InternationalBusiness7e

byCharlesW.L.HillMcGraw-Hill/Irwin Copyright?2009byTheMcGraw-HillCompanies,Inc.Allrightsreserved.Chapter1

GlobalizationWhatIsGlobalization?Theworldismovingawayfromself-containednationaleconomiestowardaninterdependent,integratedglobaleconomicsystemGlobalizationreferstotheshifttowardamoreintegratedandinterdependentworldeconomyGlobalizationhastwofacets:1)theglobalizationofmarkets2)theglobalizationofproductionTheGlobalizationOfMarketsTheglobalizationofmarketsreferstothemergingofhistoricallydistinctandseparatenationalmarketsintoonehugeglobalmarketplaceInmanyindustries,itisnolongermeaningfultotalkaboutthe“Germanmarket”orthe“Americanmarket”Instead,thereisonlytheglobalmarketTheGlobalizationOfMarketsFallingtradebarriersmakeiteasiertosellinternationallyThetastesandpreferencesofconsumersareconvergingonsomeglobalnormFirmshelpcreatetheglobalmarketbyofferingthesamebasicproductsworldwideClassroomPerformanceSystemTheshifttowardamoreintegratedandinterdependentworldeconomyisreferredtoasa)economicintegrationb)economicinterdependencyc)globalizationd)internationalizationTheGlobalizationOfProductionTheglobalizationofproductionreferstothesourcingofgoodsandservicesfromlocationsaroundtheglobetotakeadvantageofnationaldifferencesinthecostandqualityoffactorsofproductionlikeland,labor,andcapitalCompaniescompetemoreeffectivelybyloweringtheiroverallcoststructureorimprovingthequalityorfunctionalityoftheirproductofferingClassroomPerformanceSystemThemergingofhistoricallydistinctandseparatenationalmarketsintoonehugeglobalmarketplaceisknownasa)globalmarketfacilitationb)cross-bordertradec)supranationalmarketintegrationd)theglobalizationofmarketsClassroomPerformanceSystemFirmsthatareinvolvedininternationalbusinesstendtobea)largeb)smallc)medium-sizedd)large,small,andmedium-sizedTheEmergenceOfGlobalInstitutionsInstitutionsareneededto:helpmanage,regulate,andpolicetheglobalmarketplacepromotetheestablishmentofmultinationaltreatiestogoverntheglobalbusinesssystemTheEmergenceOfGlobalInstitutionsInstitutionscreatedoverthepasthalfcenturyinclude:theGeneralAgreementonTariffsandTrade(GATT)theWorldTradeOrganization(WTO)theInternationalMonetaryFund(IMF)theWorldBanktheUnitedNations(UN)TheEmergenceOfGlobalInstitutionsTheWorldTradeOrganization(likeitspredecessorGATT)isprimarilyresponsibleforpolicingtheworldtradingsystemandmakingsurethatnation-statesadheretotheruleslaiddownintradetreatiessignedbyWTOmembersIn2007,the150nationsthataccountedfor97%ofworldtradewereWTOmembersTheWTOpromoteslowerbarrierstotradeandinvestmentTheEmergenceOfGlobalInstitutionsTheInternationalMonetaryFundandtheWorldBankwerecreatedin1944TheIMFwasestablishedtomaintainorderintheinternationalmonetarysystemTheWorldBankwasestablishedtopromoteeconomicdevelopmentTheEmergenceOfGlobalInstitutionsTheUnitedNationswasestablishedin1945to:maintaininternationalpeaceandsecuritydevelopfriendlyrelationsamongnationscooperateinsolvinginternationalproblemsandinpromotingrespectforhumanrightsbeacenterforharmonizingtheactionsofnationsClassroomPerformanceSystemWhichisnotafactorofproduction?a)tradeb)landc)capitald)energyDriversOfGlobalizationTwomacrofactorsunderliethetrendtowardgreaterglobalization:thedeclineinbarrierstothefreeflowofgoods,services,andcapitalthathasoccurredsincetheendofWorldWarIItechnologicalchangeDecliningTradeAnd

InvestmentBarriersInternationaltradeoccurswhenafirmexportsgoodsorservicestoconsumersinanothercountryForeigndirectinvestment(FDI)occurswhenafirminvestsresourcesinbusinessactivitiesoutsideitshomecountryAfterWorldWarII,advancedcountriesmadeacommitmenttolowerbarrierstotradeandinvestmentSince1950,averagetariffshavefallensignificantlyandarenowatabout4%CountrieshavealsobeenopeningmarketstoFDIClassroomPerformanceSystemThesourcingofgoodandservicesfromaroundtheworldtotakeadvantageofnationaldifferencesinthecostandqualityoffactorsofproductioniscalleda)economiesofscaleb)theglobalizationofproductionc)globalintegrationd)globalsourcingDecliningTradeAnd

InvestmentBarriersTable1.1:AverageTariffRatesonManufacturedProductsasPercentofValueDecliningTradeAnd

InvestmentBarriersLowerbarrierstotradeandinvestmentmean:thatfirmscanviewtheworld,ratherthanasinglecountry,astheirmarketthatfirmscanbaseproductionintheoptimallocationforthatactivityClassroomPerformanceSystemWhichorganizationisresponsibleforpolicingtheworldtradingsystem?a)theInternationalMonetaryFundb)theUnitedNationsc)theWorldTradeOrganizationd)theWorldBankTheRoleOfTechnologicalChangeTechnologicalchangehasmadetheglobalizationofmarketsarealityImportantadvanceshaveoccurredin:microprocessorsandtelecommunicationstheInternetandWorldWideWebtransportationtechnologyTheRoleOfTechnologicalChangeImplicationsoftechnologicalchangefortheglobalizationofproductioninclude:lowertransportationcoststhatenablefirmstodisperseproductiontoeconomical,geographicallyseparatelocationslowerinformationprocessingandcommunicationcoststhatenablefirmstocreateandmanagegloballydispersedproductionsystemsTheRoleOfTechnologicalChangeImplicationsoftechnologicalchangefortheglobalizationofmarketsinclude:lowcostglobalcommunicationsnetworkshelpcreateelectronicglobalmarketplacelow-costtransportationhelpcreateglobalmarketsglobalcommunicationnetworksandglobalmediaarecreatingaworldwideculture,andaglobalmarketforconsumerproductsTheChangingDemographics

OfTheGlobalEconomyTherehasbeenadrasticchangeinthedemographicsoftheworldeconomyinthelast30yearsFourtrendsareimportant:theChangingWorldOutputandWorldTradePicturetheChangingForeignDirectInvestmentPicturetheChangingNatureoftheMultinationalEnterprisetheChangingWorldOrderTheChangingWorldOutput

AndWorldTradePictureIn1960,theUnitedStatesaccountedforover40%ofworldeconomicactivityBy2006,theUnitedStatesaccountedforlessthan20%ofworldeconomicactivityAsimilartrendoccurredinotherdevelopedcountriesTheshareofworldoutputaccountedforbydevelopingnationsisrisingandisexpectedtoaccountformorethan60%ofworldeconomicactivityby2020TheChangingWorldOutput

AndWorldTradePictureTable1.2:TheChangingDemographicsofWorldGDPandTradeTheChangingForeignDirect

InvestmentPictureInthe1960s,U.S.firmsaccountedforabouttwo-thirdsofworldwideFDIflowsToday,theUnitedStatesaccountsforlessthanone-fifthofworldwideFDIflowsOtherdevelopedcountrieshavefollowedasimilarpatternIncontrast,theshareofFDIaccountedforbydevelopingcountrieshasrisenfromlessthan2%in1980toalmost12%in2005Developingcountries,especiallyChina,havealsobecomepopulardestinationsforFDITheChangingForeignDirect

InvestmentPictureFigure1.2:PercentageShareofTotalFDIStock1980-2005

TheChangingForeignDirect

InvestmentPictureFigure1.3:FDIInflows1988-2006ClassroomPerformanceSystemWhatisthesinglemostimportantinnovationtotheglobalizationofmarketsandproduction?a)advancesintransportationtechnologyb)thedevelopmentofthemicroprocessorc)advancesincommunicationd)theInternetTheChangingNatureOf

TheMultinationalEnterpriseAmultinationalenterprise(MNE)isanybusinessthathasproductiveactivitiesintwoormorecountriesSincethe1960s,therehasbeenariseinnon-U.S.multinationals,andagrowthofmini-multinationalsTheChangingWorldOrderManyformerCommunistnationsinEuropeandAsiaarenowcommittedtodemocraticpoliticsandfreemarketeconomiesandso,createnewopportunitiesforinternationalbusinessesChinaandLatinAmericaarealsomovingtowardgreaterfreemarketreformsTheGlobalEconomyOf

TheTwenty-firstCenturyTheworldismovingtowardamoreglobaleconomicsystem,butglobalizationisnotinevitableGlobalizationalsobringsriskslikethefinancialcrisisthatsweptthroughSouthEastAsiainthelate1990sClassroomPerformanceSystemWhichofthefollowingtrendsistrue?a)theUnitedStatesisaccountingforagreaterpercentageofworldtradethaneverbeforeb)theUnitedStatesisaccountingforagreaterpercentageofforeigndirectinvestmentthaneverbeforec)theshareofworldtradeaccountedforbydevelopingcountriesisrisingd)theshareofforeigndirectinvestmentbydevelopingcountriesisdecliningTheGlobalizationDebateIstheshifttowardamoreintegratedandinterdependentglobaleconomyagoodthing?Supportersbelievethatincreasedtradeandcross-borderinvestmentmeanlowerpricesforgoodsandservices,greatereconomicgrowth,higherconsumerincome,andmorejobsCriticsworrythatglobalizationwillcausejoblosses,environmentaldegradation,andtheculturalimperialismofglobalmediaandMNEsAnti-GlobalizationProtestsMorethan40,000anti-globalizationprotesterstooktothestreetattheWTOmeetinginSeattlein1999ProtestersnowregularlyshowupatmostmajormeetingsofglobalinstitutionsGlobalization,Jobs,AndIncomeGlobalizationcriticsarguethatfallingbarrierstotradearedestroyingmanufacturingjobsinadvancedcountriesSupportersofglobalizationcontendthatthebenefitsofthistrendoutweighthecosts—thatcountrieswillspecializeinwhattheydomostefficientlyandtradeforothergoods—andallcountrieswillbenefitGlobalization,LaborPolicies,

AndTheEnvironmentGlobalizationcriticsarguethatfirmsavoidcostlyeffortstoadheretolaborandenvironmentalregulationsbymovingproductiontocountrieswheresuchregulationsdonotexist,orarenotenforcedGlobalizationsupportersclaimthattougherenvironmentalandlaborstandardsareassociatedwitheconomicprogress,soascountriesgetricherfromfreetrade,theygettougherenvironmentalandlaborregulationsGlobalizationAnd

NationalSovereigntyCriticsofglobalizationworrythattoday’sinterdependentglobaleconomyisshiftingeconomicpowerawayfromnationalgovernmentstowardsupranationalorganizationsliketheWTO,theEU,andtheUNSupportersofglobalizationcontendthatthepoweroftheseorganizationsislimitedtowhatnation-statesagreetogrant,andthatthepoweroftheorganizationsliesintheirabilitytogetcountriestoagreetofollowcertainactionsGlobalizationAndTheWorld’sPoorCriticsofglobalizationarguethatthegapbetweenrichnationsandpoornationsis