Globalization Report

Globalization

Learning objectives

Explain why it is important for

managers today to have a global perspective.

Explain the three components of globalization
Describe its effects on markets and production
Explain how technology and innovation in transportation have speeded up globalization
Discuss pros and cons of globalization

This chapter is dedicated to introducing the student to the emergence of a new and integrated world of business in which the traditional barriers to cross-border trade and investment including distance, time zones, language, differences in national government regulation, culture and business systems recede in significance due to globalization. The discussion of contemporary issues in international business illustrates the unique challenges of international business. A review of macro-economic and political changes that have taken place in the last 30 years highlights the issues that a typical manager must address in a global market. Information technology and technological changes have put global markets within the reach of small firms in remote locations. In spite of all its benefits, globalization is not a panacea. Critics of globalization point out that it has adverse effects on some firms and individuals.

The opening case chronicles the meteoric rise of Wal-Mart from its humble Arkansas beginnings in 1962 to a global retailing giant with $218 billion in sales in 2002.

The closing case, Ecuadorian Valentine Roses, follows a rose from Ecuador to New York while describing the hazardous working conditions in Ecuador and the growing backlash among European consumer groups.

WebeSource http://www.cnn.com/2004/US/Southwest/01/08/levi.s.closing.ap/

http://www.nacsonline.com/NACS/News/Daily_News_Archives/July2003/nd0722036.htm

http://www.businessweek.com/magazine/content/03_16/b3829031_mz007.htm

OUTLINE OF CHAPTER 1: GLOBALIZATION

Opening Case: Wal-Mart’s Global Expansion

Introduction

What is globalization?

The Globalization of Markets

The Globalization of Production

The Emergence of Global Institutions

Drivers of Globalization

Declining Trade and Investment Barriers

The Role of Technological Change

The changing demographics of the Global Economy

The Changing World Output and World Trade Picture

The Changing Foreign Direct Investment Picture

The Changing Nature of the Multinational Enterprise

The Changing World Order

The Global Economy of the 21st Century

The Globalization Debate

Anti-globalization Protests,

Globalization, Jobs, and Income

Globalization, Labor Policies, and the Environment

Globalization and National Sovereignty

Globalization and the World’s Poor

Managing in the global marketplace

Chapter Summary

Critical Discussion Questions

Research Task

Closing Case: Ecuadorian Valentine Roses

TEACHING SUGGESTIONS

One interactive approach to getting this class started is to ask a number of questions related to the country of origin of every day items that they see around themselves for example the clothes or shoes that they wear. Where were your shoes manufactured? (Note: Nike is an American brand which is manufactured by contract manufacturers in Southeast Asia) Where was your watch manufactured? Where were your jeans made? (On Jan 8th of 2004 the last two Levi plants in North America closed and moved its manufacturing operations to China. See web reference above). If you had to take off all your clothes that were not made in North America (or any other particular country), do you think you would be left wearing very much? Why are so many of our clothes made outside North America? (Note: The labor content of the manufacturing processes used for making most apparel is relatively high, and this makes it economically attractive to manufacture these items in locations where the labor costs are low.)

Another interactive way to begin is by discussing the type of car they or their families own. Does it make sense any more to talk about the nationality of a car? Is SAAB a Swedish car? Saab is partially owned by General Motors of USA, uses many mechanical parts imported into Sweden from GM in Germany, and assembles its cars in Sweden for sale in USA. Is a Mercedes Benz assembled in Alabama an American car? Is a Pontiac assembled in South Korea a Korean car?

TRANSITION

After this brief warm-up has helped you get the students thinking about globalization, you can transition to the opening case by asking:

How many of you shop at Wal-Mart?
Why do you shop at Wal-Mart?
Why do you think Wal-Mart has grown so successfully, both in North America and internationally?
You may refer to Costco recent international expansion (see web reference on US retailers moving their expansion overseas, above)

LECTURE OUTLINE FOR CHAPTER

This teaching outline follows the Power Point presentation provided along with this instructor’s manual.

Introduction

This chapter introduces the student to the emergence of a new and integrated world of business. The traditional barriers to cross-border trade and investment including distance, time zones, language, differences in national government regulation, culture and business systems recede in significance due to globalization. Building on this chapter the next chapter focuses on the differences in political, economic, and legal infrastructures across countries.

Slide 1-2 Wal- Mart’s global Expansion

The opening case describes Wal-Mart’s global expansion over the past several years. The effects of globalization are particularly noticeable in the retail industry. This industry has had to learn to localize products or packaging to meet the demands and needs of locals in the different countries. A question to pose to the students would be: Why has Wal-Mart a home grown US company been pursuing growth opportunities internationally?

By 1990 Wal-Mart realized that opportunities for growth were becoming limited. It had stores in all 50 states. The domestic market would soon be saturated. Growth opportunities were outside the US. Also increasingly more of the products that were stocked were made in these overseas markets.

Wal-Mart had trouble with international expansion initially. The first country it operated in outside of the U.S. was Mexico. Here it could not replicate its efficient distribution system because of bad roads poor infra structure, differing labor values, lack of leverage with local suppliers etc. As a result costs went up. Further, Wal-Mart did not carry localized products to suit Mexican tastes, needs and environment. Wal-Mart carried products that were popular in the US. However, the company learnt quickly from its mistakes and was emboldened to open stores in eight other countries. Today Wal-Mart is the largest retailer in the world.

Slide 1-3 What is globalization?

Globalization refers to a shift toward a more integrated and interdependent world economy.

Globalization has 3 components:

The globalization of markets

The globalization of production and

The emergence of global institutions

Slide 1-4 Globalization of markets.

In many markets the emergence of a global norm in terms of customer expectations has made it possible to sell standardized products all over the world.

The global acceptance of Coca-Cola, Levi's jeans, Sony Walkmans, and McDonald's hamburgers are all examples of the emergence of global markets.

Slide 1-5 Globalization of markets.

In spite of globalization of the markets for some products, there remain significant differences across most national markets. Germany still leads in per capita beer consumption, with a local pub on almost every corner and in some cities, women selling beer out of their front windows to passers by on the street. The French lead in wine consumption, and the consumption of wine is a natural part of life anywhere in France. Italians eat more pasta per capita than any other nationality.

These differences are expected to persist and managers need to match their strategies to the unique features of each national market.

Slide 1-6 Globalization of markets.

In addition to the need for marketing strategies customized to the needs of local consumers, managers must be sensitive to other forces that make national markets unique.

Government regulations and the exchange rates for local currency are some of the additional factors that shape the work of managers in global markets.

Slide 1-7 Globalization of production

Today it is common for companies to disperse parts of their production processes to different locations around the globe to take advantage of national differences in the cost and quality of factors of production.

While part of the rationale is based on costs and finding the best suppliers in the world, there are also other factors. Boeing’s manufacture of commercial aircraft is dispersed all over the world because of the desire of many national governments to develop expertise in the manufacture of aircraft. For example, Boeing manufactures aircraft parts in China because the Chinese government will not buy Boeing’s planes unless some domestic Chinese firms are contracted to supply portions of the plane - otherwise they will find another supplier (Airbus) who is willing to support local industry.

Slide 1-8 Global production.

The positioning of Swan Optical’s production activities illustrates the dispersion of production activities across the globe.

Slide 1-9 Increase in volume of world trade and production

Fig 1.1

Slide 1-10 Emergence of global institutions

As globalization increased the interconnection and interdependence of countries and companies across the world, there was an increased need for global institutions that govern the flow of goods and services between these entities.

The World Trade Organization (WTO) is primarily responsible for policing the world trading system and making sure nation-states adhere to the rules laid down in trade treaties. The International Monetary Fund (IMF) and the World Bank were created to maintain order in the international monetary system and promote economic development. The United Nations (UN) was created to preserve peace through international cooperation.

Slide 1-11 Global drivers

The two macro factors that seem to underlie and drive the trend towards greater globalization are first, the decline in the barriers to free flow of goods, services, and capital and second, dramatic technological change in communications, information processing, and transportation technologies.

Slide 1-12 Pattern of declining tariffs

Table 1.1

Slide 1-13 Declining barriers to trade

Globalization is facilitated by the reduction in trade barriers. After WWII, the industrialized countries of the West started a process of removing barriers to the free flow of goods, services, and capital between nations. First, under the General Agreement of Trade and Tariffs (GATT), over 140 nations negotiated even further decreases in tariffs and made significant progress on a number of non-tariff issues (e.g. intellectual property, trade in services). Subsequently, with the establishment of the WTO, a mechanism now exists for dispute resolution and the enforcement of trade laws.

The growth of foreign direct investment is a direct result of nations liberalizing their regulations to allow foreign firms to invest in facilities and acquire local companies. With their investments, these foreign firms often also bring expertise and global connections that allow local operations to have a much broader reach than would have been possible for a purely domestic company.

Slide 1-14 The changing pattern of world output and trade

The changing pattern of world output and trade

As the progressive reduction of tariffs were orchestrated first by GATT and then by WTO, the total volume of international trade increased and the relative proportions of outputs and exports from the different countries changed. The dominance of the United States was reduced significantly as nations like Japan, South Korea, and China began to export. Table 1.2

Slide 1-15 Percentage share of total FDI stock

Percent share of FDI stock Fig 1.3

Slide 1-16 Volume of FDI inflows

Fig 1.4

Slide 1-17 The role of technological change

Improved information processing and communication allow firms to have better information about distant markets and coordinate activities worldwide. The cost of computers as well as the cost of long-distance and international communications has plummeted in the last 10 years.

The explosive growth of the World Wide Web and the Internet provide a means to rapid communication of information and the ability of firms and individuals to find out about what is going on worldwide for a fraction of the cost and hassle as was required only a couple of years ago.

Improvements in transportation technology, including jet transport, temperature controlled containerized shipping, and coordinated ship-rail-truck systems have made firms better able to respond to international customer demands.

Slide 1-18 Shrinking globe

Fig 1.2

Slide 1-19 Changing demographics of the world economy

The U.S. share of world output has declined dramatically in the past 30 years, and a much more balanced picture is now developing among industrialized countries. Looking ahead into the next century, the share of world output of what are now referred to as “developing countries” is expected to greatly surpass that of the current “industrialized countries.”

The source and destinations of FDI has also dramatically changed over recent years, with the US and industrialized countries becoming less important (although still dominant) as developing countries are becoming increasingly considered as an attractive and stable location for investment.

A number of large multinationals are now non-U.S. based, and many are recognizable brand names in the worldwide (e.g. Sony, Philips, Toshiba, Honda, BMW). The new large multinationals are not only are originating in other developed countries, but there are an increasing number of multinationals based in developing countries.

Slide 1-20 National origin of largest multinationals.

Many economists, politicians and business leaders seem to think globalization is desirable. Globalization stimulates economic growth, raises the incomes of consumers, and helps to create jobs in all countries that choose to participate in the global economy. (Your text book is strongly in favor of free trade). (Fig 1.5)

Globalization encourages each country to specialize in the production of those goods and services that can be made most efficiently using the raw materials and skills available in that country. This increases the overall efficiency of the world trade system.

Slide 1-21 Environmental performance and income

Environmental performance and income. It is argued that tougher environmental regulations and stricter labor standards go hand in hand with economic progress.

Slide 1-22, Slide 1-23 Globalization debate-Pro and con

There are many critics of globalization who believe that the benefits of globalization are outweighed by the costs.

In developed countries, labor leaders lament the loss of good paying jobs to low wage countries. When the NAFTA agreement was signed, some politicians warned of a hearing a “giant sucking sound” as jobs left the USA for Mexico.

Even if the jobs in developed countries are not lost, globalization creates downward pressure on wages in industries where overseas production is a viable option. The availability of jobs for unskilled workers is clearly threatened when those jobs can be more efficiently performed elsewhere.

Lower labor costs are only one of the reasons why a firm may seek to expand in developing countries. These countries may also have lower standards on environmental controls and workplace safety which permit the creation of “sweatshops”. This situation allows cost-cutting and cost-efficiency but over time it has a massive negative effect on the environment and living conditions.

With the development of the WTO and other multilateral organizations such as the EU and NAFTA, countries and localities necessarily cede some authority over their actions. If the USA wanted to “protect its domestic lumber industry” by preventing imports of lumber from Canada, the dispute would likely be settled by an international arbitration panel set up by the NAFTA agreement or the WTO. Because of its trade agreements, the USA would likely be forced to open its markets to importation of lower cost, higher quality Canadian lumber. The critics of globalization argue that this amounts to a loss of sovereignty.

ANSWERS TO CRITICAL DISCUSSION QUESTIONS IN CHAPTER 1

QUESTION 1: Describe the shifts in the world economy over the last 30 years. What are the implications of these shifts for international businesses based in Britain, North America, and Hong Kong?

ANSWER 1: Globalization has led to an ever more integrated world economy over the past 30 years. There has been a significant shift away from the USA and Western European countries as being dominators of world business. While the role of these countries is still large, developing countries and Asian countries are becoming increasingly active and aggressive in international trade and investment. Significant implications for British firms involve their need to look beyond Europe and America for investment and opportunities. Consumer spending power is growing the most quickly in developing countries. British firms also face the opportunity (and the threat) of attracting Asian firms interested in Britain as a launch pad for the European market. For North American firms, the same holds true, although the importance of the increasing prosperity in Latin America suggests a potentially huge market in “their backyard.” Hong Kong, while losing its “independence”, is perceived as the gateway to the immense market of mainland China. While the free market freedoms Hong Kong firms have enjoyed are now under question, the access to China is improving along with the move towards a market economy within China. International businesses based in all three locations are facing new opportunities and threats.

QUESTION 2: "The study of international business is fine if you are going to work in a large multinational enterprise, but it has no relevance for individuals who are going to work in small firms." Evaluate this statement.

ANSWER 2: Persons who believe in this view, and the firms that they work for, may find that they do not achieve their full potential (at best) and may ultimately fail because of their myopia. As barriers to trade decrease and state of the art technological developments take place throughout the world, new opportunities and threats exist on a worldwide basis. The rise of the mini-multinationals suggests there are global opportunities for even small firms. But staying attuned to international markets isn't only important from the perspective of seeking profitable opportunities for small firms; it can also be critical for long-term competitive survival. Firms from other countries may be developing products that, if sold internationally, may wipe out small domestic competitors. Scanning international markets for the best suppliers is also important for small firms, for if a domestic competitor is able to tap into a superior supplier from a foreign country, it may be able to seriously erode a small firm's competitive position before the small firm understands the source of its competitor's competitive advantage and can take appropriate counter actions.

QUESTION 3: How have changes in technology contributed towards the globalization of markets and of production? Would the globalization of products and markets have been possible without these technological changes?

ANSWER 3: Technological changes have significantly contributed to the globalization of products and markets, and accelerated the creation of a global village. While increasing globalization of markets has been taking place since before either Marco Polo or Christopher Columbus traveled across the globe in search of trade, recent technological developments have brought the world closer together more quickly than at any time in the past. Developments in information processing and communication have decreased the costs of managing a global production system, and improvements in transportation have made the shipment of goods timelier and less costly than at any time in the past. International firms can locate facilities wherever it is most advantageous, coordinate the activities between facilities, and ship products to customers worldwide more cost effectively than at any time in the past.

QUESTION 4: “Ultimately, the study of international business is no different from the study of domestic business. Thus, there is no point in having a separate Assignment on international business.” Evaluate that statement.

ANSWER 4: The truth is that if an international business attempts to utilize the same business techniques that were effectively domestically on the international scene, it is quite likely to fail. The annals of corporate business are lined with examples of that concept, from small companies struggling to make an impact to large multinationals like Procter and Gamble, who failed in Japan when they first introduced disposable diapers to that market. International business is different in many of the ways mentioned here: 1) countries differ, 2) the range of problems a manager faces is greater and more complex, 3 the limits imposed by governmental intervention and the global trading system complicate international business, and 4) international transactions require converting funds and being susceptible to exchange rate changes. A separate Assignment on international business can provide an understanding of these difficulties, and how conducting international business requires consideration of issues not typically covered in other Assignments.

QUESTION 5: How might the Internet and the associated World Wide Web affect international business activity and the globalization of the world economy?

ANSWER 5: The ability of firms and individuals to both market their products or services, and find out about interesting new products or services worldwide, is greatly enhanced by the World Wide Web. Using this as an initial point of contact, we can imagine how this could then initiate new flows of trade and investment. Consumers can find new products of interest that are not available in local retail outlets, and then simply order them over the internet. Firms will find that they have an increasingly global customer base, and that current distribution systems may be inadequate or inappropriate.

QUESTION 6: If current trends continue, China may emerge as the world’s largest economy by 2050. Discuss the possible implications for such a development for the world trading system, the world monetary system, and the business strategy of today’s European and US-based global corporations.

ANSWER 6: The world trading system would clearly be affected by such a development. Currently China enjoys a somewhat privileged status within the World Trade Organization as a “developing” country. Such a rise to eminence, however, would clearly force it to become a full and equal member, with all the rights and responsibilities. China would also be in a position to actively affect the terms of trade between many countries. On the monetary front, one would expect that China would have to have fully convertible and trading currency, and it could become one of the “benchmark” currencies of the world. From the perspective of Western global firms, China would represent both a huge market, and potentially the home base of some very capable competitors.

TEACHING SUGGESTIONS FOR THE CLOSING CASE OF CHAPTER 1

QUESTION 1: How has participation in the international rose trade helped Ecuador’s economy and its people? How has the rise of Ecuador as a center for rose growing benefited consumers in developed nations who purchase the roses? What do the answers to these questions tell you about the benefits of international trade?

ANSWER 1: Participation in the international rose industry has helped the Ecuadorian rose farms create tens of thousands of jobs. The revenues and taxes from rose growers have been used to build vital infrastructure like schools, roads, an airport, and irrigation systems. Individual workers at the rose farms earn well above Ecuador’s minimum wage of $120/month and their jobs provide them with healthcare and pension. By employing women the rose industry has created a social revolution in Ecuador because women now much more control over their family’s spending.

Consumers in developed nations get the opportunity to buy Ecuadorian roses which are now considered the Rolls Royce of roses. They have huge heads, unusually vibrant colors and are excellent premium products for Valentine’s Day, Mother’s Day and other occasions when roses are appropriate.

International trade can yield benefits for both the country that produces the goods or services as well as the country that consumes them.

QUESTION 2: Why do you think that Ecuador’s rose industry only began to take off 20 years ago?

ANSWER 2: The rose is a perishable product. When a rose is grown in Ecuador for sale in international markets such as North America and the European Union, it is imperative that the rose is transported rapidly and under the right conditions so that it can attract a premium price in the market. The rose industry in Ecuador probably began to take off 20 years ago when developments in refrigeration technology and air transportation technology made it feasible for a rose producer in Ecuador to serve a market as far away as North America.

The Ecuadorian rose industry has grown rapidly because it provides an attractive product in response to a strong and steady market demand.

QUESTION 3: To what extent can the alleged health problems among workers in Ecuador’s rose industry be laid at the feet of consumers in the developed world and their desire for perfect Valentine’s Day roses?

ANSWER 3: It is difficult to make a direct connection between consumers in the developed world and the alleged health problems of workers in Ecuador’s rose industry. To be sure, an indirect connection exists because the roses in Ecuador are grown in response to demand in developed countries. However, that demand pre-dates the Ecuadorian rose industry and would probably be just as strong if Ecuador stopped producing roses. If the alleged health problems of the rose industry workers are indeed linked to toxic exposure at the farms, the large growers who permit the use of chemicals without protective gear and the chemical manufacturers who could do a better job of educating users about the toxicity of the chemicals must bear the primary responsibility for the health problems.

QUESTION 4: Do you think governments in the developed world should place trade sanctions on Ecuador roses if reports of health issues among Ecuadorian rose workers are verified? What else might they do to improve the situation in Ecuador?

ANSWER 4: Placing trade sanctions on Ecuador roses is one option that governments in the developed world have if the health issues are verified. The impact of these sanctions would be most severe on workers in the rose farms because they would lose their jobs. Another option is to threaten sanctions if protective steps are not introduced in a staged and progressive manner. This option has the following advantages: it would give the growers some time to get the appropriate protective gear; it would not result in immediate job losses for the workers; and finally as long as the situation is monitored rigorously it would eventually eliminate toxic exposure in the rose farms.

STUDENT EXERCISES FOR CHAPTER 1

global EDGE™ Exercise Questions http://globalEDGE.msu.edu/

Answers to Exercise Questions

Chapter 1 – Exercise 1

Numerous statistical databases and websites provide population information. Any of these sources (including the CIA World Fact book or the globalEDGE Country Insights pages) could be used to provide the answer to the exercise. For example, if the search term “population” is entered into the search box, located at http://globaledge.msu.edu/ibrd/ibrd.asp , the first resource that comes up is World Population Data Sheet located at the Population Reference Bureau (http://www.prb.org/). This resource is found under the globalEDGE category “Research: Statistical Data Sources”

Search Phrase: “Population”

Resource Name: World Population Data Sheet

Website: http://www.prb.org/

globalEDGE™ Category: “Research: Statistical Data Sources”

Chapter 1 – Exercise 2

The FDI Confidence Index is a study published by the consulting firm A.T. Kearney based on surveys of CEOs. Since it ranks countries in terms of their attractiveness, it’s listed under the category of “Research: Rankings”. It can be reached by either browsing to this category, or by searching for the phrase FDI Confidence using the search box located at http://globaledge.msu.edu/ibrd/ibrd.asp

Search Phrase: “FDI Confidence”

Resource Name: A.T. Kearney: FDI Confidence Index

Website: http://www.atkearney.com/

globalEDGE™ Category: “Research: Rankings”