BUSINESS & MANAGEMENT

BUSINESS & MANAGEMENT Unit 1.9 Globalization

KEY TOPICS Standard Level • Globalization: The causes and impacts • Reasons for the growth of multinational companies • The role and impact of multinationals in the global business environment • Regional trading blocs

Globalization • Integration and interdependence of the world economies. Economists have felt for a very long time that international free trade is good. • Globalization has really taken off since the second half of the twentieth century. • For businesses, globalization allows them to sell goods and services in many different countries; opening up huge markets for businesses.

Globalization (Cont’d) • Some businesses export their products. • Some use franchises • Others set up factories in other counties to produce their products

Indicators of globalization(Page 152) • Higher value of world trade over time • Foreign direct investment increases • Multinational corporations (MNC) are growing • Cultural awareness is growing • Multiculturalism is growing • International travel is growing • Information can spread very quickly

Comments: • With globalization the world has become a smaller place. • Economic and political decisions in one country affect businesses all over the world.

Factors contributing to the growth of globalization • Removal of trade barriers has encouraged exports and imports. • Technology has made the exchange of products and ideas very quick. • Deregulation by countries has encouraged businesses to look at new markets. • Cultural exports are a huge business. • The wide use of English has helped with communication around the world. Ex. Businesses in Germany can do business with people in Indonesia using English.

Drawbacks of Globalization • Globalization has had drawbacks. Some bad values have been given across the world Ex. American obesity is spreading as well as breakdowns in the family in some countries.

Globalization can be a threat as well as an opportunity • Competition has greatly increased because of globalization. • Customers may have more demands for their businesses. • Economies of scale and diseconomies of scale • Businesses have a greater choice of location now.

Why businesses relocate: • Costs (e.g. labor) • Profits (e.g. tax holidays) • Proximity to customers • Proximity to suppliers • Regional specialization • Act of God (e.g. Wars & Conflict, Catastrophes) • Resources (e.g. Minerals) • Escape Government Protectionist Policies

Factors to consider when deciding to globalize Businesses need to consider the different attitudes of different countries because of local culture.

Culture consists of: • Language • Lifestyle & Habits • Dressing • Mentality • Food & Beverage • Festivals & Customs • Moral Values, Religion & Philosophy • Tastes & Preferences • Art & Relics • Products & Services • Traditional Entertainment (e.g. Beijing Opera) • Music (e.g. rap) & musical instruments • Sports (e.g. table-tennis) & Games • Architecture • History • Political Structures (e.g. monarchy, communism, capitalism and etc.) • Cinematography (e.g. Japanese cartoons) • Ethics & Etiquettes • Places of Interests (e.g. Great Wall of China) • Animals & Mythical Creatures (e.g. Kiwi, Dragon, Phoenix and etc.)

Multinational Corporations (MNC) A business that operates in two or more countries.

Reasons why businesses want to become multinational • Expand customer base (increased stability) • Economies of scale • By producing in the country you wish to sell to some businesses can avoid protectionist policies. • Spread risk by being in different markets • Take advantage of superior products around the world.

Artificial trade barriers(Page 157) • Tariffs • Quotas • Unfair trade practices

Problems for MNC’s • Different cultural views can present problems to businesses that do not understand a market well. • Storage, transportation and distribution costs may increase. • External factors are a larger concern when dealing in a foreign market. • Infrastructures can be a problem in less developed countries.

Host country A country that allows an MNC to operate in it is called a host country.

Positive effects on host countries because of MNCs • Create jobs • Boost GNP (Gross National Product) • Introduce new technology and operation procedures. • Create competition in a host country helping innovation and efficiency • MNC’s charities can do more for a country’s people that their governments can.

Problems can arise because of MNCs • MNCs can cause unemployment because some local firms cannot compete. Local governments sometimes step in to protect local business. Ex. China is now asking local banks to give more loans to local businesses. • Some local businesses collapse because of pressure brought on by MNCs. Ex. Merry Mart in Chang Ping

Trading Blocs Members of a trading bloc work together to eliminate trade barriers between countries.

The World Trade Organization(WTO) 150 countries that work together to eliminate world trade barriers.

Three levels of free trade • Closer Economic Partnership Agreement (CEPA) gives access to markets between countries • Free Trade Area (FTA) Members of an area agree to trade freely with each other but still have different trade barriers with non-member countries. • Common Market - Free trade between members as well as set restrictions on goods from outside members.

Comments: Trading blocs make it harder to export outside of the bloc since some countries will impose their own protectionist measures against the block as a whole.

European Union (EU) • A common market that has opened up huge markets to the businesses of individual countries. Ex. They go from their relatively small country market to the 500 million people in the EU . • One problem that arises is that it is hard to balance things like interest rates with so many countries involved.

List of EU countries AustriaBelgiumBulgariaCyprusCzech RepublicDenmarkEstoniaFinlandFranceGermanyGreeceHungaryIrelandItalyLatviaLithuaniaLuxembourgMaltaNetherlandsPolandPortugalRomaniaSlovakiaSloveniaSpainSwedenUnited Kingdom

European Free Trade Association(EFTA) Members include: Iceland, Norway, Switzerland and Liechtenstein. • No import restrictions between these countries. • Allows some free trade in some ways with EU countries without having to be full members

North American Free Trade Agreement(NAFTA) Members include: Mexico, Canada and the U.S.A. • This is an example of an FTA • Free trade between members

Association of South East Asian Nations(ASEAN) • Close ties to the EU • Free trade between members but disputes about economic and social differences

List of ASEAN members Brunei, Burma, Cambodia, Indonesia, Laos, Malaysia, Philippines, Singapore, Thailand and Vietnam

Closer Economic Partnership Agreement (CEPA) An agreement between two countries to eliminate restrictions on trade.

Comments on trading blocs: • When countries form a regional trading bloc there will be winners and losers. • Consumers will most likely buy the cheapest and best products. • At times this can really hurt non members because some countries that can produce things cheaper but cannot compete because of quotas and tariffs. Ex. Europeans protect their local farmers hurting South American imports.

Comments on globalization: • Globalization makes business managers think about their world markets. Ex. Those businesses that do not compete in Europe the U.S. and the pacific rim are at a disadvantage. • Many businesses will start joint ventures with local businesses to get a foot in the door of a new market. • Some businesses need to change their business model to fit a local culture.

Unit 1.9 Key Terms • Common market • Customs union • Free trade • Globalization • Multinational corporations (MNC) • Regional trading bloc • Protectionist measures

BUSINESS & MANAGEMENT