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McGill University
Management Core
MGCR 382
John Saba

Globalization: causes & effects Overview We experience international transactions daily. Imports & exports reach even remote areas. Tech & e-biz promote trade. Consumers & coys pull markets closer. The era of globalization Definition: generally “the broadening set of interdependent relationships among people from diff countries” Specifically: “the inexorable integration of markets, nation-states, & technologies… in a way that is enabling individuals, corp, & nation-states to reach around the world farther, faster, deeper, & cheaper than ever before” [textbook] Process of increasing globalization is evidenced by dramatic growth in the last few decades of the 2 primary vehicles for conducting biz: i-trade & FDI -> 2 indicators of globalization World trade (5.7%) is growing faster than world GDP (3.5%). Rapid growth in trade is fueled by: decline of trade barriers, liberalization of mkts within countries, advances in information & transportation tech, developed economies now source many of they consume from low-cost manufacturing Emerging countries. Factor 1: growing i-trade shows increasing globalization World export of goods has grown dramatically from 1% of world GDP in 1950 to 22% in 2010. I-trade in services adds 6% to total world exports. i-trade in services: >$4 trillion of services are sold abroad annually, accounts for >25% of all global trade & is growing faster than trade in goods larger, developed economies account for the greatest proportion of services sold internationally. Banking & financial services are the most active cross-border services. Challenges: NOT all services can be exported, physical presence in host country is required for many services to be rendered factor 2: FDI shows increasing globalization dramatic growth of FDI as a % of world GDP: from 2.4% in 1980 to >30% in 2010. World FDI growing even faster than world trade => world FDI growth > world trade growth > world GDP growth US was the largest recipient of FDI ($180b), china was #2 with $100b SUMMARIZE GLOBALIZATION  About 25% of world production is sold outside of its country of origin  Restriction on imports continue to decline  World trade continues to grow more rapidly than world production  Foreign ownership of assets as % of world production continues to rise Causes of globalization -> macro level and firm level Macro causes (environmental) 1. Innovation & increased tech a. Improvements in both transportation, & communications & IT have significantly increased the effectiveness & efficiency of IB ops i. Cost of transportation has declined substantially, spurring rapid growth in international trade. -> more efficient, dependable shipping ii. Check textbook for evolution of transportation methods e.g. human-powered ships, horse-drawn carriages, steamships etc. tech advances led to devt. Of fuel-efficient jumbo jets, ocean-going freighters & container ships iii. Email & videoconferencing -> better coord & control iv. Internet, intranet, extranet, wifi, smart phones -> improved comm. & mgmt v. Comm. Costs, starting with telephone, have been declining since 1930s from $3000 to almost free today[compared to the use of internet e.g. Nigeria increased its telecom infrastructure from just 500000 phone lines to >30mil subscribers vi. Cellular telephone has become the most transformative tech for developing economies. African continent has fastest growth rate of subscribers, vii. Effect: dramatic rise in productivity & commerce, helps improve living standards. Rapid penetration of cellphones help account for economic growth e.g. farmers use cell phones to monitor crop prices in local mkts where they can sell their harvest viii. Since 1990, usage of internet & fax has grown dramatically such that we can send documents everywhere. Widest range of products & services is marketed online. Transmitting voices, data & images is almost at NO cost. Widespread availability of internet & email makes internationalization of firms cost effective. The internet & presence on the web opens up global marketplace to small st firls that now can take the 1 step to doing IB as multinational firms ix. Developed countries: >70% have access to internet. Emerging: increasing rapidly x. Impact of internet on IB? Who wins who loses? 1. Facilitates i-trade in services e.g. banking, education, & retailing 2. Level playing field b/w large & small firms entering a foreign mkt since even small firms can source their inputs & sell their products internationally on the web 3. The internet can make B2B transactions much easier & more efficient b. Much larger portion of population is involved in devt. & distribution of new products rather than just the production of products 2. Liberalization of cross-border trade & resource movements (changes in political environment) a. Most gov have reduced restrictions on trade & foreign investment, responding to expressed desires of their citizens & producers, the primary motives for this change include: i. Gives citizens greater consumer choice & lower prices ii. International competition makes domestic produces more efficient iii. Liberalization causes other countries to lower trade barriers 3. [linked to 2] Expanded cross-national coop a. Gov entered into cross-national treaties & agreements in order to: i. Gain reciprocal advantages for their own firms ii. Jointly attack problems one country cannot solve alone iii. Often such coop occurs within frame work of international agreements {GATT – general agreement on Tariffs & Trade}, international org (WTO), & regional trade agreements (NAFTA) Firm causes: 4 strategic reasons for firms to go international 1. Leverage core competencies (that a firm has developed in its home market) a. A distinctive strength/advantage that is central to a firm’s ops. By utilizing it in new markets, firm can increase rev & profits 2. Acquire resources & supplies or product more efficiently by expanding internationally a. Price & availability of materials, land, labour, capital,, & tech varies across countries e.g. Canadian grocery stores import coffee from Colombia b. To be closer to supply sources or secure global sourcing advantages &/or flexibility e.g. firms in extractive industries (e.g. petrol, mining, forestry) establish international ops where these raw materials are located e.g. aluminum producer Alcoa has ops everywhere to extract bauxite c. Firms internationalize to gain flexibility from a greater variety of supply bases e.g. Dell has assembly facilities in EU & china d. Gain access to lower-cost &/or higher quality FOP [capital, tech, labour] 3. Seek new markets a. Once a firm’s home market becomes saturated/mature, increase sales by expanding [i.e. diversifying] to markets beyond the firm’s home country i. Many firms derive >50% of their sales from international kits 1. Benefits of new markets: Extend marketable life of products or services that have reached maturity in home market ii. Increase in foreign sales mean more diversified rev stream & reduces firm’s dependence b. To earn higher margins i. foreign markets often generate returns far superior to those in domestic markets ii. market growth in mature markets often is sluggish or flat -> effect: firms get slim profit margins iii. less intense competition & strong mkt DD in high growth emerging mkts -> effect: high profit
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