizations like the WTO, the EU, and the UN? Critics argue that unelected bureaucrats have the power to impose policies on the democratically elected governments of nation-states Supporters claim that the power of these organizations is limited to what nationstates agree to grant
the power of the organizations lies in their ability to get countries to agree to follow certain actions

Impact of Globalization on the Worlds Poor

Is the gap between rich nations and poor nations getting wider? Critics believe that if globalization was beneficial there should not be a divergence between rich and poor nations Supporters claim that the best way for the poor nations to improve their situation is to
reduce barriers to trade and investment implement economic policies based on free market economies receive debt forgiveness for debts incurred under totalitarian regimes

Impact of the Global Marketplace on Managers

Managing an international business differs from managing a domestic business because
countries are different the range of problems confronted in an international business is wider and the problems more complex than those in a domestic business firms have to find ways to work within the limits imposed by government intervention in the international trade and investment system international transactions involve converting money into different currencies

Closing Case
The globalization of Starbucks
Where did the original idea for the Starbucks format come from? What lesson for international business can be drawn from this? What drove Starbucks to start expanding internationally? How is the company creating value for its shareholders by pursuing an international expansion strategy? Why do you think Starbucks decided to enter the Japanese market via a joint venture with a Japanese company? What lesson can you draw from this? Is Starbucks a force for globalization? Explain your answer. When it comes to purchasing coffee bans, Starbucks adheres to a fair trade program. What do you think is the difference between fair trade and free trade? How might a fair trade policy benefit Starbucks?

Next Time
National differences in political economy