GLOBALIZATION

Introduction

The global telecommunications industry, which was profiled in the opening case, is one industry at the forefront of this development. A decade ago most national telecommunications markets were dominated by state-owned monopolies and isolated from each other by substantial barriers to cross-border trade and investment. This is rapidly becoming a thing of the past. A global telecommunications market is emerging. In this new market, prices are being bargained down as telecommunications providers compete with each other around the world for residential and business customers. The big winners are the customers, who should see the price of telecommunications services plummet, saving them billions of dollars.

The rapidly emerging global economy raises a multitude of issues for businesses both large and small. It creates opportunities for businesses to expand their revenues, drive down their costs, and boost their profits. started a company to manufacture it, and has now sold the mouse to consumers worldwide, using the Internet as his distribution channel.² 

What is Globalization

The Globalization of Markets

The globalization of markets refers to the merging of historically distinct and separate national markets into one huge global marketplace. It has been argued for some time that the tastes and preferences of consumers in different nations are beginning to converge on some global norm, thereby helping to create a global market.³ The global acceptance of consumer products such as Citicorp credit cards, Coca-Cola…. By offering a standardized product worldwide, they are helping to create a global market. A company does not have to be the size of these multinational giants to facilitate, and benefit from, the globalization of markets.

In the case of many products, these differences frequently require that marketing strategies, product features, and operating practices be customized to best match conditions in a country. Thus different car models depending on a whole range of factors such as local fuel costs, income levels, traffic congestion, and cultural values.

The most global markets currently are not markets for consumer products--where national differences in tastes and preferences are still often important enough to act as a brake on globalization--but markets for industrial goods and materials that serve a universal need the world over. These include the markets for commodities such as aluminium, oil, and wheat, the markets for industrial products such as microprocessors.

In many global markets, the same firms frequently confront each other as competitors in nation after nation.

The Globalization of Production

The globalization of production refers to the tendency among firms to source goods and services from locations around the globe to take advantage of national differences in the cost and quality of factors of production. By doing so, companies hope to lower their overall cost structure or improve the quality or functionality of their product offering, there by allowing them to compete more effectively. The result of having a global web of suppliers is a better final product, which enhances the chances of Boeing winning a greater share of total orders for aircraft than its global rival, Airbus. Boeing also out sources some production to foreign countries to increase the chance that it will win significant orders from airliners based in that country.

The global dispersal of productive activities is not limited to giants such as Boeing. Many much smaller firms are also getting into the act.

Nevertheless, we are travelling down the road toward a future characterized by the increased globalization of markets and production. Modern firms are important actors in this drama, fostering by their very actions increased globalization. These firms, however, are merely responding in an efficient manner to changing conditions in their operating environment--as well they should. In the next section, we look at the main drivers of globalization.

Drivers of Globalization

Declining Trade and Investment Barriers

International trade occurs when a firm exports goods or services to consumers in another country. Foreign direct investment occurs when a firm invests resources in business activities outside its home country. Many of the barriers to international trade took the form of high tariffs on imports of manufactured goods. The typical aim of such tariffs was to protect domestic industries from "foreign competition." One consequence, however, was "beggar thy neighbour" retaliatory trade policies with countries progressively raising trade barriers against each other.

In addition to reducing trade barriers, many countries have also been progressively removing restrictions to foreign direct investment .

Such trends facilitate both the globalization of markets and the globalization of production. The lowering of barriers to international trade enables firms to view the world, rather than a single country, as their market. The lowering of trade and investment barriers also allows firms to base production at the optimal location for that activity, serving the world market from that location. Thus, a firm might design a product in one country, produce component parts in two other countries, assemble the

Finally, 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. The bottom line is that the growing integration of the world economy into a single, huge marketplace is increasing the intensity of competition in a range of manufacturing and service industries.

Having said all this, declining trade barriers can't be taken for granted. As we shall see in the following chapters, demands for "protection" from foreign competitors are still often heard in countries around the world, including the United States.

The Role of Technological Change

Microprocessors and Telecommunications

Perhaps the single most important innovation has been development of the microprocessor, which enabled the explosive growth of high-power, low-cost computing, vastly increasing the amount of information that can be processed by individuals and firms. The microprocessor also underlies many recent advances in telecommunications technology. These technologies rely on the microprocessor to encode, transmit, and decode the vast amount of information that flows along these electronic highways. The cost of microprocessors continues to fall, while their power increases . As this happens, the costs of global communications are plummeting, which lowers the costs of coordinating and controlling a global organization.

The Internet and World Wide Web

The phenomenal recent growth of the Internet and the associated World Wide Web is the latest expression of this development.

The Internet and World Wide Web (WWW) promise to develop into the information backbone of tomorrow's global economy. Companies such as Dell Computer are booking over $4 million a day in Web-based sales, while Internet equipment giant Cisco Systems books more than $20 million per day in Web-based sales.

Included in this expanding volume of Web-based electronic commerce--or
e-commerce as it is commonly called--is a growing percentage of cross-border  Packard has new-product development teams composed of individuals based in different countries. When developing new products, these individuals use videoconferencing to "meet" on a weekly basis. They also communicate with each other daily via telephone, electronic mail, and fax. Communication technologies have enabled Hewlett-Packard to increase the integration of its globally dispersed operations and to reduce the time needed for developing new products.

Implications for the Globalization of Markets

In addition to the globalization of production, technological innovations have also facilitated the globalization of markets. As noted above, low-cost transportation has made it more economical to ship products around the world, thereby helping to create global markets. Low-cost global communications networks such as the World Wide Web are helping to create electronic global marketplaces. In addition, 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. At the same time, global communications networks and global media are creating a worldwide culture. We must be careful not to overemphasize this trend. While modern communications and transportation technologies are ushering in the "global village," very significant national differences remain in culture, consumer preferences, and business practices.

The Changing Demographics of the Global Economy

The Changing World Output and World Trade Picture

In The same occurred to Germany, France, and the United Kingdom, all nations that were among the first to industrialize. This decline in the US position was not an absolute decline, since the US economy grew at a relatively robust average annual rate of close.Rather, it was a relative decline, reflecting the faster economic growth of several other economies, particularly in Asia.

The Changing Foreign Direct Investment Picture

Reflecting the relative decline in US dominance, its position as the world's leading exporter was threatened. Over the past thirty years, US dominance in export markets has waned as Japan, Germany, and a number of newly industrialized countries such as South Korea and China have taken a larger share of world exports.

In 1997 and 1998 the dynamic economies of the Asian Pacific region were hit by a serious financial crisis that threatened to slow their economic growth rates for several years. Despite this, their powerful growth may continue over the long run, as will that of several other important emerging economies in Latin America .

Notwithstanding the financial crisis that is gripping some Asian economies, most forecasts now predict a rapid rise in the share of world output accounted for by developing nations such as China. For international businesses, the implications of this changing economic geography are clear; many of tomorrow's economic opportunities may be found in the developing nations of the world, and many of tomorrow's most capable competitors will probably also emerge from these regions. 

However, as the barriers to the free flow of goods, services, and capital fell, and as other countries increased their shares of world output, non-US firms increasingly.

The Changing Nature of the Multinational Enterprise

A multinational enterprise is any business that has productive activities in two or more countries..

Non-US Multinationals

Global business activity was dominated by large US multinational corporations. With US firms accounting for about two-thirds of foreign direct investment one would expect most multinationals to be US enterprises. The large number of US  multinationals reflected US economic dominance in the three decades after World War II, while the large number of British multinationals reflected that country's industrial dominance in the early decades.

Looking to the future, we can reasonably expect growth of new multinational enterprises from the world's developing nations. As the accompanying Country Focus demonstrates, South Korean firms are starting to invest outside their national borders. The South Koreans may soon be followed by firms from countries such as Mexico…

The Rise of Mini-Multinationals

Another trend in international business has been the growth of medium-sized and small multinationals. When people think of international businesses they tend to think of firms such as Exxon, General Motors… complex multinational corporations with operations that span the globe. Although it is certainly true that most international trade and investment is still conducted by large firms, it is also true that many medium-sized and small businesses are becoming increasingly involved in international trade and investment.

The point is, international business is conducted not just by large firms but also by medium-sized and small enterprises.

The Changing World Order

Many of the former communist nations of Europe and Asia seem to share a commitment to democratic politics and free market economics. If this continues, the opportunities for international businesses may be enormous. For the best part of half a century, these countries were essentially closed to Western international businesses. Now they present a host of export and investment opportunities. The economies of most of the former communist states are in very poor condition, and their continued commitment to democracy and free market economics cannot be taken for granted. Disturbing signs of growing unrest and totalitarian tendencies are seen in many Eastern European states. Thus, the risks involved in doing business in such countries are very high, but then, so may be the returns. 

In sum, the last quarter of century has seen rapid changes in the global economy. Barriers to the free flow of goods, services, and capital have been coming down. The volume of cross-border trade and investment has been growing more rapidly than global output, indicating that national economies are become more closely integrated into a single, interdependent, global economic system. As their economies advance, more nations are joining the ranks of the developed world. Thus, follow more permanent and widespread, the liberal vision of a more prosperous global economy based on free market principles might not come to pass as quickly as many hope. Clearly, this would be a tougher world for international businesses to compete in.

For now it is simply worth noting that even from a purely economic perspective, globalization is not all good.

The Globalization Debate: Prosperity or Impoverishment?

Globalization, Jobs, and Incomes

One frequently voiced concern is that far from creating jobs, falling barriers to international trade actually destroy manufacturing jobs in wealthy advanced economies such as the United States and United Kingdom. The critics argue that falling trade barriers allow firms to move their manufacturing activities offshore to countries where wage rates are much lower.

 They argue that free trade results in countries specializing in the production of those goods and services that they can produce most efficiently, while importing goods that they cannot produce as efficiently. When a country embraces free trade, there is always some dislocation--lost textile jobs at Harwood Industries, Supporters of globalization do concede that the wage rate enjoyed by unskilled workers in many advanced economies has declined in recent years. They maintain that the declining real wage rates of unskilled workers owes far more to a technology-induced shift within advanced economies away from jobs where the only qualification was a willingness to turn up for work every day and toward jobs that require significant education and skills. They point out that many advanced economies report a shortage of highly skilled workers and an excess supply of unskilled workers. Thus, growing income inequality is a result of the wages for skilled workers being bid up by the labor market, and the wages for unskilled workers being discounted. If one agrees with this logic, a solution to the problem of declining incomes is to be found not in limiting free trade and globalization, but in increasing society's investment in education to reduce the supply of unskilled workers.³⁵

Globalization, Labor Policies, and the Environment

A second source of concern is that free trade encourages firms from advanced nations to move manufacturing facilities offshore to less developed countries that lack adequate regulations to protect labor and the environment from abuse by the unscrupulous. Globalization critics often argue that adhering to labor and environmental regulations significantly increases the costs of manufacturing enterprises and puts them at a competitive disadvantage in the global marketplace vis-à-vis firms based in developing nations that do not have to comply with such regulations. Firms deal with this cost disadvantage, the theory goes, by moving their production facilities to nations that do not have such burdensome regulations, or by failing to enforce the regulations they have on their books. If this is the case, one might expect free trade to lead to an increase in pollution and result in firms from advanced nations exploiting the labor of less developed nations.

Supporters of free trade also argue that business firms are not the amoral organizations that critics suggest. While there may be a few rotten apples, the vast majority of business enterprises are staffed by managers who are committed to behave in an ethical manner and would be unlikely to move production offshore just so they could pump more pollution into the atmosphere or exploit labor. Furthermore, the relationship between pollution, labor exploitation, and production costs may not be that suggested by critics. In general, a well-treated labor force is productive, and it is productivity rather than base wage rates that often has the greatest influence on costs. Given this, in the vast majority of cases, the vision of greedy managers who shift production to low-wage companies to "exploit" their labor force may be misplaced.

Globalization and National Sovereignty

A final concern voiced by critics of globalization is that in today's increasingly interdependent global economy, economic power is shifting away from national governments and toward supranational organizations such as the World Trade Organization, the European Union, and the United Nations. As perceived by critics, unelected bureaucrats are now able to impose policies on the democratically elected governments of nation-states, thereby undermining the sovereignty of those states. In this manner, claim critics, the national state's ability to control its own destiny is being limited.⁴⁰

The World Trade Organization is a favorite target of those who attack the world's headlong rush toward a global economy.

Managing in the Global Marketplace

An international business is any firm that engages in international trade or investment. A firm does not have to become a multinational enterprise, investing directly in operations in other countries, to engage in international business, although multinational enterprises are international businesses. As their organizations increasingly engage in cross-border trade and investment, it means managers need to recognize that the task of managing an international business differs from that of managing a purely domestic business in many ways. At the most fundamental level, the differences arise from the simple fact that countries are different. Countries differ in their cultures, political systems, economic systems, legal systems, and levels of economic development. Despite all the talk about the emerging global village, and despite the trend toward globalization of markets and production, as we shall see in this book, many of these differences are very profound and enduring.

Differences between countries require that an international business vary its practices country by country. A further way in which international business differs from domestic business is the greater complexity of managing an international business. In addition to the problems that arise from the differences between countries, a manager in an international business is confronted with a range of other issues that the manager in a domestic business never confronts. An international business must decide where in the world to site its production activities to minimize costs and to maximize value added.

Conducting business transactions across national borders requires understanding the rules governing the international trading and investment system. Managers in an international business must also deal with government restrictions on international trade and investment. They must find ways to work within the limits imposed by specific governmental interventions. As this book explains, even though many governments are nominally committed to free trade, they often intervene to regulate cross-border trade and investment. Managers within international businesses must develop strategies and policies for dealing with such interventions.

Cross-border transactions also require that money be converted from the firm's home currency into a foreign currency and vice versa. Since currency exchange rates vary in response to changing economic conditions, an international business must develop policies for dealing with exchange rate movements. A firm that adopts a wrong policy can lose large amounts of money, while a firm that adopts the right policy can increase the profitability of its international transactions.