Globalisation

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What is Globalization?

A process in which liberalisation (the reduction/removal of barriers) stimulates cross-border exchanges in goods, services and people

- a shift towards interdependency and integration

Barriers could be economic, political, physical, cultural

Distinct and national markets merging into a huge global marketplace

- tastes and preferences converge

National economies are merging into an interdependent, integrated global economic system

Globalization is a process - with consequences for businesses and nations

Anti-globalisation protestors feel we have gone too far..

Pro-globalisation supporters feel there is some way to go

There is now a cautious view and approach to globalisation, nevertheless, the force of globalisation can be slowed but not stopped. Globalisation has negative and positive implications for international business - managers must strategize to exploit the opportunities and address/avoid the threats of globalization.

Globalization Indicators

Foreign Direct Investment

- Controlling/owning assets in a foreign country

Trade

- Imports/exports

Foreign Monetary/Financial/Indirect Investment

- Movement of cash and stocks

Migration

- Movement of people across borders

Death of distance: Levitt (1983) & Friedman (2005)

Globalisation is facilitated by technology - everybody wants to consume at a reasonable price. This can be met by economies of scale

National differences arise because of history - we think they are barriers. But this doesn't mean people from different nations don't want the same/similar things to consume.

Levitt claimed the multinational corporation to be "dead" - replaced by the global corporation.

Friedman: the world is becoming flat

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Global vs National Markets

Distances still matter:

Variations in tastes, preferences, culture, business systems and laws exist

Companies still have to vary their strategies

Ghemawat (2001) - distance still matters - CAGE (These distance measures differ in importance by industry.)

Cultural - differing languages, ethnicities, religions, social norms, social networks

products with high linguistic content (TV), products affecting identity of consumers (food), product features vary - size/standards (cars/electrical appliances), country-specific quality associations (wine)

Administrative - absence of colonial ties, shared monetary/political association, political hostility, government policies, institutional weakness

Govt involvement is high in industries that are - producers of staple goods (electricity), entitlements (drugs), large employers (farming), large suppliers to govt (transportation), national champions (aerospace), vital to national security (telecoms), exploiters of natural resources (oil/gas), subject to high sunk costs (infrastructure)

Geographic - physical remoteness, lack of common border, lack of sea/river access, size of country, weak transportation/communication links, differences in climates

Products have a low value-to-weight ratio (cement), products are fragile/perishable (glass, fruit), communications/connectivity are important (financial services), local supervision/operational requirements are high

Economic - differences in consumer incomes, differences in costs/quality of - natural/financial/human resources, infrastructure, intermediate inputs, information/knowledge

nature of demand varies with income (cars), economies of standardisation/scale are important (mobile phones), labour/other factor cost differences are salient (garements), distribution/business systems are different (insurance), companies need to be responsive/agile (home appliances).

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Rugman & Oh (2008)

Disagree with Friedman & Levitt, and agree with Ghemawat that distance in its various forms matters, but find a middle way i.e. regionalisation and regional multinational corporations

They examined data on the actual performance of 380 of the world's 500 largest firms

International competitiveness does not necessarily mean globalization or global competition

Differences between countries frequently require companies to customize marketing strategies, product features and operating practices to best match conditions in a particular country.

The most global markets currently are not markets for consumer products - where national differences in tastes/preferences are still important enough to act as a barrier - but markets for industrial goods and materials that serve a universal need the world over. e.g. markets for commodities such as aluminium, oil, wheat, computer memory chips, industrial aircraft etc.

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Global Institutions

General Agreement on Tariffs and Trade (GATT)

World Trade Organisation (WTO) - responsible for policing the world trading system and making sure nation-states adhere to the rules laid down in trade treaties signed by member states. In 2011 - 154 nations accounting for 97% of world trade were WTO members - giving scope and influence. Facilitates the establishment of additional multinational agreements between member states.

International Monetary Fund (IMF) - seen as the lender of last resort to nation-states whose economies are in turmoil/whose currencies are losing value against those of other nations. In return for loans, the IMF requires nation-states to adopt specific economic policies aimed at returning their troubled economies to stability and growth.

World Bank - set up to promote economic development, focused on making low-interest loans to cash-strapped governments in poor nations that wish to undertake significant infrastructure investments (e.g. dams or roads)

United Nations (UN) - committed to preserving peace through international cooperation and collective security.

G20 - comprises the finance ministers and central bank governors of 19 largest economies in the world, plus representatives from the EU and European Central Bank.

European Union, NAFTA, MERCOSUR, ASEAN

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Starbucks - a globalization example

The original idea came from Italian coffeehouses, and the idea was refined in the US, and in 1995 the company started to expand globally. As a result, the company that only had a few stores 25 years ago is now one of the world's best-known brands with almost 17,000 stores in 50 countries.

Starbucks had an impact on consumer behaviour around the world, changing the way people consume coffee and how coffee is produced - by committing to Fair Trade coffee beans, Starbucks is promoting nonexploitive and environmentally sound growing policies in developing nations.

Globalisation is transforming industries and creating anxiety amongst those who believed their jobs were protected from foreign competition. Historically it was manufacturing workers who worried about the impact of foreign competition, however now service industry workers and confronted by competition as a service doesn't need to be performed where it is delivered.

e.g. Legal work outsourced to India - can operate overnight to deal with clients whilst domestic workers sleep.

Customer service functions that are outsourced - cheaper labour

Firms who are benefactors of globalization are also facilitators of it: by offering the same basic product worldwide, they help create a global market.

A company does not have to be the size of a multinational giant to facilitate and benefit from the globalization of markets. E.g. 90% of firms in the US that export are small businesses employing less than 100 people.

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Competition

If a firm moves into a nation not currently served by its rivals, many of those rivals are sure to follow to prevent their competitor from gaining an advantage.

As firms follow each other around the world, they bring with them many of the assets that served them well in other national markets - products, operating/marketing strategies, brand names - creating homogeneity across markets, thus greater uniformity replaces diversity.

Globalization of production

Refers to the sourcing of goods/services from locations around the globe to take advantage of national differences in the cost and quality of factors of production (i.e. labour, energy, land, capital).

Companies can lower their overall cost structure, improve the quality/functionality of their product offering, thereby allowing them to compete more efficiently.

Boeing case study

Boeing's 777

8 Japanese suppliers - fuselage, doors, wings

Singapore - doors for nose landing

3 Italian suppliers - wing flaps etc etc

30% of the 777, by value, is built by foreign companies and this is increasing further with newer models.

Boeings rationale for outsourcing production - suppliers are the best in the world at their particular activity. A global web of suppliers yields a better final product, which enhances the chances of Boeing winning a greater share of total orders for aircraft than its rival Airbus.

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Drivers of Globalization

Two macro factors underlie the trend toward greater globalisation:

1) The decline in barriers to the free flow of goods, services and capital

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

Foreign direct investment (FDI) occurs when a firm invests resources in business activities outside its home country/domestic market.

Many 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 was retaliatory trade policies, with countries progressively raising trade barriers against each other

Introduction of GATT with participating member states - General Agreement on Tariffs and Trade - worked to lower barriers to the free flow of goods and services.

In addition to reducing trade barriers, many countries have also been progressively removing restrictions to FDI

Such trends have been driving both the globalisation of markets and the globalisation 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 - thus a firm might design a product in one country, produce component parts in two other countries, assemble the product in another, then export the finished product around the world.

Trade in services now accounts for about 20% of the value of all international trade - this is driven by advances in communications which allow firms to outsource service activities to different locations around the globe.

2) Technological change - developments in communication, information processing and transportation technologies

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. This also underlies many recent advances in telecoms.

Global communication has been revolutionised by developments in satellite, optical fibre, wireless technologies and the Internet and WWW.

The cost of microprocessors continues to fall, while their power increases (Moore's law) therefore the cost of global coms plummets, lowering costs of coordinating and controlling a global organisation.

Internet and WWW - has developed into the information backbone of the global economy. E-commerce. Rolls back some of the constraints of location and time zones, makes it much easier for buyers and sellers to find each other wherever they are located and whatever their size. Allows business to expand their global presence at a lower cost. Enabled enterprises to coordinate and control a globally dispersed production system.

Transportation tech - the development of the commercial jet aircraft and super-freighters and intro of containerization, which simplifies transhipment from one mode of transport to another.

Containerization has significantly lowered costs of shipping goods over long distances, reducing labour intensity and durations.

Implications for the globalisation of production:

Dispersal of production to geographically separate locations become more economical.

Costs of information processing and communication have fallen - it is possible for a firm to create and then manage a globally dispersed production system

e.g. Dell uses the internet to coordinate and control a globally dispersed production system to such an extent that it holds only 3 days worth of inventory at assembly locations. This internet-based system records orders for computer equipment as they are submitted by customers via their website, then immediately transmits the resulting orders for components to various suppliers around the world, who can therefore adjust their production schedules accordingly.

Airfreight is low cost so Dell can use this to speed up delivery of critical components to meet unanticipated demand shifts without delaying the shipment of final product to customers.

Dell can use comms tech to outsource customer service operations to India.

Implications for the globalisation of markets

Advances have helped to created electronic global marketplaces.

New or underdeveloped industries in different countries now exist due to a global market for a certain product

Mass movement of people between countires - this has brought about some convergence of consumer tastes and preferences

Global media and comms networks are creating a worldwide culture e.g. US TV networks

The emergence of global markets for consumer products - e.g. McDonald's in Tokyo and NYC

However, while modern communication and transportation technologies are ushering in a "global village", national differences still remain in culture, consumer prefs and business practices. A firm that ignores differences between countries does so at its peril.

Improvements in production techniques and management

Infrastructural development - "soft" and "hard infrastructure

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Global Economy Effects

As trade expands, nations are becoming increasingly dependent on each other for import goods and services.

The world has become significantly wealthier since 1950, implying that rising trade is the engine that has helped to pull the global economy along

Evidence also suggests FDI is playing an increasing role in the global economy as firms increase their cross-border investments. In general, over the past 30 years, FDI has accelerated faster than the growth in world trade and world output. This improves employment across the globe and can increase sales for multinationals.

The globalisation of markets and production and the resulting growth of world trade, FDI and imports all imply that firms are finding their home markets under attack from foreign competitors.

E.g. in Japan, US companies such as Apple, P&G are expanding their presence.

in the US, Japanese automobile firms have taken market share away from General Motors and Ford

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.

However, declining barriers to cross-border trade and investment cannot be taken for granted - demands for "protection" from foreign competitors is still often heard in countries. If trade barriers decline no further, this may slow the rate of globalisation of both markets and production.

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