Chapter 1

GLOBALIZATION

INB-372
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18 January, 2016

Modern Empires

18 January, 2016

What is Globalization?
It is a process by which
barriers to cross-border trade and investments are declining,
perceived

distance is shrinking due to advances in

transportation and telecommunication technologies,
material culture is starting to look similar the world over; and
national economies are merging into an interdependent,
integrated global economic system.

What is Globalization?

Interdependent:
Independently India has IT trained workforce but they do not have the
capital to establish giant firms like Microsoft.
Again independently USA has capital but they lack cheap IT trained
workforce. So, the countries will be better off being interdependent.
Integration:
USA invests in India and thus ensures capital flow in India. India ensures
supply of cheap IT trained workforce which is needed to produce
software.

What is the Globalization of

Markets?
It is the merging of historically distinct and separate national markets into

one huge global marketplace.

E.g. Consumer products such as Citigroup credit cards, Coca Cola &
PepsiCo soft drinks, Sony PlayStation video games, McDonalds
Hamburger, Starbucks coffee, General Motors & Toyota, etc.
E.g. markets for industrial goods and materials such as aluminium, oil,
wheat, computer software, etc.
It no longer makes sense to talk about the German market or the
American market
Instead, there is the global market

Implications for the Globalization of

Production

As transportation costs associated with the globalization of production

declined, companies can now select geographically separate locations

which are more economical.
These developments make it possible for a firm to create and then
manage a globally dispersed production system.
E.g. Web allows:
Hospitals in Chicago send MRI scans to India for analysis
Accounting offices in San Francisco outsource routine tax
preparation work to accountants in Philippines

Implications for the Globalization

of Markets
Low-cost transportation made it more economical to ship products

around the world, thereby helping to create global markets.

Low cost of transportation has increased movement of people between
countries which reduced the cultural distance among people and created
convergence of taste and preferences.
Low-cost global communications network such as WWW are helping to
create electronic global market places.
Global communication network and global media like, CNN, MTV etc. also
contributed for the convergence.
E.g. McDonalds in China, Gap Jeans in Paris, E-bay
E.g. Equador supplies roses to New York

What is the Globalization of

Markets?
Reasons for globalization of markets:
falling trade barriers make it easier to sell internationally
consumers tastes and preferences are converging on some global

norm
firms promote the trend by offering the same basic products
worldwide
Coca-Cola, McDonalds and Sony all sell standardized products.

What is the Globalization of

Production?
It refers to sourcing goods and services from locations around the globe

to take advantage of national differences in the cost and quality of

factors of production (such as labor, energy, land and capital).
This helps to
Gain cost advantage by producing in locations where cost of
production factors is low
Improve the quality or functionality of the products, thus
differentiating them
E.g. USA outsource some radiology work to India
E.g. Car- designed in Germany, assembled in Mexico with components
made in US and Japan, fabricated from Korean steel and Malaysian
rubber

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Why Do We Need Global

Institutions?
Institutions

help manage, regulate, and monitor 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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DRIVERS OF GLOBALIZATION
Two macro factors seem to

underlie the trend toward

greater globalization
Decline in barriers to the
free flow of goods,
services, and capital that
has occurred since the
end of World War II
Technological change
18 January, 2016

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THE SHRINKING GLOBE

1500-1840

Best average speed of

horse-drawn coaches and
sailing ships,

1850-1930

Steam locomotives average 65mph.

Steamships average 36mph.

1950s

Propeller aircraft
300-400 mph.

1960s

Jet passenger aircraft

500-700mph.
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WHY DO WE NEED
GLOBAL INSTITUTIONS?
Global institutions
manage, regulate, and police the global marketplace
promote the establishment of multinational treaties to

govern the global business system

General Agreement on Tariffs and Trade (GATT)
World Trade Organization (WTO)
International Monetary Fund (IMF)
World Bank
United Nations (UN)
G20

UNITED NATIONS
The United Nations was established October

24, 1945 by 51 countries committed to

preserving peace through international
cooperation and collective security.

(formerly known as League of Nations)

UNs

central mandates is the promotion of higher

standards of living, full employment, and conditions
of economic and social progress and development

Membership is now at 191 countries

Headquaters: New York, USA

The Globalization Debate

Anti-Globalization Protests

Negative
Anti globalization groups protest because globalization creates,
Job losses
Downward pressure on the wage rates of unskilled workers
Environmental degradation
The cultural imperialism of global media and multinational enterprises
In Seattle, the WTO was meeting to try to launch a new round of talks to cut barriers
to cross-border trade and investment in December 1999. There was violent protest by
the anti globalization groups, where 40,000 protesters marched against globalization.

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The Globalization Debate

Positive

Anti-Globalization Protests

Globalization improves the living standard.

International chains like McDonalds and Starbucks are now available

almost at every location.

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The Globalization Debate

Negative

Globalization, Jobs and Income

MNCs shifted their production to low cost locations where wage rate is

low. As a result, the demand of labor reduced in the USA. This resulted in
job losses and reduction of wage rate in USA.
Advanced economies are becoming technology-oriented. So the demand
of unskilled workers is reducing in advanced economies creating an excess
supply of unskilled labor. Thus, growing income inequality is a result of
the wages for skilled workers being bid up by the labor market and the
wage of unskilled workers being discounted.

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The Globalization Debate

Positive

Globalization, Jobs and Income

However, benefits outweigh cost of globalization. When MNCs go to LDC,

they improve the living standards of the people of host country creating
employment and supplying world class products. As a result of such
economic growth, host country buys other products from the home
country.
E.g. USA and China (Medicine and textile).
Globalization encourages countries to specialize in products which they
can produce most efficiently. This improves the world output and overall
economic condition of the world.
Supporters of globalization argue that during 1987-1994 the income gap
actually reduced by 5.5%.

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The Globalization Debate

Globalization, Labour Policies and the Environment
Negative
LDCs lack adequate regulations to protect labour and the environment

from abuse by the corrupts. Free trade leads to an increase in pollution and
result in firms from advanced nations exploiting the labour of less developed
nations.
Supporters of anti-globalization argued that NAFTA might stimulate US
manufacturing firms moving to Mexico and then pollute the environment,
employ child labour and ignore workplace safety.

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The Globalization Debate

Globalization and the
Worlds Poor
Negative
Due to globalization the gap
between the rich and poor nations
of the world has gotten wider. In
1870, the average income per capita
in the worlds 17 richest nations was
2.4 times that of all other countries.
In 1990, the same group was 4.5
times as rich as the rest.

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The Globalization Debate

Globalization and the Worlds Poor
Positive
Due to globalization some worlds poorer nations are now observing
economic growth like, South Korea, Thailand and Malaysia.
However, some states are still poor and the reasons for their poverty are
purely internal like dictator government, economic policies that destroy
wealth, insufficient protection of property rights, and war or political unrest,
for e.g. African nations.

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Question!
IS GLOBALIZATION
GOOD OR BAD?

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