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GLOBALIZATION OFTHE WORLDECONOMY

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WHAT IS GLOBALISATION?Globalization refers to the

shift toward a more integrated and

interdependent world economy.Globalization has several differentfacets including the globalization of markets and the globalization of production.

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THE GLOBALIZATION OF MARKETS

The globalization of market refers to themerging of historically distinct and separate nationalmarkets into one huge global market place. Falling

barriers to cross-border trade have made it easier to sellinternationally. It has been argued for some time thatthe tastes and preferences of consumers in differentnations are beginning to coverage on some global norm,

thereby helping to create a global market.

EX: Coca-Cola soft drinks, Sony play station videogames, Citicorp credit cards

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THE GLOBALIZATION OF PRODUCTIONThe globalization of production refers tothe sourcing of goods and services from locationsaround the globe to take advantage of national

differences in the cost and quality of factors of production (such as labor, energy, land and capital).By doing this, companies hope to lower their overalland/or improve the quality or functionality of their

product offering, thereby allowing them to competemore effectively.

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EMERGENCE OF GLOBAL INSTITUTIONS

WTO= W ORLD TRADE ORGANISATION

IMF= INTERNATIONAL MONETARY FUND

WB= W ORLD B ANK

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W.T.O= WORLD TRADE ORGANISATION

It is primarily responsible for policing the world trading systemand making sure nation states adhere to the rules laid down in thetrade treaties signed by WTO members.

As of April 2003, some 146 nations that collectively accountedfor 97% of world trade were members of the WTO , there by giving the organization enormous scope and influence. The WTO is also responsible for facilitating the establishmentof additional multinational agreements between WTO members

states. It has promoted the lowering of barriers to cross-border tradeand investments.

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IMF= INTERNATIONAL MONETARY FUND

AND WB= WORLD BANK Both are created in 1944 by 44 nations that met atBreton Woods, New Hampshire. The task of IMF was to maintain order in theinternational monetary system and the World Bank wasto promote economic development. Both institutions have emerged as significant playersin the global economy. It has focused on making low interest rate loans tocash strapped governments in poor nations that wish toundertake significant infrastructure investments.

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DRIVERS OF GLOBALISATION

Declining Trade and Investment Barriers Average Tariff rates on manufactured

product and percent of value. Volume of world trade andproduction(1950-2002) The Role of Technological Change

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DECLINING TRADE AND INVESTMENTBARRIERS

International Trade

Foreign Direct Investment

GATT- General Agreement On Tariffs and Trade

SARS- Severe Acute Respiratory Syndrome

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AVERAGE TARIFF RATES ON MANUFACTURED PRODUCTS AS PERCENT OF VALUE

1913 1950 1990 2000

FRANCE 21% 18% 5.9% 3.9%

GERMANY 20 26 5.9 3.9ITALY 18 25 5.9 3.9 JAPAN 30 --- 5.3 3.9HOLLAND

5 11 5.9 3.9SWEDEN 20 9 4.4 3.9BRITAIN --- 23 5.9 3.9UNITED

STATES 44 14 4.8 3.9

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FIG 1.1 VOLUME OF WORLD TRADE AND PRODUCTION

(1950-2002)

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THE ROLE OF TECHNOLOGICAL CHANGES

Micro processors and telecommunicator

Internet and World Wide Web Transportation Technology

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IMPLICATION FOR THE GLOBALISATION OF

PRODUCTS As transportation costs associated with the

globalization of production declined, dispersal of production to geographically separate locations

became more economical. As a result of technological innovations discussed above, the realcosts of information processing and communicationhave fallen dramatically in the past two decades.These development make it possible for a firm tocreate and them manage a globally dispersedproduction system, further facilitating theglobalization of production.

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For example,Dell computer uses the internet to

coordinate and control a globally

dispersed production system to such anextent that it holds only three days

worth of inventory at its usually

location

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IMPLICATIONS FOR THE GLOBALIZATION OFMARKETS

The globalization of production, technologicalinnovations have also facilitated the globalization of markets. As noted above, low-cost transportation hasmade it more economical to ship products around the world, thereby helping to create global markets.For example:

Global communication networks, internet, globalmedia, like CNN,MTV, HBO. Resulting in Globalmarket, Low cost shipping, fast transportation.

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THE CHANGING DEMOGRAPHICS OF THEGLOBAL ECONOMY

Hand in hand with the tend towardglobalization has been a fairly dramatic change in thedemographics of the global economy over the past 30

years. As late as the 1960s, four stylized facts describedthe demographics of the global economy.

The world economy and world trade picture

The world foreign direct investment The dominance of large, multinational U.S. firms onthe international business scene. The communist world was off limits to western

international busineses.

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THE CHANGE PATTERN OF WORLD OUTPUT ANDTRADECOUNTRY Share of world o/p

,1963Share of world o/p, 2001-02

Share of worldexports,2002

United states 40.3% 21.5% 11.9%

Japan 5.5 7.56 6.6

Germany* 9.7 4.64 9.3

France 6.3 3.27 5.2

United in d m 6.5 3.23 4.4

Italy 3.4 3.0 3.9

Canada 3.0 1.96 4.2

S uth K rea NA 1.98 1.5

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