Globalisation, diversity and inequality

Week 1

• Globalism (commonly called globalization) characterized by networks of international linkages that bind countries, institutions, and people in an interdependent global economy.

• The invisible hand of global competition is being propelled by increasingly borderless world, by technological advancements, and by the rise of developing economies such as China and India

• Thomas Friedman -"levelling the playing field" among countries—or the "flattening of the world."

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What Is Globalization?

• The world is moving away from self-contained national economies toward an interdependent, integrated global economic system

• Globalization refers to the shift toward a more integrated and interdependent world economy

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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

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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, and capital

• Companies can – lower their overall cost structure – improve the quality or functionality of their

product offering

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Why Do We Need Global Institutions?

• Institutions– help manage, regulate, and police the global

marketplace– promote the establishment of multinational treaties to

govern the global business system

• 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)

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What Is Driving Globalization?

• The decline in barriers to the free flow of goods, services, and capital that has occurred since the end of World War II– since 1950, average tariffs have fallen significantly

and are now at 4 percent– countries have opened their markets to FDI

• Technological change – microprocessors and telecommunications– the Internet and World Wide Web– transportation technology

WHY COMPANY GOES GLOBAL?

Aggressive reasons: • New markets, be first movers, attempt to increase profits, sales and

markets.• Guarantee a supply of raw materials; no variations in cost, search people,

search competencies, search for the best of materials available, • Acquire technology: have new innovative capabilities. • Seek politically stable bases for new operations. To prevent social

disharmony. • Varies by industry, the nationality of a company will also affects it motives in

going international. • Eg: Gilltett, pepsi,

Defensive reasons: • against technology and sometime combination of both.• Nationality of a company will also affect its motives in going international:

UK companies comfortable with US and vice versa. • Recently US companies have begun to look to Japan for new ideas in

management: Xerox, Nissan and Renault.

HOW COMPANIES GO GLOBAL?

Four stages of internationalisation• First degree: Has only indirect or passive international

dealings. • accomplished with assistance of third company. Trying to look

into other markets. • Here internationalisation is handled by existing department.

Has traditional domestic organisation structure. Trade of good of goods and services.

• Second degree: company deals with overseas concerns. Retain some of its foreign trade agents and seek out for more in an active manner.

• They also represent company philosophy. • Small dedicated staff actively working with agents. • Also travel to customer sites, go thorough the agents

understand the markets and agents.

Third degree: it is reached when international concern of the company are of much higher importance to its overall makeup.

• The firm still remains domestically oriented in this stage. • Firm will have direct hand in both in import and export or producing goods or

services abroad. • Some managers will be placed overseas. Company possesses an entire

international division and not a department.

Fourth degree: management sees the company orientation as being multinational.

• company process is matured and the work standard is very much comparable to what you do in the home country.

• Eg: German company is German as well as seen as American in US. Looks for adaptability where ever it needs to adapt itself. See they parent country but actively adapt itself locally.

• They operation are both international as well as domestic.

• Type of international activity: foreign trade, assistance, contracts, FDI and

will have global organisation in structure.

Attitudes towards globallisation. • Ethnocentric attitude: sees foreign countries and their people

as inferior to the home country. • Manager with this attitude believe home country approaches

are the best. • follow the same methodology such as reward, uniform, culture. • Polycentric: see all countries as being different and difficult to

understand to indentify the practices. • foreign centres to deal with the local issues. • foreign offices make their own decisions. • This is done when you do know the language, culture, do know

the governance and practices. Do know how the political system have evolved in the state.

• Negative cases are GAP using local trade such as child labour, star bucks in Brazil.

Geocentric:

• Recognises both similarities and differences among the countries.

• draws the most effective individuals and methods from any place in the world.

• focussed on quality and performance, highly focussed on delivery and highly focussed on innovation.

THE GLOBAL BUSINESS ENVIRONMENT: • Globalism : "The World Is Flat“• Described globalization - the death of Princess Diana of

England Princess Diana was an English princess, With an Egyptian

boyfriend, Who crashed in a French tunnel, Driving a German car, With a Dutch engine, Driven by a Belgian who was drunk, On Scottish whisky, Followed closely by Italian Paparazzi, On Japanese motorcycles.

She was treated by an American doctor, Using Brazilian medicines.

This description is sent to you by an British Indian, Using Bill Gate's technology, And you are probably reading this on your computer, That uses Taiwanese chips, and a Korean monitor, assembled by Bangladeshi workers, in a Singapore plant, transported by Indian lorry-drivers, unloaded by Sicilian longshoremen, and trucked to you by Mexican immigrants?

Top 20 countries measured - trade, travel, technology, and links to the rest of the world

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The Globalization of Health Care•  The practice of outsourcing medical work to other

countries. In recent years, pressures to cut costs in the medical industry have led to the practice of outsourcing.

• Today, not only is paperwork outsourced to countries such as India, but also the reading of x-rays.

• In some cases, patients, in an effort to curb costs, are now choosing to have medical procedures conducted in foreign countries, and some insurance companies are promoting the use of foreign facilities. Discussion of the case can begin with the following questions:

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Suggested Discussion Questions•  1. A decade ago the idea that medical procedures

might move offshore was unthinkable. Today it is a reality. What trends have facilitated this process? Is the globalization of health care good or bad for the American economy?

•  2. Is the globalization of health care good or bad for patients? Who might benefit from the globalization of health care? Who might lose?

•  3. How might a universal health insurance program change the current trends in the health care industry? In your opinion, are programs like that offered by Aetna to have surgery conducted in another country truly viable?

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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

• Technological change means– lower transportation costs - firms can disperse production to

economical, geographically separate locations– lower information processing and communication costs - firms

can create and manage globally dispersed production systems– low cost global communications networks - help create an

electronic global marketplace– low-cost transportation - help create global markets– global communication networks and global media - create a

worldwide culture, and a global market for consumer products

THE GLOBAL BUSINESS ENVIRONMENT

Many facets of globalism and they intertwine

• Economic power and shifting opinions

• Challenges that managers face : politics, culture, global competition, terrorism, and technology. Eg: Western Drug manufacturer

Challenges:

• Rising nationalist

• Takeovers such as the Indian company Mittal Steel's bid for Europe's largest steel company, Arcelor

• United States reacted to an attempted takeover of the British P&O by Dubai Ports World

• Firms compete with your firm both at home and abroad

• Domestic competitors competing on price by outsourcing or off shoring resources and services anywhere in the world.

• Ford, for example, is pushing it's Mustang with the slogan "buy American,"

• Toyota has been investing in North America for 20 years in plants, suppliers, and dealerships, as well as design, testing, and research centres

• Nestle has 50 percent of its sales outside of its home market, Coca-Cola has 80 percent, and Procter & Gamble has 65 percent

Regional Trading Blocs:

• To work against the Dominance of the US

• blocs represented by the North American Free Trade Agreement (NAFTA), the EU, and the Association of Southeast Asian Nations (ASEAN).

• World trade takes place within three regional free-trade blocs (Western Europe, Asia, and the Americas) grouped around the three dominant currencies (the euro, the yen, and the dollar).

• EU - now comprises a 27-nation unified market of over 400 million people

China export powerhouse:• join the World Trade Organization (WTO) in 2002 • (GDP) growth rate (10.7 percent in 2006) • vast population of low-wage workers and massive

consumer market potential• 49,000 U.S. companies alone operating.• halfway between a command economy and a market

economy, with capital allocation still largely state-controlled

India: world's services supplier. • world's leader for outsourced back-office services,

and increasingly for high-tech services.• Fastest-growing free market democracy, estimated

growth of 8.1 percent• Hindrance to growth, in particular for the

manufacturing sector, remains its poor infrastructure.

Other Regions in the World: Russia• Move away from communism, together with the

trend toward privatization • Foreign investment, consumers' climbing confidence.• politically stable. New land, legal and labour codes, as

well as the now-convertible ruble have encouraged foreign firms to take advantage of opportunities

• Corruption and government interference persist in Russia.

• Central and South America, the Middle East, and Africa desperate to attract foreign investment

• Africa ignored by most of the world's investors, although it receives increasing investment from companies in South Africa - region's biggest economy

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How Does Globalization Affect Jobs And Income?

• Critics argue that falling barriers to trade are destroying manufacturing jobs in advanced countries

• Supporters contend that the benefits of this trend outweigh the costs– countries will specialize in what they do most

efficiently and trade for other goods—and all countries will benefit

THE GLOBALIZATION OF HUMAN CAPITAL:3.3m (U.S.) jobs would be lost in service-sector

outsourcing by 2015 (Forrester Research).IBM's India staff, jumped from 9,000 - 43,000 from

2004 through mid-2006English-speaking—earns about $20,000 a year,

compared to $80,000MNCs such as Intel, Dell, IBM, Yahoo!, and AOL employ

workers in chip design, software, call centres, and tax processing

Dell has four call centres in India, where the bulk of its 10,000 employees work, as well as software development and product testing centres

In China - long the world's low-cost manufacturing hub—jobs are on the upswing for back-office support for financial services, telecom and retail companies

THE POLITICAL AND ECONOMIC ENVIRONMENT:• Uprisings, conflicts and differences among ethnic

groupings• Many terrorist activities are also based on religious

differences, as in the Middle East • Managers to understand and anticipate ethnic,

religious, problems of general instability, problems of an operational nature, effects on the workforce, on production and access to raw materials, and on the market.

• Political risks - governmental action or politically motivated event that could adversely affect the long-run profitability or value of a firm

• Eg: Bolivian President Evo Morales' nationalize the national gas industry, followed - Venezuela, where Mr. Chavez -forced major oil companies to accept a minority stake in fields.

• Nationalization refers to the forced sale of an MNC's assets to local buyers

• Expropriation - local government seizes and provides inadequate compensation for MNC

• terrorism severe and random political risk to company personnel and assets and interrupt

• Risk assessment by multinational corporations usually takes two forms:

• Use experts or consultants familiar with the country. • A second means of political risk assessment used

by MNCs. Development of internal staff and in-house capabilities- hiring people with expertise in the political and economic conditions.

SEVEN TYPICAL POLITICAL RISK :• Expropriation of corporate assets without prompt and

adequate compensation• Forced sale of equity to host-country nationals, usually

at or below depreciated book value• Discriminatory treatment against foreign firms in the

application of regulations or laws• Barriers to repatriation of funds (profits or equity)• Loss of technology or other intellectual property (such

as patents, trademarks, or trade names)• Interference in managerial decision making• Dishonesty by government officials, including

cancelling or altering contractual agreements,extortion demands.

MANAGING POLITICAL RISK (TAOKA AND BEEMAN) ARE AS FOLLOWS:

• Equity sharing includes the initiation of joint ventures with nationals (individuals or those in firms, labour unions, or government) to reduce political risks.

• Participative management requires that the firm actively involve nationals, including those in labour organizations or government, in the management of the subsidiary.

• Localization of the operation includes the modification of the subsidiary's name, management style, and so forth, to suit local tastes. Localization seeks to transform the subsidiary from aforeign firm to a national firm.

• Development assistance includes the firm's active involvement in infrastructure development (foreign-exchange generation, local sourcing of materials or parts, management training,technology transfer, securing external debt, and so forth)

MANAGING TERRORISM RISK:No longer risk of terrorism focused on certain

areas such as South America or the Middle East

80 countries lost its citizen in WTC 9/11/2001Kidnappings are common in Latin America

(as a means of raising money for political activities)

Abductions in Colombia hit a record 3,029 in 2000

MNCs stepped up security measures hiring consultants in counterterrorism (training employees to cope with the threat of terrorism)

ECONOMIC RISK:• Political stability closely connected to economic

environment(1) the government abruptly changes its domestic

monetary or fiscal policies or (2) the government decides to modify its foreign-

investment policies. (3) risk of exchange-rate volatility results in currency

translation (4) John Mathis (Professor of international economics)

served as senior financial policy analyst for the World Bank suggested: These methods are (1) the quantitative approach, (2) the qualitative approach, (3) a combination of both of these approaches, and (4) the checklist approach

(1) the quantitative approach: measure statistically a country's ability to honor its debt obligation.

(2) the qualitative approach: evaluates a country's economic risk by assessing the compe tence of its leaders and analyzing the types of policies they are likely to implement

(3) a combination of both of these approaches, and

(4) the checklist approach

THE LEGAL ENVIRONMENT:• Consults with legal services, both locally and at

headquarters.• 70 countries, predominantly in Europe (e.g.,

France and Germany), are ruled by civil law, as is Japan

• In Islamic countries, such as Saudi Arabia, the dominant legal system is Islamic law

• Contract law plays a major role in international business transactions

Eg: many developing and communist countries is often a third party in the contract

The risk is, you could have a contract torn up or changed

• Impose protectionist policies, such as tariffs, quotas, and other trade restrictions, to give preference to their own products and industries

• Foreign tax credits, holidays, exemptions, depreciation allowances, and taxation of corporate profits are additional considerations the foreign investor must examine before acting

THE TECHNOLOGICAL ENVIRONMENT:

…The creation of a global, Web-enabled playing field that allows for multiple forms of collaboration—the sharing of knowledge and work—in real time, without regard to geography, distance, or, in the near future, even language. Thomas friedman, The World Is Flat, 2005

Advances resulting from cooperative research and development (R&D)

risks of technology transfer and pirating are considerable and costly

governments use their laws to some extent to control the flow of technology

'Bhutan Today' – first daily newspaper.

INFORMATION TECHNOLOGY:

• speed and accuracy of information transmission are changing and making geographic barriers less relevant.

• Political, economic, market, and competitive information is available almost instantaneously to anyone around the world

• cultural barriers are being lowered gradually

• Linked electronically to their employees, customers, distributors, suppliers, and alliance partners in many countries

Eg: Nike, health tourism

The Internet and e-business provide following advantages in global business:

• Convenience in conducting business worldwide; facilitating communication across borderscontributes to the shift toward globalization and a global market.

• An electronic meeting and trading place, which adds efficiency in conducting business sales.

• A corporate Intranet service, merging internal and external information for enterprisesworldwide.

• Power to consumers as they gain access to limitless options and price differentials.

• A link and efficiency in distribution.