GLOBALIZATION

Contents: Understand what is meant by globalization. Be familiar with the causes of globalization. international trade patterns, FDI flow, differences in economic growth among countries, and the rise of new MNCs are changing the nature of the world economy. Debate over the impact of globalization. Numerous opportunities and challenges due to globalization. Introduction Whether a business student is studying marketing, finance, accounting, strategy, human relations, or operations management, the differences between countries in which a firm does business will affect decisions that must be made. A fundamental shift is occurring in the world economy. The world is getting closer in terms of cross border trade and investment, by distance, time zones, languages and by national differences in government regulation, culture and business systems and toward a world in which national economies are merging into one huge interdependent global economic system. Globalization is affecting firms that previously operated in a nice, easy, protected national market. It also illustrates the increasing importance of thinking globally. What is globalization? Definition: globalization is the trend toward a more integrated global economic system. The rate at which this shift is occurring has been accelerated recently. Globalization has two faces:

Changing

Globalization of markets Globalization of production Globalization of markets:

Globalization of markets refers to the fact that in many industries historically distinct and separate national markets are merging into one huge global marketplace.

There is a movement towards a globalization of markets, as the tastes and preferences of consumers in different nations are beginning to converge upon some global norm. The global acceptance of Coca-Cola, Levis jeans, Sony Walkmans, and McDonalds hamburgers are all examples. By offering a standard product worldwide, they are helping to create a global market. Even smaller companies can get the benefits from the globalization of markets. Despite the global prevalence of global brands such as Levis, City Bank, Pepsi etc, national markets are not disappearing. There are still significant differences - Germany still leads in per capita beer consumption, with a local pub on almost every corner and in some cities, women selling beer out of their front windows to passers by on the street. The French lead in wine consumption, and the consumption of wine is a natural part of life anywhere in France. Italians lead in pasta eaten, and these differences are unlikely to be eliminated any time soon. Hence, often there is still a need for marketing strategies and product features to be customized to local conditions.

Globalization of production:
The globalization of production refers to the tendency among many firms to source goods and services from different locations around the globe in an attempt to take advantage of national differences in the cost and quality of factors of production. (labor, energy, land and capital) Through this companies hope to lower their overall cost structure and or improve the quality or functionality of their product, thereby allowing them to compete more effectively against their rivals. The examples of Boeing and Swan Optical illustrate how production is dispersed. Boeing companys commercial jet airliner, Boeing 777 contains 132,500 major components parts that are produced around the world by 545 different suppliers. Eight Japanese suppliers make parts of fuselage, doors and wings, a supplier in Singapore make the doors for the nose landing gear, three suppliers in Italy manufacture wing flaps etc. The result of having a global web of suppliers is a better final product, which enhances the chances of Boeing wining a greater share of aircraft orders than its global rival Airbus. While part of the rationale is based on costs and finding the best suppliers in the world, there are also other factors. In Boeings case, if it wishes to sell airliners to countries like China, these countries often demand that domestic firms be contracted to supply portions of the plane - otherwise

they will find another supplier (Airbus) who is willing to support local industry. Drivers of globalization Two key factors seem to underlie the trend towards increasing globalization of markets and production: the

The decline of barriers to trade and investment and Technological change.

The decline of barriers to trade and investment:
Decline in Trade barriers: Definition: International trade occurs when a firm exports goods or services to consumers in another country. Many of the barriers to international trade took the form of high tariffs on imports of manufactured goods. However, this depressed world demand and contributed to the great depression of the 1930s. After World War II, the industrialized countries of the West started a process of removing barriers to the free flow of goods, services, and capital between nations. Under GATT, over 140 nations negotiated even further to decrease tariffs and made significant progress on a number of non-tariff issues (e.g. intellectual property, trade in services). The most recent round of negotiations known as Uruguay round was competed in December 1993. The Uruguay round further reduced trade barriers, covering services as well as manufactured goods provided enhanced protection for patents, trade marks and copyrights and established WTO to police the international trading system. With the establishment of the WTO, a mechanism now exists for dispute resolution and the enforcement of trade laws. Average tariff rates have fallen significantly since 1950s, and under the Uruguay agreement, they have approached 3.9 percent by 2000. This removal of barriers to trade has taken place in conjunction with increased trade, world output, and foreign direct investment. Decline in investment barriers: Definition: The Foreign direct Investment: FDI occurs when a firm invests to international trade activities outside its home country.

The growth of foreign direct investment is a direct result of nations liberalizing their regulations to allow foreign firms to invest in facilities and acquire local companies. With their investments, these foreign firms often also bring expertise and global connections that allow local operations to have a much broader reach than would have been possible for a purely domestic company. The evidences also suggests that FDI is playing an increasing role in the global economy as firms increase their cross border investments. Between 1985 and 1995 the total annual flow of FDI from all countries increased nearly six fold to $135 billion, a growth rate in the world trade The major investors has been U.S, Japanese, and Western European Companies investing in Europe, Asia, (particularly in China, and India). For example, Japanese auto companies have been investing rapidly in Asian, European, and U.S auto assembly operations. This also shows that firms around the globe are finding their home markets under attack from Foreign competitors. For example, in Japan, Kodak has taken market share from Fuji recent years. In the United States, Japanese firms have taken away market share from General motors, and Chrysler and in Western Europe where the once dominant Dutch company Philips has seen its market share taken by Japans JVC, Matsushita and Sony. The growing integration into a single huge market place is increasing the intensity of competition in a wide range of manufacturing and service industries. These trends facilitate both the globalization of markets and globalization of production. The lowering trade and investment barriers also allows firms to base individual production activities at the optimal location for that activity, and serving the world market from that location. Thus, a firm might design a product in one country, produce component parts in two another country, assemble the product in yet another country, and then export the finished product around the world.

The role technological change:

While lowering trade barriers has made the globalization of markets and production a possibility, technological changes have made it a reality. Telecommunications is creating a global audience. Transport is creating a global village. From Buenos Aires to Boston to Beijing, ordinary people are watching MTV, they are wearing Levis jeans,

and they are listening to Sony Walkman as they commute to work. Renato Ruggiero, Director General of World trade Organization. Improved information processing and communication allow firms to have better information about distant markets and coordinate activities worldwide. The explosive growth of the World Wide Web and the Internet provide a means to rapid communication of information and the ability of firms and individuals to find out about what is going on worldwide for a fraction of the cost and hassle as was required only a couple of years ago. Microprocessor and telecommunications: The single most important innovation has been the development of the microprocessor, which enabled the explosive growth of high power, low cost computing, increasing the amount of information that can be processed by individuals and firms. Over the past 30 years, global communications have been revolutionized by the developments in satellites, optical fiber, and wireless technology, and internet and World Wide Web. All these technologies rely on the microprocessor to encode, transmit and decode the vast amount of information that flows along these electronic highways. A phenomenon known as Moores law, which predicts that the power of microprocessor technology doubles and its cost of production falls in half of every 18 months. That means the cost of coordinating and controlling a global organization will reduce phenomenally. The Internet and World Wide Web: this is the latest expression of this development. There are more than 150 million users of the Internet. This will develop into the information backbone of tomorrows global economy. Real time video conferencing and commercial transactions can be transmitted through WWW. WWW will reduce the costs of global communications and it will create a truly global electronic market place of all kinds of goods and services. Such as the soft wares and bulldozers, and this will make it easier for firms of all sizes to enter the global marketplace. Transportation technology: Improvements in transportation technology, including jet transport, temperature controlled containerized shipping, and coordinated ship-rail-truck systems have made firms better able to respond to international customer demands. As a consequence of these trends, a manager in todays firm operates in an environment that offers more opportunities, but is also more complex and competitive than that faced a generation ago. People now work with individuals and companies from many countries, and while communications technology, with the universality of English as the language of business, has decreased the absolute level of cultural

difficulties individuals face, the frequency with which they face intercultural and international challenges has increased. The changing demographics of the global economy: In 1960s there were four facts described in the demographics of the global economy. The U.S dominance in the worlds economy and world trade. U.S dominance in the world Foreign Direct Investment picture. The dominance of large multinational U.S firms in the international business scene. Roughly half of the globe (communist world), was unavailable to Western International Business. All these four facts either have changed or now changing rapidly. The changing demographics has four facets.

The changing world output and world trade picture A changing world Foreign Direct Investment picture The changing nature of the Multinational Enterprise The changing world order The changing world output and world trade picture:
The U.S. share of world output has declined dramatically in the past 30 years and a much more balanced picture is now developing among industrialized countries. Looking ahead into the next century, the share of world output of what are now referred to as developing countries is expected to greatly surpass that of the current industrialized countries. For example, Japans share of world manufacturing output increased their share of world output included China, South Korea, and Taiwan.

The changing pattern of World output and trade Country Share of world Share of world Share of world output output output 1963 (%) 1985 (%) 1995 (%) United States Japan 40.3 5.5 21.9 8.2 12.2 9.4

Germany France United kingdom Italy Canada

9.7 6.3 6.5 3.4 3.0

4.3 3.5 3.4 3.2 2.1

10.1 5.6 4.9 4.5 3.9

By the end of 1980s, the U.S position as the worlds leading exporter was threatened. Over the last 30 years, U.S dominance in export markets has reduced as Japan, Germany and a large number of newly industrialized countries such as South Korea, and Taiwan has taken a large share of the world exports. During the 1960s, the U.S accounted for 20% of world exports of manufactured goods. However, this reduced to 12.2% by 1995. Despite the fall the United States remain the worlds largest exporter, flowed closely b Germany and Japan. Rapid economic growth rates now being experienced by countries such as, China, Thailand and Indonesia, further relative decline in the U.S share of world output and world exports. The World Bank predicts more future growth by developing nations in East and South East Asia, which includes China, India, and South Korea.

A changing world Foreign Direct Investment picture:

The source and destinations of FDI has also dramatically changed over recent years, with the US and industrialized countries becoming less important (although still dominant) as developing countries are becoming increasingly considered as an attractive and stable location for investment. The U.S firms accounted for 66.3% of the worldwide FDI flow in 1960s. British firms were second, accounting for 10.5 % while Japanese firms were a distant third, with only 2%. However, with the barriers to the free flow of goods and capital fell, and as other countries increased their shares of world output, non U.S firms increasingly began to invest across national borders. The share of FDI accounted by U.S firms declined substantially form around 44 percent in 1980 to 25 percent in 1994. Meanwhile the share

accounted by Japanese, France, other developed nations and the worlds developing nations reflects a small but growing trend in FDI. Another trend shows an increasing tendency for cross border investments to be directed at developing rather than rich industrialized nations. (the flow of Foreign direct investment refers to the amounts invested across national borders each year.) Among the developing nations China has received the greatest volume of inward FDI in recent years. Other developing nations receiving a large amount o of FDI included Indonesia, Malaysia, the Philippines, and Thailand, ($14 billion dollars.).

The changing nature of the Multinational Enterprise:

Definition: A multinational enterprise is any business that has productive activities in tow or more countries. The major trends in MNCs are the rise of non-US MNCs particularly Japanese Multinationals. The second is the growth mini multinationals. A number of large multinationals are now non-U.S. based, and many are recognizable brand names in the worldwide (e.g. Sony, Philips, Toshiba, Honda, and BMW). The new large multinationals are not only are originating in other developed countries, but there are an increasing number of multinationals based in developing countries. The country focus on Koreas new multinationals clearly illustrates the growth of developing country multinationals. An increasing number of small firms are becoming global leaders in their field, giving rise to the mini-multinationals. Although most international trade and investment are still conducted by large firms, many medium sized and small businesses are increasingly involved in international trade and investment. E.g.: G.W Barth, manufacturer of cocoa beans roasting machinery based in Germany, employing just 65 people has captured 70 percent of the global market for cocoa bean roasting machines.

The changing world order:

Between 1989 and 1991 a series of remarkable democratic revolutions swept the communist world. In country after country throughout Eastern Europe and eventually in the Soviet Union communist governments collapsed. The Soviet Union is now history, which is replaced by 15 independent republics. Czechoslovakia has divided itself into two states, while Yugoslavia has dissolved into a bloody civil war among its successor states.

For about half a century, these countries were closed for western international business. The fall of communism and the development of free markets in Eastern Europe and the former Soviet Union create profound opportunities, challenges, and potential threats for firms. The economic development of China presents huge opportunities and risks, in spite of its continued Communist control. China seems to be moving progressively toward greater free market reforms. The southern China province called Guangong now has become the fastest growing economy in the world. Between 1983 and 1995, FDI in China increased from leas than $2 Billion dollars to over $38 Billion dollars. For North American firms, the growth and market reforms in Mexico and Latin America also present tremendous new opportunities both as markets and sources of materials and production. The path to full economic liberalization and open markets is not without obstruction. Economic crises in Latin America, South East Asia, and Russia all caused difficulties in 1997 and 1998. In response, much trade was reduced, and some countries imposed new controls. Malaysia, for example, suspended foreigners from trading in its equity and currency markets to prevent destabilizing influences. While firms must be prepared to take advantage of an ever more integrated global economy, they must also prepare for political and economic disruptions that may throw their plans into confusion.

The globalization debate: prosperity or impoverishment? Is the shift toward a more integrated and interdependent global economy a good thing? There are three major criticism against globalizations. These are:

Reduced jobs and incomes It encourages poor labor

policies

practices and environmental

National sovereignty of the countries are getting limited

While many economists, politicians and business leaders seem to think so, globalization is not without its critics. Globalization stimulates economic growth, raises the incomes of consumers, and helps to create jobs in all countries that choose to participate in the global economy. Some of this growth, however, creates sweatshop jobs, increases pollution, and draws people from the countryside into ever more crowded cities and slums.

Globalization; jobs and incomes: One major criticism against globalization is that compared to creating jobs it actually destroys manufacturing jobs in the wealthy advanced countries like US. These critics argue that, falling trade barriers allow the firms to move their manufacturing activities to countries where wage rates are much lower. In developed countries, labor leaders lament the loss of good paying jobs to low wage countries. When the NAFTA agreement was signed, some politicians warned of a hearing a giant sucking sound as jobs left USA for Mexico. Even if the jobs are not lost, it creates downward pressure on wages in industries where overseas production is a viable option. The availability of jobs for unskilled workers is clearly threatened when those jobs can be more efficiently performed elsewhere. One solution to this problem is to increase the education and training of workers in developed countries to maintain employment, and simply let the unskilled jobs go to locations where unskilled workers will accept lower wages. Bartlett and Steele, two journalists form Philadelphia Inquirer News paper, cite the case of Harwood industries, a US clothing manufacturer that closed US operations, where it paid workers $9 per hour, and shifted manufacturing to Honduras, where workers receive 48 cents per hour. They argue because of free trade, the wage rates of poorer Americans have fallen significantly over the years. Supporters of globalization reply that these critics miss the essential point about free trade- the benefits outweigh the costs. They argue that free trade results in countries specializing in the production of those goods and services that hey can produce more efficiently from other countries. Even though there is dislocation of jobs but the whole economy is better off as a result. According to this view, it makes little sense for the US to produce textiles at home when they can produce textiles at la lower cost in Honduras or China. Importing textiles from China leads to lowering costs for cloths in US, which results in US consumers spend less on textiles and more on other items. At the same time, the increased income generated in China, from textile exports increases income levels in that country, which helps the Chinese to purchase more products produced in US like, Boeing Jets, Intel Computers, Microsoft Software and Motorola cellular phones. Therefore, supporter of global trade, argue that free trade benefits all countries. Labor polices and globalization

One of the criticisms against globalization is that free trade encourages developed nations to move manufacturing facilities offshore to less developed countries that lack adequate regulations to protect labor and the environment. They feel that free trade can lead to an increase in pollution and exploitation of labor of less developed nations. Lower labor costs are only one of the reasons why a firm may seek to expand in developing countries. These countries may also have lower standards on environmental controls and workplace safety. Nevertheless, since investment typically leads to higher living standards, there is often pressure to increase safety regulations to international levels. No country wants to be known for its poor record on health and human safety. Thus, supporters of globalization argue that foreign investment often helps a country to raise its standards. There is also political and economic pressure on firms not to exploit labor or the environment in overseas operations. Western firms have been the subjects of consumer boycotts when it has been revealed that they, or their independent suppliers, operate at standards below that in developed countries. National sovereignty and globalization: With the development of the WTO (World Trade Organization) and other multilateral organizations such as the EU (European Union) and NAFTA (North American Free trade Agreement), countries and localities necessarily give up some authority over their actions. If the USA wanted to protect its domestic lumber industry by preventing imports of lumber from Canada, the dispute would likely be settled by an international arbitration panel set up by the NAFTA agreement or the WTO. Because of its trade agreements, the USA would likely be forced to open its markets to importation of lower cost, higher quality Canadian lumber. While this would clearly be good for consumers, the domestic lumber industry would protest. While clearly some sovereignty (independence) has been surrendered, it has been done to protect the best interests of consumers. If a nation wanted to retreat into a more protectionist position, it could clearly choose to withdraw from its international agreements. Under the new system, many decisions, which affect billions of people, are no longer made by local or national Government, but instead, if challenged by any WTO member nation, would be deferred to a group of unelected bureaucrats sitting behind closed doors in Geneva, (HQs of WTO) at risk is the very basis of democracy and accountable decision making. Ralph Nader, US environmentalist and consumer rights advocate.

Managing in the global marketplace: Definition: An International business is any firm that engages in international trade or investment. A firm does not have to be a MNC investing directly in operations in other countries to engage in International Business. All a firm has to do is to start exporting products or importing products from other countries. As the world shift toward a truly integrated global economy, more firms, both the large and small, are becoming intentional businesses. As their organizations increasingly engage in cross-border trade and investment, it means managers need to recognize that the task of managing an international business differs from that of managing a purely domestic business in many ways. Countries differ in their cultures, political systems, economic systems, legal systems, and levels of economic development. These differences require that business people vary their practices country by country, recognizing what changes are required to operate effectively. It is necessary to strike a balance between adaptation and maintaining global consistency, however. Coca-Cola would not be as successful, nor would Coke be Coke, if it tasted like ginseng in one country, lemon in another, and rhubarb in a third. Clearly, some adaptations need to be made to correspond with local regulations and distribution systems, but some things need also remain consistent in order to benefit from economies of scale in advertising and production. As a result of making local adaptations, the complexity of international business is clearly greater than that of a purely domestic firm. Firms need to decide which countries to enter, what mode of entry to use, and which countries to avoid. Rules and regulations also differ, as do currencies and languages. Managing an international business is different from managing a purely domestic business for at least four reasons: (a) countries differ, (b) the range of problems and manager faces is greater and more complex, (c) an international business must find ways to work within the limits imposed by governmental intervention and the global trading system, and (d) international transactions require converting funds and being susceptible to exchange rate changes. Question bank from Module 1: 1. What is globalization? 2. Discuss the changing demographics of the global economy.(10 marks) 3. Define International business.

4. Discuss the forces driving companies towards International business.(10 marks) 5. What are the drivers of globalization? (June/July 2003)(3 marks) 6. Is globalization prosperity or impoverishment? (June/July 2003)(10 marks)

Additional notes from Module 1: The globalization process: Definition: The globalization process is the structural and managerial changes and challenges experienced by a firm as it moves from domestic to global in operations. This process happens in three phases. Domestic operations International trade phase Multinational phase Take an example of Trident Corporation, a U.S based company, which transforms itself from being domestic to global company. The first phase is called domestic phase. Phase One: Domestic Operations U.S suppliers (Domestic) law U.S buyers All payments in (Domestic) US dollars; All credit risk under U.S.

Trident Corporation

Trident may not be global or international itself, yet its competitors, suppliers and buyers may be working across borders. This is often a key driver to push a firm like Trident into first phase of globalization international trade The second half of this phase is the international trade phase

Phase 2: International trade phase Mexican suppliers law Canadian buyers All payments in US dollars; All credit risk under U.S.

Trident Corporation

Trident responds to globalization factors by importing inputs from Mexican suppliers and making exports sales to Canadian buyers. This stage is called the international trade phase. Exporting and importing products increases the demands and requirements of a domestic business. The first is direct foreign exchange risks borne by Trident. Trident may have to quote prices and receive payments in foreign currencies. Trident will now experience significant risks from the daily volatility in exchange rates. Trident also faces risks associated with credit quality and evaluation of international counterparts. This credit risk management task is much more difficult in international business as buyers and suppliers are new and subject to differing business practices and legal systems.

Phase 3: multinational phase If Trident is successful in international trade then the time will come for the next step in the globalization process, which is the move from the international trade phase to the multinational phase. Trident will eventually need to establish foreign sales and services affiliates This step is followed by the establishment of manufacturing operations or licensing agreements abroad Tridents continued globalization will require it to identify the sources of it competitive advantages This variety of strategic alternatives available to Trident is called the foreign direct investment sequence. These alternatives include the creation of foreign sales offices, licensing agreements, manufacturing, etc.

Once Trident owns assets and enterprises in foreign countries it has entered the multinational phase of globalization. Globalization sequence: Trident and its Competitive Advantage

Greater Foreign Presence

Change Competitive Advantage

Greater Foreign Investment

Exploit Existing Competitive Advantage Abroad

Production at Home: Exporting

Production Abroad M o d e s o f e n t r y

Licensing Management Contract

Control Assets Abroad

Joint Venture

Wholly Owned Subsidiary

Greenfield Investment

Acquisition of a Foreign Enterprise

Green field investment: A long-term physical investment in productive capability in that country. (referred as new projects) Acquisition: Identification, valuation, tender, and post-acquisition, management of an existing, going-concern. Joint venture: Combining investment, capital and managerial know-how to reach specific opportunities Ways to enter the new market: modes of globalization

Simple export of the product Develop a joint venture to sell

business

through an existing company in similar

Sell

license to foreign company and collect royalties, or franchising, turnkey projects etc.

Contract a foreign company to do the business for a % of the sales Overseas office and subsidiary company set up.