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International Business 10e
Charles W.L. Hill | Arun
Kumar Jain
Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights
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Globalization
Chapter 1
What Is Globalization?
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• 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
What Is The
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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
What Is The
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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
What Is The
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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
– improve the quality or functionality of
their product offering
Why Do We Need
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Global Institutions?
• Global Institutions
– help manage, regulate, and police the
global marketplace
– promote the establishment of
multinational treaties to govern the
global business system
Why Do We Need
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Global Institutions?
• 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 Do Global
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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
– 159 members in 2013
What Do Global
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Institutions Do?
• 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
What Do Global
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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
What Is Driving Globalization?
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• 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 $20.4 trillion in 2011
– facilitates global production
• Technological change
– microprocessors and telecommunications
– Internet: information backbone of the global
economy
– transportation technology
What Does Globalization
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Mean For Firms?
• 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
Declining Trade And
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Investment Barriers
Average Tariff Rates on Manufactured Products as Percent of Value
What Does Globalization
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Mean 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
The Changing Demographics
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Of The Global Economy
• Four trends are important:
1. The changing world output and
world trade picture
2. The changing foreign direct
investment picture
3. The changing nature of the
multinational enterprise
4. The changing world order
How Has World Output And
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World Trade Changed?
• In 1960, the U.S. accounted for
almost 40% of world economic
activity, but by 2012, the U.S.
accounted for just 23%
– 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
How Has World Output And
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World Trade Changed?
The Changing Demographics of World Output and Trade
How Has Foreign Direct
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Investment Changed Over Time?
• 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,
How Has Foreign Direct
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Investment Changed Over Time?
Percentage Share of Total FDI Stock 1980-2011
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Investment Changed Over Time?
How Has Foreign Direct
FDI Inflows 1988-2011
What Is A
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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
The Changing World Order
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• 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
How Will The Global Economy Of
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The 21st Century Look?
• 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 2008-2009, and moved around the
world
Is An Interdependent Global
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Economy A Good Thing?
• 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
How Does Globalization Affect
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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
goods—and all countries will benefit
How Does Globalization Affect Labor
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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
How Does Globalization Affect
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National Sovereignty?
• Is today’s 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 nation-states
agree to grant
– the power of the organizations lies in their
ability to get countries to agree to follow
certain actions
How Is Globalization
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Affecting The World’s 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
How Does The Global Marketplace
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Affect 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
