Chapter 2 BUSA3000
Define market globalization. What are the underlying dimensions of this mega trend?
Market globalization is a broad term referring to the interconnectedness of national economies and the growing interdependence of buyers, producers, suppliers, and governments in different countries. ■ Globalization allows firms to view the world as one large marketplace for goods, services, capital, labor, and knowledge. ■ Two mega trends are underscored that have altered the international business landscape: the globalization of markets or economies and technological advances.
What effect does globalization have on national sovereignty, employment, the poor, the natural environment, and national culture?
■ Sovereignty is the ability of a nation to govern its own affairs. ■ One country's laws cannot be applied or enforced in another country. ■ Globalization can threaten national sovereignty. ■ MNE activities can interfere with the sovereign ability of governments to control their own economies, social structures, and political systems. ■ Some corporations are bigger than the economies of many nations, e.g. Walmart's total revenue is larger than the GDP of most nations, including Israel, Greece, and Poland.
What are the pros and cons of globalization?
Positive consequences of market globalization: Cross-border trade and investment opened the world to innovations and progress while increasing performance standards, currently known as global benchmarking or world class. ■ Negative consequences of market globalization: The transition to an increasingly single, global marketplace poses challenges to individuals, organizations and governments. ■ Poverty is especially notable in Africa, Brazil, China and India where lower-income countries have not been able to integrate with the global economy as rapidly as others. ■ Globalization has created countless new jobs and opportunities around the world, but it has also cost many people their jobs.
Is globalization a recent phenomenon? Describe the four phases of globalization.
Globalization is not a recent phenomenon. The origins date to the Roman Empire and earlier. ■ The word 'trade' comes from the Anglo-Saxon term trada, which means to walk in the footsteps of others. ■ Ancient trade routes were the foundation for a high level of cross-cultural exchange of ideas that lead to the development of religion, science, economic activity, and government. ■ The phrase "all roads lead to Rome" is not so much a metaphorical reference to Rome's dominance of the world 2,000 years ago, but to the fact that Rome's territorial colonies were constructed as commercial resource centers to serve the needs of the Roman empire and increase its wealth. ■ In an empire that stretched from England to Israel and from Germany to Africa, the Romans created more than 300,000 kilometers of roads. Roman roads were the life-blood of the state that allowed for trade to flourish.
What is the role of the World Trade Organization?
The World Trade Organization (WTO) is a multilateral governing body empowered to regulate international trade and investment. ■ The 149 members states in the WTO have been engaged in an ongoing liberalization of their economies since the late 1940s. ■ Joining the WTO in 2001, even China has committed to make its market more accessible to foreign companies.
Phases of Globalization
The first phase of globalization began about 1830 and peaked around 1880. ■ International commerce became widespread in this period due to the growth of railroads, efficient ocean transport, and the rise of large manufacturing and trading companies. ■ The inventions of the telegraph and telephone in the 1800s facilitated information flows between and within nations and greatly aided early efforts to manage companies' supply chains. The Second phase of globalization 1900 -1930 ■ The second phase of globalization began around 1900 and was caused by the rise of electricity and steel production. ■ The phase reached its height just before the Great Depression, a worldwide economic downturn that started in 1929. ■ At the turn-of-the-century, Western Europe was the most industrialized region and its colonization of countries worldwide led to the establishment of some of the earliest subsidiaries of multinational firms. ■ European companies such as BASF, British Petroleum, Nestlé, Shell, and Siemens had established foreign manufacturing plants by 1900. ■ The Italian manufacturer Fiat supplied vehicles to nations on both sides of the war. The Third phase of globalization 1948 - 1970s ■ The third phase of globalization followed World War II. ■ At war's end in 1945, substantial pent-up demand existed for consumer products, as well as for input goods to rebuild Europe and Japan. ■ Among the leading economies, the U.S. was least harmed by the war and became the world's dominant economy. ■ Commonplace were high tariffs, other trade barriers, with strict controls on currency and capital movements. ■ Several industrialized countries, including Australia, the United States and the United Kingdom systematically sought to reduce international trade barriers. ■ The result of this effort was the General Agreement on Tariffs and Trade (GATT) - the precursor to the World Trade Organization (WTO). ■ GATT, emerging from the Bretton Woods Conference of 23 nations in 1947, served as a global negotiating forum for liberalizing trade barriers, and marked the beginning of a series of annual meetings aimed at reducing international trade and investment barriers. ■ Participating governments recognized that liberalized trade would stimulate industrialization, modernization, and better living standards. ■ Eventually, many more nations joined the GATT, and their efforts led to the formation of the WTO. ■ Some 149 nations are now members of the WTO. ■ Additional global cooperation led to the formation of key international organizations such as the International Monetary Fund, the World Bank, and the United Nations. The Fourth and current phase of globalization 1980s - Present ■ The fourth and current phase of globalization began in the early 1980s. ■ This period witnessed enormous growth in cross-border trade and investment activity. The following innovations caused this phase: ●Commercialization of the personal computer. ●Arrival of the Internet and the web browser. ●Advances in communication and manufacturing technologies. ●Collapse of the Soviet Union and ensuing market liberalization in central and Eastern Europe. ●Substantial industrialization and modernization efforts of the East Asian economies including China.
Summarize the six dimensions of globalization. Which of these do you think is the most visible manifestation of globalization?
A. Integration and interdependence of national economies. ■ The multicounty aggregate activities of reconfiguring and integrating value-chain activities gives rise to economic integration ■ Governments contribute to this integration by: (1) Gradually lowering trade and investment barriers; (2) Harmonizing their monetary and fiscal policies within regional economic integration blocs (also known as trade blocs), e.g. EU (3) Establishing supranational institutions that transcend national borders and involve cooperation among several countries that seek further reductions in trade and investment barriers, e.g. the World Bank, International Monetary Fund, World Trade Organization, etc. B. Rise of regional economic integration blocs. ■ Since the 1950s, the emergence of regional economic integration blocs ■ Trade bloc: consist of groups of countries within which trade and investment flows are facilitated through reduced trade and investment barriers. ■ Examples- the North American Free Trade Agreement area (NAFTA), the Asia Pacific Economic Cooperation zone (APEC), and Mercosur in Latin America. ■ In more advanced stages, barriers are also removed to the cross-border flow of capital and labor. C. Growth of global investment and financial flows. ■ Foreign direct investment (FDI) has grown dramatically due to global sourcing. ■ Firms and governments undertake global currency trading to finance cross-border trade and investment. ■ The globalization of capital, i.e. the free movement of capital (denominated in dollars, euros, yen, and other world currencies) around the world is extending economic activities across the globe and fostering interconnectedness among world economies. ■ Commercial and investment banking has become a global industry. D. Convergence of consumer lifestyles and preferences. ■ Lifestyles and preferences are converging, i.e. increasingly standardized, resulting in global market segments. ■ Transnational media contribute to the convergence of buyer preferences, in part by emphasizing/commercializing a particular lifestyle observed in the U.S., Europe, or elsewhere. ■ Double-edged sword- While converging tastes facilitate the marketing of standardized products/services to global consumers, they also signal the loss of traditional lifestyles, values in individual countries and national sovereignty. E. Globalization of production. ■ Intense global competition has made economies of scale a critical key success factor. Global players are forced to evaluate global sourcing to take advantage of national differences in the cost and quality of factor inputs. ■ This explains why offshoring to low labor-cost locations such as China, Mexico, and Eastern Europe is so popular.
Describe the five drivers of globalization.
A. Worldwide reduction of barriers to trade and investment. ■ National governments have sought to reduce trade and investment barriers, which has accelerated global economic integration. ■ The World Trade Organization (WTO) has facilitated this. ■ The WTO is a multilateral governing body empowered to regulate international trade and investment, and has been engaged in an ongoing liberalization of member states' economies since the late 1940s. ■ Joining the WTO in 2001, even China has committed to make its market more accessible to foreign companies. B. Market liberalization and adoption of free markets. ■ The tearing down of the Berlin Wall in 1989, the collapse of the Soviet Union's economy that same year, and China's free-market reforms signaled the end of the 50-year Cold War between communist regimes and democracy. ■ It was the transition from command economies to market-driven economies that facilitated their membership into the global economy. ■ The East Asian economies, stretching from South Korea to Malaysia and Indonesia, had already embarked upon ambitious market-based reforms in the 1980s. ■ India joined this market liberalization trend in 1991. ■ China, India, and Eastern Europe have become some of the most cost-effective locations for producing goods and services. ■ With privatization of previously state-owned industries, these countries have encouraged economic efficiency and attracted foreign capital into their national economies. C. Industrialization, economic development, and modernization ■ Industrialization transitions emerging markets- Asia, Latin America, and Eastern Europe- from being low value-adding commodity producers, dependent on low-cost labor, to sophisticated competitive producers and exporters of premium products (higher-value products) such as electronics, computers, and aircraft. ■ The adoption of modern technologies, improvement of living standards, and adoption of modern legal and banking practices are increasing the attractiveness of emerging markets as investment targets and facilitating the spread of ideas, products, and services across the globe. D. Integration of world financial markets. ■ Integration of world financial markets enables internationally active firms to raise capital, borrow funds, and engage in foreign currency transactions. ■ The globalization of finance enables firms to pay suppliers and collect payments from customers worldwide. E. Advances in technology.
In what areas have technological advances had their greatest effect on facilitating world trade and investment?
Technology has revolutionized business: ■ Transformed national economies and promoted outsourcing/offshoring. ■ Information technology allows for more efficient adaptation to international markets as well as producing smaller lot sizes to target niche markets. ■ Emerging markets (technological leapfrogging) and consumers (reduced prices and greater selection) are the beneficiaries. ■ Spurred innovation- Societies and organizations innovate in various ways, including new product designs, new production processes, new approaches to marketing, and new ways of organizing or training. ■ Among the industries most dependent on technological innovation are biotechnology, information technology, new materials, pharmaceuticals, robotics, medical equipment and devices, lasers and fiber optics, and various electronics-based industries. ■ The cost of computer processing fell by 30 percent per year during the past two decades, and continues to fall.
