International Business 9e By Charles W L Hill McGraw Hill Irwin Copyright 2013 by The McGraw Hill Companies Inc All rights reserved Chapter 1 Globalization What Is Globalization Globalization the shift toward a more integrated and interdependent world economy The world is moving away from selfcontained national economies toward an interdependent integrated global economic system 1 3 What Is The Globalization of Markets Historically distinct and separate national markets are merging It no longer makes sense to talk about the German market or the American market Instead there is the global market falling trade barriers make it easier to sell globally consumers tastes and preferences are converging on some global norm firms promote the trend by offering the same basic products worldwide 1 4 What Is The Globalization of Markets Firms of all sizes benefit and contribute to the globalization of markets 97 of all U S exporters have less than 500 employees 98 of all small and mid sized German companies participate in international markets 1 5 What Is The Globalization of Production Firms source goods and services from locations around the globe to capitalize on national differences in the cost and quality of factors of production like land labor energy and capital Companies can lower their overall cost structure improve the quality or functionality of their product offering 1 6 Why Do We Need Global Institutions Global institutions help manage regulate and police the global marketplace promote the establishment of multinational treaties to govern the global business system 1 7 Why Do We Need Global Institutions Examples include the General Agreement on Tariffs and Trade GATT the World Trade Organization WTO the International Monetary Fund IMF the World Bank the United Nations UN the G20 1 8 What Do Global Institutions Do The World Trade Organization like its predecessor GATT polices the world trading system makes sure that nation states adhere to the rules laid down in trade treaties promotes lower barriers to trade and investment 154 members in 2011 1 9 What Do Global Institutions Do The International Monetary Fund 1944 maintains order in the international monetary system lender of last resort for countries in crisis Argentina Indonesia Mexico Russia South Korea Thailand Turkey Ireland and Greece The World Bank 1944 promotes economic development via low interest loans for infrastructure projects 1 10 What Do Global Institutions Do The United Nations 1945 maintains international peace and security develops friendly relations among nations cooperates in solving international problems and in promoting respect for human rights is a center for harmonizing the actions of nations The G20 forum through which major nations tried to launch a coordinated policy response to the 2008 2009 global financial crisis 1 11 What Is Driving Globalization Declining barriers to the free flow of goods services and capital average tariffs are now at just 4 more favorable environment for FDI global stock of FDI was 15 5 trillion in 2009 facilitates global production Technological change microprocessors and telecommunications the Internet and World Wide Web transportation technology 1 12 What Does Globalization Mean For Firms Lower barriers to trade and investment mean firms can view the world rather than a single country as their market base production in the optimal location for that activity But firms may also find their home markets under attack by foreign firms 1 13 Declining Trade And Investment Barriers Average Tariff Rates on Manufactured Products as Percent of Value 1 14 What Does Globalization Mean For Firms Technological change means lower transportation costs help create global markets and allow firms to disperse production to economical geographically separate locations low cost information processing and communication firms can create and manage globally dispersed production low cost global communications networks help create an electronic global marketplace global communication networks and global media create a worldwide culture and a global consumer product market 1 15 The Changing Demographics Of The Global Economy Four trends are important 1 The changing world output and world trade picture 2 The changing foreign direct investment picture 3 The changing nature of the multinational enterprise 4 The changing world order 1 16 How Has World Output And World Trade Changed In 1960 the U S accounted for over 40 of world economic activity but by 2009 the U S accounted for just 24 a similar trend occurred in other developed countries In contrast the share of world output accounted for by developing nations is rising expected to account for more than 60 of world economic activity by 2020 1 17 How Has World Output And World Trade Changed The Changing Demographics of World GDP and Trade 1 18 How Has Foreign Direct Investment Changed Over Time In the 1960s U S firms accounted for about two thirds of worldwide FDI flows Today the United States accounts for less than one fifth of worldwide FDI flows Other developed countries have followed a similar pattern In contrast the share of FDI accounted for by developing countries has risen Developing countries especially China have also become popular destinations for FDI 1 19 How Has Foreign Direct Investment Changed Over Time Percentage Share of Total FDI Stock 1980 2007 1 20 How Has Foreign Direct Investment Changed Over Time FDI Inflows 1988 2008 1 21 What Is A Multinational Enterprise Multinational enterprise MNE any business that has productive activities in two or more countries Since the 1960s the number of non U S multinationals has risen the number of mini multinationals has risen 1 22 The Changing World Order Many former Communist nations in Europe and Asia are now committed to democratic politics and free market economies creates new opportunities for international businesses but there are signs of growing unrest and totalitarian tendencies in some countries China and Latin America are also moving toward greater free market reforms between 1983 and 2010 FDI in China increased from less than 2 billion to 100 billion annually but China also has many new strong companies that could threaten Western firms 1 23 How Will The Global Economy Of The 21st Century Look The world is moving toward a more global economic system But globalization is not inevitable there are signs of a retreat from liberal economic ideology in Russia Globalization brings risks the