CHAPTER 2 Globalization of Markets and the of the World Trade Organization which grew to include

Internationalization of the Firm about 150 member nations.

World Trade Organization (WTO) A multilateral
Globalization of markets - refers to the gradual governing body empowered to regulate international
integration and growing interdependence of national trade and investment.
economies. Declining trade barriers and rapid changes The WTO aims to regulate and ensure fairness and
in communications, manufacturing, and transportation efficiency in global trade and investment. Global
technologies are enabling firms to internationalize cooperation in the post-war era also gave birth to the
much more rapidly and easily than ever before. International Monetary Fund and the World Bank.
Globalization allows companies to outsource value-
chain activities to the most favorable locations Early multinationals from the third phase of
worldwide. Firms source raw materials, parts, globalization originated in the United States, Western
components, and service inputs from suppliers around Europe, and Japan. European firms such as Unilever,
the globe. Globalization has also made it easier for Philips, Royal DutchShell, and Bayer organized their
companies to sell their offerings worldwide. These businesses by establishing subsidiaries around the
trends are transforming national economies. Growing world.
world trade and foreign direct investment (FDI) provide • The fourth phase of globalization began in the early
buyers with a wider choice of products than ever 1980s and featured enormous growth in cross-border
before. Global competition and innovation frequently trade and investment. It was triggered by the
help to lower consumer prices. development of personal computers, the Internet, and
Cross-border trading opened the world to innovations web browsers. It was also characterized by the collapse
and progress by giving societies the opportunity to of the Soviet Union and the market liberalization of
expand and grow. Trade through the ages fostered Central and Eastern Europe. Impressive industrialization
civilization; and modernization in East Asian economies followed.
Phases of Globalization International prosperity began to develop in the
• The first phase of globalization began in about 1830 emerging markets, including Brazil, India, and Mexico.
and peaked around 1880.3 International business . Technological advances in information,
became widespread due to the growth of railroads, communications, and transportation supported the
efficient ocean transport, and the rise of large rise of internationally active small and medium-sized
manufacturing and trading firms. Invention of the enterprises. These advances increased the ability to
telegraph and telephone in the late 1800s enabled organize and manage exports more efficiently and at
information flows between and within nations and lower cost. Modern technologies also enabled the
aided early efforts to manage companies’ supply chains. globalization of the service sector in such areas as
• The second phase of globalization began around 1900 banking, entertainment, tourism, insurance, and
and was associated with the rise of electricity and steel retailing
production. This phase reached its height just before drivers or causes of globalization.
the Great Depression, a worldwide economic downturn • dimensions or manifestations of globalization.
that began in 1929. • firm-level consequences of globalization.
• The third phase of globalization began after World • societal consequences of globalization.
War II. By the war’s end in 1945, a substantial pent-up
demand was created for consumer as well as industrial 1. DRIVERS OF MARKET GLOBALIZATION
products to rebuild Europe and Japan. Leading - Worlwide reduction of barriers to trade and
industrialized countries, including Australia, the United investment
Kingdom, and the United States, sought to reduce - Market liberalization, economic and adoption of
international trade barriers to supply goods to meet this free markets
demand. In 1947, the Bretton Woods Conference of - Industrialization, economic development and
twenty-three nations created the General Agreement modernization
on Tariffs and Trade (GATT), which reduced barriers to - Integration of world financial markets
international trade and investment. Participating - Advances in technology
governments recognized that liberalized trade would 2. DIMENSIONS OF MARKET GLOBALIZATION
stimulate industrialization, modernization, and better - integration and interdependence of national
living standards. In turn, the GATT led to the formation economies
- Rise of regional economic intergration blocs
- Growth of global investment and financial flows in producing automobiles. India is a leading supplier of
- Convergence of buyer lifestyles and preferences software.
- Globalization of production activities • Integration of world financial markets. Financial
- Globalization of services market integration makes it possible for internationally
3. FIRM-LEVEL CONSEQUENCES OF MARKET active firms to raise capital, borrow funds, and engage
GLOBALIZATION: INTERNATIONALIZATION OF THE in foreign currency transactions. Financial services firms
FIRM’S VALUE CHAIN follow their customers to foreign markets. Cross-border
- countries new business opportunities for transactions are made easier because of the ease with
internationalizing firms which funds can be transferred between buyers and
- new risks and intense rivalry from foreign competitors sellers. This takes place through networks of
- more demanding buyers who source from suppliers international commercial banks.
worldwide • Advances in technology. Technological advances are a
- greater emphasis on proactive internalization remarkable facilitator of cross-border trade and
- internalization on firm’s value chain investment. This is an important megatrend that
3.b SOCIETAL CONSEQUENCES OF MARKET requires greater elaboration.
GLOBALIZATION Technological Advances and Globalization
- Contagion : Rapid spread of financial or monetary Information technology (IT) is the science and process
crisis from one country to another of creating and using information resources. Its effect
- loss of national sovereignty on business has been revolutionary. The cost of
-Off shoring and the flight of jobs computer processing fell by more than 30 percent per
-effect on the poor year during the past three decades and continues to
-effect on the natural environment fall. IT creates competitive advantages by giving
-effect on national culture companies new ways to outperform rivals. IT benefits
1. . DRIVERS OF MARKET GLOBALIZATION smaller firms, too, allowing them to design and produce
Worldwide reduction in barriers to trade and customized products they can target to narrow, cross-
investment. national market niches. Online search engines provide
The tendency of national governments to reduce trade easy access to unlimited data for researching markets,
and investment barriers has accelerated global competitors, and other key information.
economic integration. For example, tariffs on the import Technology enables firms to interact with foreign
of industrial and medical equipment and countless partners and value-chain members in a more timely and
other products have declined nearly to zero in many cost-effective way. Such productivity advances provide
countries, encouraging freer international exchange of substantial competitive
goods and services. Falling trade barriers are facilitated Increasing availability of cell phones in Africa has
by the WTO. helped spur economic growth there.
• Market liberalization and adoption of free markets. In six years, Nigeria increased its telecom infrastructure
In the past three decades, free-market reforms in China from just 500,000 phone lines to more than 30 million
and the former Soviet Union smoothed the integration cellular subscribers. The result has been a dramatic rise
of former command economies into the global in productivity and commerce, which has helped
economy. Numerous Asian economies—for example, improve living standards. Greater access to cell phones
India, Indonesia, Malaysia, and South Korea—embraced saves wasted trips, provides access to education and
free market norms. These events opened roughly one- health care services, and facilitates communication
third of the world to freer international trade and between suppliers and customers. MNE telecom
investment. investment in Africa allows firms to fulfill social
• Industrialization, economic development, and responsibilities and improve the lives of millions of poor
modernization. Many emerging markets— rapidly people.
developing economies in Asia, Latin America, and Countries need modern infrastructure in
Eastern Europe—have now moved from being low communications, such as reliable telephone systems, to
value-adding commodity producers to sophisticated, support economic development. Mobile phones are the
competitive producers and exporters of premium most transformative technology in developing
products such as electronics, computers, and aircraft.7 economies. Fortunately, cell phone infrastructure is
For example, Brazil is now a leading manufacturer of inexpensive and relatively easy to install. The Internet of
Embraer commercial aircraft. The Czech Republic excels things refers to machine-to-machine connectivity
online. Worldwide, mobile telephony and app
development have grown enormously, creating millions investment barriers among themselves. Examples
of jobs, increasing productivity, and producing big GDP include the North American Free Trade Agreement area
gains (NAFTA), the Asia Pacific Economic Cooperation zone
McDonald’s used the social media site Renren.com to (APEC), and Mercosur in Latin America. In more
market burgers and sundaes to customers in China. advanced arrangements, such as a common market, the
Social media provide various means to reach important barriers to the cross-border flow of labor and capital are
audiences in markets around the world.13 completely removed. A notable example is the
Manufacturing European Union (www.europa.eu). The European Union
Computer-aided design (CAD) of products, robotics, and has adopted free trade among its member countries
production lines have transformed manufacturing, and harmonized fiscal and monetary policies and
mainly by reducing production costs. Revolutionary business regulations.
developments facilitate low-scale and low-cost
manufacturing; firms can make products cost effectively Governments assist this integration by lowering
even in short production runs. Such developments barriers to international trade and investment,
benefit international business by allowing firms to adapt harmonizing their monetary and fiscal policies within
products more efficiently to individual foreign markets, regional economic integration blocs, and creating
profitably target small national markets, and compete supranational institutions. These include such
more effectively with foreign competitors that enjoy organizations as the World Bank, International
cost advantages. Monetary Fund, and World Trade Organization.
Transportation
Firms consider the cost of transporting raw materials, • Growth of global investment and financial flows. In
components, and finished products when deciding the process of conducting international transactions,
either to export or manufacture abroad. If transport firms and governments buy and sell large volumes of
costs to an important market are high, management national currencies (such as dollars, euros, and yen).
may decide to manufacture merchandise in that
market. The development of fuel-efficient jumbo jets, The free movement of capital around the world—the
giant ocean-going freighters, and new transportation globalization of capital—extends economic activities
technology have greatly reduced shipping times and across the globe. It further increases
costs interconnectedness among world economies. The bond
Advances in transportation and low freight costs have market has gained worldwide scope, with foreign bonds
helped spur market globalization. Triple E class ships representing a major source of debt financing for
can carry thousands of shipping containers governments and firms.
• Convergence of consumer lifestyles and preferences.
2. Dimensions of Market Globalization Consumers around the world increasingly spend their
money and time in similar ways. Many aspects of
The globalization of markets can be characterized by lifestyles and preferences are converging. Shoppers in
several major dimensions or manifestations. New York, Paris, and Shanghai increasingly demand
similar household goods, clothing, automobiles, and
• Integration and interdependence of national electronics. Teenagers everywhere are attracted to
economies. iPods, Levi’s jeans, and Hollywood movies. Convergence
Internationally active firms develop multi-country of preferences is also occurring in industrial markets,
operations through trade, investment, geographic where professional buyers source raw materials, parts,
dispersal of company resources, and integration and and components that are increasingly standardized—
coordination of value chain activities. A value chain is that is, similar or identical in design and structure
the sequence of value-adding activities the firm Google is one of many multinational enterprises that
performs in the course of developing, producing, contribute to convergence of consumer lifestyles and
marketing, and servicing a product. The collective preferences.
activities of such firms give rise to economic integration,
that is, increased trade and other commercial activities • Globalization of production.
among the nations of the world. Intense global competition is forcing firms to reduce
• Rise of regional economic integration blocs. their costs of production. Companies cut their costs and
Regional economic integration blocks consist of groups selling prices through economies of scale,
of countries that facilitate reduced trade and standardization of finished products, and shifting
manufacturing and procurement to foreign locations 3.Societal Consequences of Globalization
with less expensive labor. For example, firms in the auto Major advances in living standards have been achieved
and textile industries have relocated their in virtually all countries that have opened their borders
manufacturing to low labor-cost locations such as to increased trade and investment
China, Mexico, and Poland. Contagion The tendency of a financial or monetary crisis
• Globalization of services. in one country to spread rapidly to other countries due
The services sector—banking, hospitality, retailing, and to the ongoing integration of national economies.
other service industries—is undergoing widespread Loss of National Sovereignty
internationalization. The real estate firm REMAX has Sovereignty is defined as the ability of a nation to
established more than 5,000 offices in some 50 govern its own affairs; normally one country’s laws
countries. Firms increasingly outsource business cannot be applied or enforced in another country.
processes and other services in the value chain to Globalization, however, can threaten national
vendors located abroad. In a relatively new trend, many sovereignty in various ways. MNE activities can interfere
people go abroad to undergo medical procedures, such with a government’s ability to control its own economy,
as cataract and knee surgeries, to save money social structure, and political system. Some
3. Firm-Level Consequences of Market Globalization: corporations are bigger than the economies of small
Internationalization of The Firm’s Value Chain nations; Walmart’s internal economy—its total
revenues—is larger than the GDP of many of the
Globalization compels firms to organize their sourcing, world’s nations, including Israel, Greece, and Poland.
manufacturing, marketing, and other value-adding Large multinational firms can apply a lot of pressure on
activities on a global scale to achieve cost advantages governments through lobbying or campaign
and time efficiencies. In a typical value chain, the firm contributions and can frequently influence the
conducts research and product development (R&D), legislative process.
purchases production inputs, and assembles or
manufactures a product or service. The largest firms are constrained by market forces. In
The value-chain concept is useful in international countries with many competing firms, one company
business because it helps clarify what activities are cannot force customers to buy its products or force
performed where in the world. For example, exporting suppliers to supply it with raw materials and inputs.
firms perform most upstream value-chain activities Resources that customers and suppliers use are made
(R&D and production) in the home market and most through free choice. Company performance depends on
downstream activities (marketing and after-sales the firm’s skill at winning customers, working with
service) abroad. suppliers, and dealing with competitors. Corporate
Each value-adding activity in the firm’s value chain is dominance of individual markets is rare. In reality,
subject to internationalization; that is, it can be market forces generally dominate companies
performed in locations outside the home country
To minimize globalization’s harm and reap its benefits,
The most typical reasons for locating value-chain governments should ensure the freedom to enter and
activities in particular countries are to reduce the costs compete in markets, protect private property, enforce
of R&D and production or to gain closer access to the law, and support voluntary exchange through
customers. Through offshoring, the firm relocates a markets rather than through political processes. Banks
major value-chain activity by establishing a factory or and financial institutions should be regulated
other subsidiary abroad. A related trend is global appropriately. Transparency in the affairs of business
outsourcing, in which the firm delegates performance of and regulatory agencies is critical
a value-adding activity to an external supplier or Offshoring
contractor located abroad.
Stages in firms value chain Globalization has created countless new jobs and
1 research and developmet opportunities worldwide, but it also has cost many
2.Procurement (sourcing) people their jobs. Ford and General Motors have laid off
3.manufacturing thousands of workers in the United States, partly the
4. marketing result of competitive pressures posed by carmakers
5.distribution from Europe, Japan, and South Korea. Ford, GM, and
Sales and service Volkswagen all have transferred thousands of jobs from
their factories in Germany to countries in Eastern
Europe.25 Offshoring is the relocation of manufacturing Effect on Sustainability and the Natural Environment
and other value-chain activities to cost-effective Globalization promotes manufacturing and economic
locations abroad. For example, the global accounting activity that results in increased pollution, habitat
firm Ernst & Young relocated much of its accounting destruction, and deterioration of the ozone layer. In
support work to the Philippines. Massachusetts General China, for example, economic development is attracting
Hospital has its CT scans and X-rays interpreted by much inward FDI and stimulating the growth of
radiologists in India. Many IT support services for numerous industries. The construction of factories,
customers in Germany are based in the Czech Republic infrastructure, and modern housing can spoil previously
and Romania. pristine environments. In Eastern China, growing
industrial demand for electricity led to construction of
Reshoring the Three Gorges Dam, which flooded agricultural lands
MNEs sometimes engage in reshoring—the return of and permanently altered the natural landscape. See the
manufacturing and services back to the home country. Apply Your Understanding exercise at the end of this
For example, Apple has returned some computer chapter, which presents an Ethical Dilemma problem on
manufacturing, and General Electric has returned the environmental damage done by a large oil company
washer and dryer production, to the United States. in Nigeria.
Reshoring arises for various reasons, including the rise It is therefore no surprise that as globalization
of wages and other costs in emerging markets and the stimulates rising living standards, concerned citizens
desire to locate closer to key customers in the advanced focus on improving their environment. Over time,
economies. governments pass legislation that promotes improved
Effect on the Poor environmental conditions. For example, Japan endured
Some MNEs have been criticized for paying low wages, polluted rivers and smoggy cities in the early decades of
exploiting workers, and employing child labor. Child its economic development following World War II. As its
labor is particularly troubling because it denies children economy grew, however, the Japanese passed tougher
educational opportunities. It is estimated that there are environmental standards to restore their natural
more than 200 million children aged 5 to 14 at work environment.
around the world. Effect on National Culture
Globalization exerts strong pressures on national
Nike was criticized for paying low wages to shoe factory culture because market liberalization exposes local
workers in Asia, some of whom worked in sweatshop consumers to global brands, unfamiliar products, and
conditions. Critics complained that, although founder different values. People worldwide are exposed to
Phil Knight is a billionaire and Nike shoes sell for $100 or movies, television, the Internet, and other information
more, some of Nike’s suppliers paid their workers only a sources that promote lifestyles of people in the United
few dollars per day States and other advanced economies
The flow of cultural influence often goes both ways, too.
Labor exploitation and sweatshop conditions are major Cafe Spice is an Indian food company whose founder
concerns in many developing economies. What other hails from Mumbai.
employment choices are available to these poorly As the influence of the Chinese economy grows over
educated people? time, Western countries will likely adopt some of
A low-paying job is usually better than no job at all. China’s cultural attitudes and behaviors. Chinese
Studies suggest that banning products made using child restaurants and some Chinese traditions are already a
labor may produce negative unintended consequences way of life in much of the world. Similar influences are
such as reduced living standards. evident from Latin America and other areas in the
Legislation passed to reduce child labor in the formal developing world. Cultural imperialism is offset by the
economic sector (the sector regulated and monitored countertrend of local nationalism. Although many
by public authorities) may have little effect on jobs in products andservices have become largely universal,
the informal economic sector, sometimes called the people’s behaviors and attitudes remain relatively
underground economy. In the face of persistent stable over time. Religious differences are as strong as
poverty, abolishing formal sector jobs does not ensure ever. Language differences are steadfast across national
that children leave the workforce and go to school. borders. As globalization standardizes superficial
The growth of the footwear industry in Vietnam aspects of life across national cultures, people resist
translated into a fivefold increase in wages. these forces by insisting on their national identity and
taking steps to protect it. For example, laws exist to
protect national language and culture in Belgium,
Canada, and France. Globalization and Africa Africa is
home to the poorest countries. The majority of its 1
billion people live on less than $2 a day. It is the area
least integrated into the world economy and accounts
for less than 3 percent of world trade. Although it has
abundant natural resources, Africa remains
underdeveloped due to many factors, including an
inadequate commercial infrastructure, lack of access to
foreign capital, high illiteracy, government corruption,
wars, and the spread of AIDS.

One of the most effective ways to alleviate African

poverty is to develop more business based models of
development. Several sub-Saharan African countries
have recently experienced significant economic growth
by increasing international trade in commodities. Africa
is a major supplier of petroleum to Europe and the
United States. Angola is among the top oil suppliers to
China. This activity has developed a ripple effect of
economic development. Because of the boom of certain
sectors in Africa, there has been an increase in foreign
banks, retailers, and MNE operations in the continent