sessions 1-3- globalization and its impact

8/7/2019 Sessions 1-3- Globalization and its impact

1/52

Globalization and its Impact

Sessions 1-3


2/52

Refers to shift toward a more integratedand

interdependent world economy.

Globalization

Globalization of

Markets

Globalization of

Production

Merging of historically

distinct & separate national

markets into one huge global

market place

Sourcing of goods / servicesfrom locations around the

globe to take advantage of

national differences in the cost/

quality of factors of production.


3/52

International Trade occurs when a firm exports

goods /services to consumers in another country

Foreign Direct Investment (FDI) occurs when a firmInvests resources in business activities outside its

home country.


4/52

Drivers of Globalization

1.) Decline in barriers to the free flow of

goods, services,and capital.

2.) Technological change.

3.)Industrialization and economic development.

4.)Integration of world financial markets &

development of institutions that support & faciilitate

International trade.5.)Increased global competition.


5/52

Declining Trade &

Investment

Barriers

Cutting tariffs on import

of industrial goods,

services & agricultural

products.

Phasing out subsidies to

agricultural producers

Reducing barriers to

cross-border invetsment

Limiting use of anti-

dumping laws

Reducing barriers to

Foreign Direct Investment

Allows a firm to

base production

at the optimal

location to drive

down production

costs / increase

product quality

World economies

becoming more

inter-twined.

World is

becoming

wealthier.


6/52

TechnologicalChange

Development of micro-

processors & advances

In telecommunication

technology.

Rapid growth of internet

and world-wide web

Innovations in

transportationtechnology.

Dispersal of

production/markets to

geographically separate

locations has become

economical.

Real costs of processing

and communication have

fallen.

Mass movement of

people across countries.

Worldwide culture created

through global media


7/52

Changing Demographics of the Global Economy

Changing World Output and World Trade Picture

Share in the world output /exports of U.S., Germany,

France & U.K. has slipped.

China's share has increased.

Changing Foreign Direct Investment Picture

Share in FDI flows of U.S.declined from 66.3% in 1960 to

30% in 2003.

Increased flow of foreign investment into developing nations.

Changing Nature of Multi-national Enterprises

Rise of non-U.S. multi-nationals(drop of U.S. from 48.5 in

1973 to 28% in 2002.)

Rise of mini-multi-nationals.


8/52

Changing Demographics of the Global Economy

The Changing World Order and the 21st century

Former Communist nations of Europe and Asia are moving

towards democratic politics and free market economies.

China is progressively moving towards free market reforms.

Latin America moving towards democracy & free market

Reforms.

Privatization of state-owned businesses, widespread adoptionof deregulation, opening of markets to more competition,

removing of barriers to cross-border trade/investment.


9/52

International Companies

Multi-national /

Transnational

Companies

Globally

Integrated

Company

Multi-

Domestic

Company


10/52

Risks in International Business

RisksCross-Cultural

Risk

Commercial

Risk

Currency(Financial)

Risk

Country

Risk


11/52

PROS AND CONS OF GLOBALIZATION

JOBS AND INCOME

Loss of jobs in developednations by out-sourcing

of jobs to low-wage

nations, thereby leading

to higher unemployment

and and lower living

standards in homenations.

Leads to cost-effectiveness

and reduction of product

prices

More pollution

Exploitation of labor of less

developed countries.

Tougher environmental /

labor regulations.

f Rising income levels lead to lesser

Pollution.

f Labor well-treated /

ethical standards.

LABOR POLICIES AND THE ENVIRONMENT


12/52

NATIONAL SOVEREIGNTY

Power shifts away from national

Governments to supranational

Organziations such as the WTO,

UN.

f Existence of WTO and UN rests on

the support received from member

states.

Divide between the rich and

the poor nations increases.

WORLD'S POOR


13/52

Global Institutions

World Trade Organization ( Previously GATT)

Policing the world trading system & ensuring nation-states adhere to the rules laid

down in trade treties signed by member states.

Facilitating the establishment of additional multinational agreements between

member states. Objective is to liberalize trade.

International Monetary Fund / World Bank

To maintain order in the international monetary system.

Lender of last resort to nation-states in economic turmoil.

To promote economic development.

United Nations To maintain international peace & security.

To develop friendly relations among nations.

To cooperate in solving international problems / promoting respect for human rights.

Be a centre for harmonizing the actions of nations.


14/52

Political Factors and Legal Systems in Global

Business Environment

Sessions 4 - 6


15/52

Political System

System of Government in a nation

Collectivism Socialism Individualism Democracy Totalitarianism

Communist Theocratic Tribal


16/52

Collectivism

Stresses the primacy of collective goals over individual goals.

Needs of society as a whole more important than individualfreedom.

Socialism

Means of production owned by states for benefit of labor.

Communists violent revolution & totalitarian dictatorship

Social Democrats- democratic means.

Individualism

Individual to have freedom in his/her economic/political pursuits.

Interests of the individual to take precedence over interests of

the state.


17/52

Democracy

Government is by the people, exercised either directly or

through elected representatives.

Totalitarianism

One person/political party exercises absolute control over

all spheres of human life and prohibits opposing parties.

Socialism can be

achieved only

through

totalitarian

dictatorship.

Communist

Political power

monopolized by a

party, group, individual

that governs according

to religious principles.

Theocratic

Political party that

represents the interest

of aparticular tribe

monopolizes power.

Tribal


18/52

Economic Systems

All productive

activities are privately

owned.

Production isdetermined by the

interaction between

demand & supply.

Role of government

Is to encourage

Vigorous free & fair

competition between

private producers.

Quantity of goods &

services to be

produced & their

prices decided

by Government.

All businesses areState owned.

Certain sectors are

left to private

ownership & free

market mechanism

Other sectors have

significant stateownership &

Government planning.

Market Command Mixed


19/52

Rules or laws that regulate behavior along with the processes by

which laws are enforced and through which redress forgrievances is obtained.

Legal Systems

Based on tradition

(legal history),

precedent ( cases

that have come before

thecourts in the past)

and custom(ways in

which laws are applied

inspecific situations).

Based on detailed

set of laws

organized into

codes.

Law based on

Religious teachings.

Common Civil Theocratic


20/52

Bundle of legal rights :

Over the use of a resource

Use of any income derived from the resource

Property Rights

Right over property that is the product

of intellectual activity

Intellectual Property Right

Grants the inventor of a

new product or processexclusive rights for a

defined period to the

manufacture,use or sale

of that invention.

Patent

Exclusive legal rights

of authors, artist,

composers &

publishers to publish

& disperse their work.

Designs & names

by which merchants/manufacturers

designate &

differentiate their

products.

Copyrights Trademarks


21/52

Economic System and the Political Economy

Sessions 7 - 8


22/52


23/52

Broader Conceptions of Development

Human Development Index

Life Expectancy at birth (function of health care)

Educational Attainment (adult literacy rate & enrollment in

primary, secondary& tertiary education) Whether average incomes sufficient to meet basic needs

(adequate food, shelter & health care).


24/52

Relationship between Political Economy and

Economic Progress

Impact of innovation and entrpreneurship.Importance of market economy forinnovation / entrepreneurship

Importance of strong property rights

Political system ( democracy / totalitarian regime).

Economic progress leads to a democratic regime.


25/52

Relationship between Geography and

Economic progress.

Topography ( Mountaineous/ landlocked/coastal) Climate

Rate of disease

Condition of soil


26/52

Transition in States

Factors leading to spread in Democracy

Totalitarian regime falied to deliver economic progress. New information/communication technologies led to

spread of democratic ideals/information from free societies.

Increasingly prosperous middle & working class pushed

for democratic reforms.

Effect of Global Terrorism

Tension between civilizations

Clash of value systems and ideology.

Spread of Market-Based Systems

Privatization

Deregulation of economies to promote greater competition.


27/52

Economic Transition

Deregulation Removing legal restrictions to free play of market.

Removing restrictions to operations of private enterprises.

Removing restrictions to direct investment by

foreign enterprises.

Deregulation Removing legal restrictions to free play of market.

Removing restrictions to operations of private enterprises.

Removing restrictions to direct investment by

foreign enterprises.

Privatization Transfer of ownership of state property into hands of

private individuals.

No sheltering of privatized firms from competition.

Proper corporate governance of the privatized firms.

Legal Systems Protection of property rights.


28/52

Overall Attractiveness of a Country

Overall

Attractiveness

BenefitsSize of Economy

Likely Economic Growth

Costs

CorruptionLack of Infrastructure

Strict standards with regard

to product safety, environmental

pollution etc.

Absence of cap on damage

awards

RisksPolitical risks, Social unrest/Anti-Business Trends

Economic Risks: Economic Mismanagement

Legal Risks:Failure to Safeguard

Property Rights


29/52

International Trade Theory

Sessions 9-11


30/52

Mercantilism

It was in a country's best interests to maintain a

trade surplus,(export more than it imported), thereby

accumulating gold and silver to increase national wealth.

Viewed trade as a zero-sum game (gain in one country

results in loss by another.)


31/52

Theory of Absolute Advantage (Adam Smith)

A country has an absolute advantage in the production

of a product when it is more efficient than any other

country in producing it.

Countries should specialize in the production of goods

for which they have an absolute advantage and then trade

these for goods produced by other countries.

A country should never produce goods that it can buy at

a lower cost from another country.


32/52

Theory of Comparative Advantage ( Ricardo)

fA country should specialize in the production of

those goods that it produces most efficiently and

buy the goods that it produces less efficiently

from other countries.

Potential world production is greater with

unrestricted free trade than it is with restricted trade.

Differences in labor productivity between nations

underlie the notion of competitive advantage.


33/52

Critique of the Ricardian Model (PPF is not necessarily a straight

line)

Immobile Resources Resources do not always move easily from one

economic activity to another.

Diminishing Returns to Specialization

The number of units of resources required to produce

each unit of output increases with additional units ( not

all units are of same quality or different goods use

resources in different proportions.)

Dynamic Effects and Economic Growth

Free trade changes a country's stock of resources and

the efficiency to utilize those resources.


34/52

Hecksher Ohlin Theory

Comparative advantage arises from differences

in national factor endowments (extent to which country

is endowed with land, labour, capital).

Nations have varying factor endowments, leading to

varying costs. More abundant a factor, lower the cost.

Critique :Assumes that technologies are same across countries.

( leading to Leontief Paradox).


35/52


36/52

Product Life Cycle Theory

New product

introduced in

U.S.

Low level of

Exports to

Developing

countries

Increase in

demand for

new product

New Product

produced by

foreign producers

In home

coutry.

Market in U.S.

matures, product

standardized,

competition on price

Producers in

low cost

countries able

to produce

at low cost

Locus of

production

switches to

developing

countries.

U.S. Becomes an

importer for

the product


37/52

New Trade Theory

Economies of scale are unit cost reductions associated witha large volume of output.

Through impact of economies of scale trade can

increase the variety of goods available to consumers and

decrease the average cost of goods.

When the output required to attain economies of scalerepresents a significant proportion of total world demand,

global market may be able to support a small number of

enterprises.

First entrants into the industry gain first-mover advantages.


38/52

National Competitive Advantage Porter's Diamond

Firm Strategy,

Structure, and

Rivalry

Factor

Endowments

Demand

Conditions

Related and

Supporting

Industries


39/52

Country- Similarity Theory

Economic

Similarity of

Industrial

Countries

Similarity

of

Location

Cultural

Similarity

Similarity of

Political &

Economic

Interests


40/52

Parameters for Sustaining Superior Performance at all Levels

COUNTRY LEVEL COMPETENCIES & INVESTOR-CONFIDENCE

RAISING FRAMEWORKS

Presence of institutions & mechanisms that promote investor

confidence , skill &resource accumulation,human capital

Build-up, regulatory systems etc.

ORGANIZATIONAL LEVEL STRATEGIES, STRUCTURES,

CULTURES, REWARDING SYSTEMS, SENSE OF PURPOSEIN SOCIETY

Leadership that promotes employee empowerment,

Experimentation & entrepreneurship

INDIVIDUAL LEVEL COMPETENCIES TALENTS, SKILLS,

MOTIVATION, LEARNING ABILITY & COMMITMENT TO EXCELLENCE

Individual's & organization's beliefs in self-development & skills

upgradation


41/52

Implications of International Trade Theory for Business

Location

A firm should disperse its production activities to thosecountries where they can be performed more efficiently.

First-Mover Advantages

Where global market supports few firms, it pays off to invest

substantial financial resources to to build first-mover

advantage

Government Policy

Firms having pivotal role in international trade can exert a

strong influence on governmnet trade policy.

Building Factor Endowments

Firms should build up their factors by invetsing in training &

greater commitment to R&D.


42/52

The Political Economy of International Trade

Sessions 12-15


43/52

Instruments of Trade Policy

Tariffs Subsidies ImportQuotas

Voluntary

Export

Restraints

Local

ContentRequire

ment

Administr

-ative

Policies

Anti-

Dumping

Duties


44/52

Instruments of Trade Policy

Tariff

Tax levied on imports (or exports)

Specific Tariffs

Levied as a fixed charge for

each unit of a good imported

Ad Valorem Tariffs

Levied as a proportion of the

value of goods imported.

Tariffs are pro-producer and anti-consumer (protect producers from

foreign competitors; restriction of supply raises domestic prices.

Import tariffs reduce overall efficiency of world economy.


45/52

Subsidy

Government payment to a domestic producer

Cash GrantsLow-interest

LoansTax Breaks

Government

Equity

Participation

Helps :

To compete against foreign imports& gain export markets.

Achieve a first-mover advantage in an emerging indutry

Gains to the domestic economy due to increased employment

and tax revenues.

Allows inefficient producers to stay in business.

Encourages countries to overproduce heavily subsidized products

Encourgaes countries to produce which could be imported at lower cost

Reduces international trade in the subsidized product.


46/52

Import Quota

Direct restriction on the

quantity of some good that

may be imported Into a country.

Voluntary Export Restraint

Quota on trade imposed by the

exporting Country, typically at the

request of the importing countrys

government.

Tariff Rate Quota

A lower tariff rate applied to

imports within the quota than

those over the quota.

Benefit domestic producers by limiting import competition.

Raises domestic price of an imported good; in case of excess demandraises price of both domestically produced and imported good.


47/52

Local Content RequirementRequirement that some specific fraction of a good

should be produced domestically.

Physical Terms

A certain % of components of

product to be produced

locally

Value

A certain % of value of

product to be produced

locally


48/52

Administrative Trade Policies

Bureaucratic rules designed to make it difficult for importsto enter a country.

Anti-dumping Policies

Policies designed to punish foreign firms that enagage in

Dumping ( selling goods in a foreign market at belowTheir costs of production, or selling goods in a foreign

Market at below their fair market value.


49/52

Case for Government Intervention

Protecting Jobs & Industries

National Security

Forcing trade partners to

play by the rules of the game. Protecting consumers from

unsafe products.

Furthering foreign policy

objectives.

Protecting human rights

Need to protect infant industry

Helping firms' to gain first-moveradvantages and help overcome

Barriers to entry creted by foreignfirms.

Political Arguments Economic Arguments


50/52

World Trade Organziation (WTO)

Is responsible for arbitraing trade disputes and monitoring /

enforcing trade policies of member countries.

Trade policies with respect to manufactured goods (GATT).

Trade policies with respect to services and intellectualproperty.(1995)

Opening up of telecommunications market to competition

and FDI (1998).

Liberalize cross-border trade in financial services (March 1999).

Cutting tariffs on industrial goods and services, phasing out

Subsidies to agricultural products, reducing barriers to cross-border

Invetsment & limiting use of anti-dumping laws. (DOHA round)


51/52

Principles of Trading System under WTO

1.) Trade without discrimination

a.) MFN : Treating other people equally.

b.) National Treatment : Treating foreigners & nationals

equally.

2.) Freer Trade : Gradually through negotiations.

3.)Predictibility of business environment.

4.)Promoting fair competition.5.) Encouraging development & economic reform.


52/52

Implications for Managers

Effect on Firm's Strategy

Tariff barriers raise the costs of exporting products toa country, leading to comeptitive dis-advantage vis-a-vis

indigenous competitors.

Quotas may limit a firm's ability to serve a country from

locations outside of that country.

Local content regulations may force a firm to locate moreproduction activities in a given market than it would otherwise.

PolicyImplications

Firms can exert a strong influence on Government policy with

respect to protectionism, free trade etc. which further has a

direct impact on business.

sessions 1-3- globalization and its impact

Documents