CHAPTER 1: 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 the increasing globalization of markets and production:

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 Germany France United kingdom Italy Canada 40.3 5.5 9.7 6.3 6.5 3.4 3.0 21.9 8.2 4.3 3.5 3.4 3.2 2.1 12.2 9.4 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: