Week 2 / Basic Definition of Globalization Flashcards
Chapter 1
Globalization
Opening Case: Globalization of Production at
Bombardier
- Designated Metal Connection (DMC) from the United States,
- Kobe Steel LTD from Japan,
- Chengdu Sigma Precision Components from China,
- Chemetall GMBH from Germany,
- Cheltenham Tool Co. Ltd. from the U.K.,
- Centro Tratamientos from Spain,
- Castle Metals from Mexico
Lack of Barriers to Trade and Investment
• Transportation – sold to Alstom SA (France)
• Commercial Line – sold to Airbus (multinational – France,
Spain, Netherlands)
Opening Case:
GM and Its Chevrolet Supercar, The Corvette ZR1
Eight distinctive automotive brands under GM umbrella
GM operates on 5 continents and has a strong
presence in China
Chevrolet-branded vehicles sold in all markets
worldwide
What Is Globalization?
Definition
As per Wikipedia
Globalization, or globalisation (Commonwealth English; see spelling differences), is the process of interaction and integration among people, companies, and governments worldwide. (Wikipedia)
What Is Globalization? (1) Textbook definition
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
The Globalization of Markets
-The merging of historically distinct and separate national markets into one huge global marketplace (definition)
- In many markets, the tastes and preferences of
consumers in different nations are converging on some
global norm, creating a global market
• Examples: Coca-Cola, McDonald’s, IKEA, Starbucks, Apple
The most global of markets are for industrial goods and
materials that serve universal needs around the world
• Aluminum, oil, wheat, microprocessors
Globalization of Production
- Refers to the 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).
- Companies lower overall cost structure and/or improve quality or functionality of product offering, thereby allowing them to compete more effectively
The Globalization of Production
• Early outsourcing was primarily for manufacturing
• Today, modern communications technology allows
companies to outsource services
The Emergence of Global Institutions
Global Institutions (definition) • Manage, regulate, and police the global market place • Promote the establishment of multinational treaties to govern the global business system
Examples to be discussed: World Trade Organization (WTO) International Monetary Fund (IMF) World Bank United Nations (1945)
World Trade Organization (WTO)
• Responsible for policing the world trading system and
making sure nation-states adhere to the rules laid down in trade treaties signed by WTO member states
• Founded in 1995
• Polices world trading system and ensures nations adhere to the
rules established in WTO treaties
• Succeeded the General Agreement on Tariffs and Trade (GATT)
• 164 nations accounted for 98 percent of world trade (2017)
International Monetary Fund and World Bank (created in 1944)
• IMF was 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
• World Bank was to promote economic development
Provides low interest rate loans to cash-strapped governments that wish to undertake infrastructure investments (building dams or road systems,..)
International Monetary Fund (IMF)
- The IMF loans come with strings attached:
- Countries are required to adopt specific policies aimed at returning their troubled economies to stability and growth.
• Some critics charge that the IMF’s policy recommendations are often inappropriate
- Maintains order in the international monetary system
- Lender of last resort
- Requires nation-states to adopt specific economic policies in return for loans
The World Bank (WB)
WB is a group comprised of the following:
• 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
Big difference between IMF and World Bank is shifted from their origin policy
United Nations (UN)
- Maintains international peace and security
- Develops friendly relations among nations
- Promotes cooperation in solving international problems
- Promotes respect for human rights
- A center for harmonizing the actions of nations
- Includes 193 member countries
Drivers of Globalization (1)
Two macro factors seem to underlie the trend toward
greater 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
Drivers of Globalization (2)
1) Declining Trade and Investment Barriers
- Lowering barriers to international trade enables firms to view the world, rather than a single country, as their market.
- Reducing and eliminating trade and investment barriers allows firms to base production at the optimal location, serving the world market from that location.
- A firm might design a product in one country, produce component parts in two other countries, assemble the product in yet another country, and then export the finished product around the world.
Declining Trade and Investment Barriers
• International trade occurs when a firm exports goods or services to consumers in another country
• Foreign direct investment occurs when a firm invests
resources in business activities outside its home country
• During 1920s and 1930s, many nations put up barriers to
international trade to protect domestic industries
- After WWII, advanced Western countries reduced barriers
- GATT, Uruguay Round, and WTO
Table 1.1 Average Tariff Rates on Manufactured
Products as Percentage of Value
See slide 40
France in 1913 was 21%, USA in 1913 was 44%,
In 2020 they were less than 2%
Knowledge Society and Trade Agreements
Part of declining trade and investment barrier
World trade is predicted to increase more rapidly than world production for the foreseeable future
- Produce more today and more of it traded across national borders
- Consumers are more knowledgeable, which drives demand
- Countries have been reducing restrictions to foreign investment and trade
Implications of fast-paced volume of world trade
- More companies dispersing parts production
- Economies of nation-states becoming more intertwined
- World becoming significantly wealthier
Technological Change
• Technological change has made globalization of markets and production a tangible reality.
- Since the end of World War II, the world has seen major advances in:
- Communication,
- Information processing,
- Transportation technology and
- Explosive emergence of the Internet and World Wide Web
Microprocessors and Telecommunications
- Development of the microprocessor enabled the explosive growth of high-power, low-cost computing, vastly increasing the amount of information that can be processed.
- Satellite, Optical fiber, wireless and Internet technologies rely on microprocessor to encode, transmit, and decode the vast amount of information that flows along these electronic highways
Moore’s Law:
as costs of microprocessors fall, their power
increases
Internet
- In 1990, fewer than 1 million users were connected to the Internet. By 2019, approximately 4 billion Internet users.
- The Web makes it much easier for buyers and sellers to find each other, wherever they may be located and whatever their size.
- It enables enterprises to coordinate and control a globally dispersed production system in a way that was not possible 25 years ago
• Internet of Things (IoT)
- In 2017, 3.8 billion users (51 percent of global population)
- Makes it easier for buyers and sellers to find each other
Such as using your phone to turn off your AC or Turn it back on
A system of interrelated devices connected to the internet (Smart Home)
Transportation Technology
Several major innovations in transportation technology have occurred since World War II:
• Development of commercial jet aircraft and superfreighters reducing time needed to get from one location to another; has effectively shrunk the globe
• Introduction of containerization has revolutionized the
transportation business, significantly lowering the costs of shipping goods over long distances
Transportation Technology
Containerization
Containerization: Because the international shipping industry is responsible for carrying about 90 percent of the volume of world trade in goods, this has been an extremely important
development.
Transportation Technology
• Commercial jets,
Cargo plane
Implications for the Globalization of Production
• Lower transportation costs makes geographically dispersed
production system more economical
• Allows firms to better respond to customer demands
Implications for the Globalization of Markets
- Low cost communication networks create electronic global marketplace
- Low cost transportation makes shipping products around the world economical
- Reduced cultural distance
- Converging consumer tastes and preferences
The Changing Demographics of the Global
Economy(1)
The Changing World Output and World Trade Picture
See Table 1.1. Historical Changing World Output and Trade
In 1960, USA was the leader of share of world output (38.3%), but in 2018 it is 24.4%
Changes in Foreign Direct Investment (FDI)
• Among developing nations, the largest recipient of FDI has been China (received between 2004 and 2012 between $60B to $100B a year, followed by Brazil, Mexico, and India.
• Sustained flow of FDI into developing nations is an
important stimulus for economic growth in these countries
Large FDI = Big Asset for country growth and investors
The Changing Nature of the Multinational Enterprise
- A multinational enterprise (MNE) is any business that has productive activities in two or more countries.
- Since the 1960s, there have been two notable trends in the demographics of the multinational enterprise:• The rise of non-U.S. multinationals, particularly
Japanese multinationals, and
• The growth of mini-multinationals
The Changing Nature of the Multinational Enterprise
Non-U.S. multinationals
• The large number of U.S. multinationals reflected U.S. economic dominance in the three decades after World War II while,
• The large number of British multinationals reflected that country’s industrial dominance in the early decades of the twentieth century
The Changing Nature of the Multinational Enterprise
Non-U.S. multinationals
- Globalization of the world economy and Japan’s rise to the top rank of economic powers has resulted in a relative decline in the dominance of U.S. and British firms in the global marketplace
- If we look at smaller firms, we see significant growth in the number of multinationals from developing economies
The Rise of Mini-Multinationals
- Most Int’l trade and investment still conducted by large firms but,
- Many medium-sized and small businesses are becoming increasingly involved in international trade and investment.
Example:
• International Road Dynamics (IRD) of Saskatchewan has subsidiaries in the United States, Chile, China, Belgium.
• Iceculture Inc., based in Ontario with a staff of 15 export to Britain, Europe, South Africa, Iceland, etc
The Changing Demographics of the Global Economy (9)
The Changing World Order
- The economies of most of the former communist states are in very poor condition, and their continued commitment to democracy and free market economics cannot be taken for granted.
- More quiet revolutions have been occurring in India, China, and Latin America.
• Their implications for international businesses may be
just as profound as the collapse of communism in
Eastern Europe
- China continues to move progressively toward greater free market reforms.
- If what is occurring in China continues for two more decades, China may move from developing economy to industrial superpower status even more rapidly than Japan did
- Throughout most of Latin America debt and inflation are down;
- Governments are selling state-owned enterprises to private investors;
- FDI is welcomed and the region’s economies are growing;
- These changes have increased the attractiveness of Latin America, both as a market for exports and as a site for FDI
The Globalization Debate (1)
Is the shift toward a more integrated and interdependent global economy a good thing?
Anti-globalization arguments: • Harmful effects on jobs and income • Labor policies • Environmental impact • National sovereignty • World’s poor
The Globalization Debate (2)
Globalization, Jobs and Income
• Outsourcing of Canadian jobs to developing countries: fears of a long-term harmful effects on Canada’s well-being. (Example
Gildan Activewear Inc. Montreal).
• Technological change has had a bigger impact than globalization on the declining share of national income enjoyed by labour.
• The solution is not in limiting free trade and globalization, but in increasing society’s investment in education to reduce the supply
of unskilled workers
The Globalization Debate (3)
Globalization, Labour Policies
- A second source of concern is less developed countries lack adequate regulations to protect labour and the environment from abuse by the unscrupulous.
- Globalization critics often argue that adhering to labour and environmental regulations significantly increases the costs of manufacturing enterprises and puts them at a competitive disadvantage in the global marketplace
The Globalization Debate (4)
Globalization and National Sovereignty
• Another concern is increasingly interdependent global economy shifts economic power away from national governments toward organizations such as WTO, EU and UN.
• The WTO is a favourite target of those who attack the
headlong rush toward a global economy
The Globalization Debate (5)
Globalization and the World’s Poor
- Critics of globalization argue that despite the supposed benefits associated with free trade and investment, the gap between the rich and poor is widening.
- While some of the world’s poorer nations are capable of rapid periods of economic, there is stagnation among the world’s poorest nations economies
Managing in the Global Marketplace
The task of managing an international business
• Differences between countries require that an international business vary its practices country by country;
• Cross-border transactions also require that money be
converted from the firm’s home currency into a foreign
currency and vice versa
Toyota Case study 3
All the car parts are made in different countries
Do you know why your iPhone was assembled in China?
Labour costs is only one factors
Chinese subcontractors respond very quickly
Lots of engineers and factory workers (15 days to find everyone in China days vs 9 months it would have taken to find everyone in the USA)
CBC video on WTO with Tim Richardson
Relation of Canada to the WTO
Is the definition of gloabliation the same over time?
No! As the Harvard Business Article shows it is changing
Table 1.2 Canadian Exports and Imports- Major Trading Partners
The Changing world output and world trade picture
Exports: US the largest with 319,067 Million
Imports: US the Largest too
