International Business

10e

By Charles W.L. Hill

Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Chapter 1

Globalization
 What Is Globalization?
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

1-3
 What Is The
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

1-4
 What Is The
Globalization of Markets?
All sized firms 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

1-5
 What Is The
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

1-6
 Why Do We Need
Global Institutions?
Global institutions
help manage, regulate, and police the global
marketplace
promote the establishment of multinational
treaties to govern the global business system

1-7
 Why Do We Need
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

1-8
 What Do Global
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
164 members in 2016

1-9
 What Do Global
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 projects

1-10
 What Do Global
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 to the
2008-2009 global financial crisis

1-11
 What Is Driving
Globalization?
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 EUR 27.6 trillion in 2017
facilitates global production
Technological change
microprocessors and telecommunications
Internet: information backbone of the global economy
transportation technology

1-12
 What Does Globalization
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

1-13
 Declining Trade And
Investment Barriers
Average Tariff Rates on Manufactured Products as Percent of Value
1913 1950 1990 2014
France 21% 18% 5.9% 1.5%
Germany 20 26 5.9 1.5
Italy 18 25 5.9 1.5
Japan 30 — 5.3 1.3
Holland 5 11 5.9 1.5
Sweden 20 9 4.4 1.5
United Kingdom — 23 5.9 1.5
United States 44 14 4.8 1.5

1-14
 What Does Globalization
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 production
globally
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
1-15
The Changing Demographics
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

1-16
How Has World Output And
World Trade Changed?
In 1960, the U.S. accounted for almost
40% of world economic activity, but by
2020, the U.S. accounted for just 20%
a similar trend occurred in other developed
countries
In contrast, the share of world output
accounted by developing nations is
rising
expected to account for more than 60% of
world economic activity by 2020 1-17
How Has World Output And
World Trade Changed?
The Changing Demographics of World Output and Trade

Country Share of World Share of World Share of World

Output, 1960 (%) Output, 2014 (%) Exports, 2014 (%)
United States 38.30% 22.40% 9.20%
Germany 8.70 5.00 8.40
France 4.60 3.60 3.10
Italy 3.00 2.80 2.90
United Kingdom 5.30 3.00 2.70
Canada 3.00 2.30 2.70
Japan 3.30 5.90 3.90
China NA 13.30 13.20

1-18
 How Has Foreign Direct
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, have
also become popular destinations for FDI 1-19
 How Has Foreign Direct
Investment Changed Over Time?
Percentage Share of Total FDI Stock 1980-2011

1-20
 How Has Foreign Direct
Investment Changed Over Time?
FDI Inflows 1988-2011

1-21
 What Is A
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

1-22
The Changing World Order
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

1-23
How Will The Global Economy
Of 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

1-24
Is An Interdependent Global
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

1-25
 How Does Globalization
Affect 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

1-26
How Does Globalization Affect Labor
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 as countries get
richer from free trade, they implement
tougher environmental and labor
regulations

1-27
 How Does Globalization
Affect 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 1-28
 How Is Globalization
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

1-29
 How Does The Global
Marketplace 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
1-30