Lecture 4: Global Integration

Question 1

Economic globalisation

Answer 1

A historical process, the result of human innovation and technological progress. It refers to the increasing integration of economies around the world, particularly through the movement of goods, services, and capital across borders.

Question 2

Four views on the big picture of globalisation

Answer 2

Nothing new is happening, technological determinism (strong and weak form) and political construct

Question 3

Technological determinism (strong form)

Answer 3

Since the onset of the information technology revolution, there is essentially nothing governments can do to stop global financial flows.

Question 4

Technological determinism (weak form)

Answer 4

Most persuasive for multinationalisation of production, but not for international financial integration

Question 5

Political construct / ideological change

Answer 5

The trend towards market integration mostly comes from political power then via the diffusion of economic ideas

Question 6

Positive effects of globalisation (6)

Answer 6

Growth of free trade, infusion of foreign capital and technology to poor countries, economic development, information between countries, increasing competition and reduction of prices.

Question 7

Negative effects of globalisation (4)

Answer 7

Trade barriers still remain, increase income disparities, tax havens for MNEs, MNEs are accused of social injustice (unfair working conditions and lack of environment concern)

Question 8

Semi-globalisation

Answer 8

Incomplete cross-border integration. Covers the range of situations in which neither the barriers nor the links among markets in different countries can be neglected.

Question 9

Ghemawat (2003) reviews the empirical evidence on cross-border integration of markets by using different dimensions

Answer 9

• Product market integration: trade flows (intensity), FDI (shift from raw materials to services) and price integration (prices equalise across countries)
• Factor market integration: Capital (price-based measures of capital market integration), labour (cross-border convergence of wages) and knowledge (would imply that knowledge is available everywhere)

Question 10

There are many specific ways in which firms try to add value through cross-border operations under conditions of incomplete integration, but they can be grouped in terms of two fundamental economic functions that organisations try to fulfill by crossing borders:

Answer 10

1. aggregation (vertical MNE) = involves exploiting similarities across countries, while somehow sidestepping the differences among them, so as to tap increasing returns to sale.
2. arbitrage (horizontal MNE) = involves exploiting differences among countries by taking advantage of variations in absolute costs or willingness-to-pay (e.g. outsourcing to countries with low wages).

Question 11

Global MNE

Answer 11

> 20% sales in all three regions, <50% in one

Question 12

Bi-Regional MNE

Answer 12

> 20% of sales in 2 regions, < 50% in one

Question 13

Host region oriented MNE

Answer 13

> 50% of sales in triad other than the home region

Question 14

Home region oriented MNE

Answer 14

> 50% of sales in their home region in a triad

Question 15

Global integration

Answer 15

MNEs can freely leverage same assets on a global scale

Question 16

National isolation

Answer 16

No synergies across markets

Question 17

Semi-globalisation

Answer 17

MNEs can treat countries, regions, and the world as complementary

Question 18

The Triad Power Concept

Answer 18

The triad is home to most innovations in the industry and is the geographic economic space including the three largest markets in the world for most new products: North-America, Europe and Japan (Asia)

Question 19

Triad Power

Answer 19

A company that has equal penetration and exploitation capabilities, and no blind spots, in each of the triad regions

Question 20

MNEs have difficulties with getting a balanced geographical dispersion of sales. There are five underlying reasons for this:

Answer 20

1. Sales are unevenly distributed
2. Lack of global market success
3. Observed lack of market performance
4. No different competitive strategies
5. inappropriate governance structure

Question 21

The internalisation model of foreign expansion suggests that firms will establish foreign affiliates in the case of strong

Answer 21

Ownership, location, and internalisation advantages.

Question 22

The internationalisation model argues that firms will

Answer 22

Incrementally build foreign operations, starting with low resource commitments in culturally proximate countries, and then expanding these commitments and geographical scope

Question 23

Porter has suggested that international competitiveness at the level of specific industries depends critically on a favourable configuration of home country diamond conditions

Answer 23

1. Factor conditions
2. Demand conditions
3. Related and supporting industries
4. Strategy, structure and rivalry

Question 24

At the downstream and, MNEs attempt to add value mainly by

Answer 24

Aggregation theory - add value mainly by capitalising similarities across markets

Question 25

At the upstream end, MNEs add value by

Answer 25

Arbitrage theory - Exploiting differences across regions