Chapter 1 Summary: Globalization

Globalization

Chapter 1

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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.

What Is Globalization? 1

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.

What Is Globalization? 2

The Globalization of Production

Sourcing goods to take advantage of differences in cost and quality of factors of production.
Factors of production include labor, energy, land, capital.

Early outsourcing was confined to manufacturing.

Modern communications technology has advanced outsourcing today for service activities.

What Is Globalization? 3
The Globalization of Production continued
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.

The Emergence of Global Institutions 1

Institutions needed 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).

The Emergence of Global Institutions 2

World Trade Organization (W T O)

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 W T O members.

The Emergence of Global Institutions 3

International Monetary Fund (I M F)

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.

The Emergence of Global Institutions 4

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.

The Emergence of Global Institutions 5

United Nations (U N)
Promotes peace through international cooperation and collective security.
193 member countries.
U N 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.

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The Emergence of Global Institutions 6

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.

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Drivers of Globalization 1

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.

G A T T lowered barriers.
Uruguay Round extended G A T T and established W T O.

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Drivers of Globalization 2

Declining Trade and Investment Barriers continued

Between 19 60 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.

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Figure 1.1 Value of World Merchandised Trade and World Production 19 60 to 2021

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Drivers of Globalization 3

Role of Technological Change

Communications.
Development of the microprocessor single most important innovation since World War II.
Moore’s law predicts that the power of 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 acts as an equalizer.

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Drivers of Globalization 4

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.

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The Changing Demographics of the Global Economy 1

The Changing World Output and World Trade Picture

19 60s: 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 B R I C countries growing more rapidly.
Developing nations may account for more than 60 percent of world economic activity by
2030.

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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.

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Figure 1.2 F D I Outward Stock Outward as a Percentage of G D P

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Figure 1.3 F D I Inflows (in Millions of Dollars), 19 90 to 2020

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The Changing Demographics of the Global Economy 3

The Changing Nature of the Multinational Enterprise

Multinational enterprise (M N E) 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.

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

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The Changing Demographics of the Global Economy 4

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.

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The Changing Demographics of the Global Economy 5

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.

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The Changing Demographics of the Global Economy 6

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.

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The Globalization Debate 1

Antiglobalization Protests
Began with 19 99 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.
Theory and evidence suggest these fears may be exaggerated.

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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.

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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.

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The Globalization Debate 4

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.

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The Globalization Debate 5

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.
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Figure 1.5 Income Levels and Environmental Pollution

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The Globalization Debate 6

Globalization and National Sovereignty

Critics argue:
Shift of power away from national governments toward supranational organizations.
W T O, E U, U N.

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.

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The Globalization Debate 7

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.

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Figure 1.6 Percentage of the World’s Population Living in Poverty During 19 81 to 2015

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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.

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End of Main Content

© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw Hill LLC.

Accessibility Content: Text Alternatives for Images

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Figure 1.1 Value of world merchandised trade and world production 19 60 to 2021 – Text
Alternative

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The vertical axis provides the index value ranging from 0 to 2,500 in increments of 500.
Index Value 19 60, 100. The horizontal axis has years. A line representing the Merchandise
Trade Index is given as follows: 1960, 100. 19 70, 200. 19 80, 400. 19 90, 700. 2000, 1,000.
2010, 2,400. 2020, 2,200. A line representing the World G D P Index is given as follows: 19
60, 100. 19 70, 200. 19 80, 300. 19 90, 400. 2000, 500. 2010, 420. 2020, 450. All values are
estimated.

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Figure 1.2 F D I outward stock outward as a percentage of G D P – Text Alternative

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The entries for 1995, 2005, and 2020 are given as follows. U K: 19 95, 15%. 2005, 49%.
2020, 76%. France: 19 95, 15%. 2005, 29%. 2020, 56%. Germany: 19 95, 12%. 2005, 29%.
2019, 51%. U S A: 19 95, 13%. 2005, 28%. 2019, 39%. Japan: 19 95, 1%. 2005, 8%. 2019,
35%. China: 2005, 3%. 2020, 35%. World: 19 95, 12%. 2005, 25%. 2019, 46%. All values are
estimated.

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Figure 1.3 F D I inflows (in millions of dollars) – Text Alternative

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The data for developing and developed economies is given as follows. 19 90: Developing
economies, 20,000. Developed economies, 200,000. 19 95: Developing economies, 100,000.
Developed economies, 350,000. 2000: Developing economies, 230,000. Developed
economies, 1,380,000. 2005: Developing economies, 350,000. Developed economies,
9,00,000. 2010: Developing economies, 600,000. Developed economies, 1,300,000. 2015:
Developing economies, 700,000. Developed economies, 2,000,000. 2019: Developing
economies, 750,000. Developed economies, 1,480,000. 2020: Developing economies,
745,000. Developed economies, 950,000. All values are estimated.

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Figure 1.4 National share of the largest 2,000 multinational corporations in 2019 – Text
Alternative

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The entries are as follows. United States, 29%. Other, 24%. China, 15%. Japan, 11%. United
Kingdom, 4%. South Korea, 3%. France, 3%. India, 3%. Canada, 3%. Germany, 3%. Taiwan,
2%.

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Figure 1.5 Income levels and environmental pollution – Text Alternative

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The vertical axis has Pollution Levels and the horizontal axis has Income per capita. A
dotted vertical line is marked at $8,000 income per capita. A line representing carbon
dioxide emissions starts at the origin, intersects with the dotted line halfway, and goes up to
the right. A curve representing other pollutants starts at the origin, rises to the right,
intersects with the dotted line, and dips to the right.

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Figure 1.6 Percentage of the world’s population living in poverty during 19 81 to 2015 –
Text Alternative

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The vertical axis has the population percentage ranging from 0 to 80 in increments of 10.
The horizontal axis has years. The entries are as follows. A line representing the Poverty
headcount ratio at $1.90 a day by the 2011 P P P is given as follows: 19 81, 43. 19 87, 37. 19
93, 31. 19 99, 27. 2005, 20. 2008, 15. 2015, 10. A line representing the Poverty headcount
ratio at $5.50 a day by the 2011 P P P is given as follows: 19 81 to 19 99, averages at 67.
2005, 60. 2011, 50. 2015, 47. All values are estimated.

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