Globalization

Chapter # 1
 Opening Case:
The Globalization of Health Care

There is a shortage of radiologists in the United States and demand

for their services is growing twice as fast as the rate of graduation.

Solution to the problem: Send images over the Internet to be

interpreted by radiologists in India.
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 Opening Case:
The Globalization of Health Care
Outsourcing health care is not only limited to radiology; we are
beginning to see patients travel internationally for treatments as
well as surgery

In 2004 some 170,000 foreigners visited India for medical

treatments; the number is expected to grow at 15% for the next
several years

Question: Will demand for American health services soon collapse

as work moves offshore to places like India?

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Introduction…
Over the past five decades, a fundamental shift has been occurring in
the world economy.
We have been moving away from a world in which national economies
were relatively self-contained entities, isolated from each other by
barriers to cross-border trade and investment; by distance, time
zones, and language; and by national differences in government
regulation, culture, and business systems.
We are moving toward a world in which barriers to cross-border trade
and investment are declining; perceived distance is shrinking due to
advances in transportation and telecommunications technology;
material culture is starting to look similar the world over; and national
economies are merging into an interdependent, integrated global
economic system.
The process by which this transformation is occurring
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is commonly referred to as globalization.
Introduction…
At the same time, recent political events have raised some questions
about the inevitability of the globalization process.
The exit of the United Kingdom from the European Union (Brexit),
the renegotiation of the North American Free Trade Agreement
(NAFTA) by the Trump administration, and trade disputes between the
United States and many of its trading partners, including most notably
China, have all contributed to uncertainty about the future of
globalization.
While the world seems unlikely to pull back significantly from
globalization, there is no doubt that the benefits of globalization are
more in dispute now than at any time in the last half century.
This is a new reality, albeit perhaps a temporary one, but it is one the
international business community will have to adjust to.
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What is Globalization?
• The shift toward a more integrated and
interdependent world economy.
Two components:
 The globalization of markets
 The globalization of production

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GLOBALIZATION OF MARKETS
The merging of distinctly separate national
markets into one huge global marketplace.
 Falling barriers to cross-border trade have made it
easier to sell internationally
 Tastes and preferences converge onto a global norm
 Firms offer standardized products worldwide
creating a global market
GLOBALIZATION OF MARKETS
Difficulties that arise from the globalization of markets
 Significant differences still exist among national markets
along many relevant dimensions, including consumer
tastes and preferences, distribution channels, culturally
embedded value systems, business systems, and legal
regulations.
These differences frequently require companies to
customize best match conditions in a particular country

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GLOBALIZATION OF MARKETS
Difficulties that arise from the globalization of markets
 The most global of markets are not typically markets for
consumer products - where national differences in tastes
and preferences can still be important enough to act as a
brake on globalization - but markets for industrial goods
and materials that serve universal needs the world over.
It is increasingly evident that many newer high
technology consumer products, such as Apple’s iPhone,
are being successfully sold the same way the world over.

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GLOBALIZATION OF MARKETS
Difficulties that arise from the globalization of markets
 In many global markets, the same firms frequently confront
each other as competitors in nation after nation. Coca-
Cola’s rivalry with PepsiCo is a global one, as are the
rivalries between Ford and Toyota; Boeing and Airbus;
Caterpillar and Komatsu in earthmoving equipment;
General Electric and Rolls-Royce in aero engines; Sony,
Nintendo, and Microsoft in video-game consoles; and
Samsung and Apple in smartphones.

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GLOBALIZATION OF MARKETS
Difficulties that arise from the globalization of markets
 If a firm moves into a nation not currently served by its
rivals, many of those rivals are sure to follow to prevent
their competitor from gaining an advantage. As firms
follow each other around the world, they bring with them
many of the assets that served them well in other national
markets—their products, operating strategies, marketing
strategies, and brand names—creating some homogeneity
across markets. Thus, greater uniformity replaces diversity.

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GLOBALIZATION OF PRODUCTION
Refers to sourcing of goods and services from locations
around the world to take advantage of national differences
in the cost and quality of factors of production (such as
labor, energy, land, and capital).
By doing this, companies hope to lower their overall cost
structure or improve the quality or functionality of their
product offering, thereby allowing them to compete more
effectively.

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GLOBALIZATION OF PRODUCTION (CONTD.)

Consider Boeing’s 777:

 eight Japanese suppliers make parts for the fuselage (main body),
doors, and wings;
 a supplier in Singapore makes the doors for the nose landing gear;
 three suppliers in Italy manufacture wing flaps; and so on.
In total, some 30 percent of the 777, by value, is built by foreign
companies.
And, for its most recent jet airliner, the 787, Boeing has pushed this
trend even further; some 65 percent of the total value of the aircraft is
outsourced to foreign companies, 35 percent of which goes to three
major Japanese companies.

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GLOBALIZATION OF PRODUCTION (CONTD.)

Part of Boeing’s rationale for outsourcing so much production to foreign

suppliers is that these suppliers are the best in the world at their
particular activity.
A global web of suppliers yields a better final product, which enhances
the chances of Boeing winning a greater share of total orders for aircraft
than its global rival, Airbus.
Boeing also outsources some production to foreign countries to increase
the chance it will win significant orders from airlines based in that
country.

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GLOBALIZATION OF PRODUCTION (CONTD.)

 Early outsourcing efforts were primarily confined to manufacturing

activities, such as those undertaken by Boeing and Apple.
 Increasingly, however, companies are taking advantage of modern
communications technology, particularly the Internet, to outsource
service activities to low-cost producers in other nations.
 Many software companies, including Microsoft, now use Indian
engineers to perform test functions on software designed in the
United States. The time difference allows Indian engineers to run
debugging tests on software written in the United States when U.S.
engineers sleep, transmitting the corrected code back to the United
States over secure Internet connections so it is ready for U.S.
engineers to work on the following day.
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 Drivers of Globalization

Two macro factors underlie the trend toward greater

globalization.
 The first is the decline in barriers to the free flow of
goods, services, and capital that has occurred since the
end of World War II.
 The second factor is technological change, particularly the
dramatic developments in recent decades in
communication, information processing, and transportation
technologies.

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DECLINING TRADE AND INVESTMENT BARRIERS
(contd.)
 During the 1920s and 1930s, many of the world’s nation-
states erected formidable barriers to international trade and
foreign direct investment.
 Advanced industrial nations of the West committed
themselves after World War II to removing barriers to the
free flow of goods, services, and capital between nations.

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DECLINING TRADE AND INVESTMENT BARRIERS
(contd.)
 International trade occurs when a firm exports goods
or services to consumers in another country.
 Foreign Direct Investment (FDI) occurs when a firm
invests resources in business activities outside its home
country.
 Many of the barriers to international trade took the form of
high tariffs on imports of manufactured goods. The
typical aim of such tariffs was to protect domestic industries
from foreign competition. One consequence, however, was
“beggar thy neighbor” retaliatory trade policies, with
countries progressively raising trade barriers against each
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other.
DECLINING TRADE AND INVESTMENT BARRIERS
(contd.)

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 THE ROLE OF TECHNOLOGICAL CHANGE
 The lowering of trade barriers made globalization of
markets and production a theoretical possibility.
 Technological change has made it a tangible reality.
 Every year that goes by comes with unique and
oftentimes major advances in communication, information
processing, and transportation technology, including the
explosive emergence of the “Internet of Things”.

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 THE ROLE OF TECHNOLOGICAL CHANGE
 Communications
Perhaps the single most important innovation since World War II has been
the development of the microprocessor, which enabled the explosive
growth of high-power, low-cost computing, vastly increasing the
amount of information that can be processed by individuals and firms.
The microprocessor also underlies many recent advances in
telecommunications technology.
Over the past 30 years, global communications have been revolutionized
by developments in satellite, optical fiber, wireless technologies, and of
course the Internet.

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 THE ROLE OF TECHNOLOGICAL CHANGE
 Communications (Contd.)
These technologies rely on the microprocessor to encode, transmit, and
decode the vast amount of information that flows along these electronic
highways.
The cost of microprocessors continues to fall, while their power
increases (a phenomenon known as Moore’s law, which predicts that
the power of microprocessor technology doubles and its cost of
production falls in half every 18 months).

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 THE ROLE OF TECHNOLOGICAL CHANGE
 Internet
The explosive growth of the Internet since 1994, when the first web
browser was introduced, has revolutionized communications and
commerce.
In 1990, fewer than 1 million users were connected to the Internet.
By 1995, the figure had risen to 50 million.
By 2019, the Internet had 4.5 billion users, or 58 percent of the global
population.
It is no surprise that the Internet has developed into the information
backbone of the global economy.

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 THE ROLE OF TECHNOLOGICAL CHANGE
 Internet (Contd.)
It rolls back some of the constraints of location, scale, and time zones.
The Internet makes it much easier for buyers and sellers to find each
other, wherever they may be located and whatever their size.
It allows businesses, both small and large, to expand their global
presence at a lower cost than ever before.
Just as important, it enables enterprises to coordinate and control a
globally dispersed production system in a way that was not possible 30
years ago.

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 THE ROLE OF TECHNOLOGICAL CHANGE
 Transportation Technology
In addition to developments in communications technology, several major
innovations in transportation technology have occurred since the 1950s.
In economic terms, the most important are probably the development of
commercial jet aircraft and super freighters and the introduction of
containerization, which simplifies transshipment from one mode of
transport to another.
The advent of commercial jet travel, by reducing the time needed to get
from one location to another, has effectively shrunk the globe.

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 THE ROLE OF TECHNOLOGICAL CHANGE
 Transportation Technology
Containerization has revolutionized the transportation business,
significantly lowering the costs of shipping goods over long distances.
Because the international shipping industry is responsible for carrying
about 90 percent of the volume of world trade in goods, this has been an
extremely important development.

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 THE ROLE OF TECHNOLOGICAL CHANGE
 Transportation Technology (Contd.)
Before the advent of containerization, moving goods from one mode of
transport to another was very labor intensive, lengthy, and costly.
It could take days and several hundred longshore workers to unload a
ship and reload goods onto trucks and trains.

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 THE ROLE OF TECHNOLOGICAL CHANGE
 Implications for the Globalization of Production
As transportation costs associated with the globalization of production have
declined, dispersal of production to geographically separate locations has
become more economical.
As a result of the technological innovations discussed earlier, the real costs
of information processing and communication have fallen dramatically in the
past two decades.
These developments make it possible for a firm to create and then manage a
globally dispersed production system, further facilitating the globalization of
production.
A worldwide communications network has become essential for many
international businesses.

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 THE ROLE OF TECHNOLOGICAL CHANGE
 Implications for the Globalization of Markets
In addition to the globalization of production, technological innovations have
facilitated the globalization of markets.
Low-cost global communications networks, including those built on top of the
Internet, are helping create electronic global marketplaces.
As noted earlier, low-cost transportation has made it more economical to ship
products around the world, thereby helping create global markets.
In addition, low-cost jet travel has resulted in the mass movement of people
between countries.
This has reduced the cultural distance between countries and is bringing about
some convergence of consumer tastes and preferences.
At the same time, global communications networks and global media are
creating a worldwide culture.
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 THE ROLE OF TECHNOLOGICAL CHANGE
 Implications for the Globalization of Markets
(Contd.)
U.S. television networks such as CNN and HBO are now received in many
countries, Hollywood films and American TV programs are shown the world over,
while non-U.S. networks such as the BBC and Al Jazeera also have a global
footprint.
Streaming services such as Netflix are pushing this development even further,
making programming from various nations available worldwide.
In any society, the media are primary conveyors of culture; as global media
develop, we must expect the evolution of something akin to a global culture.
A logical result of this evolution is the emergence of global markets for
consumer products.
It is now as easy to find a McDonald’s restaurant in Tokyo as it is in New York, to
buy an iPad in Rio as it is in Berlin, and to buy Gap jeans in Paris as it is in30San
The Globalization Debate
Is the shift toward a more integrated and interdependent global
economy a good thing?
Many influential economists, politicians, and business leaders seem to
think so. They argue that falling barriers to international trade and
investment are the twin engines driving the global economy toward
greater prosperity.
Advantages
 Increased international trade and cross-border
investment will result in lower prices for goods and
services
 Globalization stimulates Economic growth
 Increase in consumer income
 Creates jobs
 Countries specialize in production of goods and 31

services that are produced most efficiently

The Globalization Debate (Contd.)

Disadvantages
 Destroys manufacturing jobs in wealthy,
advanced countries
 Wage rates of unskilled workers in advanced
countries declines
 Companies move to countries with fewer labor
and environment regulations
 Loss of sovereignty

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End of the chapter…