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Chapter 1

Globalization

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© 2022 McGraw Hill. 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.
 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.

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 Opening Case
Detroit Bikes
By 2018, about 95 percent of bikes sold in U.S.
were assembled in China; about 65 percent of
component parts were also produced in China.
• American consumers benefitted from lower prices.

Detroit Bikes is an exception to outsourcing

trend but struggled with production and local
sourcing.
2018 tariffs and resulting trade war was a
mixed blessing for Detroit Bikes, due to
supply chain disruptions.
Detroit Bikes is trying to avoid raising prices,
other companies say they have no choice.

© McGraw Hill V CG/Getty Images 3

 Introduction
World Economy Today
Fewer self-contained national economies.
More integrated global economic system with lower barriers to
trade and investment.
Transformation is called globalization.
Today, benefits of globalization are more in dispute than at any
time in the last half century.
• This shift has created many challenges and some opportunities, too.
• Globalization continues to impact almost everything we do.

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 What Is Globalization? 1

Globalization
A shift toward a more integrated and interdependent world
economy.
Two facets:
• Globalization of markets.
• Globalization of production.

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 What Is Globalization? 2

The Globalization of Markets

The merging of historically distinct and separate national markets
into one huge global marketplace.
In many markets, tastes and preferences of consumers in different
nations are converging on some global norm, creating a global
market.
• Examples: Coca-Cola, McDonald’s, IKEA, Starbucks, Apple.

The most global of markets are for industrial goods and materials
that serve universal needs around the world.
• Aluminum, oil, wheat, microprocessors.

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 What Is Globalization? 3

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.
• Improvement of the quality or functionality of a product to
compete more effectively.

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 What Is Globalization? 4

The Globalization of • Impediments to globalization:

Production continued • Formal and informal trade
• Early outsourcing was barriers.
primarily for manufacturing. • Barriers to foreign direct
investment.
• Today, modern
communications technology • Transportation costs.
allows companies to • Economic and political risk.
outsource services. • Managerial challenge for
coordinating a globally
dispersed supply chain.

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 The Emergence of Global Institutions 1

Global Institutions
• Manage, regulate, and police the global marketplace.
• Promote the establishment of multinational treaties to govern
the global business system.
• Created by voluntary agreement between individual nation-
states.

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 The Emergence of Global Institutions 2

World Trade Organization (WTO)

• Polices world trading system and ensures nation-states
adhere to the rules established in W TO treaties.
• Succeeded the General Agreement on Tariffs and Trade
(GATT).
• 164 member nations accounted for 98 percent of world trade
(2020).

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 The Emergence of Global Institutions 3

International Monetary Fund (IMF)

• Maintains order in the international monetary system.
• Lender of last resort.
• Requires nation-states to adopt specific economic policies
in return for loans.

World Bank
• Promotes development using low-interest loans.
• Seen as less controversial than IMF.

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 The Emergence of Global Institutions 4

United Nations (UN)

Committed to maintaining international peace and security on
basis of UN Charter:
• Develops friendly relations among nations.
• Promotes cooperation in solving international problems.
• Promotes respect for human rights.
• A center for harmonizing the actions of nations.

Includes 193 member countries.

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 The Emergence of Global Institutions 5

Group of Twenty (G20)

• Comprised of finance ministers and central bank governors of
the 19 largest world economies plus the E U and European
Central Bank.
• Represents 90 percent of global G DP.
• Became a forum for a coordinated policy response to the
financial crisis of 2008 and 2009.

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 Drivers of Globalization 1

Two Macro Factors Toward Greater Globalization

1. Decline in barriers to free flow of goods, services, and capital.
2. Technological change.

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 Drivers of Globalization 2

Declining Trade and Investment Barriers

International trade occurs when a firm exports goods or services
to consumers in another country.
Foreign direct investment (F DI) occurs 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.

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 Table 1.1 Average Tariff Rates on Manufactured
Products as Percentage of Value

Country 1913 1950 1990 2018

France 21 percent 18 percent 5.9 percent 3.9 percent
Germany 20 26 5.9 3.9
Italy 18 25 5.9 3.9
Japan 30 -- 5.3 2.5
Netherlands 5 11 5.9 3.9
Sweden 20 9 5.9 3.9
United Kingdom -- 23 5.9 3.9
United States 44 14 5.7 3.1

Sources: The 19 13 to 19 90 data are from “Who Wants to Be a Giant?” The Economist: A Survey of the
Multinationals, June 24, 1995, pp. 3 to 4. The 2018 data are from the World Tariff Profiles 2019, published by the
World Trade Organization.

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 Drivers of Globalization 3

Declining Trade and Investment Barriers

continued
Trade in goods and services has been
growing faster than world output for decades.
By 2019, sales of foreign affiliates of
multinational corporations reached $27 trillion.
Implications of fast-paced volume of world
trade:
• More companies dispersing parts production.
• Economies of nation-states becoming more
intertwined.
• World becoming significantly wealthier.

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 Figure 1.1 Value of World Merchandised
Trade and World Production 1960 to 2019

Access the text alternative for slide images.

© McGraw Hill Sources: World Bank, 2020; World Trade Organization, 2020; United Nations, 2020. 18
 Drivers of Globalization 4

Declining Trade and Investment Barriers continued

Some firms finding home markets under attack from foreign
competitors.
Global financial crisis of 2008 to 2009 and drop in global output
that occurred led to more calls for trade barriers to protect jobs at
home.
• Resulting trade wars, such as one between U.S. and China.
• May slow the rate of globalization and production.

COVID-19 global pandemic has had a significant impact on global

supply chains, and thus on globalization.

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 Drivers of Globalization 5

Role of Technological Change

Communications.
• Since World War II, microprocessor created explosive growth of
high-power, lost-cost computing.
• Microprocessors also advanced telecommunications.
• Moore’s Law: as costs of microprocessors fall, their power
increases.

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 Drivers of Globalization 6

Role of Technological Change continued

The Internet.
• In 2019, 4.5 billion users (58 percent of global population).
• Reduces constraints of location, scale, and time zones.

Transportation Technology.
• Commercial jets, superfreighters.
• Innovation of containerization has significantly lowered shipping
costs.

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 Drivers of Globalization 7

Role of Technological Change continued

Implications for the Globalization of Production.
• Lower transportation costs makes geographically dispersed
production system more economical; allows firms to better
respond to demand shifts.

Implications for the Globalization of Markets.

• Low-cost communication networks create electronic global
marketplace.
• Low-cost transportation makes shipping products around the world
economical.
• Reduced cultural distance.
• Converging consumer tastes and preferences.
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 The Changing Demographics of the
Global Economy 1

Global Economy: Early 1960s

• U.S. dominated the world economy, world trade.
• U.S. dominated world FDI.
• U.S. MNEs dominated international business.
• About half the world was off limits to Western international
business.
• Today, much has changed.

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 The Changing Demographics of the
Global Economy 2

The Changing World Output and World Trade Picture

Early 1960s.
• U.S. was dominant in industrial power, accounting for about 38 percent
of world manufacturing output.

Today:
• U.S. accounts for only 24 percent.
• Germany, France, the U.K., and Canada had similar decline.
• Rapid economic growth now in countries like China, India, Russia, and
Brazil.
• Chinese economy could surpass U.S. within a decade.
• Further relative decline by the U.S. and others is likely.

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 Table 1.2 Changing Demographics of World
Output and World Exports

Share of World Share of Share of

Output in 1960 World Output World Exports
Country (%) Today (%) Today (%)
United States 38.3 percent 24.0 percent 8.2 percent
Germany 8.7 4.6 7.1
France 4.6 3.2 2.8
Italy 3.0 2.4 2.4
United Kingdom 5.3 3.3 2.3
Canada 3.0 2.0 2.2
Japan 3.3 6.0 3.6
China NA 15.2 11.1

© McGraw Hill Sources: Output data from World Bank database, 2019. Trade data from W T O Statistical Database, 2019. 25
 The Changing Demographics of the
Global Economy 3

The Changing Foreign Direct Investment Picture

• World output generated by developing countries has been
steadily increasing since 19 60s.
• 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 is rising.
• Largest developing country recipients of F DI are China, Mexico,
and Brazil.

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 Figure 1.2 FDI Outward Stock as a
Percentage of GDP

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© McGraw Hill Sources: O E CD data 2020, World Development Indicators 2020, U NCT A D database, 2020.. 27
 Figure 1.3 FDI Inflows (in millions of
dollars) 1990 to 2019

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© McGraw Hill Source: United Nations Conference on Trade and Development, World Investment Report 2020. 28
 The Changing Demographics of the
Global Economy 4

The Changing Nature of the Multinational Enterprise

• A multinational enterprise (MNE) is any business that has
productive activities in two or more countries.
• In last 50 years, rise of non-U.S. multinationals and growth of
mini-multinationals.
• Non-U.S. Multinationals.
• Large number of U.S. multinationals reflects U.S. economic
dominance.
• Today, world economy is shifting away from North America and
western Europe.

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

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© McGraw Hill Source: Forbes Global 2000 in 2019. 30

 The Changing Demographics of the Global
Economy 5

The Changing Nature of the Multinational Enterprise

continued
• The Rise of Mini-Multinationals.
• More small- and medium-size businesses (mini-multinationals) are
involved in international trade and investment.
• Internet lowers barriers that smaller firms face in building
international sales.

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 The Changing Demographics of the
Global Economy 6

The Changing World Order

Collapse of communism throughout eastern Europe.
• Greater export and investment opportunities, but political unrest is an
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 remain high.

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 The Changing Demographics of the Global
Economy 7

Global Economy of the Twenty-First Century

A more integrated global economy.
• New opportunities for firms.
• But political and economic disruptions can upset plans.
• Risks associated with global financial crisis.
• Impact of global supply chain disruptions.

Hedging strategies increasing in importance.

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 The Globalization Debate 1

Is A More Integrated and Interdependent Global Economy

Good?
• 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.

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 The Globalization Debate 2

Antiglobalization Protests
Began with WTO protest in December 19 99 in Seattle.
• Protest turned violent.
• Other protests have occurred worldwide.

Critics fear globalization has detrimental effects on living

standards, wages, and the environment.
• Theory and evidence suggests these fears are exaggerated.

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 The Globalization Debate 3

Globalization, Jobs, and Income

• Critics say that falling trade barriers destroy manufacturing jobs
in wealthy economies (U.S. and western Europe).
• Service activities are increasingly outsourced to nations with
lower labor costs.
• Supporters say benefits outweigh the costs.
• Outsourcing allows a company to reduce its cost structure and
reduce prices.

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 The Globalization Debate 4

Globalization, Jobs, and Income continued

Share of labor in national income has declined.
• Attributed to a fall in unskilled labor.
• Gap between poorest and richest segments of society has widened.

In most countries, real income levels have increased for all.

Many advanced economies report shortage of highly skilled
workers and an excess of unskilled workers.

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 The Globalization Debate 5

Globalization, Labor Policies, and the Environment

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 lead to economic

progress.
• Tougher regulations come with economic progress.

Studies show a hump-shaped relationship between income levels

and pollution levels.

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 Figure 1.5 Income Levels and
Environmental Pollution

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© McGraw Hill Source: C. W. L. Hill and G. T. M. Hult, Global Business Today (New York: McGraw-Hill Education, 2018). 39
 The Globalization Debate 6

Globalization and National Sovereignty

Critics worry economic power is shifting away from national
governments and toward supranational organizations such as the
WTO, European Union, and UN.
• Believe that unelected bureaucrats impose policies and undermine
sovereignty.

Supporters say the power of these organizations is limited to what

nation-states collectively agree to grant.
• Must be able to persuade member states to follow certain actions.
• Without the support of members, the organizations have no power.

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 The Globalization Debate 7

Globalization and the World’s Poor

Critics argue the gap between rich and poor is wider, and the
benefits of globalization are not shared equally.
• Many poor nations are under totalitarian regimes, suffer from endemic
corruption, have few property rights, are involved in war, have rapidly
expanding populations, are burdened by high debt.
• No money to invest in public infrastructure.

Debt relief movements:

• Rich nations like the U.S. offer debt relief for “highly indebted poorer
countries” (HIPCs).
• Reduce import barriers from poor nations.

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 Figure 1.6 Percentage of the World's Population
Living in Poverty During 1981 to 2015

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© McGraw Hill Source: World Bank Data Base on Poverty and Equity, World Development Indicators, 2019. 42
 Managing in the Global Marketplace
International Business
Any firm that is engaged in
international trade or investment.
Managing international business
differs from managing domestic
business.
• Practices vary by country.
• Issues are more complex.
• Need to understand rules governing
international trade and investment.
• Need to convert currency.

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 Summary
In this chapter, we have
• Understood what is meant by the term globalization.
• Recognized 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.
• Understood how the process of globalization is creating
opportunities and challenges for management practice.

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 End of Main Content

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© 2022 McGraw Hill. 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.