Global Business Today 10e by Charles W.L. Hill and G. Tomas M. Hult ©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. Source: © Carl Court/Getty Images Introduction and Overview Chapter 1: Globalization ©McGraw-Hill Education. Learning Objectives LO 1-1 Understand what is meant by the term globalization. LO 1-2 Recognize the main drivers of globalization. LO 1-3 Describe the changing nature of the global economy. LO 1-4 Explain the main arguments in the debate over the impact of globalization. LO 1-5 Understand how the process of globalization is creating opportunities and challenges for management practice. ©McGraw-Hill Education. Opening Case: Uber: Going Global from Day One ▪ Disrupted the existing taxi business ▪ Started in 2009 ▪ By 2016, in 68 countries and 375 cities ▪ Established service first then fought regulator attempts to shut service down ▪ Used social networks to gain rider support ▪ Vancouver, Canada and other cities banned Uber ▪ Local rivals emerging ©McGraw-Hill Education. Introduction 1 of 2 The world economy today ✓ Fewer self-contained national economies with high barriers to cross-border trade and investment ✓A more integrated global economic system with lower barriers to trade and investment ✓Over $5 trillion in foreign exchange transactions daily ✓Over $19 trillion of goods and $5 trillion of services being sold across national borders ✓The establishment of international institutions ©McGraw-Hill Education. Introduction 2 of 2 Today’s world reflects globalization ✓ Declining barriers to cross-border trade and investment ✓ Advances in transportation and telecommunications ✓ Material culture similar all over the world ✓ National economies merging into integrated global economic system ©McGraw-Hill Education. What Is Globalization? 1 of 4 ▪ Globalization refers to the trend towards a more integrated and interdependent world economy ▪ Two key facets of globalization ✓ The globalization of markets ✓ The globalization of production ©McGraw-Hill Education. What Is Globalization? 2 of 4 The Globalization of Markets ✓ The merging of historically distinct and separate national markets into one huge global marketplace ✓ In many markets today, the tastes and preferences of consumers in different nations are converging upon some global norm ▪ Coca Cola, McDonald’s, IKEA, Starbucks, Apple ©McGraw-Hill Education. What Is Globalization 3 of 4 The Globalization of Production ✓ 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 (labor energy, land, and capital) ✓ Lower overall cost structure ✓ Improve the quality or functionality of the product to compete more effectively ✓ Boeing only undertakes engineering design, marketing and sales, final assembly – everything else is outsourced globally ▪ Currently rethinking this strategy ©McGraw-Hill Education. Did You Know? Did you know why your iPhone was assembled in China? It’s not what you might think. Click to play video ©McGraw-Hill Education. What Is Globalization 4 of 4 The Globalization of Production continued ✓ Early outsourcing was primarily for manufacturing ✓ Today, modern communications technology allows companies to outsource services ✓ Impediments to globalization ▪ ▪ ▪ ▪ ▪ ©McGraw-Hill Education. Formal and informal trade barriers Barriers to foreign direct investment Transportation costs Economic and political risk Managerial challenge The Emergence of Global Institutions 1 of 3 ▪ Global institutions ✓ Manage, regulate, and police the global market place ✓ Promote the establishment of multinational treaties to govern the global business system ▪ World Trade Organization (WTO) ✓ Polices world trading system and ensures nations adhere to the rules established in WTO treaties ✓ Succeeded the General Agreement on Tariffs and Trade (GATT) ✓ 162 nations accounted for 98% of world trade (2016) ©McGraw-Hill Education. The Emergence of Global Institutions 2 of 3 ▪ International Monetary Fund (IMF) ✓ Promotes order in the international monetary system ✓ Lender of last resort ▪ The World Bank ✓ Promotes economic development using low-interest loans ©McGraw-Hill Education. The Emergence of Global Institutions 3 of 3 ▪ The United Nations (UN) ✓ ✓ ✓ ✓ ✓ Maintains international peace and security Develops friendly relations among nations 193 member countries Promotes respect for human rights Is a center for harmonizing the actions of nations ▪ The Group of 20 (G20) ✓ Finance ministers and central bank governors of 19 largest world economies ✓ Represents 90% of global BDP ✓ A forum for a coordinated policy response to the financial crisis of 2008-2009 ©McGraw-Hill Education. Can the International Court of Justice be Effective? The International Court of Justice (www.icj-cij.org) is the principal judicial organ of the United Nations (UN). Of the six principal organs of the UN, it is the only one not located in New York (United States); instead, the seat of the Court is at the Peace Palace in The Hague (Netherlands). The court’s role is to settle, in accordance with international law, legal disputes submitted to it by countries and to give advisory opinions on legal questions referred to it by authorized United Nations organs and specialized agencies. But, how effective can the UN International Court of Justice really be in the global marketplace with its many legal systems? Source: www.icj-cij.org/court. ©McGraw-Hill Education. Drivers of Globalization 1 of 6 Two factors driving the move toward greater globalization ✓ Decline in barriers to free flow of goods, services, and capital ✓ Technological change ©McGraw-Hill Education. Drivers of Globalization 2 of 6 Declining Trade and Investment Barriers ✓ International trade: when a firm exports goods or services to consumers in another country ✓ Foreign direct investment: when a firm invests resources in business activities outside its home country ✓ During 1920s and 1930s, many nations put up barriers to international trade to protect domestic industries ✓ After WWII, advanced Western countries reduced barriers ▪ GATT, Uruguay Round, and WTO ©McGraw-Hill Education. Table 1.1 Average Tariff Rates on Manufactured Products as Percentage of Value 1913 1950 1990 2014 21% 18% 5.9% 1.5% Germany 20 26 5.9 1.5 Italy 18 25 5.9 1.5 Japan 30 -- 5.3 1.3 Holland 5 11 5.9 1.5 Sweden 20 9 4.4 1.5 United Kingdom -- 23 5.9 1.5 United States 44 14 4.8 1.5 France Sources: The 1913–1990 data are from “Who Wants to Be a Giant?,” The Economist: A Survey of the Multinationals, June 24, 1995, pp. 3–4. The 2014 data are from World Development Indicators 2015, World Bank. ©McGraw-Hill Education. Drivers of Globalization 3 of 6 Declining Trade and Investment Barriers continued ✓ We produce more goods and services than ever before but a greater proportion being traded across national borders ✓ Consumers more knowledgeable which drives demand ✓ Volume of world trade growing faster than GDP ▪ More companies dispersing parts production ▪ Economies are becoming even more intertwined ▪ World has become significantly wealthier ©McGraw-Hill Education. Figure 1.1 Value of World Trade and World Production 1950-2014 Source: World Trade Organization, 2016. ©McGraw-Hill Education. Drivers of Globalization 4 of 6 The Role of Technological Change ✓ Since World War II, there have been major advances in communication, information processing, and transportation ✓Microprocessors and Telecommunications ▪ Moore’s Law ✓The Internet ▪ Currently, 3.3 billion users (46% of global population) ✓Transportation Technology ▪ Containerization ©McGraw-Hill Education. Drivers of Globalization 5 of 6 The Role of Technological Change continued ✓ Implications for the Globalization of Production ▪ Lower transportation costs ▪ Geographically dispersed production system more economical ▪ Allow firms to better respond to customer demands ©McGraw-Hill Education. Improved Transportation has Shrunk the Globe Commercial jet travel has reduced the time needed to get from one location to another, effectively shrinking the globe. © Glow Images RF ©McGraw-Hill Education. Drivers of Globalization 6 of 6 The Role of Technological Change continued ✓ Implications for the Globalization of Markets ▪ Low cost communication networks help create electronic global marketplace ▪ Low cost transportation makes it economical to ship products around the world ▪ A reduction in cultural distance ▪ A convergence of consumer tastes and preferences ©McGraw-Hill Education. The Changing Demographics of the Global Economy 1 of 7 ▪ In the 1960s: ✓ U.S. dominated the world economy, world trade, and world FDI ✓ U.S. MNEs 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 ©McGraw-Hill Education. The Changing Demographics of the Global Economy 2 of 7 The Changing World Output and World Trade Picture ✓ Early 1960s: ▪ U.S. - dominant industrial power accounting for about 38.3% of world manufacturing output ✓ By 2014: ▪ U.S. accounted for only 22.4% ▪ Germany, France, and the U.K. had a similar decline ▪ Rapid economic growth now in countries like China, India, Russia, and Brazil ▪ Further relative decline by the U.S. is likely ©McGraw-Hill Education. Table 1.2 The Changing Demographics of World Output and Trade Share of World Output 1960 (%) Share of World Output 2014 (%) Share of World Exports 2015 (%) United States 38.3 22.4 9.2 Germany 8.7 5.0 8.4 France 4.6 3.6 3.1 Italy 3.0 2.8 2.9 United Kingdom 5.3 3.0 2.7 Canada 3.0 2.3 2.7 Japan 3.3 5.9 3.9 China NA 13.3 13.2 Country Sources: Output data from World Bank database, 2016. Trade data from WTO Statistical Database, 2015. ©McGraw-Hill Education. The Changing Demographics of the Global Economy 3 of 7 The Changing Foreign Direct Investment Picture ✓ The share of world output generated by developing countries has been steadily increasing since the 1960s ✓ The stock of foreign direct investment (total cumulative value of foreign investments) generated by rich industrial countries is declining ✓ Cross-border flows of foreign direct investment are rising ✓ The largest recipient of FDI is China, followed by Brazil, Mexico, and India ©McGraw-Hill Education. Figure 1.2 Percentage Share of Total FDI Stock Source: C. W. L. Hill and G. T. M. Hult, International Business: Competing in the Global Marketplace. (New York, NY: McGraw-Hill Education, 2017). Jump to Appendix 1 long image description ©McGraw-Hill Education. Figure 1.3 FDI Inflows 1980-2014 Source: C. W. L. Hill and G. T. M. Hult, International Business: Competing in the Global Marketplace. (New York, NY: McGraw-Hill Education, 2017). Jump to Appendix 2 long image description ©McGraw-Hill Education. The Changing Demographics of the Global Economy 4 of 7 The Changing Nature of the Multinational Enterprise ✓ Non-U.S. Multinationals ✓ A multinational enterprise (MNE) is any business that has productive activities in two or more countries ✓ Since the 1960s: There has been a rise in non-U.S. multinationals and there has been a rise in minimultinationals ✓ By 2012, largest nonfinancial multinationals were found in U.S., Britain, France, Germany and Japan ©McGraw-Hill Education. Figure 1.4 National Share of Largest Multinationals 1973 and 2012 Source: C. W. L. Hill and G. T. M. Hult, International Business: Competing in the Global Marketplace. (New York, NY: McGraw-Hill Education, 2017). Jump to Appendix 3 long image description ©McGraw-Hill Education. The Changing Demographics of the Global Economy 5 of 7 The Changing Nature of the Multinational Enterprise continued ✓ The Rise of Mini-Multinationals ▪ More small and medium-sized businesses involved in international trade and investment ▪ Internet lowers barriers that small and medium firms face in building international sales ©McGraw-Hill Education. The Changing Demographics of the Global Economy 6 of 7 The Changing World Order ✓ The collapse of communism in Eastern Europe ▪ Greater export and investment opportunities, but political unrest is increasing risk ✓ Economic development in China ▪ Huge opportunities despite continued government control, but also new competition from Chinese firms ✓ Free market reforms and democracy in Latin America ▪ New markets and new sources of materials and production, but economic and political risk remains high ©McGraw-Hill Education. The Changing Demographics of the Global Economy 7 of 7 The Global Economy of the 21st Century ✓ A more integrated global economy ▪ New opportunities for firms ▪ But, political and economic disruptions can throw plans into disarray ©McGraw-Hill Education. The Globalization Debate 1 of 7 Is the shift toward a more integrated and interdependent global economy a good thing? • Many experts believe that globalization is promoting greater prosperity in the global economy, more jobs, and lower prices for goods and services • Others feel that globalization is not beneficial ©McGraw-Hill Education. The Globalization Debate 2 of 7 Antiglobalization Protests ✓ Began with WTO protest in December 1999 in Seattle ▪ Protest turned violent ✓ Protestors fear globalization has detrimental effects on living standards, wages, and the environment ▪ Theory and evidence suggests these fears are exaggerated ©McGraw-Hill Education. The Globalization Debate 3 of 7 Globalization, Jobs, and Income ✓ Falling trade barriers destroy manufacturing jobs in wealthy economies (U.S. and western Europe) ✓ Service activities increasingly outsourced to nations with lower labor costs ✓ Supporters say benefits outweigh the costs ✓ Outsourcing allows company to reduce its cost structure and as a result, can reduce prices ©McGraw-Hill Education. The Globalization Debate 4 of 7 Globalization, Jobs, and Income continued ✓ OECD studies show that while gap between poorest and richest segments of society has widened, in most countries, real income levels have increased for all, including poorest segment ✓ Many advanced economies report shortage of highlyskilled workers and an excess of unskilled workers ©McGraw-Hill Education. The Globalization Debate 5 of 7 Globalization, Labor Policies, and the Environment ✓ Lack of regulations in less developed countries ✓ Adhering to environmental regulations increases costs of manufacturing ✓ Supporters argue that tougher regulations lead to economic progress ✓ Studies show a hump-shaped relationship between income levels and pollution levels ©McGraw-Hill Education. Figure 1.5 Income Levels and Environmental Pollution Source: Hill, C. W. L.; Hult, G. T. M., International Business: Competing in the Global Marketplace. New York, NY: McGraw-Hill Education, 2017. Jump to Appendix 4 long image description ©McGraw-Hill Education. The Globalization Debate 6 of 7 Globalization and National Sovereignty ✓Critics worry economic power is shifting away from national governments and toward supranational organizations such as the WTO, the European Union (EU), and the UN ✓Supporters argue that the power of these organizations is limited to what nation-states collectively agree to grant ▪ The organizations must be able to persuade members states to follow certain actions ▪ Without the support of members, the organizations have no power ©McGraw-Hill Education. The Globalization Debate 7 of 7 Globalization and the World’s Poor ✓ Critics argue the gap between rich and poor has gotten wider and the benefits of globalization have not been shared equally ▪ Many of the world’s poorest nations are under totalitarian regimes, suffer from endemic corruption, have few property rights, are involved in war, and are burdened by high debt ▪ United Nations adopted Millennium Goals ▪ Eight economic and human development goals for the world ©McGraw-Hill Education. Managing in the Global Marketplace 1 of 2 ▪ International business is any firm that engaged in international trade or investment ▪ Managing international business differs from managing purely domestic business ▪ International business must vary its practices country by country ▪ International business issues greater in complexity ▪ Need to understand rules governing international trade and investment ©McGraw-Hill Education. Managing in the Global Marketplace 2 of 2 International business different for four reasons ✓ Countries are different ✓ Range of problems is wider and problems more complex ✓ Must find ways to work within governmental limits ✓ Transactions involve converting money into different currencies ©McGraw-Hill Education. Summary In this chapter we have ✓ Explored what is meant by the term globalization. ✓ Identified the main drivers of globalization. ✓ Described the changing nature of the global economy. ✓ Explained the main arguments in the debate over the impact of globalization. ✓ Discussed how the process of globalization is creating opportunities and challenges for business managers. ©McGraw-Hill Education.
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