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Globalization and International Linkages Chapter One Globalization and International Linkages

Learning Objectives Assess the implications of globalization for countries, industries, firms, and communities Review the major trends in global and regional integration Examine the changing balance of global economic power and trade and investment flows among countries

Learning Objectives (continued) Analyze the major economic systems and recent developments among countries that reflect those systems

Social Media Changed the way in which people connect Changed global business strategy Changed the way in which international business is conducted Impacted international diplomacy

Communication Platforms Can be accessed by individuals and groups from any location Offer myriad opportunities for companies to identify and target discrete groups Revolutionize nature of management by allowing direct interaction between producers and consumers Accelerate the already rapid pace of globalization and integration

Management Process of completing activities with and through other people International management is the process of: Applying management concepts and techniques in a multinational environment Adapting management practices to different economic, political, and cultural contexts

Multinational Corporations (MNCs) Firms that have: Operations in more than one country International sales Mix of nationality among managers and owners Managers are required to develop international management expertise Increasingly coming from developing nations like China and India

Globalization and Internationalization Process of social, political, economic, cultural, and technological integration among countries around the world Evidence can be seen in increased levels of trade, capital flows, and migration Internationalization Process of a business crossing national and cultural borders

Factors That Facilitate Globalization Technological advances in transnational communications, transport, and travel Offshoring Companies undertake some activities at offshore locations instead of in their home countries Outsourcing Subcontracting or contracting out of activities that had previously been performed by the firm to external organizations

Benefits of Globalization Wealth Better jobs Access to technology Lower prices Availability of goods

Criticisms of Globalization Offshoring of service jobs to lower-wage countries Companies and countries place downward pressure on wages and working conditions Growing trade deficits and slow wage growth could lead to economic collapse Concerns over environmental and social impacts

Global Agreements General Agreement on Tariffs and Trade (GATT) Helped in the dramatic reduction of tariff and nontariff barriers among nations World Trade Organization (WTO) Oversees rules and regulations for international trade and investment

Regional Agreements North American Free Trade Agreement (NAFTA) U.S.–Singapore Free Trade Agreement U.S.–Central American Free Trade Agreement (CAFTA and CAFTA-DR) European Union (EU) Transatlantic Trade and Investment Partnership (T-TIP) Association of Southeast Asian Nations (ASEAN) Trans-Pacific Partnership (TPP)

North American Free Trade Agreement (NAFTA) Member nations include the United States, Canada, and Mexico Helped eliminate tariffs and import and export quotas Opened government procurement markets to companies in the other two nations Increased opportunity to make investments in each other’s country

North American Free Trade Agreement (NAFTA) (continued) Increased the ease of travel between countries Removed restrictions on agricultural products, auto parts, and energy goods

Changing Global Demographics Factors contributing to the increase in the median global population age Increase in global life expectancy due to improvements in technology and healthcare Increase in time spent in retirement due to increase in life expectancy Decline in global fertility rate

Shifting Balance of Economic Power in the Global Economy Result of economic integration and rapid growth of emerging markets Emerging and developing nations might play a dominant role in the global economic system BRIC countries - Brazil, Russia, India, and China E7 - Seven major emerging economies (Brazil, China, India, Indonesia, Mexico, Russia, and Turkey)

Shifting Balance of Economic Power in the Global Economy (continued) N-11 - Next wave of emerging markets (Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, Philippines, Turkey, South Korea, and Vietnam) African countries can benefit from the increase in price of commodities Gas and oil, agricultural products, and mineral and mining products

Table 1.7 - Changing Global Demographics: Developing Countries on the Rise

Trends in Trade and International Investments Since the global recession in 2009 , global trade and investment have continued to grow Foreign direct investment (FDI) Amount invested in property, plant, or equipment in another country Growing at a slow but steady rate in the years since the global recession May reach $1.7 trillion by 2017

Global Economic Systems Market economy Command economy Mixed economy

Market Economy Exists when private enterprises reserve the right to own property and monitor production and distribution of goods and services Management is effective Private ownership provides local evaluation and understanding Least restrictive form of economy Resource allocation is determined by the law of demand

Market Economy (continued 1) General balance between supply and demand sustains prices Imbalance creates price fluctuation Competition is encouraged Helps promote innovation, economic growth, high quality, and efficiency

Market Economy (continued 2) Optimal growth is facilitated by focusing on how to best serve the customer Monopolies or restrictive business practices may be prohibited to maintain the integrity of the economy

Command Economy Government holds explicit control over the price and supply of a good or service Businesses are owned by the state Ensures that investments and other business practices are done in the best interest of the nation Management ignores demographic information Creates an environment where little motivation exists

Mixed Economy Combination of market and command economy Helps raise the standard of living Aided by regulations concerning minimum wage standards, social security, environmental protection, and the advancement of civil rights Ownership of organizations that are critical to the nation may be transferred to the state Subsidizes costs and allows the firms to flourish

Evaluation of the World’s Economies Established economies North America European Union Japan Emerging economies Central and Eastern Europe China Other emerging markets of Asia (South Korea, Hong Kong, Singapore, and Taiwan) India Developing economies South America Middle East and Central Asia Africa

North America One of the four largest trading blocs in the world Combined purchasing power of the United States, Canada, and Mexico is more than $19 trillion Free-market-based economy provides considerable freedom in decision-making processes International firms receive the benefit of greater flexibility and lower barriers

North America (continued 1) The United States Firms maintain dominant global positions in technology-intensive industries Considered to be a lucrative market for expansion by foreign MNCs Canada is the largest trading partner Most of the largest foreign-owned companies in Canada are totally or heavily U.S.-owned Legal and business environments are similar to that in the U.S.

North America (continued 2) Mexico Strongest Latin American economy Has free-trade agreements with over 46 countries Competes with Asia for the U.S. market and has the benefit of proximity and lower-cost labor Facilitated by the maquiladora system Increased trade with both Europe and Asia

European Union (EU) Objectives and goals Firms have the benefit of: Eliminate all trade barriers among member nations Follow a single currency (euro) and a regional central bank Firms have the benefit of: Manufacturing high-quality, low-cost goods Shipping manufactured goods across the EU without paying duties or being subject to quotas

European Union (EU) (continued) Challenges Absorbing its eastern neighbors that could result in a giant, single European market Large deficits faced by several European governments Resulted from structural conditions and shorter-term economic pressures Placed pressure on the euro Maintaining a unified EU in the coming decades

Japan Unprecedented economic success in the 1970s and 1980s Huge positive trade balance Strong yen Gained recognition as the world leader in manufacturing and consumer goods Remains a formidable international competitor and is well poised in all major economic regions

Japan (continued) Early success can be attributed to: The Ministry of International Trade and Industry (MITI) Governmental agency that identifies and ranks national commercial pursuits and guides the distribution of national resources to meet these goals Keiretsus Large, vertically integrated corporations whose holdings supply much of the assistance needed in providing goods and services to end users

Emerging and Developing Economies Face relatively low GDP per capita Have an unskilled or semiskilled workforce Involve considerable government intervention in economic affairs Can be viewed as developing economies that exhibit sustained economic reform and growth

Russia Dismantled price controls Privatized businesses previously owned by the government Direct investment and membership in International Monetary Fund (IMF) helped to raise GDP and decrease inflation

Russian Economy Early economy was boosted by abundant oil and high global energy prices Recent decreases in demand have pushed Russia into a recession Likely to undergo many years of economic instability and recurrent political problems Challenges - Persistent crime, corruption, and lack of public security

Central and Eastern Europe Hungary Privatization of state-owned businesses Joint ventures between local and western firms Receives direct investments from MNCs Poland Only economy in the EU to continue to grow during the global recession of 2008–2009

Central and Eastern Europe (continued) Key for Albania and other Eastern European countries is to make themselves less risky and more attractive for international business Maintain social order Establish rule of law Rebuild collapsed infrastructure Get factories and other value-added, job-producing firms up and running

China Considerable decline in GDP Current challenges Massive savings glut in corporate sector Globalization of manufacturing networks Vast developmental needs Unemployment (15–20 million new jobs required annually) Social unrest

China: Major Risk for Investors Caused due to: Delicate nature of the one country, two systems balance (communism and capitalism) Concerns about undervaluation of China’s currency Unpredictable and fluid nature of policies toward foreign firms Trade relations with developed nations remain tense

Economic Performance in Emerging Markets of Asia South Korea Chaebols: Large, family-held conglomerates that have considerable economic and political power Has a solid economy with moderate growth and inflation, low unemployment, an export surplus, and fairly equal distribution of income Hong Kong Headquarters for some of the most successful multinational operations in Asia

Economic Performance in Emerging Markets of Asia (continued 1) Singapore Emerged as an urban planner’s model and the leader and financial center for Southeast Asia Taiwan Progressed from a labor-intensive economy to one dominated by technologically sophisticated industries

Economic Performance in Emerging Markets of Asia (continued 2) Thailand, Malaysia, Indonesia, and Vietnam Have a large population base with inexpensive labor despite lack of natural resources Known to have social stability but have suffered from turmoil in the aftermath of recent economic crisis

India Recent trend of locating software and higher value-added services has bolstered middle- and upper-class market for goods and services Attractive to U.S. and British investors Presence of English-speaking, well-educated, and technologically sophisticated workers Availability of government funds for economic development

South America Faced many economic problems Accumulated heavy foreign debt obligations Experienced severe inflation Implemented economic reforms to reduce debt Periodic economic instability and the emergence of populist leaders have had an impact on the attractiveness of countries in this region

South America: Brazil Attracted considerable foreign investment Through privatization of power, telecommunications, and other infrastructure sectors Benefited from one of the most stable governments throughout Latin America Undisputed economic leader of South America

South America: Brazil (continued) Long-term prospects are still potentially positive due to: Presence of a large and relatively well-educated population Availability of ample natural resources Existing industrial base Strategic geographic position

Chile Economic growth has fluctuated between three and six percent since the 2000s Attracts FDI, mainly dealing with gas, water, electricity, and mining Continues to participate in globalization Engages in trade agreements with Mercosur, China, India, the EU, South Korea, and Mexico

Argentina Has an overall strong economy Due to abundance of natural resources, highly literate population, export-oriented agriculture, and diversified industrial base Has suffered recurring economic problems Inflation, external debt, capital flight, and budget deficits Economic growth has slowed since the global recession

Middle East and Central Asia Possess large oil reserves Have highly unstable geopolitical and religious forces Try to balance these forces with economic viability and activity in the international business arena Rely almost exclusively on oil production Have made large investments in U.S. property and businesses

Africa Has considerable natural resources but remains very poor and undeveloped International trade is only beginning to serve as a major source of income Risk for foreign investors arises from: Overwhelming diversity of the population Major political instability

Africa (continued 1) Economic setbacks are caused due to: Tragic tribal wars Spread of diseases such as AIDS, malaria, and Ebola Lack of institutions, infrastructure, and economic capacity to take full advantage of globalization Poverty, malnutrition, illiteracy, corruption, social breakdown, vanishing resources, overcrowded cities, drought, and homeless refugees

Africa (continued 2) Economic growth and dynamism have accelerated in recent years Rise in GDP Growth in telecommunications, banking, and retailing Rate of return on foreign investment in Africa is higher than for any other region

Be the International Business Consultant: Walmart in India In light of this situation, what would your recommendation be to Walmart? Should it stick with the wholesale focus, or should it pursue another joint venture with an Indian partner? Alternatively, should it maintain a “wait and see” approach in hopes that the Indian government will finally reform its restrictions on foreign investment?

Review and Discuss How has globalization affected different world regions? What are some of the benefits and costs of globalization for different sectors of society (companies, workers, communities)?

Review and Discuss (continued 1) How has NAFTA affected the economies of North America and how has the EU affected Europe? What importance do these economic pacts have for international managers in North America, Europe, and Asia?

Review and Discuss (continued 2) Why are Russia and Eastern Europe of interest to international managers? Identify and describe some reasons for such interest and also risks associated with doing business in these regions

Review and Discuss (continued 3) Many MNCs have secured a foothold in Asia, and many more are looking to develop business relations there Why does this region of the world hold such interest for international management? Identify and describe some reasons for such interest

Review and Discuss (continued 4) Why would MNCs be interested in South America, India, the Middle East and Central Asia, and Africa, the less developed and emerging countries of the world? Would MNCs be better off focusing their efforts on more industrialized regions? Explain

Review and Discuss (continued 5) MNCs from emerging markets (India, China, Brazil) are beginning to challenge the dominance of developed country MNCs How might MNCs from North America, Europe, and Japan respond to these challenges?