Module 1

Globalization
Dr/Ghada Mohamed Abdel Fattah

e-mail: [email protected]
 Global Business Environment

Copyright © 2010 Pearson Education, International Business 5e Chapter 1 - 2

Inc. publishing as Pearson
 Globalization Involves Us All

We experience international
transactions daily

Imports and exports reach

even remote areas

Technology and e-biz

promote trade

Consumers and companies

pull markets
Copyright © 2010 Pearson Education,
closer
International Business 5e Chapter 1 - 3
Inc. publishing as Pearson
Copyright © 2010 Pearson Education, International Business 5e Chapter 1 - 4
Inc. publishing as Pearson
 International Business

Copyright © 2010 Pearson Education, Chapter 1 - 5

Inc. publishing as Pearson International Business 5e
Multinational Corporations
MNCs
• A corporation which has possessions and other
facilities in at least one country other than its home
country.

• MNCs have branches established in different

countries and a headquarters, from where they’ll
manage the other offices.

• MNCs can also be called stateless companies, as

they are not concentrated on a single state .
Multinational Corporations
 Globalization

Trend toward greater economic, cultural, political

and technological interdependence among national
institutions and economies

Globalization of Globalization of
markets production
Dispersal of production
Convergence in buyer
activities worldwide to
preferences in markets
minimize costs or
around the world
maximize quality

Copyright © 2010 Pearson Education, International Business 5e Chapter 1 - 8

Inc. publishing as Pearson
 Benefits of Globalization

Globalization Globalization
of markets of production

• Reduces marketing costs • Access lower-cost labor

• New market opportunities • Access technical expertise
• Levels income stream • Access production inputs

Copyright © 2010 Pearson Education, International Business 5e Chapter 1 - 9

Inc. publishing as Pearson
 Challenges to Business

Physical Digital Reputational

security security risk

Examine company Guard proprietary Require ethical and

vulnerability and information and lawful behavior from
create a disaster confidential all employees and
recovery plan communications business partners

Copyright © 2010 Pearson Education, International Business 5e Chapter 1 - 10

Inc. publishing as Pearson
 The Emergence of Global Institutions 1

Global Institutions
• Manage, regulate, and police the global marketplace.
• Promote the establishment of multinational treaties to govern the global
business system.
• Created by voluntary agreement between individual nation-states.

• As markets globalize and an increasing proportion of business activity

transcends national borders, institutions are needed to help manage, regulate,
and police the global marketplace and to promote the establishment of
multinational treaties to govern the global business system.

Q: What are the major organizations governing International Trade?

• Try visit:
https://globaledge.msu.edu/

© McGraw Hill 11
 The Emergence of Global Institutions 2

1- World Trade Organization (WTO)

• Polices world trading system and ensures nation-states adhere to the
rules established in WTO treaties.
• Succeeded the General Agreement on Tariffs and Trade (G ATT).
• 164 member nations accounted for 98 percent of world trade (2020).

• Without an institution such as the WTO, the globalization of markets and

production is unlikely to have proceeded as far as it has.
• However, as we look closely at the WTO, critics charge that the organization
is taking over the national sovereignty of individual nation-states.

© McGraw Hill 12
 The Emergence of Global Institutions 3

2- International Monetary Fund (IMF)

• Maintains order in the international monetary system.
• Lender of last resort.
• Requires nation-states to adopt specific economic policies
in return for loans.

3- World Bank
• Promotes development using low-interest loans.
• Seen as less controversial than I MF.

© McGraw Hill 13
 The Emergence of Global Institutions 4

4- United Nations (UN)

Committed to maintaining international peace and security on
basis of UN Charter:
• Develops friendly relations among nations.
• Promotes cooperation in solving international problems.
• Promotes respect for human rights.
• A center for harmonizing the actions of nations.

Includes 193 member countries.

Although the UN is perhaps best known for its peacekeeping role, one of the organization’s
central mandates is the promotion of higher standards of living, full employment, and
conditions of economic and social progress and development—all issues that are central to
the creation of a vibrant global economy. As much as 70 percent of the work of the UN
system is devoted to accomplishing this mandate.

© McGraw Hill 14
 The Emergence of Global Institutions 5

5- Group of Twenty (G20)

• Comprised of finance ministers and central bank governors of the
19 largest world economies plus the EU and European Central
Bank.
• Represents 90 percent of global GDP.
• Became a forum for a coordinated policy response to the financial
crisis of 2008 and 2009.
• 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 European Union and the European
Central Bank. Collectively, the G20 represents 90 percent of global
GDP and 80 percent of international global trade.

© McGraw Hill 15
 Drivers of Globalization 1

Two Macro Factors Toward Greater Globalization

1. Decline in barriers to free flow of goods, services, and capital:
The advanced industrial nations of the West committed
themselves after World War II to progressively reducing
barriers to the free flow of goods, services, and capital among
nations.10 This goal was enshrined in the General Agreement
on Tariffs and Trade.

2. Technological change.

© McGraw Hill 16
Globalization Drivers I:
Remove barriers to trade
and investment
 Drivers of Globalization 2

I- Declining Trade and Investment Barriers

International trade occurs when a firm exports goods or services to
consumers in another country.

Foreign direct investment (F DI) occurs when a firm invests resources in

business activities outside its home country.

• During 1920s and 1930s, many nations put up barriers to international

trade to protect domestic industries.

After W W II, advanced Western countries reduced barriers.

• GATT, Uruguay Round, and W TO.
The advanced industrial nations of the West committed themselves after World War II to progressively reducing barriers
to the free flow of goods, services, and capital among nations.10 This goal was enshrined in the General Agreement on
Tariffs and Trade (see Table 1.1 on the next slide).

The most recent negotiations to be completed, known as the Uruguay Round, were finalized in December 1993. 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 World Trade Organization to
police the international trading system.

© McGraw Hill 18
 Table 1.1 Average Tariff Rates on Manufactured
Products as Percentage of Value

Country 1913 1950 1990 2018

France 21 percent 18 percent 5.9 percent 3.9 percent
Germany 20 26 5.9 3.9
Italy 18 25 5.9 3.9
Japan 30 -- 5.3 2.5
Netherlands 5 11 5.9 3.9
Sweden 20 9 5.9 3.9
United Kingdom -- 23 5.9 3.9
United States 44 14 5.7 3.1

Sources: The 19 13 to 1990 data are from “Who Wants to Be a Giant?” The Economist: A Survey of the
Multinationals, June 24, 1995, pp. 3 to 4. The 2018 data are from the World Tariff Profiles 2019, published by the
World Trade Organization.

© McGraw Hill 19
 Drivers of Globalization 3

Declining Trade and Investment Barriers continued

• Trade in goods and services has been growing
faster than world output for decades.

• By 2019, sales of foreign affiliates of multinational

corporations reached $27 trillion.
Implications of fast-paced volume of world trade:
• More companies dispersing parts production.
• Economies of nation-states becoming more intertwined.
• World becoming significantly wealthier.
• The globalization of markets and production and the
resulting growth of world trade, foreign direct investment,
and imports all imply that firms are finding their home
markets under attack from foreign competitors.

© McGraw Hill BC F C/Shutterstock 20

 Figure 1.1 Value of World Merchandised
Trade and World Production 1960 to 2019

Access the text alternative for slide images.

© McGraw Hill Sources: World Bank, 2020; World Trade Organization, 2020; United Nations, 2020. 21
 Drivers of Globalization 4

Declining Trade and Investment Barriers continued

• Some firms finding home markets under attack from foreign
competitors.
• Global financial crisis of 2008 to 2009 and drop in global output
that occurred led to more calls for trade barriers to protect jobs
at home.
• Resulting trade wars, such as one between U.S. and China.
• May slow the rate of globalization and production.

COVID-19 global pandemic has had a significant impact on global supply

chains, and thus on globalization.

The World Trade Organization has forecasted that due to the ongoing COVID-19 pandemic,
world trade will slump by as much as one third in 2020, while cross border investment may
fall by 40%.

© McGraw Hill 22
 Globalization Drivers II:
Technological Innovation

Email and Internet, intranets, Transportation

videoconferencing and extranets advancements

Better Improved More efficient,

coordination communications dependable
and control and management shipping

Copyright © 2010 Pearson Education, International Business 5e Chapter 1 - 23

Inc. publishing as Pearson
 Drivers of Globalization 5

II- Role of Technological Change

1- Communications.
• Since World War II, microprocessor created explosive growth of
high-power, lost-cost computing.
• Microprocessors also advanced telecommunications.
• Moore’s Law: as costs of microprocessors fall, their power
increases.

• Moore’s law: The power of microprocessor technology doubles and

its costs of production fall in half every 18 months.

© McGraw Hill 24
 Drivers of Globalization 6

Role of Technological Change continued

2- The Internet.
• In 2019, 4.5 billion users (58 percent of global population).
• Reduces constraints of location, scale, and time zones.

3- Transportation Technology.
• Commercial jets, super-freighters.
• Innovation of containerization has significantly lowered shipping
costs.
• Containerization has revolutionized the transportation business,
significantly lowering the costs of shipping goods over long distances.
Because the international shipping industry is responsible for carrying
about 90 percent of the volume of world trade in goods, this has been
an extremely important development.

© McGraw Hill 25
 Drivers of Globalization 7

Role of Technological Change continued

Implications for the Globalization of Production.

• Lower transportation costs makes geographically dispersed
production system more economical; allows firms to better
respond to demand shifts.
Implications for the Globalization of Markets.
• Low-cost communication networks create electronic global
marketplace.
• Low-cost transportation makes shipping products around the world
economical.
• Reduced cultural distance.
• Converging consumer tastes and preferences.
Despite these trends, we must be careful not to overemphasize their importance. While modern
communications and transportation technologies are ushering in the “global village,” significant
national differences remain in culture, consumer preferences, and business practices.

© McGraw Hill 26
Globalization Then and Now
 The Changing Demographics of the Global
Economy 1

I- Global Economy: Early 1960s

• U.S. dominated the world economy, world trade.

• U.S. dominated world FDI.

• U.S. MNEs dominated international business.

• About half the world was off limits to Western international

business.

• U.S. was dominant in industrial power, accounting for about 38 percent of

world manufacturing output
© McGraw Hill 28
 The Changing Demographics of the Global
Economy 2

II-Today:
Today too much has changed
• U.S. accounts for only 24 percent.

• Germany, France, the U.K., and Canada had similar decline.

• Rapid economic growth now in countries like China, India, Russia, and
Brazil.

• Chinese economy could surpass U.S. within a decade.

• Further relative decline by the U.S. and others is likely.

Overall, the World Bank has estimated that today’s developing nations may account for more than 60 percent
of world economic activity by 2030, while today’s rich nations, which currently account for more than 55
percent of world economic activity, may account for only about 38 percent.

© McGraw Hill 29
 Table 1.2 Changing Demographics of World
Output and World Exports

Share of World Share of Share of

Output in 1960 World Output World Exports
Country (%) Today (%) Today (%)
United States 38.3 percent 24.0 percent 8.2 percent
Germany 8.7 4.6 7.1
France 4.6 3.2 2.8
Italy 3.0 2.4 2.4
United Kingdom 5.3 3.3 2.3
Canada 3.0 2.0 2.2
Japan 3.3 6.0 3.6
China NA 15.2 11.1

© McGraw Hill Sources: Output data from World Bank database, 2019. Trade data from W TO Statistical Database, 2019. 30
 The Changing Demographics of the Global
Economy 3

The Changing Foreign Direct Investment Picture

• World output generated by developing countries has been steadily
increasing since 1960s.
• Stock of foreign direct investment (total cumulative value of foreign
investments) generated by rich industrial countries is declining.
• Cross-border flows of foreign direct investment is rising.
• Largest developing country recipients of FDI are China, Mexico, and Brazil.

• Reflecting the dominance of the United States in the global economy, U.S.
firms accounted for 66.3 percent of worldwide foreign direct investment
flows in the 1960s. British firms were second, accounting for 10.5 percent,
while Japanese firms were a distant eighth, with only 2 percent. The
dominance of U.S. firms was so great that books were written about the
economic threat posed to Europe by U.S. corporations. Several European
governments, most notably France, talked of limiting inward investment by
U.S. firms.
© McGraw Hill 31
 Figure 1.2 FDI Outward Stock as a
Percentage of GDP

Access the text alternative for slide images.

© McGraw Hill Sources: O EC D data 2020, World Development Indicators 2020, U N C TA D database, 2020.. 32
 Figure 1.3 FDI Inflows (in millions of
dollars) 1990 to 2019

Access the text alternative for slide images.

© McGraw Hill Source: United Nations Conference on Trade and Development, World Investment Report 2020. 33
 The Changing Demographics of the Global
Economy 4

The Changing Nature of the Multinational Enterprise

• A multinational enterprise (MNE) is any business that has
productive activities in two or more countries.
• In last 50 years, rise of non-U.S. multinationals and growth of
mini-multinationals.
• Non-U.S. Multinationals.
• Large number of U.S. multinationals reflects U.S. economic
dominance.
• Today, world economy is shifting away from North America and
western Europe.

© McGraw Hill 34
 Figure 1.4 National Share of the Largest
2,000 Multinational Corporations in 2019

Access the text alternative for slide images.

© McGraw Hill Source: Forbes Global 2000 in 2019. 35

 The Changing Demographics of the Global
Economy 5

The Changing Nature of the Multinational Enterprise continued

• The Rise of Mini-Multinationals.
• More small- and medium-size businesses (mini-multinationals) are
involved in international trade and investment.
• Internet lowers barriers that smaller firms face in building international
sales.

When people think of international businesses, they tend to think of firms such as
ExxonMobil, General Motors, Ford, Panasonic, Procter & Gamble, Sony, and
Unilever—large, complex multinational corporations with operations that span the
globe.
Although most international trade and investment is still conducted by large firms,
many medium-sized and small businesses are becoming increasingly involved in
international trade and investment.

© McGraw Hill 36
 The Changing Demographics of the Global
Economy 6

The Changing World Order

Collapse of communism throughout eastern Europe.
• Greater export and investment opportunities, but political unrest is an
increasing risk.

Economic development in China.

• Huge opportunities despite continued government control, but also new
competition from Chinese firms.
Free market reforms and democracy in Latin America.
• New markets and new sources of materials and production, but economic and political risk remain high.

• In 1989 and 1991, a series of democratic revolutions swept the communist world. For reasons that are
explored in more detail in Chapter 3, in country after country throughout eastern Europe and eventually in
the Soviet Union itself, Communist Party governments collapsed. The Soviet Union receded into history,
replaced by 15 independent republics. Czechoslovakia divided itself into two states, while Yugoslavia
dissolved into a bloody civil war among its five successor states.

© McGraw Hill 37
 The Changing Demographics of the Global
Economy 7

Global Economy of the Twenty-First Century

A more integrated global economy.
• New opportunities for firms.
• But political and economic disruptions can upset plans.
• Risks associated with global financial crisis.
• Impact of global supply chain disruptions.

Hedging strategies increasing in importance.

The past quarter century has seen rapid changes in the global economy. Not
withstanding recent developments such as the higher tariffs introduced by the Trump
administration in the United States, barriers to the free flow of goods, services, and
capital have been coming down. As their economies advance, more nations are
joining the ranks of the developed world.
© McGraw Hill 38
 The Globalization Debate 1

Is A More Integrated and Interdependent Global

Economy Good?

• Experts believe globalization promotes greater prosperity in the

global economy, more jobs, and lower prices for goods and
services. (Proponents of Globalization)

• Others feel that globalization is not beneficial. (Opponents of

Globalization)

© McGraw Hill 39
 The Globalization Debate 2

Anti-globalization Protests
Began with W TO protest in December 1999 in Seattle.
• Protest turned violent.
• Other protests have occurred worldwide.

Critics fear globalization has detrimental effects on living standards,

wages, and the environment.
• Theory and evidence suggests these fears are exaggerated.

• Popular demonstrations against globalization date back to December 1999, when more than 40,000
protesters blocked the streets of Seattle in an attempt to shut down a World Trade Organization meeting
being held in the city. The demonstrators were protesting against a wide range of issues, including 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, which was seen as being dominated by what some protesters called the “culturally
impoverished” interests and values of the United States.

© McGraw Hill 41
 The Globalization Debate 3

Globalization, Jobs, and Income

• Critics say that falling trade barriers destroy manufacturing jobs in
wealthy economies (U.S. and western Europe).
• Service activities are increasingly outsourced to nations with lower
labor costs.
• Supporters say benefits outweigh the costs.
• Outsourcing allows a company to reduce its cost structure and reduce
prices.

• One concern frequently voiced by globalization opponents is that

falling barriers to international trade destroy manufacturing jobs in
wealthy advanced economies such as the United States and western
Europe. Critics argue that falling trade barriers allow firms to move
manufacturing activities to countries where wage rates are much lower.
© McGraw Hill 42
 The Globalization Debate 4

Globalization, Jobs, and Income continued

Share of labor in national income has declined.
• Attributed to a fall in unskilled labor.
• Gap between poorest and richest segments of society has widened.

In most countries, real income levels have increased for all.

Many advanced economies report shortage of highly skilled workers and an excess of
unskilled workers.

Note that the wage gap between developing and developed nations is closing as
developing nations experience rapid economic growth.
For example, one estimate suggests that wages in China will approach Western levels
in two decades. To the extent that this is the case, any migration of unskilled jobs to
low-wage countries is a temporary phenomenon representing a structural adjustment
on the way to a more tightly integrated global economy.

© McGraw Hill 43
 The Globalization Debate 5

Globalization, Labor Policies, and the Environment

Critics argue that the lack of labor and environmental regulations
in less developed countries attract investment.
• Adhering to environmental regulations increases costs of
manufacturing.

Supporters argue that tougher regulations lead to economic

progress.
• Tougher regulations come with economic progress.

Studies show a hump-shaped relationship between income levels

and pollution levels (see figure on next slide).
While the hump-shaped relationship depicted in Figure 1.5 seems to hold across a wide range of
pollutants—from sulfur dioxide to lead concentrations and water quality—carbon dioxide emissions are
an important exception, rising steadily with higher-income levels.

© McGraw Hill 44
 Figure 1.5 Income Levels and
Environmental Pollution

Access the text alternative for slide images.

© McGraw Hill Source: C. W. L. Hill and G. T. M. Hult, Global Business Today (New York: McGraw-Hill Education, 2018). 45
 The Globalization Debate 6

Globalization and National Sovereignty

Critics worry economic power is shifting away from national governments
and toward supranational organizations such as the W TO, European
Union, and UN.
• Believe that unelected bureaucrats impose policies and undermine
sovereignty.
• The World Trade Organization is a favorite target of those who attack the headlong rush toward a global
economy. As noted earlier, the WTO was founded in 1995 to police the world trading system established by the
General Agreement on Tariffs and Trade. The WTO arbitrates trade disputes among its 164 member states. The
arbitration panel can issue a ruling instructing a member state to change trade policies that violate GATT
regulations. If the violator refuses to comply with the ruling, the WTO allows other states to impose appropriate
trade sanctions on the transgressor.

Supporters say the power of these organizations is limited to what

nation-states collectively agree to grant.
• Must be able to persuade member states to follow certain actions.
• Without the support of members, the organizations have no power.
© McGraw Hill 46
 The Globalization Debate 7

Globalization and the World’s Poor

Critics argue the gap between rich and poor is wider, and the
benefits of globalization are not shared equally.
• Many poor nations are under totalitarian regimes, suffer from endemic
corruption, have few property rights, are involved in war, have rapidly
expanding populations, are burdened by high debt.
• No money to invest in public infrastructure.

Debt relief movements:

• Rich nations like the U.S. offer debt relief for “highly indebted poorer
countries” (HIPCs).
• Reduce import barriers from poor nations.
While recent history has shown that some of the world’s poorer nations are capable of rapid periods of
economic growth—witness the transformation that has occurred in some Southeast Asian nations such as
South Korea, Thailand, and Malaysia—there appear to be strong forces for stagnation among the world’s
poorest nations.

© McGraw Hill 47
 Figure 1.6 Percentage of the World's Population
Living in Poverty During 1981 to 2015

Access the text alternative for slide images.

© McGraw Hill Source: World Bank Data Base on Poverty and Equity, World Development Indicators, 2019. 48
To summarize the Globalisation
Debate
 Globalization
Opponents & Supporters

Rage Reason

Violence Legitimacy

Carnage Civility

Exclusion Debate

Copyright © 2010 Pearson Education, International Business 5e Chapter 1 - 50

Inc. publishing as Pearson
 Jobs and Wages

Opponents Supporters

 Eliminates jobs in  Increases wealth and

developed nations efficiency everywhere

 Lowers wages in  Generates labor market

developed nations flexibility in developed
countries
 Exploits workers in  Advances economies
developing nations of developing nations

Copyright © 2010 Pearson Education, International Business 5e Chapter 1 - 51

Inc. publishing as Pearson
 Labor, Environment, & Markets

Opponents Supporters

– Globalization lowers + Investment raises

labor standards labor standards

– Weakens protection of + Open economies most

the environment environment friendly

– Exploits workers in + Companies concerned

poor nations for future markets

Copyright © 2010 Pearson Education, International Business 5e Chapter 1 - 52

Inc. publishing as Pearson
 Income
Income Inequality
Inequality debate

1 Inequality within nations

Poor people in developing
nations benefit most from
an open economy ???

2 Inequality between nations

Nations open to world trade 3 Global inequality
and investment grow faster Inequality has fallen, but
than rich nations ??? experts disagree on the
extent of the decline!!!!
 National Sovereignty

Opponents Supporters

Supranational
Globalization has
institutions reduce
benefited societies by
autonomy of national,
helping to spread
regional, and local
democracy worldwide
governments

Copyright © 2010 Pearson Education, International Business 5e Chapter 1 - 54

Inc. publishing as Pearson
 Impact on Culture

Opponents Supporters

• Destroys cultural • Specialize and trade

diversity to obtain other goods
• Homogenizes our • Import cultural goods
world from other nations
• Bankrupts local • Protects deeper moral
small businesses and cultural norms

Copyright © 2010 Pearson Education, International Business 5e Chapter 1 - 55

Inc. publishing as Pearson
Impact on the Environment
Impact on the Economy
 Managing in the Global Marketplace
International Business
Any firm that is engaged in
international trade or investment.

Managing international business

differs from managing domestic
business.
• Practices vary by country.
• Issues are more complex.
• Need to understand rules governing
international trade and investment.
• Need to convert currency.

© McGraw Hill Qilai Shen/In Pictures Ltd./Corbis/Getty Images 58

 Culture Matters:
The Global Consumer

Material Desire

Artistic Influence

Western Values

A Force for Good

Deeper Values

Copyright © 2010 Pearson Education, International Business 5e Chapter 1 - 59

Inc. publishing as Pearson
 International Business Players

Multinational Small Businesses Born Global

Corporation and Entrepreneurs Firm
Small companies and Adopts a global
Business that has
individuals becoming perspective and
direct investments
increasingly active in engages in international
abroad in multiple
international trade business from or near
countries
and investment its inception

Copyright © 2010 Pearson Education, International Business 5e Chapter 1 - 60

Inc. publishing as Pearson
 Global Business Environment

Copyright © 2010 Pearson Education, International Business 5e Chapter 1 - 61

Inc. publishing as Pearson
 To succeed Globally
Global Managers should:

✓ Communicate effectively
✓ Know the customer
✓ Emphasize global awareness
✓ Market effectively
✓ Monitor business environments
✓ Analyze problems correctly

Copyright © 2010 Pearson Education, International Business 5e Chapter 1 - 62

Inc. publishing as Pearson
 Group Assignment 1

✓ Discuss: The Dark side of MNCs

Copyright © 2010 Pearson Education, International Business 5e Chapter 1 - 63

Inc. publishing as Pearson