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Global Economy and Market Globalization

A Case Story in the Global Economy

Julie Valentine is a college junior majoring in business. On a recent Saturday, she went shopping at a local mall. First, she ordered a big breakfast, unaware that most of her meal was imported from abroad: bacon from Spain, fruit from Costa Rica, juice from Brazil, French-branded yogurt, and bread made from wheat grown in Argentina. Julie then headed to the department store to buy a gift for her dad. She perused neckties with Italian and French brand names, and others made in China, Mexico, and Romania. She also considered electric shavers made by Braun (a German brand) and Philips (a Dutch brand). She eventually bought a Panasonic (a Japanese brand). Next, she headed to the perfume counter, where she tried various brands, including Chanel (France), French Connection(UK), Eau de Gucci(Italy), and Shiseido(Japan).

Julie was dreaming of buying a laptop computer. At the electronics store, she explored several models made in China’s mainland, Ireland, Malaysia, and Taiwan. As she passed a travel agency, she remembered that her spring vacation was just around the corner and decided to consult her best friend Melissa. Whipping out her Nokia cell phone (a Finnish brand, but made in Hungary, Mexico, and South Korea), she reached Melissa. Melissa answered on her Motorola phone (a U.S. brand, but made in Malaysia and other Asian locations). The two chatted about their dream trip to the beaches of southern Spain, considered Mexico, but decided they would probably end up in Panama City, Florida. Julie looked at a blouse made in Vietnam, but hesitated to purchase it because she had read that some products from Southeast Asia are made by child labor.

Julie left the mall and drove away in her Hyundai (a Korean brand, but made in China). She was envious of Melissa’s car, a BMW (a German brand, but assembled in the United States with Asian, European, and South African components). Over the following weeks, Julie and her exchange-student friend, Anders (her favorite Norwegian import), met up several times at restaurants featuring food from various nations, including France, India, Lebanon, Mexico, etc. On Friday night, they watched the latest movie in the Matrix series (made in Australia and the United States, financed by the Japanese) on a friend’s big-screen TV (a Dutch brand, but made in Indonesia). Over dinner, Julie and Anders enjoyed pasta from Italy and shrimp from El Salvador, and chatted about their future. Julie was dreaming of an international career.

Globalization of Markets

As you can see from the opening story, international business touches our daily experiences. The globalization of markets refers to the ongoing economic integration and growing interdependency of countries worldwide. In practical terms, the globalization of markets is evident in several related trends. First is the unprecedented growth of international trade. In 1960, cross-border trade was modest — about $100 billion per year. Today, it accounts for a substantial proportion of the world economy, amounting to some $10 trillion annually — that is, $10,000,000,000,000! Second, trade between nations is accompanied by substantial flows of capital, technology, and knowledge. Third is the development of highly sophisticated global financial systems and mechanisms that facilitate the cross-border flow of products, money, technology, and knowledge. Fourth, globalization has brought about a greater degree of collaboration among nations through multilateral regulatory agencies such as the World Trade Organization (WTO) and the International Monetary Fund (IMF).

Globalization both compels and facilitates companies to pursue cross-border business activities and international expansion. Simultaneously, going international for a firm has become easier than ever before. A few decades ago, international business was largely the domain of large, multinational companies. Recent developments have created a more level playing field that allows firms of any size to benefit from active participation in international business. In addition, where cross-border business was once mainly undertaken by manufacturing firms, this is no longer the case. Companies in the services sector are also internationalizing, in such industries as banking, transportation, engineering, design, advertising, and retailing.

Phases of Globalization

Since the 1800s, we can identify four distinct phases in the evolution of market globalization. Each phase is accompanied by revolutionary technological developments and international trends.

The first phase of globalization began about 1830 and peaked around 1880. International business became widespread during this period due to the growth of railroads, efficient ocean transport, and the rise of large manufacturing and trading companies. Invention of the telegraph and telephone in the late 1800s facilitated information flows between and within nations, and greatly aided early efforts to manage companies’ supply chains.

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Unit One Global Economy and Market Globalization

The second phase of globalization began around 1900 and was associated with the rise of electricity and steel production. The phase reached its height just before the Great Depression, a worldwide economic downturn that began in 1929. In 1900, Western Europe was the most industrialized region in the world. Europe’s colonization of countries in Asia, Africa, the Middle East, and beyond led to the establishment of some of the earliest subsidiaries of multinational firms. European companies such as BASF, British Petroleum, Nestle, Shell, and Siemens had established foreign manufacturing plants by 1900. In the year before World War I (pre-1914), many firms were already operating globally. The Italian manufacturer Fiat supplied vehicles to nations on both sides of the war.

The third phase of globalization began after World War II. At war’s end in 1945, substantial pent-up demand existed for consumer products, as well as for input goods to rebuild Europe and Japan. The United States was least harmed by the war and became the world’s dominant economy. Substantial government aid helped stimulate economic activity in Europe. Before the war, tariffs and other trade barriers had been high, and there had been strict controls on currency and capital movements. Several industrialized countries, including Australia, Britain, and the United States, systematically sought to reduce barriers to international trade. The result of this effort was the General Agreement on Tariffs and Trade (GATT). Emerging from the Bretton Woods Conference of 23 nations in 1947, the GATT served as a global negotiating forum for liberalizing trade barriers. The GATT marked the beginning of a series of annual negotiating meetings aimins at reducing barriers to international trade and investment. The GATT eventually transformed into the World Trade Organization (WTO) as more countries joined this multinational agency. The World Trade Organization is a multilateral governing body empowered to regulate international trade and investment. The WTO aims to ensure fairness and efficiency in international transactions. Some 149 nations are now members of the WTO. Additional global cooperation in the post-war era gave birth to other international organizations such as the International Monetary Fund and the World Bank. Early multinationals from this third phase of globalization originated from the United States, Western Europe, and Japan. The Europeans often expanded into former colonies. Firms like Unilever, Philips, Royal Dutch Shell, British Petroleum, and Bayer organized their businesses by establishing independent subsidiaries in each of the foreign countries where they did business. American multinationals such as IBM, Boeing, Texas Instruments, Xerox, and McDonnell Douglas spread out across the globe on the strength of technological and competitive advantages. Growing multinational enterprise (MNE) activities and early efforts at trade liberalization resulted in substantial increases in international trade and investment beginning in

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the 1960s. Recovered from World War II, MNEs in Europe and Japan began to challenge the global dominance of U.S. multinationals. With the easing of trade barriers and currency controls, capital began to flow freely across national borders, leading to integration of global financial markets.

The fourth and current phase of globalization began in the early 1980s. This period witnessed enormous growth in cross-border trade and investment. The current phase was triggered by key trends, including the commercialization of the personal computer, the development of the Internet and the Web browser, advances in communications and manufacturing technologies, the collapse of the Soviet Union and ensuring market liberalization in central and Eastern Europe, and the industrialization and modernization efforts of East Asian economies, including China.

Growing international prosperity began to reach emerging markets such as Brazil, India, and Mexico. The 1980s witnessed huge increases in FDI, especially in capital- and technology-intensive sectors. Technological advances in information, communications, and transportation made it feasible for managers to organize far-flung operations around the world, geographically distant yet electronically interconnected. These technologies also facilitated the globalization of the service sector in areas such as banking, entertainment, tourism, insurance, and retailing. The merger of major firms once viewed as strongholds of national corporate power exemplified the growing integration of the world economy. For example, GM acquired Saab in Sweden, Ford acquired Mazda in Japan, and Daimler Benz bought Chrysler in the United States.

In the contemporary era, countless firms configure and coordinate trade and investment activities in a giant global marketplace. The ensuing phases of globalization have gradually shrunk the world into a manageable global marketplace.

Dimensions of Market Globalization

As a broad phenomenon, globalization has been investigated from the perspective of various disciplines, including economics, history, anthropology, political science, sociology, and technology. In terms of international business, market globalization can be viewed simultaneously as a (1) consequence of economic, technological, and government policy trends; (2) driver of economic, political, and social phenomena; and (3) driver and consequence of firm-level internationalization. Globalization of markets is a multifaceted phenomenon, with five major dimensions:

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Unit One Global Economy and Market Globalization

(1) Integration and interdependence of national economies

Internationally active firms devise multinational operations through trade, investment, geographic dispersal of company resources, and integration and coordination of value chain activities — the sequence of value-adding activities performed by the firm in the process of developing, producing, marketing, and servicing a product. The aggregate activities of these firms give rise to economic integration. Governments contribute to this integration by various means. First, they gradually lower barriers to international trade and investment (for example, by negotiating trade agreements). Second, they increasingly harmonize their monetary and fiscal policies within regional economic integration blocs (also known as trade blocs), such as the European Union. Third, they devise the supervision supranational institutions — such as the World Bank, International Monetary Fund, and the World Trade Organization — that seek further reductions in trade and investment barriers.

(2) Rise of regional economic integration blocs

Closely related to the previous trend is the emergence since the 1950s of regional economic integration blocs. Examples include the North American Free Trade Agreement area (NAFTA), the Asia Pacific Economic Cooperation zone (APEC), and Mercosur in Latin America. These regional economic blocs incorporate groups of countries within which trade and investment flows are facilitated through the reduction of trade and investment barriers. In more advanced arrangements, such as the “common market,” barriers to the cross-border flow of factors of production (mostly labor and capital) are removed. The European Union, in addition to adopting free trade among its members, is harmonizing fiscal and monetary policies and adopting common business regulations.

(3) Growth of global investment and financial flows

In the process of conducting international transactions, firms and governments buy and sell large volumes of national currencies (such as dollars, euros, and yen). The free movement of capital around the world — the globalization of capital — extends economic activities across the globe and is fostering interconnectedness among world economies. Commercial and investment banking is a global industry. The bond market has gained worldwide scope, with foreign bonds representing a major source of debt financing for governments and firms. Information and communications networks facilitate heavy volumes of financial transactions every day, integrating national markets. Nevertheless, widespread integration can have negative effects. For example, when Thailand and Malaysia experienced a monetary crisis in 1997, it quickly spread to South Korea, Indonesia, and the Philippines, causing prolonged recession in most East Asian economies.

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(4) Convergence of consumer lifestyles and preferences

Around the world, many consumers are increasingly similar in how they spend their money and time. Lifestyles and preferences are converging. Consumers in Tokyo, New York, and Paris demand similar household goods, clothing, automobiles, and electronics. Teenagers everywhere are attracted to iPods, Nokia cell phones, and Levi’s jeans. Major brands have gained a worldwide following. The trend is encouraged by greater international travel, movies, global media, and the Internet, which expose people to products, services, and living patterns from around the world. Hollywood films such as Kill Bill and Lord of the Rings receive much attention from a global audience. Convergence of preferences is also occurring in industrial markets, where professional buyers source raw materials, parts, and components that are increasingly standardized — that is, very similar in design and structure. Yet, while converging tastes facilitate the marketing of highly standardized products and services to buyers worldwide, they also promote the loss of traditional lifestyles and values in individual countries.

(5) Globalization of production

Intense global competition is forcing firms to reduce the cost of production and marketing. Companies strive to drive down prices through economies of scale and by standardizing what they sell. They seek economies in manufacturing and procurement by shifting these activities to foreign locations in order to take advantage of national differences in the cost and quality of factor inputs. Firms in the auto and textile industries, for example, have relocated their manufacturing to low labor-cost locations such as China, Mexico, and Eastern Europe. Production on a global basis is occurring in the service sector as well, in such industries as retailing, banking, insurance, and data processing. As an example, the real estate firm RE/MAX has established more than 5,000 offices in over 50 countries. The French firm Accor operates hundreds of hotels worldwide.

Drivers of Market Globalization

(1) Worldwide reduction of barriers to trade and investment

The tendency of national governments to reduce trade and investment barriers has accelerated global economic integration. For example, tariffs on the import of automobiles, industrial machinery, and countless other products have declined nearly to zero in many countries, encouraging freer international exchange of goods and services. Reduction in trade barriers is greatly aided by the WTO. China joined the WTO in 2001 and has committed to making its market more accessible to foreign companies. Reduction of trade barriers is also associated with

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Unit One Global Economy and Market Globalization

the emergence of regional economic integration blocs, a key dimension of market globalization.

(2) Market liberalization and adoption of free markets

The collapse of the Soviet Union’s economy in 19, the tearing down of the Berlin Wall that same year, and China’s economic reforms smoothed the integration of former economics into the global economy. Numerous East Asian economies, stretching from South Korea to Malaysia and Indonesia, had already embarked on ambitious market-based reforms. India joined the trend in 1991. These events opened roughly one-third of the world to freer international trade and investment. China, India, and Eastern Europe have become some of the most cost-effective locations for producing goods and services worldwide. These processes encouraged economic efficiency and attracted massive foreign capital into their national economies.

(3) Industrialization, economic development, and modernization

Industrialization implies that emerging markets — rapidly developing economies in Asia, Latin America, and Eastern Europe — are moving from being low value-adding commodity producers, dependent on low-cost labor, to sophisticated competitive producers and exporters of premium products such as electronics, computers, and aircraft. For example, Brazil has become a leading producer of private aircraft, and the Czech Republic now excels in the production of automobiles. As highlighted in the opening vignette, India is now a leading supplier of computer software. Economic development is enhancing standards of living and discretionary income in emerging markets. Perhaps the most important measure of economic development is Gross National Income (GNI) per head. Africa is home to the lowest-income countries, along with India and a few other countries in Asia and Nicaragua. These areas are also characterized by low levels of market globalization. The adoption of modern technologies, improvement of living standards, and adoption of modern legal and banking practices are increasing the attractiveness of emerging markets as investment targets and facilitating the spread of ideas, products, and services across the globe.

(4) Integration of world financial markets

Integration of world financial markets makes it possible for internationally active firms to raise capital, borrow funds, and engage in foreign currency transactions. Financial services firms follow their customers to foreign markets. Cross-border transactions are made easier partly as a result of the ease with which funds can be transferred between buyers and sellers, through a network of international commercial banks. For example, as an individual you can transfer funds to a friend in another country using the Society for Worldwide Interbank Financial Telecommunication (SWIFT) network. Connecting over 7,800 financial institutions in some 200

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countries, SWIFT facilitates the exchange of financial transactions. The globalization of finance contributes to firms’ ability to develop and operate world-scale production and marketing operations. It enables companies to pay suppliers and collect payments from customers worldwide.

(5) Technological advances

Perhaps the most important drivers of market globalization since the 1980s have been technological advances in communications, information, manufacturing, and transportations. While globalization makes internationalization an imperative, technological advances provide the means for internationalization. Initially, technological advances have greatly eased the management of international operations. Firms now interact more efficiently with foreign partners and value-chain members than ever before. Firms transmit all variety of data, information, and vital communications that help ensure the smooth running of their operations worldwide. In addition, companies use information technology to improve the productivity of their operations, which provides substantial competitive advantages. For example, information technology allows firms to more efficiently adapt products for international markets, or produce goods in smaller lots to target international markets. In addition, technological advances have made the cost of international operations affordable for all types of firms, explaining why so many small- and medium-sized enterprises (SMEs) have internationalized during the past two decades. Technological advances have also spurred the development of new products and services that appeal to a global audience. China and India are the new beachheads of technological advances. India has become a focus of global Internet- and knowledge-based industries. Top management at Intel and Motorola, two of the world’s premier technology companies, agree that China is the place to be when it comes to technological progress. Both firms receive a substantial portion of their revenue from sales in China. Management predicts double-digit increases in demand for technology products in China far into the future. Intel’s CEO commented, “I come back from visiting China and feel as if I’ve visited the fountain of youth of computing.” The most important activity underlying technological advances is innovation. Societies and organizations innovate in various ways, including new product designs, new production processes, new approaches to marketing, and new ways of organizing or training. Technological advances have had the greatest impact in several key areas: information technology, communications, manufacturing, and transportation.

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Unit One Global Economy and Market Globalization

Firm-lever Consequences of Market Globalization: Internationalization of the Firm’s Value Chain

The globalization of markets has opened up countless new business opportunities for internationalizing firms. At the same time, globalization implies that firms must accommodate new risks and intense rivalry from foreign competitors. Globalization results in buyers who are more demanding and who shop for the best deals from suppliers worldwide. A purely domestic focus is no longer viable for firms in most industries. Companies need to proactively internationalize their value chain in order to profit from new opportunities and reduce the harm of potential threats. Managers must increasingly adopt a worldwide orientation rather than a local focus. Internationalization may take the form of global sourcing, exporting, or investment in key markets abroad. The more proactive firms seek a simultaneous presence in all major trading regions, especially Asia, Europe, and North America. They concentrate their activities in those countries where they can achieve and sustain competitive advantage.

The most direct implication of market globalization is on the firm’s value chain. Market globalization compels firms to organize their sourcing, manufacturing, marketing, and other value-adding activities on a global scale. As noted earlier, a value chain is the sequence of value-adding activities performed by the firm in the process of developing, producing, marketing, and servicing a product. In a typical value chain, the firm conducts research and product development (R&D), purchases production inputs, and assembles or manufactures a product or service. Next, the firm performs marketing activities such as pricing, promotion, and selling, followed by distribution of the product in targeted markets and after-sales services. Value chains vary in complexity and across industries and product categories. The value chain concept is useful in international business because it helps clarify what activities are performed where in the world. For instance, exporting firms perform most “upstream” value-chain activities (R&D and production) in the home market and most “downstream” activities (marketing and after-sales services) abroad.

The following belowed illustrates a typical international firm’s value chain. Each value-adding activity is subject to internationalization; that is, it can be performed abroad instead of at home. As the examples suggest, companies have considerable latitude regarding where in the world they locate or configure key value-adding activities. The most typical reasons for locating value-chain activities in particular countries are to reduce the costs of R&D and production or to gain closer access to customers. The practice of internationalizing the value chain is often referred

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to as off shoring, where the firm relocates a major value-chain activity by establishing a factory or other subsidiary abroad. A related trend is global sourcing, in which the firm delegates performance of the value-adding activity to an external supplier or contractor located abroad. Globalization drove these firms to relocate key value-adding activities to the most advantageous locations around the world.

Firm’s Value Chain

Stages in the Chain Examples The Firm Pfizer conducts R&D in Singapore, Japan, and other countries to scientific talent for collaborating with local Office Genzyme Corp. does BMW and Wolverine marketer of brands(e.g., Bates), Direct sales such as Amway and Avon employ independent pharmaceutical furniture Steelcase sources Honda locate World Wide, companies Research & Procurement Manufacturing Marketing Distribution Sales & Services Firm’s Value Development (sourcing) manufacturer much of the marketing and testing of the United manufacturing subsidiaries in popular shoe low-cost parts its surgical in China and products in Mexico. Dell Germany, Switzerland, Kingdom. Renault via low-cost factories in eastern Europe, processes such as data entry, call centers, and processing performed in India. States to more Hush Puppies, their own target their huge U.S. contracts with sales force retail stores abroad to Mexico, and elsewhere, in order to reach end-users. Toyata maintains sales and customer service operations abroad in order to meet customer requirements more effectively. from suppliers and diagnostic effectively vehicles to the independent in China, gain access to has business and the United market. Carrefour and reach its Barclays Bank customers. worldwide networks of stores and offices to be near their customers. produces cars establish partner firms. payroll 10

Unit One Global Economy and Market Globalization

China in Global Economy

A huge population and rapidly growing economy make China a huge importer of consumer products, technology, and commodities. China began pursuing market reforms in the late 1970s. It achieved explosive economic growth, quadrupling its GDP during the succeeding 30 years. China’s growth was especially fast in the 1990s while exports amounted to just $78 billion in 1993, and surged to $974 billion by 2006. Although income per person is still modest at around $6,800, China in 2007 stood as the second-largest economy in the world (after the United States).

China’s economic reforms have progressed in fits and starts, with the national government periodically loosening the tightening central controls. China has struggled to sustain job growth for tens of millions of workers laid off from state-owned enterprises, migrants, and new entrants to the workforce. Roughly one hundred million rural workers drift between villages and the huge cities, many subsisting through part-time, low-paying jobs. Poor infrastructure in communications and transportation remains a major challenge, especially in the countryside.

These trends are both a boon and a bane to international business. While it is a booming new market, China also puts considerable strain on world resources, leading to higher commodity prices. It also means environmental degradation. Eight of the 10 most polluted cities in the world are now in China. Nevertheless, it suggests opportunities for western firms marketing technologies and equipment for the protection of the environment.

To profit from China’s low-cost labor and growing affluence, thousands of foreign companies set up sales offices and manufacturing facilities there. Many companies have succeeded in China, including Coca-Cola, General Motors, McDonald’s, Motorola, Airbus, and Volkswagen. Wal-Mart saved immense sums by sourcing over $30 billion of merchandise from China in 2007. Success in China requires a deep understanding of the market and long-term commitments. The country holds huge long-term potential for firms that take the time and invest the resources to succeed there.

Discussion issues in class:

1. Define market globalization, and give your understanding of global economy. 2. Describe the four phases of globalization.

3. Summarize the five dimensions of globalization. 4. Describe the five drivers of globalization.

5. In what areas have technological advances had their greatest effect on facilitating world trade and investment?

6. What is your opinion about the situation of China in global economy?

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Vocabulary

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1. international business 国际商务 2. economic integration 经济一体化 3. globalization of markets 市场全球化

4. the International Monetary Fund (IMF) 国际货币基金组织 5. World Trade Organization (WTO) 世界贸易组织 6. global financial system 全球金融体系 7. multinational companiy 公司 8. supply chain 供应链 9. trade barrier 贸易壁垒

10. the General Agreement on Tariffs and Trade (GATT) 关税与贸易总协定 11. the Bretton Woods Conference 布雷顿森林会议 12. the World Bank 世界银行

13. market liberalization 市场自由化 14. emerging markets 新兴市场

15. the globalization of capital 资本全球化 16. Gross National Income (GNI) 国民总收入

17. the Society for Worldwide Interbank Financial Telecommunication (SWIFT) 银行金融电讯协会

18. economic integration blocs 经济一体化集团

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