Globalization

1. Chapter 1 Globalization

2. Introduction In the world economy today, we see: 1. a shift away from self-contained national economies with high barriers to cross-border trade and investment - examples 2. a move toward a more integrated global economic system with lower barriers to trade and investment 3. about $3 trillion in foreign exchange transactions taking place everyday 4. over $12 million of goods and some $3 trillion of services being sold across national borders 5. the establishment of international institutions

3. Introduction The effects of this trend can be seen in: 1. the cars we drive 2. the food we eat 3. the jobs where we work 4. the clothes we wear & 5. many other ways

4. What Is Globalization?(Explained in 5 slides) Question: What is globalization? Globalization refers to the trend towards a more integrated global economic system Two key facets of globalization are: 1. the globalization of markets (?) 2. the globalization of production Why do produce in other countries(?)

5. Outsourcing Medical Work (1 of 8) What do you think of the practice of outsourcing medical work to other countries? In recent years, pressures to cut medical costs have led to the practice of outsourcing. Today, not only is medical transcription (?) outsourced to countries such as India, but also radiology (?)

6. Outsourcing Medical Work (2 of 8) In some cases, patients, in an effort to curb costs, are now choosing to have medical procedures conducted in foreign countries. In recent years advances in technology are a primary key to making the outsourcing of medical work possible

7. Outsourcing Medical Work (3 of 8) In particular, the Internet makes it possible for US doctors to quickly transmit large amounts of data to countries such as India and Mexico where the data can be processed and returned. In addition, the high cost of medical care in countries like the US is prompting people to consider cheaper alternatives.

8. Outsourcing Medical Work (4 of 8) The cost to repair a leaky heart valve in India is about $10,000 including airfare. While in the US the same surgery could cost $60,000. So, when considered from a strictly economic perspective, the globalization of health care should result in a more efficient industry.

9. Outsourcing Medical Work (5 of 8) Certain medical procedures, illegal in the US, are done in Mexican border towns like Tijuana, which is close to San Diego. I’ve seen some of this. Pros & cons.

10. Outsourcing Medical Work (6 of 8) Prices in the US should fall as countries like India and Mexico offer their services as an alternative to higher-priced US ones. It would follow then, that Americans would have more disposable income which could then be spent in other parts of their economy.

11. Outsourcing Medical Work (7 of 8) Maybe the outsourcing of medical procedures to nations where salaries of medical professional are lower clearly benefits consumers. However, we might say that the level of care in countries such as India and Mexico may not be up to the standards found in the US. (See the next slide.)

12. Outsourcing Medical Work (8 of 8) Think about this: Where do rich people from Mexico go for their medical care? Houston. And not just people from Mexico. I’ve seen Japanese, Saudis, Egyptians, and Syrians too.

13. Canadian Humor - 1

14. Canadian Humor - 2

15. The Globalization of Markets(1) The globalization of markets refers to the merging of historically distinct and separate national markets into one huge global marketplace In many markets today, the tastes and preferences of consumers in different nations are converging upon some global norm Examples of this trend include Coca Cola, McDonald’s hamburgers, Starbucks, and iPhones

16. The Globalization of Markets(2) There are still some country-wide differences: Germans drink more beer Italians eat more pasta Russians drink more of anything alcoholic. Alcoholism is rampant.

17. The Globalization of Production The globalization of production refers to the sourcing of goods and services from locations around the globe to take advantage of national differences in the cost and quality of factors of production (labor, energy, land, and capital) The goal for firms is to lower their overall costs or improve the quality or functionality of their product to gain competitive advantage Example: auto manufacturers in Mexico

18. The Emergence of Global Institutions (1) Several global groups have emerged to: 1. help manage, regulate, and police the global market place (WTO) 2. promote the establishment of multinational treaties to govern the global business system

19. The Emergence of Global Institutions Global institutions that work include: 1. the World Trade Organization (WTO) which is responsible for policing the world trading system and ensuring that nations adhere to the rules established in WTO treaties In 2008, 151 nations accounting for 97% of world trade were members of the WTO

20. The Emergence of Global Institutions 2. the International Monetary Fund (IMF) which maintains order in the international monetary system 3. the World Bank which promotes economic development

21. The Emergence of Global Institutions A notable global institution that does not work is: The United Nations (UN) which maintains international peace and security, develops friendly relations among nations, cooperates in solving international problems and promotes respect for human rights, and is a center for harmonizing the actions of nations

22. Drivers of Globalization Question: What is driving the move toward greater globalization? There are two macro factors underlying the trend toward greater globalization: 1. declining barriers to trade and investment 2. technological change

23. Declining Trade and Investment Barriers (1) International trade occurs when a firm exports goods or services to consumers in another country Foreign direct investment (FDI) occurs when a firm invests resources in business activities outside its home country

24. Declining Trade and Investment Barriers (2) During the 1920s and 1930s, many nations erected barriers to international trade and FDI to protect domestic industries from foreign competition, which should have protected jobs How do barriers protect jobs? Further explained on the next slide.

25. Smoot-Hawley Act (2) The Smoot-Hawley Tariff Act increased tariffs on imports to the US by up to 50%. Why? It was enacted on June 1930 by the Republican congress under Pres. Hoover. An example of Law of Unintended Consequences. Why?. What was the real result? A. B.

26. Declining Trade and Investment Barriers After WWII, advanced Western countries began removing trade and investment barriers Why? Under GATT (the forerunner of the WTO) over 100 nations negotiated further decreases in tariffs and made significant progress on a number of non-tariff issues What is the big difference between the WTO & GATT?

27. Declining Trade and Investment Barriers Lower trade barriers enable firms to view the world as a single market and establish production activities in optimal locations around the globe What does this accomplish? HP in Viet Nam This has led to an acceleration in the volume of world trade and investment since the early 1980s

28. The Role of Technological Change The lowering of trade barriers made globalization of markets and production a theoretical possibility; technological change made it a tangible reality Since WW II, there have been major advances in: 1. communication, phone & Internet 2. information processing, & 3. transportation

29. SUPERFREIGHTER (1)

30. SUPERFREIGHTER (2)

31. CONTAINER SHIP (1)(2 weeks Hong Kong to Long Beach)

32. CONTAINER SHIP (2)(2 weeks Hong Kong to Long Beach) What is the advantage of shipping large quantities of stuff on a 747 or a cargo ship? What are the implications for a US firm manufacturing in China or Mexico? Waterpic next 2 slides

33. Hauling Products from Mexico

34. Hauling Products from Mexico Tell the Waterpic story.

35. The Role of Technological Change Question: What are the implications of technological change for the globalization of production? Lower transportation costs make a geographically dispersed production system more economical (?) and allow firms to better respond to international customer demands

36. The Role of Technological Change Question: What are the implications of technological change for the globalization of markets? 1. Low-cost communications networks have helped create electronic global marketplaces (?) 2. Low-cost transportation has enabled firms to create global markets, and has facilitated the movement of people from country to country promoting a convergence of consumer tastes and preferences

37. The Changing Demographics of the Global Economy In the 1960s: 1. the US dominated the world economy and the world trade picture 2. the US dominated world FDI 3. US multinationals dominated the international business scene 4. About half the world-- the centrally planned economies (?) of the communist world-- were off limits to Western international business – Why? Today, much of this has changed.

38. India’s IT Industry (2 of 4 ) Four key factors have contributed to the growth of India’s software industry. 1. Is the huge number of engineers in India. Some 400,000 engineers graduate from Indian universities every year. The US does not graduate enough.

39. India’s IT Industry (3 of 4 ) 2. Is India’s low wage structure. Indian engineers make about 12 % of what an US colleague might make. 3. Is coordination between Western firms and Indian firms is facilitated by the large number of English-speaking Indians.

40. India’s IT Industry (4 of 4 ) 4. Because of the differences in time zones, Indian firms operate while US firms are closed. So what?

41. The Changing World Output and World Trade Picture In the early 1960s the US was the world's dominant industrial power accounting for about 40.3% of world manufacturing output By 2007, the US accounted for only 20.7% Other developed nations experienced a similar decline What happened?

42. The Changing World Output and World Trade Picture (1) Rapid economic growth is now being experienced by countries such as China, Thailand, Malaysia, and India. Further, relative decline in the US share of world output and world exports seems likely

43. The Changing World Output and World Trade Picture (2) Forecasts predict a rapid rise in the share of world output accounted for by developing nations such as China, India, Indonesia, Thailand, and So. Korea, and a decline in the share by industrialized countries such as Britain, Japan, and the US So firms may find both new markets and new competitors in the developing regions of the world

44. The Changing Foreign Direct Investment Picture The share of world output generated by developing countries has been steadily increasing since the 1960s The stock of FDI (total cumulative value of FDI) generated by rich industrial countries has been on a steady decline There has been a sustained growth in cross-border flows of FDI The largest recipient of FDI has been China.

45. The Changing Nature of the Multinational Enterprise A multinational enterprise (MNE) is any firm that has business activities in two or more countries – MNE does not connote BIG. Since the 1960s, there has been a rise in non-US MNCs there has been a rise in mini-multinationals - WOC

46. The Changing Nature of the Multinational Enterprise The globalization of the world economy has resulted in a decline in the dominance of US firms in the global marketplace In 1973, 48.5 % of the world’s 260 largest MNEs were US firms By 2006, just 24 of the world’s 100 largest non-financial MNEs were from the US, 13 were from France, 12 from Germany, 12 were from Britain, and 9 were from Japan, and 7 of the world’s largest 100 MNEs were from developing economies

47. The Changing Nature of the Multinational Enterprise While most international trade and investment is conducted by large MNEs, many small and medium-size firms are expanding internationally The Internet has made it easier for many smaller firms to build international sales Why? Tell story of Australian mining equipment firm - egalitarian

48. The Changing World Order Today, many markets that had been closed to Western firms are open The collapse of communism in Eastern Europe has created a host of export and investment opportunities Why now? Economic development in China has created huge opportunities despite continued Communist control Free market reforms and democracy in Latin America have created opportunities for new markets and new sources of materials and production – exceptions are: Bolivia, El Salvador, & Venezuela Why these?

49. The Global Economy of the Twenty-First Century A more integrated global economy presents new opportunities for firms, but it can also result in political and economic disruptions that may throw plans into disarray Describe the present global economic collapse in terms of “global economy”.

50. The Globalization Debate Question: Is the shift toward a more integrated and interdependent global economy a good thing? Many experts believe that globalization is promoting greater prosperity in the global economy, more jobs, and lower prices for goods and services Others feel that globalization is not beneficial – Why not?

51. Antiglobalization Protests Tell about Bill Clinton's review of the effects of The NAFTA on the US economy.

52. Globalization, Jobs, and Income (1) Critics of globalization worry that jobs in advanced economies are being lost to low-wage nations Remedy? Supporters of globalization disagree, claiming that the benefits of free trade outweigh its costs While some jobs may be lost, the economy as a whole is better off See next slide. Supporters argue that free trade will result in countries specializing in the production of those goods and services that they can produce most efficiently, while importing goods and services that they cannot produce as efficiently, and that in doing so, all countries will gain

53. Globalization, Jobs, and Income (2) The US has lost textile jobs to China, Vietnam, and Malaysia. But according to the next slides unemployment has not gone up. Why not?

54. IS SOUTHERN EMPLOYMENT TANKING (1 of 6) Fortune, 12/13/2004

55. IS SOUTHERN EMPLOYMENT TANKING (2 of 6 ) Complaints about the loss of U.S. textile jobs are heard across the land, not to mention in the halls of Congress. lt's true that garment makers and their suppliers have suffered. In the decade after 1992, shipments by U.S. apparel plants dropped from $97.6 billion a year to $45:5 billion due to cheap, imported garments.

56. IS SOUTHERN EMPLOYMENT TANKING (3 of 6 ) Employment in garment plants and the fabric mills that supply them declined from 1,594,000 workers to 618,000. That happened partly because of improved productivity in the milts, but mostly from imports of formerly US made garments.

57. IS SOUTHERN EMPLOYMENT TANKING (4 of 6 ) But take a closer look at the confederacy of traditional textile states. The unemployment rate in Alabama, No. Carolina, Georgia, Mississippi, Tennessee, and Virginia is lower today than it was at the end of 1992. The only exception is So. Carolina, where unemployment is no worse than it was in 1993.

58. IS SOUTHERN EMPLOYMENT TANKING (5 of 6 ) Even in that state, many workers are earning good pay at BMW, Bosch, and Michelin plants, to name just a few foreign firms that have created jobs there. At least in gross terms, the economy is absorbing textile job losses

59. IS SOUTHERN EMPLOYMENT TANKING (6 of 6 ) Which is not to say, “Nobody’s hurting?” The new jobs require up-to-date skills. Many unemployed textile workers, meanwhile, have 20-year old diplomas from 2nd rate high schools. These people are the victims of shortsighted textile firms that chose protection (?) over adjustment to the global economy – and the federal and local officials who abetted these firms.

60. Globalization, Labor Policies, and the Environment (1 of 2) Critics of globalization argue that that free trade encourages firms from advanced nations to move manufacturing facilities offshore to less developed countries with lax environmental and labor regulations

61. Globalization, Labor Policies, and the Environment (2 of 2) Supporters of free trade point out that tougher environmental regulation and stricter labor standards go hand in hand with economic progress and that as countries get richer as a result of globalization, they raise their environmental and labor standards Free trade does not lead to more pollution and labor exploitation, it leads to less – Do you believe this? China’s story @ 4 rivers dam & the Nike story

62. Globalization and National Sovereignty (1) Critics of globalization worry that economic power is shifting away from national governments and toward supranational organizations such as the WTO, the European Union (EU), and the UN – The truth is -

63. Globalization and National Sovereignty (2) Supporters of globalization argue that the power of these organizations is limited to what nation-states collectively agree to grant Yes, but… The organizations must be able to persuade members states to follow certain actions Without the support of members, the organizations have no power

64. Managing in the Global Marketplace(1 of 2) Question: What does the shift toward a global economy mean for managers of an international firms? Managing an international business (any firm that engages in international trade or investment) differs from managing a domestic business in four key ways See next slide.

65. Managing in the Global Marketplace(2 of 2) 1. Countries differences require firms to vary their practices country by country 2. Managers face a greater and more complex range of problems Why? 3. International firms must work within the limits imposed by governmental intervention and the global trading system (WTO, NAFTA, EU) 4. International transactions require converting funds and being susceptible to exchange rate changes (?)

66. The end of chapter 1.