Chapter 1 Globalization

1 - 3 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Globalization What does “globalization” mean? -What are its causes? -Why is it proceeding rapidly? -What is its impact on Jobs? Incomes? Labor and environmental policies? National sovereignty? International Trade patterns -Foreign direct investment flows -Economic growth rates -Multinational corporations and their impact

1 - 4 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Globalization Trend to integrated / interdependent World Economy -Trend’s rate of change accelerating Trend away from national economies isolation due to: -Cross-border trade and investment -Geographic and time (zones) distance -National government regulations -Idiosyncratic business systems -National cultures

1 - 5 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Globalization of Markets Distinct/separate markets merging into a huge global marketplace -Mostly NOT consumer product markets -Mostly industrial products -Tastes and preferences of consumers converging (??) MNCs creating global marketplace? MNCs more vulnerable to competition in their home markets

1 - 6 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Globalization of Production Each MNC -Sources particular goods and services from a set of locations it selects around the world -Develops a global web of suppliers as a source of competitive advantage -Decides “where to produce” depending on a country’s factors of production Labor, land, capital, energy, expertise Host governments have a stake in the successful establishment of an MNC’s operations

1 - 7 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Global Institutions’ Emergence These define the “rules” of international economic activity -World Trade Organization (succeeded GATT) -International Monetary Fund (IMF) -World Bank -United Nations

1 - 8 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Evidence of Globalization World trade increase more than -20x up between ’50 and ’98 -25x up from ’70 to ’02 FDI annual flows increased more than -10x from ’84 to ’98, or -50x between ’75 and ’00 -Declined about 50% between ’00 and ’03

1 - 9 McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. More evidence of Globalization FDI bilateral treaties up more than 10x from ’80 to ’02 By ,000 parent companies : -operated away from home markets through 500,000 subsidiaries / affiliates -Produced US$11 trillion in global sales, 25% of global output US, Japanese, Western European companies the major investors in Europe, Asia, and North America

McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. “Drivers” of Globalization: Declining Trade and Investment Barriers Average Tariff Rates on Manufactured Products (% value) France Germany Italy Japan30– Holland Sweden Britain– USA

McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. “Drivers” of Globalization: Technological Change Globalization of markets and production -is the result of lowering of trade barriers and -is enabled by technological change Telecommunications and microprocessors The internet and the world-wide web Transportation technology

McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Globalization and the Global Economy % share of world output and exports outputoutput output exports exports United States Japan Germany9.7 (W) France United Kingdom Italy Canada ChinaNA

McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Technological Change and Globalization Globalization of markets and production -the result of lowering of trade barriers -enabled by technological change Telecommunications & microprocessors -High power/low cost computing -Increase in information processing capacity The internet and the world-wide web Transportation technology

McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Globalization and the MNE A multinational enterprise (MNE) is any business that has productive activities in two or more countries The national heritage of the largest MNEs United States45%25%27% Japan United Kingdom France Germany “Mini-multinationals” a world economy factor

McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Globalization: Prosperity or Impoverishment? Impact of trade liberalization and FDI barrier removal on -jobs and incomes Do jobs move from wealthy, advanced economies in search of lower wage rates? -On labor policies and the environment Do manufacturing facilities move to developing countries with weaker labor laws and environmental protection? -On national sovereignty WTO, UN, EU: supplanting national governments?

McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.