Midterm Study Notes - Chapter 1-Globalization

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12 Oct 2010

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MGT491 Midterm Notes ± Chapter 1: Globalization
x Globalization ± the shift toward a more integrated and interdependent world economy. There are several facets,
including globalization of markets and globalization of production.
The Globalization of Markets
x Globalization of markets ± the merging of historically distinct and separate national markets into one huge
global marketplace
x Falling barriers to cross-border trade make it easier to sell internationally
x Tastes and preferences of consumers in different nations are beginning to converge into a global norm, helping
to create a global market
o Ex. Coca-Cola, Sony Playstation, IKEA, Starbucks, MacDonalds
o These firms are also facilitators of this trend, by offering the same product worldwide they help to
create a global market
x In the US, 90% of firms that export are small businesses employing less than 100 people
x *HUPDQ\LVWKHZRUOGVODUJHVWH[SRUWHU± 98% of its small and mid-sized companies have exposure to
international markets (via either exports or international production)
x Differences occur in global markets among consumer tastes and preferences, distribution channels, culturally
embedded value systems, business systems, legal regulations
o Requires companies to use customized marketing strategies, product features, and operating
practices to match conditions in a particular country
x Most global markets are not for consumer products but for industrial goods and materials that serve a universal
need (incl. aluminum, oil, wheat, microprocessors, computer memory chips, aircraft, computer software,
financial assets, etc).
x Many competitor rivalries are global ± ex. Coke competing with Pepsi all over the world, Boeing vs. Airbus,
Sony/Nintendo/Microsoft, etc
x If a firm moves into a nation not currently served by its competition, the competition will soon follow to prevent
the first-mover from getting an advantage
x Firms bring their products, operating strategies, marketing strategies and brand names across the world with
them, creating homogeneity across markets
The Globalization of Production
x Globalization of production ± the outsourcing of goods and services from locations around the globe to take
advantage of national differences in the cost and quality of factors of production, in order to lower their overall
cost structure or improve the quality or functionality of their product offering, allowing them to compete more
x Factors of production ± labor, energy, land, capital
x Ex. Boeing ± 8 Japanese suppliers make parts for fuselage, Singapore makes doors for nose landing gear, 3
Italian suppliers make wing flaps, etc.
o Rationale for outsourcing so much production to foreign suppliers ± they are the best in the world at
their particular activity, yields better final product, enhances the chances of winning a greater share
of total orders than its rival Airbus
o Also outsource because increases chance of winning significant orders from airlines based in that
x Ex. Vizio flat panel TVs ± components manufactured in South Korea, China and US, assembly in Mexico,
selling them in the US.
x Early outsourcing efforts usually for manufacturing activities, now service activities also being outsourced
because of modern communications technology, mostly the internet
x Outsourcing customer service functions like call centers
x Ex. radiology ± hospitals send images to India, while the American doctors sleep they analyze it, have results in
the morning
x Dispersing value-creating activities can shorten time and lower cost required to develop products
x Impediments to achieving optimal dispersion of productive activities to locations around the world ± informal and
formal barriers to trade, barriers to foreign direct investment, transportation costs, issues associated with
economic and political risk
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The Emergence of Global Institutions
x Help manage, regulate, and police the global marketplace and promote establishment of multinational treaties
to govern the global business system
x GATT ± General Agreement on Tariffs and Trade
x WTO ± World Trade Organization (succeeded GATT, functions are basically the same for both:)
o Primarily responsible for policing the world trading system and making sure nation-states adhere to
the rules laid out in signed treaties
o Accounts for 97% of world trade ± huge scope and influence
o Facilitating the establishment of additional multinational agreements between WTO member state
o Promotes lowering barriers to cross-border trade and investment
o Seeks to create a more open global business system unencumbered by barriers to trade and
investment between countries
o Critics say that the WTO is usurping the national sovereignty of individual nation-states
x IMF ± International Monetary Fund
o Established to maintain order in the international monetary system
o Significant player in global economy
o Lender of last resort to nation-states whose economies are in turmoil, currencies are losing value
o In return for loans, IMF requires that the borrowers adopt specific economic policies aimed at
returning their troubled economies to stability and growth ± controversial because critics say
recommendations are often inappropriate, telling governments which policies they must adopt,
usurping sovereignty of nation-states
x World Bank (sister institution to the IMF)
o Set up to promote economic development
o Significant player in global economy
o Less controversial than IMF, focuses on making low-interest loans to cash strapped governments in
poor nations that wish to undertake significant infrastructure investments (ex. building dams, roads,
x United Nations
o Established by countries committed to preserving peace through international cooperation and
collective scrutiny
o Almost every country in the world now belongs to the UN
o Members agree to adopt the obligations of the UN charter, an international treaty that establishes
basic principles of international relations
o UN has 4 purposes:
To maintain international peace and security
To develop friendly relations among nations
To cooperate in solving international problems and in promoting respect for human rights
To be a center for harmonizing the actions of nations
higher standards of living, full employment, and conditions of economic and social progress and
development ± all essential for the creation of a vibrant global economy
o Belief that eradiating poverty and improving the well-being of people everywhere is necessary to
create conditions for lasting world peace
x All of these institutions were created by voluntary agreement between individual nation-states, functions are
enshrined in international treaties
x 2 macro factors
o Decline in barriers to free flow of goods, services, and capital that has occurred since the end of
o Technological change, particularly the dramatic developments in recent years in communication,
info processing and transportation technologies
Declining Trade and Investment Barriers
x In 1920s and 1930s, many nations created barriers to international trade and foreign direct investment
x International trade ± occurs when a firm exports goods or services to consumers in another country
x Foreign direct investment (FDI) ± occurs when a firm invests resources in business activities outside its home
x Many barriers to trade were in the form of high tariffs on imports of manufactured goods ± aim was to protect
domestic industries from foreign competition
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o This decreased world demand, contributed to the Great Depression in the 1930s
x After this experience, after WW2 the industrialized nations of the West wanted to remove barriers to the free
flow of goods, services and capital
o Goal was enshrined in GATT
o Reducing trade barriers, enhanced protection for patents, trademarks, copyrights, established the
WTO to police the international trading system
o Tariff rates have fallen significantly since 1950
x Beginning in 2001 ± WTO meetings to work toward cutting tariffs on industrial goods, services, and agricultural
products; phasing out subsidies to agricultural producers; reducing barriers to cross-border investment, limiting
the use of antidumping laws.
give them access to the markets of the developed world
x Many countries also working on progressively removing restrictions to foreign direct investment, including
bilateral investment treaties designed to protect and promote investment between countries
x Lowering barriers to international trade enables firms to view the world, rather than a single country, as their
x Lowering trade and investment barriers allows firms to base production at the optimal location for that activity ±
ex. design in one country, produce parts in two other countries, assemble in another country, then export
finished product around the world
x Trends:
o More firms are dispersing parts of production process to different locations around the globe to
drive down production costs and increase quality
o (FRQRPLHVRIWKHZRUOGVQDWLRQVDUH becoming intertwined, becoming increasingly dependent on
each other for goods and services
o World has become significantly wealthier since 1950, rising trade is helping pull the global economy
x International trade in services has been driven by advances in communications which allow companies to
outsource service activities to different places around the world
o Outsource customer service, software maintenance, call centers, etc to developing nations where
labor costs are lower
x Foreign direct investment playing an increasing role in the global economy as firms increase cross-border
x Globalization of markets and production and resulting growth of world trade, foreign direct investment, and
imports imply that firms are finding home markets under attack from foreign competitors ± increasingly intense
competition in manufacturing and service industries
The Role of Technological Change
x Lowering trade barriers makes globalization of markets and production a possibility
x Technological change makes it tangible reality
x Telecommunications ± creates global audience
x Microprocessors and Telecommunications
o Microprocessor is the single most important innovation ± development of the microprocessor,
enabled growth of high power & low cost computing, increasing amounts of information that can be
o Microprocessor underlies many telecommunications technologies ± satellite, optical fiber, wireless
technologies, internet
o Microprocessor encodes, transmits and decodes the info
o 0RRUHV/DZ± the power of microprocessor technology doubles and its cost of production falls by
half every 18 months
o Cost of global communications goes down, lowers cost of coordinating and controlling a global
x Internet and the World Wide Web
o Information backbone of the global economy
o Equalizer ± removes some of the constraints of location, scale, time zones, makes it must easier for
buyers and sellers to find each other ± wherever and however large they are, allows businesses no
matter what size they are to expand their global presence at a lower cost than ever before
x Transportation Technology
o Development of the commercial jet aircraft, super-freighters, introduction of containerization ±
simplifies transshipment from one mode of transport to another
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