Session 2: Globalization (I) Flashcards
Opening case: The Globalization of Production at Bombardier
- Started by manufacturing snowmobiles
- Now they globally manufacture planes, trains
- Lower barriers to trade and invest so it’s easier for them to go source materials from other places
- Working with hundreds of suppliers that can develop the product
Globalization definition
Globalization offers opportunities to cut costs, improve efficiency, and access capabilities that are absent in-house and domestically
Globalization is a risky business:
Competitive, regulatory, trade policy,
political, and macroeconomic factors
intertwine to shape the business environment.
What is Globalization?
Globalization refers to the shift toward a more
integrated and interdependent world economy.
Globalization has several different facets, including:
- Globalization of Markets
- Globalization of Production
- Globalization of Consumers
Globalization of Markets and Consumers
The merging of historically distinct and separate national markets into one huge global marketplace.
* Falling barriers to cross-border trade have made it easier to sell internationally (Trade regimes dynamic)
* Tastes and preferences of consumers in different nations converge on some global norm, thereby helping to create a global market (Cultural dynamic)
* Consumer products such as Citicorp credit cards, Apple iPhones, offer a standardized product worldwide, helping create a global market (Standardization & Commodification
dynamic)
Globalization of Production
Sourcing of goods and services from locations around the world to take advantage of national differences in costs and quality of factors of production (labor, energy, land, and capital).
Competition
Companies lower overall cost structure and/or improve quality or functionality of product offering, thereby allowing them to compete more effectively.
Workforce
Shifts happen in the labor structure and priority areas of an economy.
Planet
Business transactions orchestrated in country X generate substantial environmental impact across multiple world locations.
Where Globalization Does Come From?
- Global institutions
- Not a spontaneous phenomenon.
- Creating the post-WWII (western) order on the axiom that free trade fosters economic growth and cooperation between countries, which 11 are associated with democratization and peace.
What do Global Institutions do?
- Laid the fabric of the current global regimes of trade and production
- Help manage, regulate, and police the global marketplace;
- Promote the establishment of multinational treaties to govern the global business system.
Examples of global institutions:
➢ United Nations → Specialized Agencies (e.g. FAO, IFAD, UNICEF)
➢ World Trade Organization (WTO) preceded by the GATT
➢ International Monetary Fund (IMF)
➢ World Bank
World Trade Organization (WTO)
- Historical Process: Subsequent round of multilateral negotiations to lower trade barriers
- GATT (1948) → WTO (1995)
- Responsible for policing the world trading system: Make sure nation-states adhere to the rules laid down in trade treaties signed by WTO member states.
International Monetary Fund (1944)
- To maintain order in the international monetary system
- Lender of last resort to nation-states whose economies are in turmoil and whose currencies are losing value
- Loans come with strings attached: Countries are required to adopt specific policies aimed at stability and growth.
- Some critics charge that the IMF’s policy recommendations are often inappropriate
World Bank (1944)
- To promote economic development
- Provides low interest rate loans to cash strapped governments that wish to undertake infrastructure investments (building dams or road systems,..).
Group of organizations: - IBRD- the Int’l Bank for Reconstruction and Development
- IDA- International Development Association
- IFC- International Finance Corporation
- MIGA- Multilateral Investment Guarantee Agency
- ICSID- International Centre for Settlement of Investment Disputes
What Drives Globalization?
- Decline in barriers to the free flow of goods, services, and capital, since the end of World War II
- Technological change in communication, information processing, and transportation
Opportunities Created by Declining Trade and Investment Barriers:
- Enabling firms to view the world, rather than a single country, as their market.
- Allowing to base production at the optimal location, serving the world market from that location (remember Bombardier?)
Technological Change
Facilitating an infrastructure that accelerated the globalization of markets and production:
✓ Communication,
✓ Information processing,
✓ Transportation technology
✓ From Internet and World Wide Web to AI
The Era of the Multinational Enterprise
- A multinational enterprise (MNE) is any business that has productive activities in two or more countries.
Since the 1960s:
✓ Rise of non-U.S. multinationals (e.g., Japanese MNEs in the 80s)
✓ Emerging markets multinationals (EMNEs, e.g. Korea & Taiwan in the 90s/00s)
✓ Growth of “mini-multinationals”
Globalization Outcomes
- trade grew exponentially
- changing demographics of the global economy
Can you name any EMNE?
- Korea: Samsing, LG, Hyundai
- Mexico: Cemex, Grupo Bimbi
- South Africa: Sasol, MTN Shoprite
The Dark Sides of Globalization
Anti-globalization arguments:
✓ Harmful effects on jobs and income
✓ Labor policies
✓ Environmental impact
✓ National sovereignty
✓ World’s poor
The elephant in the room curve
- The world’s 80th to 90th percentile richest
people - America’s and Europe’s middle class - gained almost nothing in the period between
1988 and 2008, the boom years of globalization
1. Globalization has narrowed inequality between countries, but increased inequality within developed economies.
2. While the world’s poorest and richest made huge leaps forward, the West’s middle classes made virtually no progress
What the Amazon rainforest tells us about globalization
Globalization-> soaring global demands for agricultural products-> Brazilian farmers seeking to enlarge production-> deforestation
Other Concerns
Globalization and National Sovereignty: Increasingly interdependent global economy shifts economic power away from national governments toward organizations such as WTO, EU
Poverty Reduction: Evidence-based arguments that, despite increased global trade and the absolute number of individuals lifted from poverty, the gap between poor and rich countries widens and global shares of individuals living in poverty stay the same or worsen.
