8. Globalization Flashcards
What is globalization?
The movement toward a more integrated and interdependent world economy.
What are the evidence of globalization?
Increased mobility of;
goods/services, labor, technology, and capital
What has driven globalization?
- Advent of global institutions (e.g. World Bank, International Monetary Fund, Multinational corporations, etc).
- Reductions in trade and investment barriers
- Technological advances
What is the first movement of globalization?
Bretton Woods Agreement (1944) which established the framework for increased international commerce and finance following World War II.
What are 2 institutions established by the Bretton Woods Agreement? For what purpose?
To oversee the process.
- World Bank: To promote general economic development (e.g. lending to developing countries, primarily for infrastructure, agriculture, education, and similar development needs).
- International Monetary Fund (IMF): To maintain order in the international monetary system by providing funds to economies in financial crisis (currency crisis, banking crisis, financial debt crisis)
Where is the reduction in worldwide trade barriers originated from?
In 1947 with the initial General Agreement on Tariffs and Trade (GATT).
What are the purposes of original GATT and subsequent variations?
They are multilateral agreements to:
- Liberalize and encourage trade by eliminating tariffs, subsidies, import quotas and other barriers
- Harmonize related laws across nations
- Reduce transportation and other costs as a group undertaking
Who coordinates GATT accomplishments? When is it established?
The World Trade Organization (WTO). in 1995.
What is WTO responsible for?
- Overseeing the implementation, administration and operation of the covered trade agreements
- Providing a forum for negotiations and for setting international trade disputes
Concurrent with reduction in trade barriers, what has many counties done?
Removed restrictions on investment in the county by foreign investors
What is the investment by foreign investors called?
Foreign direct investments (FDI)
In which areas significant technological advancement have occurred?
- Communication and info processing: the ability to transmit and process large quantities of voice and data at low costs (Internet and World Wide Web)
- Transportation advances: the ability to move people and products faster and cheaper (large long-range jet aircraft, FedEx/UPS, large cargo ships, supertankers, containerization)
Which area of understanding must participating business in international business activity have?
- Political system
- Economic system
- Legal system
What kind of understanding business must have about legal system?
Property rights.
Contract laws.
Intellectual property laws.
Product and safety laws.
What are 3 major areas in which globalization has occurred?
Trade, production, and capital markets.
What is FDI?
direct investment by an entity in facilities to manufacture and/or market goods and services in a foreign country
Globalization of Trade: What are the reasons for international trade growth?
- Reduction in trade barriers to imports
- Increased economic integration of countries
- Regional trade agreements (e.g. NAFTA, EEU)
- Internet and World Wide Web capabilities
- Development of financial sector that supports international trade
Globalization of Trade: How much did world economic output grow between 1950-2000? Global trade?
6-fold.
17-fold.
Globalization of Trade: How much did world exports grow between 2000-2008? in 2009? In 2010-2011?
At average annual rate of 5%.
Declined by 12% due to worldwide economic downturn.
Grew by 14%in 2010 and 5% in 2011.
Globalization of Trade: Is US import or export county historically?
Import.
Globalization of Trade: How much % of imports was of GDP in 1960? In 2013? Exports?
Imports:
1960: 4%. 2013: 17%.
Exports:
1960: 5%. 2013: 14%.
Globalization of Trade: Who are the top 5 countries by exports in 2014?
- China: $2,342,000
- US: 1,621,000
- Germany: 1,508,000
- Japan: 683,000
- Netherland: 672,000
Globalization of Trade: Who are the top 5 countries by imports in 2014?
- US: $2,413,000
- China: 1,959,468 - export surplus
- Germany: 1,216,000 - export surplus
- Japan: 822,000
- United Kingdom: 684,000
Globalization of Trade: What are the US export/import composition? Which item is export more? Which item does it import significantly more than export**?
*Capital goods/equipment: E(24%), I(21) Industrial/natural resources: E(22), I(24) ***Consumer: E(9), I(20) Automotive: E(7), I(11) *Agriculture/food: E(6), I(4) Other goods: E(2), I(3) *Service: E(30), I(17)
Globalization of trade “Take Aways”?
- International trade had grown dramatically over recent years
- US trade also has grown dramatically over recent years since the 1990s especially imports
- US is the world’s largest import country
- China has experienced greatest export growth - the world largest export country
Globalization of Production: What are 2 general means of sourcing?
- Outsourcing of goods and services
* Foreign Direct Investment (FDI)
Globalization of Production: what is outsourcing?
Acquiring goods or services from a separate external provider under contractual terms
Globalization of Production: What are reasons for outsourcing?
- Cost savings
- Improved quality
- Reduced delivery time
- Enable entity to focus on core business
- Scalability
- Access knowledge, talent, and best practices of foreign provider
Globalization of Production: What are 5 outsourcing risks?
- Quality
- Security: Misappropriation of intellectual property, trade process, data
- Export/import: Home country or source country restricts the transfer of goods
- Current exchange: COG and services in domestic currency increases
- Legal: Possible violation of a country’s laws
Globalization of Production: What are 6 ways to mitigate outsourcing risks?
- Use due process in selecting foreign providers
- Use qualified lawyer in foreign country
- Determine legal requirements before entering into contracts
- Execute thorough contracts with arbitration clause
- Negotiate for pmts in home currency
- Strict policies concerning legal compliance
Globalization of Production: What is foreign direct investment?
Establish owned or controlled facilities in a foreign location to produce goods/services by;
acquiring property, plant, equipment and other assets in foreign county to carry out production or service functions
Globalization of Production: What are 4 major objectives of FDI?
- Lower cost structure
- Improved quality
- Expand markets
- Increase growth potential
Globalization of Capital Markets: What is capital market?
Bring together providers of capital (investors) and users of capital (borrowers).
Globalization of Capital Markets: What are common examples of capital market?
- Stock market
- Bond market
- Commodities market
- Money market
Globalization of Capital Markets: Historically, who served as intermediary between providers and users of capital?
Only domestic capital market.
Globalization of Capital Markets: What are limitations of domestic capital markets?
- Limited size and wealth of domestic residents
- Limited supply of domestic capital - increase cost
- Limited domestic investment opportunities
Globalization of Capital Markets: what is it?
Interconnected set of financial institutions and national markets that permit the trading of financial securities and other financial assets between and among investors and borrowers world-wide.
Globalization of Capital Markets: what are 2 formal international financial markets that should be noted?
- Eurodollar Market (Euromarket)
* Eurobond Market (International Bond Market)
Globalization of Capital Markets: What does Eurodollar market provide?
Short and intermediate-term loans world-wide denominated in US dollars.
Globalization of Capital Markets: what is international bond market?
Long-term loans outside borrower’s home country.
Offered in most major currencies
Avoids most government regulation
Globalization of Capital Markets: How much has cross-border loans increased between 1990 and 2006? International equity offerings?
Loans: $3,600 billion to 17,875 billion (+500%)
Equity offering: 18 billion to 377 billion (+2,100%)
Globalization of Capital Markets: what happened to cross-border financial flows starting in 2007? 2010?
2007: Declined significantly
2010: Leveled off after rebounding in 2009.
Globalization of Capital Markets: what are 2 major reasons for global growth in capital market?
- Government deregulation of international financial services
- Advances in communication and data processing
Globalization of Capital Markets: how does it move compared to global trade?
Similar pattern, but declined much more significantly for the recession.
Globalization of Capital Markets: Which one larger: US owned assets abroad or foreign owned asset in Us?
More investment in US. The difference has been growing last 20 yrs.
Globalization of Capital Markets: what are the benefits?
For investor: Greater range of investment opportunities
- Chance for greater returns
- Diversification of investments
For capital users: Greater funds availability
- More source of capital
- Chance for lower cost of capital
Globalization of Capital Markets: what are risks? How can it be mitigated?
The currency exchange risks.
By hedging.
Globalization of Capital Markets: which one is greater: the value of international borrowing or equity issues?
Borrowing.
Power Shift: What has growth of globalization resulted in?
Shifts in economic importance among nations.
Power Shift: In which areas has it occurred?
- Output
- Trade
- Services
- FDI
- Home country of multinational entities
Power Shift: What happened to World output (measured by real GDP) between 1969-2009?
More than tripled.
Power Shift: How has the US share of world output shifted in mid 1960s to current?
Mid 1960s: US - 40% of world output 1969: US - 30% 1969 to 2007: 25-35% After 2007: Less than 25% 2012: about 22% 2013-forward: projected to continue to decline
Power Shift: What is the trend for the share of world GDP (output) by country?
- Decline in the share for US, Europe, and Japan
- Increase for China, India, Brazil
- Decline for US, Europe, Japan was not caused by absolute decline in their output, but caused by great economic growth of China, India, Brazil
- Decline in US and increase in China are expected to continue
- If the trend continues, China will be the leader
Power Shift: what has been the trend for the world exports (trade) by country?
- Exports has declined for US, Germany, Japan, France, UK in 1995, but significantly increasing for China (2% to 12%)
- US has lost from 13% to 9%
- Japan has the steepest loss of 10% to 6%
- In 2009, China has become the world’s largest exporter
Power Shift: What are 2 major reasons for movement of service world-wide?
- Internet and global communications - enables entities to relocate value-adding services to low-cost locations (call center, help desk, programming)
- Relocation of services necessary to support foreign trade and production
Power Shift: How has the US share of world-wide accumulated foreign direct investment changed in 1980 and 2005?
1980=40%
2005=20%
Power Shift: FDI for US in 2010?
US was one of the 3 largest FDI investing countries and one of the 3 largest FDI receiving countries.
Power Shift: How has the developing countries’ share of world-wide accumulated FDI changed in 1980 to 2005?
1980=5%
2005=15% Trend is expected to continue
Power Shift: How has the US share of world-wide multinational companies changed from 1973 to 2015?
1973: 50% of largest 260 multinational
2005: 30% of 100
2009: 28% of 500
2015: 25% of 500
Power Shift: How has the share of top 6 export countries in the world-wide export changed last 25 yrs?
Remained in the range of 40-45%.
Becoming global: what are ways entities can engage in international business?
- Importing/exporting
- Foreign licensing
- Foreign franchising
- Foreign joint venture
- Foreign subsidiary
Becoming global: what is the most basic form of international business?
Importing/exporting
Becoming global: what are the advantages of exporting?
- Increase domestic scales and output - achieve economies of scale domestically
- Avoids cost of establishing foreign production capabilities
- Providers experiences in international business at low risk
Becoming global: what are advantages of importing?
- Obtaining goods not otherwise available
- Obtaining goods at lower cost
- Obtaining goods of better quality than similar goods produced in the home country
Becoming global: what are disadvantages of exporting/importing?
- Possible high cost of transportation (especially for low value-to-weight ratio goods: heavy relative to value)
- Existence or possibility of trade barriers (quotas/tariffs)
Becoming global: what is foreign licensing?
Granting a foreign entity the right to use an asset;
Patent, trademark, formula, etc
and receives royalty pmts
Becoming global: what are advantages/disadvantages of foreign licensing?
Ad:
- Increased revenue through royalties
- Avoids trade barriers concerns
- Avoids costs and risks of opening a foreign operation
Dis:
- Licensee may misuse patens, technology processes, and other proprietary info
- Licensor may not be able to control Licensee sufficiently to assure standards are met
- Licensee may not have management or technical capabilities to fully realize benefits of the license
Becoming global: what is foreign franchising? In which areas is it used primarily?
Special form of licensing in which the franchisor typically mandates strict operating procedures.
In foreign retail and service market.
Franchisor frequently provides on-going assistance.
Becoming global: what are the advantages and disadvantages?
Ad:
- Provide increased revenue from royalties
- Avoids costs and risks of opening foreign facilities
Dis:
- Franchisee may misuse proprietary info
- Franchisee quality control my not meet franchisor’s stds
Becoming global: what is foreign joint venture?
Establishing an entity in a foreign location and jointly owned by 2 or more otherwise unrelated entities.
Becoming global: what are advantages/disadvantages of foreign joint venture?
Ad:
- Host country co-owner has knowledge of local environment
- Costs and risks of undertaking are shared with 1 or more other venture partners
- Foreign local resistance from government, labor, and other business may be less with a local stakeholder
Dis:
- Foreign co-owner may misuse partner’s patents, technology, proprietary information
- Home country co-owner does not have absolute control
- Shared ownership can lead to differences in goals, objectives, strategy
Becoming global: what is foreign subsidiary?
Entity acquired or establish a foreign subsidiary - a controlled, but legally separate entity.
Becoming global: what are advantages and disadvantages of foreign subsidiary?
Ad:
- Quick entry into the foreign market - don’t have to develop a new entity
- Known level of operating results and related historical information
- May block or preempt competitors from entering the market
Dis:
- Possible lack of understanding of acquired firm’s values, culture, operating processes
- Pre-existing corporate culture may be difficult to integrate with parent
- Synergies or other expected benefits may not materialize
Becoming global: what is an alternative to acquiring preexisting subsidiary? What is it also called?
Establishing a new foreign subsidiary.
Also called Greenfield Venture (founding entity is “breaking new ground”).
Becoming global: what are advantages and disadvantages of establishing foreign subsidiary?
Ad:
- Foreign subsidiary can be built from “ground up” to have desired culture, operating style and procedures
- Parent better able to transfer organizational competencies, skills, routines, and culture
Dis:
- Time consuming
- More costly than acquisition
- Greater risk associated unknown revenues, costs, and other operating aspects
Becoming global: what are advantages and disadvantages of foreign subsidiary acquired or established?
Ad:
- Parent maintains control over assets and operations
- Parent is able to coordinate strategy with other operations and adapt as needed
Dis:
- Capital investment most costly of alternatives for engaging in international business
- Greater unknowns about outcomes and risks
- Costs and risks burden of single parent
Becoming global: what is a summary conclusion about most low cost, low risk means of engaging in international business?
Importing/exporting.
Becoming global: what is a summary conclusion about protection of patents, technology process or other proprietary information?
If these are important, don’t engage in foreign licensing or joint venture.
Becoming global: what is a summary conclusion about how to overcome foreign oppositions to establishing foreign operations?
Use joint ventures?
Becoming global: what is a summary conclusion about getting complete control and facilitating global strategy?
Use wholly-owned foreign subsidiary.
What is repatriation restrictions?
Restriction on the movement of funds from a foreign country to the home country of an entity.
