Globalization

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 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.

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 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.

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 The Emergence of Global Institutions 1

Institutions needed to help manage, regulate, and police

global marketplace.
• General Agreement on Tariffs and Trade (GATT).
• World Trade Organization (WTO).
• International Monetary Fund (IMF).
• World Bank.
• United Nations (UN).

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 The Emergence of Global Institutions 2

World Trade Organization (WTO)

• 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 WTO members.

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 The Emergence of Global Institutions 3

International Monetary Fund (IMF)

• 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.

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 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.

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 The Emergence of Global Institutions 5

United Nations (UN)

Promotes peace through international cooperation and
collective security.
193 member countries.
UN 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

1920s to 1930s: 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 (FDI): when a firm invests
resources in business activities outside its home country.

GATT lowered barriers.

• Uruguay Round extended GATT and established WTO.

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 Drivers of Globalization 2

Declining Trade and Investment Barriers continued

Between 1960 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 1960 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

1960s: 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 BRIC 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 FDI Outward Stock Outward as
a Percentage of GDP

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 Figure 1.3 FDI Inflows (in Millions of
Dollars), 1990 to 2020

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 The Changing Demographics of the Global
Economy 3

The Changing Nature of the Multinational Enterprise

Multinational enterprise (MNE) 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 1999 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.
• WTO, EU, UN.

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 1981 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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 Assignment 1: Due date: May 04, 2023

Directions: Provide a comprehensive reaction to the

statement below. Construct your own sentence. Minimum of
150 words. Do not copy from the internet.

The study of international business is fine if you are going to

work in a large multinational enterprise, but it has no
relevance for individuals who are going to work in small
firms.” Give your reaction to this statement.

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