LOG 408: Global Logistics Management Lecture 2: Globalization and International Trade

Key Points of Last Lesson What Is Supply Chain: Scope: From the raw material to the final consumer Process: purchasing, warehousing, transportation, etc. Objectives: cost and service level Key Thought in Global Supply Chain Management: Six factors makes global logistics much more important compared to a few decades ago Highly complex, covering various aspects SC dispersed over a larger geographical area It offers many more opportunities than just the domestic supply chain Risk factors are also present

Examples of logistics applications to manufacturing and services Robust logistics strategies enable the entire supply chain to compete e.g. Ikea ‘flat packed’ products, simplified & standardized processes e.g. triage rapid assessment of patient needs, matching patients with the right care stream as early as possible

Growth in international trade There has been considerable growth in recent decades in world trade; world exports grew from $62 billion in 1950 to a peak of $16,000 billion by 2008 before subsequently declining due to economic crisis Facilitated by regional trade agreements Hence more freight is moving all around the world Logistics systems are thus having to play an increasingly important role in the global economy

Total World Merchandise Exports 1950-2009

An observation from the US perspective About one-fifth of the output of U.S. firms is produced overseas. One-quarter of U.S. imports are between foreign affiliates and U.S. parent companies. Since the late 1980s, over half of U.S. companies increased the number of countries in which they operate.

Exports by Country (2010 estimates)

Position of Turkey in 2010 Import: US$186b, 21st in world (US world No.1, $1,968b) Export: US$114b, 30th in the world (China world No.1, $1,578b)

Measuring Logistics Performance The global logistics performance index (LPI), developed by World Bank, ranks 155 countries’ logistics performance against six key dimensions: Customs Infrastructure International shipments Logistics competence Tracking & tracing Timeliness

Top 10 countries in the global LPI (2010)

Position of Turkey LPI 2010: No. 39 In comparison, China at No. 27. In comparison, China in 2014 at No. 28.

UNCTAD Liner Shipping Connectivity Index (LSCI) Generated from five components: Maximum vessel size in a country’s ports The number of companies providing services to a country’s ports The number of services offered by the liner companies The number of ships deployed on services to a country’s ports TEU capacity on the deployed ships

More on UNCTAD’s LSCI Compared to LPI, it focuses more on seaport infrastructure and services China ranked No.1 with largest ports and huge export volumes Other high ranking countries: Hong Kong, Singapore, Germany Turkey world No. 25

Trends within the 2010 LSCI

Globalization Companies must learn to operate as if the world were one large market (Levitt, 1983) Multinational companies (MNCs) Transnational corporations (TNCs) An example of globalization: A Greek owned vessel, built in Korea, charted to a Danish operator, employing Philippines seafarers, is registered in Panama, insured in the UK, and transports German made cargo in the name of a Swiss freight forwarder from a Dutch port to Argentina (Kumar and Hoffmann, 2002)

More on Globalization Discussion: Is globalization is good or bad? Key is a wise management of the wealth /job redistribution due to globalization Globalization stages: Ethnocentricity: a company when doing business abroad thinks and acts as if they were still operating in their home country Examples: Turkish Airline Polycentricity: a company adopts the host country perspective Examples: Carrefour Geocentricity: a company acts completely independent of geography and adopts a global perspective, and will tailor to the local environment as appropriate (i.e. ‘glocalization’) Examples: MacDonald

Foreign direct investment (FDI) Financial flows from a company in one country to invest in another country (for example in a factory) Very significant in the overall global economy Can be key to dictating a countries success Strong competition to attract FDI among countries Some countries put in place certain conditions to attract more FDI e.g. low rates of corporate taxation Setup special economic zones

Some thoughts on FDI MNCs invest in foreign countries may primarily for Market (e.g., Japanese firms invest in the US) Natural or human resources (e.g., Western firms invest in China) Technology (e.g., firms from developing countries invest in developed countries) How does Turkey posit itself in global FDI boom? FDI inflow global ranking (2013): US (2815b), UK, Hong Kong, China (1344b), …, Turkey (No. 28, 194b)

Overseas site selection factors

World’s Top 10 Non-financial TNCs in 2008 ranked by foreign assets

Major Trade Corridors

Directional Imbalances When there are mismatches in the volumes or types of freight moving in opposite directions in a freight market The imbalances seldom happen in passenger markets, but often in freight markets E.g., shipping a typical container from Hong Kong to EU is twice expensive than that of shipping from EU to Hong Kong

Traditional versus circular routings

Questions to think How globalized is your country? If it not highly globalized, what can be done to improve its position? Taking your own country as an example, identify freight routes where you believe directional imbalances exist.