Globalization

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Globalization Chapter 2
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Bangalore
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What Makes Bangalore so Popular as a Site for
FDI?

• Pay - Indians are paid ¼ Western rates
• Education Home of several million highly
  educated knowledge worker
• Language English is widely spoken
• Time Zone Optimally located for time-sharing

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Globalization

• Outsourcing and Offshoring (FDI)
• Search for global markets (sales and
  standardization)
• Integration and interdependence of national
  economies (stock markets)
• Ease of international transactions (technologies,
  transportation and policies)
• The emergence of a global culture?????

Does Globalization increase or decrease the
worlds standard of living?
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Organizing Framework to Examine Globalization
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Drivers of Market Globalization

• Worldwide reduction of barriers to trade and
  investment
• Market liberalization and adoption of free
  markets
• Industrialization, economic development, and
  modernization
• Integration of world financial markets
• Advances in technology

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Dimensions of Market Globalization

• 1. Integration and interdependence of national
  economies.
• Governments contribute to this integration by
• Gradually lowering trade and investment barriers
• Increasingly harmonize their monetary and fiscal
  policies within regional economic integration
  blocs (also known as trade blocs), e.g. EU
• Establishing supranational institutions that
  transcend national borders and involve
  cooperation that seek further reductions in trade
  and investment barriers, e.g. the United Nations
  and the WTO.

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2. Rise of Regional Trading Blocs and Economic
Unions

• Trade bloc A free-trade area established by two
  or more countries through multiple tax, tariff,
  and trade agreements, designed to reduce or
  eliminate barriers to cross-border trade and
  investment.
• Examples- the North American Free Trade Agreement
  area (NAFTA), the Asia Pacific Economic
  Cooperation zone (APEC), and Mercosur.
  http//www.apec.org/apec/member_economies/key_econ
  omic_indicators.html
• In more advanced stages, barriers are also
  removed to the cross-border flow of capital and
  labor.
• Economic and Monetary Union A single market with
  a common currency. This is characteristic of more
  advanced stages of economic integration.
• Example- Currently, the only example of an
  economic and monetary union is the European Union
  with its common currency of the euro.

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3. Growth of Global Investment and Financial Flows

• FDI and stock speculation/investment has grown
  dramatically.
• Currency trading to finance cross-border trade
  investment.
• The free movement of capital (denominated in
  dollars, euros, yen, and other world currencies)
  around the world Commercial and investment
  banking has become a global industry.
• The bond market has gained worldwide scope, with
  foreign bonds representing a major source of debt
  financing for governments and firms.

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4. Convergence of Consumer Lifestyles and
Preferences

• Lifestyles and preferences are converging, i.e.
  increasingly standardized
• Transnational media contributes to the
  convergence of buyer preferences
• The loss of traditional lifestyles and values in
  individual countries.

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5. Globalization of Production

• Production Shift Manufacturers search for
  economies of scale and to take advantage of
  national differences in the cost and quality
  factors
• This explains why offshoring to low labor-cost
  locations such as China, Mexico, and Eastern
  Europe is so popular
• Services Shift The service sector is also global
  sourcing.
• Firms in retailing, banking, insurance, and data
  processing are all establishing offshore
  facilities and relationships.
• The real estate giant RE/MAX has established more
  than 5,000 offices in over 50 countries. The
  French firm Accor operates hundreds of hotels
  worldwide.
• The distribution of foreign direct investment has
  changed markedly, from an emphasis on
  manufacturing to services.

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Information Technology

• The cost of computer processing fell by 30
  percent per year during the past two decades, and
  continues to fall.
• Aggressive integration of IT into firms
  value-chain activities, which accounted for 45
  percent of total business investments
• IT alters industry structure, changes the rules
  of competition, and creates new ways to
  outperform rivals, thus forming the basis for
  competitive advantage.
• Data, information, and experience can be readily
  shared via collaboration software within a
  multinational company.
• Smaller firms can leverage IT to design and
  produce customized products that can be targeted
  to narrow, cross-national niches.
• The impact of IT on our daily lives has been
  profound- cell phones, Google, Yahoo, etc.

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Communications Technology

• The most profound technological advances have
  occurred in communications,
• telecommunications, satellites, optical fiber,
  wireless technology, and the Internet.
• The Internet, and Internet-dependent
  communications systems such as intranets,
  extranets, and e-mail, connects millions of
  people across the globe.
• The dot-com boom of the 1990s led to massive
  investment in fiber-optic telecommunications
  cable.
• Transmitting voices, data, and images is
  essentially costless, making Boston, Bangalore
  and Beijing next-door neighbors, instantly.
• The Internet opens up the global marketplace to
  companies that would normally not have the
  resources to do international business.

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Declining Cost of Global Communication and
Growing Number of Internet Users
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Societal Consequences of Market Globalization

• Positive consequences Cross-border trade and
  investment opened the world to innovations and
  progress while increasing performance standards,
  currently known as global benchmarking or world
  class.
• Negative consequences The transition to an
  increasingly single, global marketplace poses
  challenges to individuals, organizations and
  governments.
• Poverty is especially notable in Africa, Brazil,
  China and India where lower-income countries have
  not been able to integrate with the global
  economy as rapidly as others.
• While globalization has created countless new
  jobs and opportunities around the world, it has
  also cost many people their jobs.

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What is Economic Freedom?

• Business Freedom
• Trade Freedom
• Fiscal Freedom
• Government Size
• Monetary Freedom

• Investment Freedom
• Financial Freedom
• Property Rights
• Freedom from Corruption
• Labor Freedom

http//www.heritage.org/research/features/index/ch
apters/pdf/Index2008_Chap4.pdf
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Economic Freedom Enhances Income Growth

• Positive outcomes of market globalization higher
  standards of living
• efficient utilization of resources
• greater access to technology and products
• Liberalization of markets enhances income
• illustrated in Heritage Foundation studies.

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Economic Freedom and Wealth

• Economic freedom explains from 54 to 74 percent
  of the variation in income among countries.
• A 10 increase in economic freedom in a country
  can produce an increase in GNP per capita of 7.4
  to 13.6.
• The message is clear enhancing economic freedom
  can lead to significant improvements in living
  standards.

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Unintended Consequences of Market Globalization

• Loss of national sovereignty
• Power shifts to MNEs and supranational
  organizations concentration of power by MNEs
  leads to monopoly
• Offshoring and the flight of jobs
• Globalization causes dislocation of jobs firms
  shift manufacturing abroad in order to avoid
  workplace safety and health regulations
• Effect on the poor
• Benefits of globalization are not evenly
  distributed
• Effect on the natural environment
• MNEs fail to protect the environment
• Effect on national culture
• Globalization results in loss of national
  cultural values and identity

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Loss of National Sovereignty

• Sovereignty is the ability of a nation to govern
  its own affairs. One countrys laws cannot be
  applied or enforced in another country.
• MNE activities can interfere with the sovereign
  ability of governments to control their own
  economies, social structures, and political
  systems.
• Some corporations are bigger than the economies
  of many nations, e.g. Wal-Marts total revenue is
  larger than the GDP of most nations, including
  Israel, Greece, and Poland.
• Large market nationals can exert considerable
  influence on governments through lobbying or
  campaign contributions, e.g. for the devaluation
  of the home currency which would give them
  greater price competitiveness in export markets.

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Advantages of Offshoring

• Advantages of offshoring
• Economies of scale by centralizing production
  locations
• Low-cost labor advantages in certain countries
  and
• Knowledge-sharing from contracting with
  experienced suppliers.
• Those facing intense competition, shrinking
  profit margins, and unfavorable industry trends,
  may achieve corporate survival through
  offshoring.
• Countries with low cost inputs and more favorable
  business environments clearly benefit from
  offshoring, e.g. China, India, Mexico, Brazil,
  and Poland.

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Loss of National Sovereignty cont.

• Still, even the largest firms are constrained by
  market forces.
• The resources that buyers and suppliers control
  are the result of free choices made in the
  marketplace. In reality, markets dominate
  companies.
• Some argue that gradual integration of the global
  economy and increased global competition combined
  with privatization of industries in various
  nations are making companies less powerful, for
  example Ford, Chrysler, and General Motors once
  completely dominated the U.S. auto market. Today
  many more firms compete in the U.S., including
  Toyota, Honda, Hyundai, Kia, Nissan, and BMW.

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Effect on the Poor

• In poor countries, globalization creates jobs and
  tends to raise wages, yet may also result in job
  losses as automation is implemented for
  labor-intensive jobs, e.g. in India the
  hand-woven textiles industry will soon replace
  the millions of people employed with increased
  use of machinery.
• MNEs are often criticized for paying low wages,
  exploiting workers, and employing child labor.
• Child labor is particularly troubling because it
  denies children educational opportunities that
  would contribute to their future development.

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MNE Activities in Developing Countries

• Example- Nike has been criticized for paying low
  wages to shoe factory workers in Asia, some of
  whom work in sweatshop conditions.
• Labor exploitation and sweatshop conditions are
  genuine concerns in many developing economies.
• Nevertheless, consideration must be given to the
  other choices available to people in those
  countries.
• Finding work in a low-paying job may be better
  than finding no work at all.
• Eliminating child labor does not automatically
  make children go to school instead of to work,
  and can worsen their living standards.

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MNEs as Runaway Corporations

• Multinationals have been the center of
  criticisms, being labeled as runaway or
  footloose corporations - quick to relocate
  production to countries that offer better
  comparative advantages.
• Example- Electrolux, a Swedish manufacturer of
  home appliances, moved its Greenville, Michigan,
  based refrigerator plant to Mexico in 2005.
  Electrolux had provided 2,700 jobs in this
  western Michigan community of 8,000. Despite
  repeated appeals by the local community, the
  labor union, and the State of Michigan - that
  offered incentives to the company to stay -
  Electrolux went with its decision to shift
  manufacturing to Mexico.

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Advantages of Offshoring

• Advantages of offshoring
• Economies of scale by centralizing production
  locations
• Low-cost labor advantages in certain countries
  and
• Knowledge-sharing from contracting with
  experienced suppliers.
• Those facing intense competition, shrinking
  profit margins, and unfavorable industry trends,
  may achieve corporate survival through
  offshoring.
• Countries with low cost inputs and more favorable
  business environments clearly benefit from
  offshoring, e.g. China, India, Mexico, Brazil,
  and Poland.

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The Concept of Ethical Relativism

• The concept of Ethical Relativism is important
  here, i.e. ethics can only be judged within its
  own context. Other jobs in that country may pay
  similar wages, so relative to that country, the
  wages are reasonable. Relative to U.S. standards,
  they are not. Also, although child labor is
  deplorable, lets not forget that the U.S.
  exploited children in much the same way until the
  Child Labor laws were passed.
• Critics insist that such workers be given a
  decent wage, yet legislation to increase
  minimum wage levels can also reduce the number of
  available jobs.
• Countries that attract investment due to low-cost
  labor eventually lose their attractiveness as
  wages rise.
• For most countries, globalization supports a
  growing economy. Example- Vietnam growth of the
  footwear industry has increased wages five times.

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Public Scrutiny of Business Conduct

• To minimize globalizations harm and reap its
  benefits, governments should strive for an open
  economic regime
• Freedom to enter and compete in markets
• Protection of persons and intellectual property
• Rule of law
• Voluntary exchange imposed by markets rather than
  through the political process.
• Governments sometimes scrutinize corporate
  activity, e.g. Sarbanes-Oxley Act of 2002.
• This legislation was a response to a series of
  majorcorporate and accounting scandals including
  those affecting Enron, Tyco International and
  WorldCom.
• A decline in public trust of accounting and
  reporting practices led to this legislation which
  introduced new or enhanced standards for all
  U.S.public company boards and management.

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Offshoring and the Flight of Jobs

• Offshoring is the relocation of manufacturing and
  other value-chain activities to cost-effective
  destinations abroad.
• Examples- Ernst Young has much of its support
  work done by accountants in the Philippines.
  Massachusetts General Hospital has its CT scans
  and X-rays interpreted by radiologists in India.
  Many IT support services for customers in Germany
  are based in the Czech Republic and Romania.
• Offshoring has resulted in job losses in many
  mature economies with relatively high wages.
• 1960s-1970s- The first wave of offshoring began
  in the 1960s and 1970s with the shift of U.S. and
  European manufacturing of cars, shoes,
  electronics, textiles, and toys to cheap-labor
  locations such as Mexico and Southeast Asia.
• 1990s- The next wave began in the 1990s with the
  exodus of service sector jobs in credit card
  processing, software code writing, accounting,
  healthcare, and banking services.

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Effect on the Natural Environment

• Globalization harms the environment by promoting
  increased manufacturing and other business
  activities that result in pollution, habitat
  destruction, and deterioration of the ozone
  layer.
• Example- China is attracting much inward FDI and
  stimulating the growth of numerous industries,
  which results in new factories whose activities
  spoil previously pristine environments also,
  growing industrial demand for electricity led to
  construction of the Three Gorges Dam, which
  flooded agricultural lands, displaced one-million
  inhabitants and permanently altered the natural
  landscape in Eastern China.
• Globalization-induced industrialization produces
  considerable environmental harm, however, this
  harm diminishes over time.

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Corporate Social Responsibility

• Over time, governments pass legislation that
  promotes improved environmental conditions.
• Example- Japan endured polluted rivers and smoggy
  cities in the early decades of its economic
  development following World War II. As Japans
  economy grew, the Japanese passed tough
  environmental standards, aimed at restoring
  natural environments.
• Referred to as Corporate Social Responsibilty
  (CSR), Benetton in Italy (clothing), Alcan in
  Canada (aluminum), Kirin in Japan (beverages),
  and Starbucks (environmentally sound coffee
  growing practices and farmer welfare) are
  examples of firms that embrace practices that
  protect the environment, often at the expense of
  profits.

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Effect on National Culture

• Market liberalization opens the door to foreign
  companies, global brands, unfamiliar products,
  and new values.
• In the business sector, firms employ similar
  technologies and production methods worldwide,
  leading to more uniform operating methods and
  outputs.
• Consumers increasingly wear similar clothing and
  drive similar cars, listen to the same recording
  stars, modeled increasingly according to Western
  countries, especially the U.S.
• Thus, peoples norms, values, and behaviors tend
  to homogenize over time. Transnational
  advertising lead to the emergence of societal
  values
• Critics call these trends the McDonalds-ization
  or the Coca-Colonization of the world,
  referring to a type of cultural colonization.

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Concerns over Cultural Imperialism

• Governments try to block cultural imperialism
  and prevent the erosion of local traditions.
• In France, Canada, and Belgium, laws were passed
  to protect national language and culture.
• The flow of cultural influence often goes both
  ways - Advanced Fresh Concepts is a Japanese food
  company that is transforming American fast food
  by selling sushi and other Japanese favorites in
  supermarkets throughout the U.S.
• Cultural imperialism is offset by the opposite
  trend of nationalism.
• Homogenization of world cultures is promoted by
  global media people are exposed to movies,
  television, the Internet, and other information
  sources that promote certain lifestyles.
• Global media have a pervasive effect on local
  culture, gradually shifting it toward a universal
  norm.

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Relationship Between Globalization and Growth in
Per Capita Gross Domestic Product, 1990s
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Firm Level Consequences of Market Globalization

• Countless new business opportunities for
  internationalizing firms
• New risks and intense rivalry from foreign
  competitors
• More demanding buyers who source from suppliers
  worldwide
• Greater emphasis on proactive internationalization
  
• Internationalization of firms value chain

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Firm Level Consequences of Globalization

• The most significant implication of market
  globalization for companies is that a purely
  domestic focus is no longer viable for firms in
  most industries.
• Market globalization compels firms to
  internationalize their value chain, and adopt a
  global rather than a local focus.
• Value chain The sequence of value-adding
  activities performed by the firm in the process
  of developing, producing, and marketing a product
  or a service.
• Globalization is the heightened ability of a firm
  to internationalize its value chain (reconfigure
  key value-adding activities), leading to greater
  international integration and cost efficiencies.

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Examples of How Firms Value Chain Activities Can
Be Internationalized
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Internationalization of the Firms Value Chain

• Value Chain the sequence of value adding
  activities performed by the firm in the process
  of developing, producing, marketing, and
  servicing a product.
• Market globalization compels firms to reconfigure
  their sourcing, manufacturing, marketing, and
  other value-adding activities on a global scale.
• Reasons for reconfiguring value adding activities
  include potential cost savings the need to
  access customers, inputs, labor, or technology
  and the opportunity to exploit foreign partner
  capabilities.

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Implications for Management

• Building interconnectedness global
  orchestration of value-chain activities
• Exploiting knowledge
• Search for maximum flexibility in
  manufacturing, sourcing and other value-adding
  activities
• Relentless search for productivity gains and
  operational efficiency
• Recognizing, cultivating, and measuring key
  global strategic assets of the organization
• Gaining and sharpening partnering capabilities

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Implications for Managers Acquiring Global
Competence is a Requirement

• Open-mindedness
• Tolerance for ambiguity
• Perceptiveness
• Premium on personal relationships
• Flexibility, adaptability, and self-reliance 
• Good sense of humor
• Warmth in human relationships
• A curious mind

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Environments of International Business

• Environment
• All the forces influencing the life and
  development of the firm
• Forces
• External Forces (Uncontrollable) Forces over
  which management has no direct control
• Internal Forces (Controllable) Forces that
  management can use to adapt to external forces

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International Business Model
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Reference Books on Globalization

• The World is Flat A Brief History of the
  Twenty-First Century by Thomas L. Friedman, New
  York Farrar, Straus and Giroux, 2005 and 2006.
• The Next Global Stage Challenges and
  Opportunities in Our Borderless World by Kenichi
  Ohmae, Pearson Education, Inc./ Wharton School
  Publishing, 2005.
• Tectonic Shift The Geoeconomic Realignment of
  Globalizing Markets by Jagdish N Sheth and
  Rajendra Sisodia, New Delhi Response Books
• The Culture Code An Ingenious Way to Understand
  Why People around the World Live and Buy As They
  Do by Clotaire Rapaille, Broadway Books, 2006.