enu globalisation 280712

Go Global !Global Economic Environment :Global Economic Environment :Understanding Globalisation and the Global Economy

By

Stephen OngStephen OngEdinburgh Napier University Business School

[email protected] Professor, College of Management, Shenzhen

University29 July 2012

Learning Objectives

To define globalization and international business and show how they affect each other

To discuss globalization’s future and the major criticisms of globalization

To understand why companies engage in international business and why international business growth has accelerated

To become familiar with different ways in which a company can accomplish its global objectives

AgendaAgenda

1. The Global Economy2. Understanding Globalisation3. Global institutions4. Global drivers5. The Globalisation Debate6. Companies & Globalisation

IntroductionIntroduction

Globalization is the ongoing process that deepens and broadens the relationships and interdependence among countries

International Business (IB) is a mechanism to bring about globalization

IntroductionIntroduction

International business consists of all commercial transactions—including sales, investments, and transportation—that take place between two or more countries– increasingly foreign countries are

a source of both production and sales for domestic companies

Introduction

7

1. Global Economy 1. Global Economy (2008 estimates CIA yearbook, World Bank)Country GDP($B) Population (m) Agriculture Industry Services (%GDP)USA 14330 301.6 1% 20% 79%EU 18850 324 2% 27% 71%Japan 4844 127.7 2% 25% 73%Brazil 1665 191.6 8% 38% 54%Russia 1757 142.1 5% 37% 58%India 1237 1124.7 20% 19% 61%China 4222 1318.3 12% 48% 40%Hong Kong 223 6.9 0% 9% 91%Taiwan 401 23 2% 25% 73%Singapore 154 4.5 0% 34% 66%Malaysia 214 26.5 8% 48% 44%Indonesia 510 225.6 13% 46% 41%Iran 382 71 11% 42% 47%Botswana 13 1.8 2% 47% 51%

1.1 World economic order 2040

1.2 Developed Economies GDP

1.3 Emerging Economies1.3 Emerging Economies

1.4 reEmerging Economies1.4 reEmerging Economies

1.5 Why Latin America ?

1.6 World exports 20051.6 World exports 2005

1.7 Inflation & deflation

1.8 Energy Use 2005

1.9 Emerging economies & FDI 1.9 Emerging economies & FDI

1.10 BigMac PPP Index

1.11 Car Ownership

1.12 Demographic Changes

1.13 Business Confidence

1.14 Production costs1.14 Production costs

1.15 Global Business Hubs

1.16 Forces Driving Globalization1. Increase in and application of technology

2. Liberalization of cross-border trade and resource movements

3. Development of services that support international business

4. Growing consumer pressures

5. Increased global competition

6. Changing political situations

7. Expanded cross-national cooperation

2. What is Globalization?

The shift towards a more integrated an interdependent world economy

Two components:– globalization of markets

– globalization of production

2.1 Globalization of Markets

The merging of distinctly separate national markets into a global marketplace– Consumer tastes and preferences are converging into a

global norm

– Firms that offer standardized products worldwide help create a global market

2.2 Globalization of Consumer Markets?

Significant differences still exist between national markets on many relevant dimensions:

Consumer tastes, preferences and values

Distribution channels and legal regulations

Business systems

These differences require that product features, marketing and operating strategies be customized (localized) to best match the conditions in a country

2.3 Globalization of Markets?

Countries are significantly different

Range of problems are wider and more complex

Government intervention in trade and investment creates problems

International investment is impacted by different currencies

2.4 Globalization of Production

The sourcing of goods and services from locations around the world

Takes advantage of differences in cost or quality of the factors of production

Labor

Land

Energy

Capital

2.5 Impediments to Global Production

Formal and informal trade barriers

Restrictions on foreign direct investment

Transportation costs

Economic and political risk

2.5 Globalization of Services

Historically, this has been primarily confined to manufacturing enterprises

Increasingly, firms are taking advantage of modern communications technology and the Internet to outsource service activities to low-cost producers in other nations

Trade in services currently accounts for 20% of all international trade

3. Emergence of Global Institutions

Globalization creates the need for institutions to help manage, regulate and police the global marketplace

– GATT

– WTO

– IMF

– World Bank

– United Nations

3.1 General Agreement on Tariffs & Trade

GATT was established to:– police the world trading system

– remove barriers to the free flow of trade, services and capital between nations

Uruguay round created the World Trade Organization

3.2 World Trade Organization

150 member nations (97% of world trade)

assumed prior GATT agreements and extended GATT to include services and intellectual property

promotes lower trade and investment barriers

3.3 IMF and World Bank

International Monetary Fund (IMF) and the World Bank were created in 1944 by 44 nations that met at Bretton Woods, New Hampshire

IMF was created to maintain order in the international monetary system

World Bank was created to promote economic development through low-interest loans

3.4 United Nations Established in 1945 by 51 nations

– committed to preserving peace through international cooperation and collective security

Membership is now at 191 countries

Four main purposes 1. Maintain international peace and security

2. Develop friendly relations among nations

3. Cooperate in solving international problems and in promoting respect for human rights

4. Serve as a center for harmonizing the actions of nations

4. Global Drivers

Two macro factors underlie the trend towards greater globalization

1. Decline in trade and investment barriers

2. Technological change

4.1 Global Drivers of Globalization – Decline in Trade and Investment Barriers

4.1.1 World Exports4.1.1 World Exports

GermanyUnited States

ChinaJapan

FranceNetherlands

United KingdomItaly

0 2 4 6 8 10 12

9.20

8.59

8.025.38

4.063.83

3.71

3.40

Source: World Trade Organization

Percentage Share of World Exports, Selected Nations, 2007

4.1.2 Average Tariff Rates

4.1.3 Average Tariff Rates on Manufactured Products as Percent of Value

4.1.2 Foreign Direct Investment

Firms investing in resources in business activities outside its home

country

4.1.3 Fewer FDI Restrictions

Nations recognize the increasing Nations recognize the increasing importance of FDIimportance of FDI

Between 1992 and 2005

– 2,226 changes worldwide in laws governing FDI – 94% created a more favorable investment climate

As of 2005

– 2,495 bilateral FDI treaties involved 160 nations – twelvefold increase from 181 treaties in 1980

4.1.4 Decline in Trade and Investment Barriers

Resulting in:

volume of world trade has grown faster than the world economy

flow of FDI has grown faster than the growth in world trade and world output

4.1.5 Volume of World Trade and Production 1950-2002

4.1.6 Growth of World Trade, Production & FDI 1992-2004

4.1.7 Decline in Trade and Investment Barriers

Globalization of markets and production and the integration of the world economy has resulted in the increasing:

– attacks by foreign competitors in domestic markets

– overall intensity of competition

Measuring GlobalizationMeasuring Globalization

Globalization can be difficult to measure

The A.T. Kearney/Foreign Policy Globalization Index ranks countries by– Economic dimensions

– Technological dimensions

– Personal contact

– Political dimensionsrecently ranked Singapore and Hong Kong as

most globalized

4.1.8 Openness = Trade / GDP4.1.8 Openness = Trade / GDP

4.2 Global Drivers of Globalization Global Drivers of Globalization – – Technological ChangeTechnological Change

4.2.1 Global Drivers of Globalization - Technological Change

1. Microprocessors and Telecommunications

- lower the real costs in information processing and communication and facilitate global dispersion

2. Transportation Technology

- lower costs & transit times due to containerization

3. Internet and World Wide Web

- information backbone of the global economy

4. Production, Packaging and distribution processes

- Machines have increased speed, reliability, energy efficiency, product shelf life

4.2.2 Implications of Technological Change

Lower costs of transportation and information processing has facilitated the dispersion of production to geographically separate locations and the growth in international trade in services

Technological innovations have facilitated the globalization of markets

4.2.3 Global Drivers of Globalization

A Word of Caution

One must not overemphasize these trends!

Communication and transportation technologies are creating a “global village”

But significant national differences remain in culture, consumer preferences and business practices

4.3 Changing Demographics of the Global Economy

As late as the 1960’s US dominated the world economy and trade

US dominated the global foreign direct investment

Large, US multinationals dominated the scene

Half the globe was Communist World and off limits

4.3.1 Changing Demographics of the Global Economy

US is a smaller player in the global economy as a

– producer and exporter

– source of and recipient of FDI

A similar trend occurred in other developed countries

The share of world output accounted for by developing nations is rising and is expected to exceed more than 60% of world economic activity by 2020

4.4 Changing Pattern of World Output and Trade

4.5 Percentage Share of Total FDI Stock 1980-2005

4.6 FDI Inflows 1988-2006

4.7 Changing Demographics

of the Global Economy

Changing nature of multinationals

– Mini-multinationals grow in importance

– Non-US multinationals play greater role

4.8 Changing Demographics of the Global Economy

Collapse of the USSR and Communist nations

Emergence of “BRIC’s”– Brazil

– Russia

– India

– China

4.9 Global Economy of the 21st Century?

Recently, we have seen the :– changing demographics of the global

economy– removal of trade and investment barriers

Resulting in national economies integrating into a more interdependent, global economy

However, it is hazardous to use current trends to predict the future

The world may be moving towards a more global economic system, but globalization in not inevitable

5. The Globalization Debate

Is the shift toward a more integrated and interdependent global economy a

good thing?

5.1 Globalization Debate: The Pro’s

Improves the efficiency of production

Lowers the prices for goods and services

Stimulates economic growth and job creation

Raises consumer income and prosperity levels

Rising income levels lead to demands for greater environmental protection (Grossman & Kruger)

5.1.1 Environmental Pollution and Income Levels

Fig 1.6

5.2 Globalization Debate:The Con’s

Limits national sovereignty

Facilitates cultural imperialism

Destroys manufacturing jobs in wealthy countries

Lowers wage rates of unskilled workers in wealthy, advanced countries

Shifts manufacturing to countries with fewer labor and environmental regulations

Costs of GlobalizationCosts of Globalization

• Threats to national sovereigntyThreats to national sovereignty– lose freedom to “act locally”lose freedom to “act locally”

• Economic growth and environmental Economic growth and environmental stressstress– growth consumes nonrenewable natural growth consumes nonrenewable natural

resources and increases environmental resources and increases environmental damagedamage

• Growing income inequality and Growing income inequality and personal stresspersonal stress– promotes global superstars at the promotes global superstars at the

expense of othersexpense of others

Costs of GlobalizationCosts of Globalization

Offshoring involves the transferring of production abroad – it can be beneficial because it reduces

costs

– but, it also means that jobs move abroad

Yet, offshoring may also create new, better jobs at home

5.3 Globalization and the World’s Poor

Critics argue that globalization has not helped poor– 1870: per capita income of 17 richest nations was 2.4x that of all

other countries

– 1990: it was 4.5x larger

Other factors may have influenced the gap– Totalitarian governments– Economic policies that destroyed wealth

creation– Corruption – little protection of property rights – Expanding populations– Civil unrest and war

5.4 Pressures for Localization

Non-Tariff Barriers

Cultural Differences

Consumer Preferences

Differences in Infrastructure

Dynamic Distribution Channels

5.5 Forces Against Globalization

Nationalism and Regional Separatism

Cultural Identity and Economic Sovereignty

Limited Natural Resources

Human and Labor Rights

IMF Reformers and Debt Relief

Environmental NGO’s and Anti-Globalization

5.6 Recent WTO Major Setbacks

““Battle in Seattle”Battle in Seattle”

Doha Trade Round Doha Trade Round CollapseCollapse

5.7 Management Challenges in the Global MarketplaceNations have profound and enduring

differences in: – cultures,

– political systems,

– economic systems,

– legal systems and

– levels of economic development

Requiring firms to vary practices across nations

5.8 Management Challenges in the Global Marketplace Range of problems confronted in an

international business is wider and the problems more complex than those in a domestic business

Firms have to find ways to work within the limits imposed by government intervention in the international trade and investment system

International business transactions involve converting money into different currencies

6. Companies & Globalisation6. Companies & Globalisation

To expand sales– pursuing international sales increases the

potential market and potential profits

To acquire resources– may give companies lower costs, new and

better products, and additional operating knowledge

To diversify or reduce risks– international operations may reduce operating

risk by smoothing sales and profits, preventing competitors from gaining advantage

Why Companies Engage in Why Companies Engage in International Business (IB)International Business (IB)

These three reasons – sales expansionsales expansion

– resource acquisitionresource acquisition

– risk minimizationrisk minimization

guide all decisions about whether, where, and how to engage in international business

Modes of Operations in IBModes of Operations in IB

Merchandise exports – goods that are sent out of a

country

Merchandise imports– goods that are brought into a

country

Sometimes referred to as visible exports and imports


Service exports– provider and receiver of payment

Service imports– recipient and payer of payment

Examples– Tourism and transportation

– Service performanceturnkey operations and management contracts

– Asset uselicensing and franchising


Investments – Foreign Direct Investment

(FDI)investor takes a controlling interest

in a foreign company

–joint venture

– Portfolio Investmenta non-controlling financial interest in

another entity

Types of International OrganizationsTypes of International Organizations

Collaborative arrangements – Joint ventures

– Licensing arrangements

– Management contracts

– Minority ownership

– Long-term contractual arrangements

Strategic alliance – companies that work together, but the

agreement is critical to at least one partner

– an agreement that does not involve joint ownership


Multinational enterprises (MNEs) – take a global approach to markets and

production or have operations in more than one country

Sometimes they are referred to as– multinational corporations (MNCs)

– multinational companies (MNCs)

– transnational companies (TNCs)


In foreign markets, companies may have to adapt their typical methods of doing business– foreign conditions may

dictate a particular method

– operating modes may be different from those used domestically

Why IB is DifferentWhy IB is Different

The external environment affects a company’s international operations

Managers must understand social science disciplines and how they affect functional business fields

Consider

– physical factorsphysical factors

– social factorssocial factors

– competitive factorscompetitive factors

Physical and Social FactorsPhysical and Social FactorsGeographic influences

– natural conditions influence production locations

Political policies– determines where and how business occurs

Legal policies– influence how a company operates

Behavioral factors– may require changes in operations

Economic forces – explain differences in costs, currency values,

market size

The Competitive EnvironmentThe Competitive Environment

Competitive strategy for products– Cost strategy

– Differentiation strategy

– Focus strategy

Company resources and experience– market leaders have more resources for

international operations

Competitors faced in each market– local or international

The Competitive EnvironmentThe Competitive Environment

So, a company’s competitive strategy influences how and where it can best operate

Its competitive situation may differ from country to country in terms of its relative strength and which competitors it faces

Looking to the FutureLooking to the FutureThree major perspectives on the

future of international business and globalization– Further globalization is inevitable

– International business will grow primarily along regional rather than global lines

– Forces working against further globalization and international business will slow down both trends

Casestudy : The Global Casestudy : The Global Pharmaceutical industryPharmaceutical industry

1.1. Read and prepare the Read and prepare the Casestudy on The Global Casestudy on The Global Pharmaceutical Industry Pharmaceutical Industry (Johnson, Whittington & (Johnson, Whittington & Scholes (2011)) for Scholes (2011)) for discussion and discussion and presentation next week. presentation next week.

2.2. Identify and evaluate the Identify and evaluate the challenges facing global challenges facing global pharmaceutical firms the pharmaceutical firms the External Environment and External Environment and Industry analysis – PESTEL Industry analysis – PESTEL and Five Forces.and Five Forces.

ConclusionConclusion

►““A powerful force drives the world A powerful force drives the world toward a converging commonality, toward a converging commonality, and that force is technology. The and that force is technology. The result is a new commercial reality result is a new commercial reality – the emergence of global markets – the emergence of global markets for standardized consumer for standardized consumer products on a previously products on a previously unimagined scale of magnitude.” unimagined scale of magnitude.” Theodore Levitt

Next Week : Discussion PaperNext Week : Discussion Paper

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Questions?Questions?