IB 350, Ch. 1
Define the term, Multinational Enterprise (MNE)
A firm that owns business operations in more than one country.
As globalization unfolds, it is transforming industries and creating anxiety among those who believed their jobs were protected from foreign competition. What factors are encouraging foreign competition?
Advances in technology, lower transportation costs, and the rise of skilled workers in developing countries imply that many services no longer need to be preformed where they are delivered.
Talk about the UN Security Council
China, France, Russia, UK and US all have the power to veto.
Define the World Trade Organization (WTO).
The organization that succeeded the GATT as a result of the successful completion of the Uruguay Round of GATT negotiations. It is primarily responsible for policing the world trade system and making sure nation-states adhere to the rules laid down in the trade treaties signed by WTO member states. 155 nations were members as of mid-2012. Also responsible for facilitating the establishment of additional multinational agreements. Has promoted the lowering of barriers to cross-border trade and investment.
Ch. 1 Learning goals:
What is globalization? What is globalization? What are the major forces of globalization? Is globalization a positive force or a negative force - and for whom? How should managers respond to the effects of globalization? What are the prospects for globalization in the future?
Managers of IB must decide what?
Where in the world to site production activities to minimize costs and to maximize value added; whether it is ethical to adhere to the lower labor and environmental standards found in many less developed nations; decide how to best coordinate and control globally dispersed production activities; decide which foreign markets to enter and which to avoid; should they export its product to the foreign country' should it produce under license in that country?
Debt relief movements in poor countries with large debts must be matched by what?
Wise investments in public projects that boost economic growth (such as education) and by the adoption of economic policies that facilitate investment and trade.
Will globalization continue at current pace?
YES: Market demand for goods Technology - reduced cost increased ease Political liberalization Sustain economic development Existing relationships - switching cost Profits/benefits for global commerce Competition between businesses and between governments NO: Job threats leads to political pressure - Nationalism/ isolation Cultural conflict Terrorism Political instability in individual countries Pan-epidemic Economic cycle Market saturation Environmental pressure Natural resource limitations National sovereignty Global economic crisis
Define Globalization.
Refers to the shift towards a more integrated and interdependent world economy. (Trend away from distinct national economic units and toward one huge global market). Globalization has several facets, including the globalization of markets and the globalization of production.
It is important not to push too far the view that national markets are giving way to global markets. Why?
Significant differences still exist among national markets along many relevant dimensions, including consumer tastes and preferences, distribution channels, culturally embedded value systems, business systems, and legal regulations.
Chapter Summary Note:
Since the end of WWII, barriers to the free flow of goods, services, and capital have been lowered significantly. More than anything else, this has facilitated the trend towards the globalization of production and has enabled firms to view the world as a single market.
Concern: Today's increasingly interdependent global economy shifts economic power away from national governments and towards where?
Supranational organizations such as the WTO, the EU and the UN
The lowering of trade barrier made globalization of markets and production a theoretical possibility. What has made it a tangible reality?
Technological change.
The globalization of markets and production and the resulting growth of world trade, foreign direct investment, and imports all imply what?
That firms are finding their home markets under attack from foreign companies.
While modern communication and transportation technologies are ushering in the "global village," what should we remember?
That significant national differences still remain in culture, consumer preferences, and business practices.
Chapter Summary Note:
The development of the microprocessor and related developments in communication and information processing technology have helped firms link their worldwide operations into sophisticated information networks. Jet airway travel, by shrinking travel time, has also helped to link the worldwide operations of IB. These changes have enabled firms to achieve tight coordination of their worldwide operations and to view the world as a single market.
In terms of technology, what is perhaps the single most important innovation been?
The development of the microprocessor. It has enabled an explosive growth of high-power, low-cost computing, vastly increasing the amount of information that can be processed by individual firms.
Chapter Summary Note:
The globalization of markets implies that national markets are merging into one huge marketplace. However, it is important not to push this view too far.
Chapter Summary Note:
The globalization of production implies that firms are basing individual productive activities at the optimal world locations for the particular activity. As a consequence, it is increasingly irrelevant to talk about American products, Japanese products, or German products, because they are being replaced by 'global' products.
The relative decline of the US position in the global economy reflects what?
The growing economic development and industrialization of the world economy, particularly in Asia.
What is the 'Uruguay Round'?
The most recent negotiation among member states of GATT to lower barriers to the free flow of goods and services. The Uruguay Round further reduced trade barriers; extended GATT to cover services as well as manufactured goods; provided enhanced protection for patents, trademarks, and copyrights; and established the WTO to police the international trading system.
During time of uncertainty, what happens to FDI?
it gets hit hard
We have been moving away from a world in which national economies were relatively self-contained entities, isolated from each other by barriers to cross-border trade and investment; by distance, time zones, and languages; and by national differences in government regulations, culture, and business systems. -Perceived distance is shrinking due to what factors? -What is this process commonly referred to as?
-Advances in transportations and telecommunications technology; material culture is starting to look similar all over the world; and national economies are merging into an interdependent, integrated global economic system. -Globalization
Talk about Gregg Easterbrook's, Who's Afraid of Globalization
-Fear of globalization comes from the fear of change and the realization that no one is in charge- particularly the government. -Income and longevity are rising almost everywhere in the world...food production continues to rise, literacy rates and education are rising globally. -"99.9% of the earth's non-Western population yearn for the living standards, education and democracy of the West. -Economic growth is no cure all. -Developing nations will benefit if they, too, evolve an ethic that considers everyone worthy of a decent life... labor protection.
Talk about Paul Garrison's, Now is the era for the transnational manager
-Managers need to be transnational because politics and public policy impacts their business- need to anticipate the social and governmental impact of their strategies and tactics. -Transnational managers need to be able to move in quickly and adapt to a local market, regardless of countries origins. Needs to know sociopolitical realities. -managers need to be savvy about hot public policy- and the threat of government intervention and regulation can impact on their strategies. -Think within and across borders
Talk about Susan George's, A Short History of Neoliberalism
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Talk about James Fryer's, Globalisation and the rise in inequality
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Talk about the article, The rich and the rest, What to do (and not do) about inequality
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What are the four reasons managing an international business is different from managing a purely domestic business?
1. Countries are different 2. The range of problems confronted by a manger in an IB is wider and the problems themselves more complex than those confronted by a manager in a domestic business. 3. An IB must find ways to work within the limits imposed by government intervention in the international trade and investment system, 4. International transactions involve converting money into different currencies.
Since the 1960s, what are the two notable trends in the demographics of MNE?
1. the rise of non-US multinationals and 2. the growth of mini-multinationals.
Most global markets are for industrial goods and materials that serve a universal need- not consumer products. What are some example of industrial goods and materials?
Aluminum, oil, and wheat; microprocessors, DRAMs, and commercial jet aircrafts.
Define the United Nations (UN).
An international organization made up of 193 countries headquartered in NYC, formed in 1945 to promote peace, security and cooperation.
Quick Study 1.1: What is meant by the globalization of market? Which product markets tend to be the most global?
Answer please.
Quick Study 1.2: What is meant by the globalization of production? Why are production systems being globalized?
Answer please.
Quick Study 1.3: What is the main purpose of global institutions such as the WTO, IMF, and World Bank?
Answer please.
Quick Study 2.1: How do declining trade and investment barriers contribute toward the globalization o production and markets?
Answer please.
Quick Study 2.2: Explain the role of new technology in facilitating the globalization of production and markets.
Answer please.
Define the term, International Business
Any firm that engages in international trade or investment.
Chapter Summary Note:
As a consequence of the globalization of production and markets, in the last decade world trade had grown faster than world output, foreign direct investment has surged, imports have penetrated more deeply into the world's industrial nations, and competitive pressures have increased in industry after industry.
Chapter Summary Note:
By the mid-1990s, the US share of the world output had been cut in half, with major hares now being accounted for by western Europe and Southeast Asian economies. The US share of worldwide foreign direct investment had also fallen, by about two-thirds. US multinationals were now facing competition form a large number of Japenses and European multinationals. In addition, the emergence of mini-multinationals was noted.
C=consumer markets, B= business markets. Some producers only sell to consumer markets, business markets or a mix. Which market is the most global?
C. Selling to the business market- they have more similarity in basic criteria.
The move toward a global economy has been further strengthened by the widespread adoption of liberal economic policies by who?
Countries that had firmly opposed them for two generations or more.
What changes have increased the attractiveness of Latin America, both as a market for exports and as a site for foreign direct investments?
Debt and inflation are down, governments have sold state-owned enterprises to private investors, foreign investment is welcomed, and the region's economies have expanded.
Managers need to recognize that the task of managing an IB differs from that of a domestic business... why?
Differences in cultures, political systems, economic systems, legal systems and levels of economic development.
Define Foreign Direct Investment (FDI).
Direct investment in business operations in a foreign country.
What is globalization?
Distinct national markets merging into global markets* (Globalization of Markets) - there is still variation/diversity in markets
Thomas Friedman has argued that the world is becoming flat. How so?
Enterprising individuals based in India, China or Brazil have the same opportunities to better themselves as those living in western Europe, the US and Canada.
Define G20.
Established in 1999, the G20 comprises the finance ministers and central bank governors of the 19 largest economies in the world, plus representatives from the EU and the European Central Bank.
What is an economic risk of globalization?
Financial crisis in one place leads to financial crisis everywhere. Ex. The US economic crisis.
For businesses, this globalization process has produced many opportunities. How?
Firms can expand their revenues by selling around the world and/or reduce their costs by producing in nations where key inputs, including labor, are cheap.
What are the two macro factors that underlie the trend towards greater globalization (drivers of globalization)?
First is the decline in barriers to the free flow of goods, services and capital that has occurred since the end of WWII. Second is technological change, particularly the dramatic development in recent decades in communications, information processing and transportation technologies.
Figure 1.1, Average Annual % Growth in Volume of Exports and World GDP (1950-2010) implies what?
First, more firms are dispersing parts of their production process to different locations around the globe to drive down production costs and increase production quality. Second, the economies of the world's nation-states are becoming more intertwined- nations are becoming increasingly dependent on each other for important goods and services. Third, the world has become significantly wealthier since 1950, and the implications is that rising trade is the engine that had helped to pull the global economy along.
A fairly dramatic change in the demographics of the global economy has occurred over the past 30 years. What is four stylized facts of the 1960s that are now drastically changing?
First, the US dominance in the world economy and world trade picture. Second, the US dominance in world foreign direct investment. Third, the dominance of large, multinational US firms on the international business scene. Fourth, roughly half the globe (communist world) was off-limits to Western international business. A shift in the economic geography of the world is now under way.
In addition to the globalization of production, technological innovations have facilitated the globalization of markets. How?
For example, due to the tumbling costs of shipping goods by air, roses grown in Ecuador can be cut and two days later be sold in NY. This has given rise to an industry in Ecuador that did not exist 20 years ago. Low-cost jet travel has resulted in the mass movement of people between countries. This has reduced the cultural distance between countries and is bringing about some convergence of consumer tastes and preferences. Creating a worldwide culture.
What are some of the global institutions that have been created to help perform these functions in the global marketplace?
General Agreement on Tariffs and Trade (GATT), its successor, the World Trade Organization (WTO); the International Monetary Fund (IMF), the World Bank, and the United Nations (UN)
What are the Forces in the Global Economy?
Global organizations -GATT, WTO, IMF, UN, etc. Reduced trade barriers Technological change -Communication -----Internet -----Entertainment -----Telecom -Transportation -Automation
In the past, many of the barriers to international trade took the form of what?
High tariffs on imports of manufactured goods. The typical aim of such tariffs was to protect domestic industries from foreign competition. This depressed world demand and contributed to the Great depression of the 1930s.
What is a companies hope when they globalize a product?
Hope to lower their overall cost structure or improve the quality or functionality of their product offering, thereby allowing them to compete more effectively.
Chapter 1 shows what?
How the world economy is becoming more global and reviews the main drivers of globalization.
The globalization of the world economy has resulted in what? (In terms of the US)
In a relative decline in the dominance of US firms in the global marketplace.
Why do Boeing and Apple outsource much of their production to foreign suppliers?
In an attempt to boost quality, lower costs, and increase flexibility.
Chapter Summary Note:
In the 1960s, the US economy was dominant in the world, US firms accounted for most of the foreign direct investment in the world economy, US firms dominated the list of large multinationals, and roughly half the world- the centrally planned economies of the Communist world- was closed to Western businesses.
As markets globalize and an increasing proportion of business activity transcends national borders, what is needed?
Institution to help manage, regulate and police the global marketplace and to promote the establishment of multinational treaties to govern the global business system.
Define the International Monetary Fund (IMF).
International institution set up to maintain order in the international monetary system. The IMF is often seen as the lender of last resort to nation-states whose economies are in turmoil and whose currencies are losing value against those of other nations.
Define the World Bank.
International institution set up to promote general economic development in the world's poorer nations. Less controversial than the IMF. It has focused on making low-interest loans to cash-strapped governments in poor nations that wish to undertake significant infrastructure investments.
Define the General Agreement on Tariffs and Trade (GATT).
International treaty that committed signatories to lowering barrier to the free flow of goods across national borders and led to the WTO.
Why has containerization revolutionized the transportation business?
It has significantly lowered the cost of shipping goods over long distances.
What are some of the issues anti-globalization protests against?
Job losses in industries under attack from foreign competitors, downward pressure on the wage rates of unskilled workers, environmental degradation, and the cultural imperialism of global media and multinational enterprises.
Concern: Free trade encourages firms from advanced nations to move manufacturing facilities to where?
Less developed countries that lack adequate regulations to protect labor and the environment from abuse by the unscrupulous.
Define Globalization of Markets.
Moving away from an economic system in which national markets are distinct entities, isolated by trade barriers and barriers of distance, time and culture, and toward a system in which national markets are merging into one global market. Falling barriers to cross-border trade have made it easier to sell internationally. Tastes and preferences of consumers in different nations are beginning to converge on some global norm, thereby helping to create a global market.
Define International Trade.
Occurs when a firm exports goods or services to consumers in another country.
Chapter Summary Note:
One of the most dramatic developments of the past 20 years has been the collapse of communism in astern Europe, which has created enormous long-run opportunities for IBs. In addition, the move toward free market economies in China and Latin America is creating opportunities (and threats) for Western IBs.
What does OCED stand for?
Organization for Economic Cooperation and Development
Increasingly companies are taking advantage of modern communications technology, particularly the Internet, to do what?
Outsource service activities to low-cost producers in other nations. Example: radiology work, software design (these two can be considered 24-hour running machine. Work is done in the US and then worked on in India while they are asleep and vise versa), and customer call centers.
Chapter Summary Note:
Over the past three decades, we have witnessed the globalization of market and production.
What has allowed businesses, small and large, expand their global presence at a lower cost than ever before?
The Internet and WWW.
Chapter Summary Note:
The benefits and costs of emerging global economy are being hotly debated among businesspeople, economists, and politicians. The debate focuses on the impact of globalization on jobs, wages, the environment, working conditions, and national sovereignty.
What is much of the motivation for Foreign Direct Investments by non-US companies?
The desire to disperse production activities to optimal locations and to build a direct presence in major foreign markers. Firms have shifted labor-intensive manufacturing operations from their home markets to developing nations where labor costs are lower
In terms of transportation technology, what has effectively shrunk the globe?
The development of commercial jet aircraft and super-freighters and the introduction of containerization.
Define Moore's Law.
The power of microprocessor technology doubles and its costs of production fall in half every 18 months.
What has allowed many medium and small sized businesses to become increasingly involved in international trade and investment?
The rise of the Internet- it has lowered the barriers small firms face in building international sales.
What are two other important trends in the changing of the FDI picture?
The sustained growth in cross-border flows of foreign direct investment that occurred during the 1990s and the importance of developing nations as the destination of foreign direct investment. The sustained flow of foreign investment into developing nations is an important stimulus for economic growth in those countries.
Define the term, Stock of Foreign Direct Investment
The total accumulated value of foreign-owned assets at a given time.
During 1989 and 1991, what happened in the Communist world?
Throughout eastern Europe and eventually in the Soviet Union itself, Communist Party government collapsed and was replaced by 15 independent republics.
What are the four main purposes of the UN?
To maintain international peace and security, to develop friendly relations among nations, to cooperate in solving international problems and in promoting respect for human rights, and to be a center for harmonizing the actions of nations.
Define Globalization of Production.
Trend by individual firms to disperse parts of their productive processes to different locations around the globe to take advantage of differences in cost and quality of factors of production (such as labor, energy, land and capital).
Chapter Summary Note:
Two factors seem to underlie the trend toward globalization: declining trade barriers and changes in communication, information, and transportation
