International Business Lecture 2: Perspectives on globalization

Aims of the lecture To define and contrast globalization of markets and globalization of production To identify methods of internationalizing operations To apply theories of internationalization and foreign direct investment (FDI) To follow trends in FDI outflows and inflows, highlighting the growing influence of emerging economies To outline the impacts of globalization on societies, together with the roles (actual and potential) of MNEs

What is globalization? Definition: Increasing and deepening interactions between individuals and organizations across the globe. Processes are ongoing, at varying pace between countries and between sectors. Globalization of markets, implying growing uniformity, has been partially realized, but local preferences predominate in many sectors. Globalization of production, implying co-ordination of operations across borders, has transformed manufacturing, but country differences are important.

Classifying countries in terms of economic development Developed countries – Industrialized and economically advanced countries, with high levels of prosperity. Developing countries – Countries changing from mainly agricultural or natural resource-based economy to industrial production. Transition economies – Countries moving from communist or state-planned systems to market-based systems. (They overlap with developing countries, as modernization of their industries is a priority.) Emerging economies or markets – Fast-growing developing and transition economies.

Figure 2.1: Globalization

Table 2.1: What does globalization mean for business, society and government?

Methods of internationalizing operations Outsourcing – contracting with another company to carry out operations, usually more cheaply than the firm can do ‘in-house’. Includes: Business process outsourcing (BPO) Offshoring (contracting out of a function to a low-cost location) FDI – ownership and control of foreign assets. Includes: Greenfield investment Acquisition of an existing business Joint venture

Figure 2.2: Methods of internationalizing operations

Theories of internationalization Early theories of FDI were based on location and ownership advantages Product life cycle theory Theory of incremental internationalization Concept of ‘psychic distance’ Dunning’s eclectic paradigm, known as the OLI paradigm – configuring ownership, location and internalization advantages

Figure 2.3: Product Life Cycle

Figure 2.4: Incremental internationalization

Production/ manufacturing Export Sales subsidiaries Production/ manufacturing Psychic distance Market knowledge Experiential knowledge Size of market Incremental internationalization

Figure 2.5: Dunning’s eclectic paradigm

GLOBALIZATION THEORIES 1. World-System Theory: Synopsis and Analysis 2. World Polity Theory: Synopsis and Analysis 3. World Culture Theory: Synopsis and Analysis Globalization and Its Discontents - Wikipedia, the free encyclopedia Globalization and Its Discontents is a book published in 2002 by the 2001 Nobel ..... Still Discontent with Globalization, article by Stiglitz in Aspenia ... http://en.wikipedia.org/wiki/Globalization_and_Its_Discontents - 51k - Cached - Similar pages

Changing patterns of FDI FDI has been a driver of globalization. FDI inflows … into developed countries have focused on proximity to large markets. into to developing and emerging economies are growing, due to the benefits of globalized production and growth in emerging markets. Outward investors have been predominantly from the developed countries, but emerging MNEs are now rapidly internationalizing – investing in both developed and developing countries.

Figure 2.6: Growth in value of FDI stock Source: UN, World Investment Reports 2005 and 2007 (Geneva: UN)

Figure 2.7: FDI inflows, 1994-2006 Source UN, World Investment Reports 2005 and 2007 (Geneva: UN)

Figure 2.8: Number of MNEs based in developed, developing and transition economies Source UN, World Investment Report 2007 (Geneva: UN)

Figure 2.9: FDI outflows from developing and transition countries Source UN, World Investment Reports 2005, 2006 and 2007 (Geneva: UN)

Major FDI Indicators (WIR 2010) Flow 1401466 256465 40715 3588 32779 18098 887 5286 1137976 501755 698224 724878 15280 313997 380859 16959 Stock 7442548 1728455 193348 16339 122250 97170 43451 54444 5653181 1620467 2322127 2440336 72878 2783235 2996215 143752 1114189 478349 95000 34613 25949 12522 5696 61620 565892 276181 361949 378388 15831 129883 148753 22920 17743408 4893490 473083 163959 400808 309523 125085 412229 12352514 5146806 7447904 8037813 271399 3120583 3648577 394724 100.0% 27.6% 2.7% 0.9% 2.3% 1.7% 0.7% 69.6% 29.0% 42.0% 45.3% 1.5% 17.6% 20.6% 2.2% % of 2009 World FDI 2000 2009 Major FDI Indicators (WIR 2010) World Developing economies China: India: Brazil Mexico South Africa Commonwealth of Independent States (CIS) Developed economies Euro area European Union (EU) Developed economies: Europe Developed economies: Asia United States Developed economies: America Developed economies: Oceania http://stats.unctad.org/FDI/TableViewer/tableView.aspx US Dollars at current prices and current exchange rates in millions

Impacts of globalization on societies Economic impacts: For host societies, FDI and outsourcing bring jobs and prosperity in favoured sectors but, especially in low-skill sectors, work is insecure as investors may shift production to another country Loss of low-skill jobs in home countries of investors Widening inequality – both within and between countries. Diffusion of technology: Host societies benefit from technology transfer and spillover effects, but risk of stifling local innovative capacity.

Source ILO (2004) A Fair Globalization (Geneva : ILO) Figure 2.10: Share of the top 1% of earners in gross income in selected industrialized countries

Figure 2.11: Number of internet users per thousand people Source UNDP (2007) Human Development Report 2007-2008 (Basingstoke: Palgrave Macmillan)

Figure 2.12: Globalized production and social impacts

Global financial markets Global finance is often cited as at the forefront of globalization, facilitated by: The revolution in IT and the internet Liberalization of national financial systems, opening up to outside investors. The benefits for emerging economies have been rapid economic integration, capital investment and economic growth. However, risks of global financial volatility have grown.

Cultural and environmental impacts of globalization Culture change through industrialization and urbanization. Convergence in lifestyles as consumer societies grow. On the other hand, cultural differences persist. Environmental Industrialization, power generation and extraction of natural resources have gathered pace, bringing environmental degradation and hastening climate change. Developed and emerging countries have differing perspectives of on the need to promote environmental protection

Conclusions Globalization has ‘shrunk’ the world – due to IT, communications and modern transport, combined with opening up of countries to outside investors. Globalization of production has transformed manufacturing, but markets, especially in consumer products, remain localized. MNEs have been at the forefront of internationalization of production, especially through FDI, now increasingly encompassing emerging MNEs and markets. New jobs and greater consumer choice have resulted, but negative social impacts represent the ‘dark’ side of globalization.