The Global Economy

Global Economy
Common to buy clothing anywhere in US which has
a tag labeled, Made in Malaysia, China or Sri
Lanka
Simple observation reminds us that our
consumption of goods has a strong international
character
Increasingly true to speak not only of national
economies but a larger, highly inter-connected and
interdependent- GLOBAL ECONOMY
Before discussing basic mechanisms of
industrialization and economic change within Third
World, important to look at the broader global
industrial environment within which these nations
are forced to compete

Setting the Stage: Origins of the

Global Economy

Since 1970s world economy hit by turbulent forces

Unemployment in western countries

Traditional industries (iron and steel) have declined

LDCs bearing huge financial debts which threaten drive

for development

Trading tensions have emerged between industrial

countries and the newly industrializing countries

Causes of These Conditions?

Some argue that continuing OPEC escalation of oil prices through limited
production is root cause

Had some effect but too simple an answer

More profound changes in world economic structure were underway

before this

Increasingly growing consensus that world economy has become more

volatile, complex and tightly connected

Countries affected by what is happening abroad and at larger geographical

scale

Internationalization of Trade and

Labor

As with Japanese autos, American computers and

Taiwanese calculators there is an emergence of a new
international division of labor

Basically a change in geographical pattern of

specialization at the global scale-constantly changing
and very dynamic

Example: movement of textile and shoe production

from Indonesia to China

International Division of Labor

Division of labor has taken on spatial

dimensions- some areas come to specialize in
certain types of economic activity
At broad scale : industrialized countries ---
manufactured goods while non-industrialized
countries --- raw materials
However this simple pattern no longer exists
Now much more complex structure involving
fragmentation of many processes and their
geographical relocation on a global scale

Forces Surrounding Global System

of Production

These five factors are affecting

production patterns:
1. Trans-national or multi-national
corporations (MNCs)-firms that operate in
many nations
Increasingly these firms have local
production points and suppliers that
operate across national boundaries
providing and securing labor, capital and
other resources from a variety of places
and which have become very powerful
and important influences in the global
economy

Sequential Model of TNC

Development
Stage I- Serve domestic market only
Stage II- Export to overseas markets
through independent channels (sales
agents)
Stage III- Establish sales outlets in
overseas markets by acquiring local
firm and/or setting up new facility
Stage IV- Establish production facility
overseas by acquiring local firm
and/or setting up new facility

Basic Enterprise

Ta
rif

1
Nation
Center

er
h
Ot

tio
a
N

Factory

Penetration of a National Market

Geographical Growth of a Multinational

Corporation

Distribution center

Multinational Corporation

Penetration of Foreign Markets

Representative

Forces Surrounding Global System

of Production

2. National governments- through their

industrial, trade and foreign policies
especially liberalization policies
Liberalization refers to the way in which
policies facilitate transactions (trade and
sales) of a variety of products and services
Deregulation refers to the easing of
taxation, entry and pricing of products or
services dictated by government policy
Privatization refers to the ownership of
former public sector operations and firms
by private corporations and enterprises

Forces Surrounding Global System

of Production

3. Enabling Technologies- transport,

communications, production and
organizational improvements
Explosion of enhanced transport and
communication services such as air cargo,
integrators offering definite time delivery
(FedEx and UPS), electronic mail and
electronic data interchange (EDI)
Advanced inventory management such
(just-in-time (JIT)) and new systems of
distribution such as third party logistics
(3PL)

Just-in-Time and its Logistic

Delivery units for
parts

Production Unit

Delivery units for

finished goods

se
ou
eh
ar
W

Old warehouse before

Just-in-Time

FACTORY
Assembly Line
Moving storage
units

Assembly and warehousing

place

Moving storage
units

% of Products Shipped for Just-inTime Manufacturing

Forces Surrounding Global System

of Production

4. Shifts in Market Conditions and

Demand
Economic cycles affect markets and
production, e.g. the Asian financial crisis
Dramatic shifts in demand affect over
time influence type of good being
produced and production schedules
Application of new technology can mean
product obsolescence
These changes can be described in part
through product life cycle

Product Life Cycle

Essence of PLC is that growth in sales of product follows

systematic path, from initial introduction to market
through development, growth, maturity, decline and
obsolescence

Product Life Cycle

Competition

Monopoly
rs
it to
pe
m
Co

Sales

Inno

Idea

Promotion

Research and
development
Stage 1

vati
ng f
irm

First competitors

Mass production

Decline of
production

Growth

Maturity

Decline

Stage 2

Stage 3

Stage 4

Cellular Phones of Nokia

Evolution of basic
Cellular phones are an
example of a product
which is especially
applicable to the notion
of the product life cycle
phone to color
enhancement to camera
and email device

Hinterland

Global Financial Centers

Telecommunications

Space
Time

London

Los Angeles

Tokyo

New York

Hong Kong
Singapore

Stock Market Opening Period

Global Production Chains and Networks

Production Chain: Materials > Procurement > Transformation > Marketing

and Sales >Distribution > Service

Definition: transactionally linked sequence of functions where each stage

adds value to the process of goods and services production

Two aspects important: coordination and regulation and geographical

configuration

Production chains may be very localized but increasingly are global in

scale to take advantage of international division of labor

KIA Auto Parts Flow

Assembled in S Korea KIA Sorrento clear example of global supply chain

Uses 30K parts from all around world

Parts shipped from places as diverse as Wales and Mexicobut very risky

War in Iraq and piracy in Malacca Straits

Demonstrate surprising adaptability due to advance planning, multiple

sourcing of parts and ability to shift routes on short notice

KIA Auto Parts Flow

Communicates regularly with suppliers-at least once a week

Order several months in advance

If necessary use air freight instead of sea freight

Greater demand forced KIA to air freight airbags from Swedish company
which makes them in the U.S.

Greater expense of trans-Pacific flight better than slowing down

production line