Chapter 1 GLOBALIZATION

1. Chapter 1GLOBALIZATION MGT 372 Lecture By: Ms. Adina Malik (ALK)

2. What is Globalization? • It is a process by which • barriers to cross-border trade and investments are declining, • perceived distance is shrinking due to advances in transportation and telecommunication technologies, • material culture is starting to look similar the world over; and • national economies are merging into an interdependent, integratedglobal economic system.

3. What is Globalization? Interdependent: Independently India has IT trained workforce but they do not have the capital to establish giant firms like Microsoft. Again independently USA has capital but they lack cheap IT trained workforce. So, the countries will be better off being interdependent. Integration: USA invests in India and thus ensures capital flow in India. India ensures supply of cheap IT trained workforce which is needed to produce software.

4. What is the Globalization of Markets? • It is the merging of historically distinct and separate national markets into one huge global marketplace. • E.g. Consumer products such as Citigroup credit cards, Coca Cola & PepsiCo soft drinks, Sony PlayStation video games, McDonald’s Hamburger, Starbucks coffee, General Motors & Toyota, etc. • E.g. markets for industrial goods and materials such as aluminium, oil, wheat, computer software, etc. • It no longer makes sense to talk about the “German market” or the “American market” • Instead, there is the “global market”

5. What is the Globalization of Markets? Reasons for globalization of markets: • falling trade barriers make it easier to sell internationally • consumers’ tastes and preferences are converging on some global norm • firms promote the trend by offering the same basic products worldwide • Coca-Cola, McDonalds and Sony all sell standardized products.

6. What is the Globalization of Production? • It refers to sourcing goods and services from locations around the globe to take advantage of national differences in the cost and quality of factors of production (such as labor, energy, land and capital). • This helps to • Gain cost advantage by producing in locations where cost of production factors is low • Improve the quality or functionality of the products, thus differentiating them • E.g. USA outsource some radiology work to India • E.g.Car- designed in Germany, assembled in Mexico with components made in US and Japan, fabricated from Korean steel and Malaysian rubber

7. Why Do We Need Global Institutions? • Institutions • help manage, regulate, and monitor the global marketplace • promote the establishment of multinational treaties to govern the global business system • Examples include • theGeneral Agreement on Tariffs and Trade (GATT) • theWorld Trade Organization (WTO) • theInternational Monetary Fund (IMF) • theWorld Bank • theUnited Nations (UN)

8. Drivers of Globalization • Declining Trade and Investment Barriers Previously there were, • High tariff rate on each others goods and services to protect domestic industries from foreign competition. High tariff lead to high price of foreign goods which prevent these goods to compete with local goods. • Governments used to provide subsidies to important local industries. This reduced the cost of production of domestic goods. Consequently, foreign products could not compete. For e.g. RMG, Textile, Jute & Agricultural sectors in Bangladesh. • Due to lack of international business activities, countries which were poor became poorer. Such strategies are called ‘Beggar thy neighbour policy’.

9. Drivers of Globalization • Moreover, high tariff on foreign goods depressed the world demand and contributed to the Great Depression of the 1930s. • After World War II, formation of General Agreement on Tariffs and Trade (GATT) contributed towards the reduction of barriers and ensured free flow of goods between nations. Eight rounds of negotiations among member states (now numbering 153) have worked to lower the barriers. • Uruguay Round held in December 1993, to further reduce trade barriers. Doha round in late 2001 also contributed for reduction of barriers and subsidies, particularly in agricultural sector. During 1913 to 2005 tariff rates reduced to 3.9% from 44%. • Countries have opened their markets to FDI.

10. Drivers of Globalization 2. The Role of Technological Change The lowering of trade barriers made globalization of markets and production a theoretical possibility. Technological change has made it a tangible reality. • Microprocessors and Telecommunications The single most important innovation has been the development of microprocessor which enabled the explosive growth of • high power, low cost computing • recent advances in telecommunication technology, satellite, optical fiber, wireless technology, world wide web and internet. • telecommunication cost between London and New York has reduced from $244.65 to $3.32 during 1930 to 1990.

11. Drivers of Globalization • Internet and World Wide Web: • Development in Internet increased the scope of e-business. • It makes buyers and sellers to find each other. • It allows businesses, both small and large, to expand their global presence at a lower cost. • Transportation technology: • The beginning of commercial jet travel, by reducing the time needed to get from one location to another, has effectively shrunk the globe. • Containerization has revolutionized the transportation business, significantly lowering the costs of shipping goods over long distances.

12. Implications for the Globalization of Production • As transportation costs associated with the globalization of production declined, companies can now select geographically separate locations which are more economical. • These developments make it possible for a firm to create and then manage a globally dispersed production system. • E.g. Web allows: • Hospitals in Chicago send MRI scans to India for analysis • Accounting offices in San Francisco outsource routine tax preparation work to accountants in Philippines

13. Implications for the Globalization of Markets • Low-cost transportation made it more economical to ship products around the world, thereby helping to create global markets. • Low cost of transportation has increased movement of people between countries which reduced the cultural distance among people and created convergence of taste and preferences. • Low-cost global communications network such as WWW are helping to create electronic global market places. • Global communication network and global media like, CNN, MTV etc. also contributed for the convergence. • E.g.McDonald’s in China, Gap Jeans in Paris, E-bay • E.g.Equador supplies roses to New York

14. The Globalization Debate Anti-Globalization Protests Negative Anti globalization groups protest because globalization creates, • Job losses • Downward pressure on the wage rates of unskilled workers • Environmental degradation • The cultural imperialism of global media and multinational enterprises In Seattle, the WTO was meeting to try to launch a new round of talks to cut barriers to cross-border trade and investment in December 1999. There was violent protest by the anti globalization groups, where 40,000 protesters marched against globalization.

15. The Globalization Debate Anti-Globalization Protests Positive • Globalization improves the living standard. • International chains like McDonalds and Starbucks are now available almost at every location.

16. The Globalization Debate Globalization, Jobs and Income Negative • MNCs shifted their production to low cost locations where wage rate is low. As a result, the demand of labor reduced in the USA. This resulted in job losses and reduction of wage rate in USA. • Advanced economies are becoming technology-oriented. So the demand of unskilled workers is reducing in advanced economies creating an excess supply of unskilled labor. Thus, growing income inequality is a result of the wages for skilled workers being bid up by the labor market and the wage of unskilled workers being discounted.

17. The Globalization Debate Globalization, Jobs and Income Positive • However, benefits outweigh cost of globalization. When MNCs go to LDC, they improve the living standards of the people of host country creating employment and supplying world class products. As a result of such economic growth, host country buys other products from the home country. • E.g.USA and China (Medicine and textile). • Globalization encourages countries to specialize in products which they can produce most efficiently. This improves the world output and overall economic condition of the world. • Supporters of globalization argue that during 1987-1994 the income gap actually reduced by 5.5%.

18. The Globalization Debate Globalization, Labour Policies and the Environment Negative • LDCs lack adequate regulations to protect labour and the environment from abuse by the corrupts. Free trade leads to an increase in pollution and result in firms from advanced nations exploiting the labour of less developed nations. • Supporters of anti-globalization argued that NAFTA might stimulate US manufacturing firms moving to Mexico and then pollute the environment, employ child labour and ignore workplace safety.

19. The Globalization Debate Globalization, Labour Policies and the Environment Positive • The supporters of free trade argue that tougher environmental regulations and stricter labor standards go hand in hand with economic progress. So free trade enables developing countries to increase their economic growth and become richer which in turn strengthen the regulations. • International free trade agreements protect countries from exploitation. E.g. NAFTA protects Mexico from being exploited by the US firms.

20. The Globalization Debate Globalization and National Sovereignty Negative • World Trade Organization (WTO), the European Union and the United Nations—these supranational organizations impose policies on the democratically elected governments of the nation-states. Thus the independent economies are transferring their economic power away from national governments towards these organizations. • WTO monitor the trade policies and activities of its 150 member states who are signatory to the GATT. The arbitration panel can issue a ruling instructing a member state to change trade policies that violate GATT regulations. This is regarded as interference by the protesters of globalization.

21. The Globalization Debate Globalization and National Sovereignty Positive • Supporters say that WTO and such other organizations generate collective decision which reflects the opinion of all the member states. If these bodies fail to serve the collective interest of member states, those states will withdraw their support and the supranational organization will collapse. In this view, the real power still resides with individual nation–states.

22. The Globalization Debate Globalization and the World’s Poor Negative Due to globalization the gap between the rich and poor nations of the world has gotten wider. In 1870, the average income per capita in the world’s 17 richest nations was 2.4 times that of all other countries. In 1990, the same group was 4.5 times as rich as the rest.

23. The Globalization Debate Globalization and the World’s Poor Positive Due to globalization some world’s poorer nations are now observing economic growth like, South Korea, Thailand and Malaysia. However, some states are still poor and the reasons for their poverty are purely internal like dictator government, economic policies that destroy wealth, insufficient protection of property rights, and war or political unrest, for e.g. African nations.

24. Question! IS GLOBALIZATION GOOD OR BAD?