Globalization

Chapter Outline

OPENING CASE: The Globalization of Production at Boeing

INTRODUCTION

WHAT IS GLOBALIZATION?

The Globalization of Markets

The Globalization of Production

Management Focus: Vizio and the Market for Flat Panel TVs

THE EMERGENCE OF GLOBAL INSTITUTIONS

DRIVERS OF GLOBALIZATION

Declining Trade and Investment Barriers

The Role of Technological Change

THE CHANGING DEMOGRAPHICS OF THE GLOBAL ECONOMY

The Changing World Output and World Trade Picture

Country Focus: India’s Software Sector

The Changing Foreign Direct Investment Picture

The Changing Nature of the Multinational Enterprise

Management Focus: China’s Hisense – An Emerging Multinational

The Changing World Order

The Global Economy of the Twenty-First Century

THE GLOBALIZATION DEBATE

Antiglobalization Protests

Country Focus: Protesting Globalization in France

Globalization, Jobs, and Incomes

Globalization, Labor Policies, and the Environment

Globalization and National Sovereignty

Globalization and the World’s Poor

MANAGING IN THE GLOBAL MARKETPLACE

CRITICAL THINKING AND DISCUSSION QUESTIONS

CLOSING CASE: Who Makes the Apple iPhone?

Learning Objectives

1. Understand what is meant by the term globalization.

2. Recognize the main causes of globalization.

3. Describe the changing nature of the global economy.

4. Explain the main arguments in the debate over the impact of globalization.

5. Understand how the process of globalization is creating opportunities and challenges for business managers.

Chapter Summary

This opening chapter introduces the reader to the concepts of globalization and international trade, and provides an introduction to the major issues that underlie these topics. The components of globalization are discussed, along with the drivers of globalization and the role of the General Agreement on Tariffs and Trade (GATT) and its successor the World Trade Organization (WTO) in lowering trade barriers. The influence of technological change in facilitating globalization is also discussed, along with the role of multinational firms in international business.

The chapter also describes the changing demographics of the global economy, with a special emphasis on the increasingly important role of developing countries in world trade. This discussion is complemented by a description of the changing world order, which was brought on by the collapse of communism in Eastern Europe and republics of the former Soviet Union. The chapter ends with a candid overview of the pros and cons of the trend towards globalization.

Opening Case: The Globalization of Production at Boeing

Summary

The opening case explores U.S. aircraft manufacturer Boeing’s approach to the production of its Dreamliner 787 airplane. Boeing’s strategy was unlike any of its previous strategies. Instead of producing much of the aircraft itself, Boeing, noting that 80 percent of its customers were foreign airlines, decided to outsource some 65 percent of the value of the Dreamliner to suppliers located around the world. This strategy introduced a number of challenges for Boeing, and production of the 787 was often delayed. A discussion of the case can revolve around the following questions:

QUESTION 1: Reflect on Boeing’s decision to outsource much of the production of the Dreamliner 787. What benefits does this strategy offer? Are there any drawbacks?

ANSWER 1: Boeing has traditionally outsourced some of the production of its aircraft, but it took outsourcing to a new level with the Dreamliner 787, outsourcing 65 percent of its value to suppliers located around the world. This strategy allowed each company including Boeing to focus on what it does best, allowing for greater efficiency and lower costs. Some students may also suggest that by using suppliers located in customer countries, Boeing was able to introduce a “local” element to the Dreamliner and gain goodwill with its customers. However, with its new strategy, Boeing also encountered many problems including challenges in coordinating its globally dispersed production chain. Production was frequently delayed and the aircraft was ready for sale much later than Boeing had anticipated. Some students may note that while Boeing was able to benefit from the expertise of its suppliers, by outsourcing, the company also lost the ability to increase its own knowledge and skills.

QUESTION 2: How has globalization made Boeing’s approach to the production of the Dreamliner possible?

ANSWER 2: Students should recognize the importance of technology that facilitated Boeing’s strategy to outsource much of its Dreamliner 787 aircraft to suppliers located around the globe. Some students might also point out that open markets and free trade were also important to the easy movement of parts from country to country. Other students might note that globalization has allowed for the creation of a more skilled workforce in many countries – something that was also important to Boeing.

Teaching Tip: Students can explore Boeing’s global operations at the company’s web site as {http://www.boeing.com/boeing/}.

Teaching Tip: Students can explore Apple’s global operations at the company’s web site as {http://www.apple.com/about/}.

Lecture Note: To extend this discussion, consider the perspective of some of Apple’s suppliers. To learn more, go to {http://www.businessweek.com/articles/2014-09-18/some-apple-suppliers-get-cut-off-must-scramble-for-new-business}.

Lecture Note: Students may also want to explore the situation at Foxconn, Apple’s Chinese supplier at {http://www.businessweek.com/articles/2012-09-27/whats-behind-the-foxconn-worker-riots}.

Chapter Outline with Lecture Notes, Video Notes, and Teaching Tips

INTRODUCTION

A) Globalization refers to the trend towards a more integrated global economic system where barriers to cross-border trade and investment are declining, perceived distance is shrinking thanks to advances in transportation and telecommunications, and material cultures are more similar across borders. The effects of globalization can be seen everywhere, from the cars people drive and the food they eat, to the jobs where they work and the clothes they wear. In 2012, some $18.3 trillion of goods, and $4.3 trillion of services were sold across borders. Today, more than $5 trillion in foreign exchange transactions are made daily.

Lecture Note: To extend this discussion, consider {http://www.businessweek.com/articles/2014-01-16/at-davos-the-state-of-globalization-in-2014} and {http://www.businessweek.com/news/2014-01-15/davos-defenders-of-globalization-fight-to-show-2014-is-not-1914#p1}.

Teaching Tip: The trend towards globalization has not gone unnoticed at many premier universities around the world. An organization called the Network of International Business Schools {http://www.nibsnet.org/} provides a forum for schools with international business programs to discuss their curriculums. Consider visiting this web site, and providing your students some examples of how colleges and universities are integrating the realities of globalization into their business curriculums.

Lecture Note: The U.S. Census Bureau offers an extensive web site that maintains, among other things, monthly statistics on trade between the United States and its trading partners. The web site is {http://www.census.gov/foreign-trade/top}.

B) The rapidly emerging global economy raises a multitude of issues for businesses including all sorts of new opportunities for business to expand their revenues, drive down their costs, and boost their profits. It also gives rise to challenges and threats such as how best to expand into a foreign market, whether and how to customize product offerings, marketing policies, human resources practices, and business strategies in order to deal with national differences in culture and how best to deal with the threat posed by efficient foreign competitors entering the home market place.

C) Globalization is also unleashing new anxieties for people who, until recently, had felt fairly secure in their jobs. Thanks to advances in technology, lower transportation costs, and an increase in skilled workers in low cost nations such as India, and China, services that had been performed locally can be exported.

Lecture Note: Having a global mindset is becoming an important variable in the hiring selection process at some companies. To learn more, go to {http://www.businessweek.com/articles/2014-10-01/international-experience-will-help-you-get-a-job-at-goldman-sachs}.

D) The accounting services industry is just one of many that have been transformed as a result of globalization. Today, many accountants in India, trained in the U.S. accounting code, perform work for U.S. accounting firms. These accountants access individual tax returns stored on computers in the United States, perform routine calculations, and save their work. A U.S. counterpart then inspects their work, and bills the U.S. client for services.

WHAT IS GLOBALIZATION?

A) Globalization refers to the shift towards a more integrated and interdependent world economy.

Video Note: There are several videos in the International Business Library on Pinterest (http://www.pinterest.com/mheibvideos/) that look at globalization from various perspectives. To explore globalization from the perspective of a CEO, consider CEO Weighs Consequences of Globalization. To see globalization as viewed by graduate students, see Graduate Students Recount Experiences with Globalization.

The Globalization of Markets

B) The globalization of markets refers to the merging of historically distinct and separate national markets into one huge global marketplace in which the tastes and preferences of consumers in different nations are beginning to converge upon some global norm. The global acceptance of Coca-Cola, Citigroup credit cards, IKEA furniture, and McDonald's hamburgers are all examples. These firms not only benefit from the globalization of markets, they also, by offering the same basic products worldwide, facilitate the trend. Yet there are still significant differences between markets that frequently require that marketing strategies, product features, and operating practices be customized for a country. In fact, the most global markets are for industrial goods and materials that serve a universal need around the world like microprocessors, rather than for consumer products. In many industries, there is no such thing as a “German market” or an “American market,” there is only a global market.

The Globalization of Production

C) The globalization of production refers to the sourcing of 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 land, labor, capital, and energy), thereby allowing them to compete more effectively against their rivals. Building Boeing’s 777 for example, involves eight Japanese suppliers, and a supplier from Singapore. Boeing outsources 65 percent of its 787 aircraft to foreign companies. Similarly, American maker of flat panel TVs, Vizio, is outsourcing parts from China, South Korea, and the United States, assembling them in Mexico, and selling them in the United States. The Internet is also facilitating efforts by service companies to outsource activities to low-cost nations. Some hospitals for example, outsource radiology work to India, and IBM and Microsoft outsource software testing to engineers in India.

Management Focus: Vizio and the Market for Flat Panel TVs

Summary

This feature explores the evolution of the flat panel television industry over recent decades. While the technology for flat panel televisions was developed in the United States in the 1960s, virtually all production now takes place in low-cost locations. The feature examines the strategy of one company, American-based Vizio, and clearly demonstrates the impact of globalization, and in particular the globalization of production.

Suggested Discussion Questions

Please see Critical Thinking Question 7 for discussion of this feature.

Teaching Tip: To learn more about Vizio go to {http://www.vizio.com/about/} and also consider {http://www.businessweek.com/news/2012-01-11/vizio-aims-low-price-wrecking-ball-at-pcs-after-shaking-up-tvs.html}.

THE EMERGENCE OF GLOBAL INSTITUTIONS

A) Over the last half century, a number of global institutions have been created to help manage, regulate, and police the global market place, as well as to promote the establishment of multinational treaties to govern the global business system. The World Trade Organization (WTO), like its predecessor the General Agreement on Tariffs and Trade (GATT), is responsible for policing the world trading system and making sure that nations adhere to the rules established in WTO treaties. As of 2013, the 159 nations that account for about 98 percent of world trade were all members of the WTO. The International Monetary Fund (IMF) maintains order in the international monetary system while the World Bank promotes economic development. The United Nations (UN) maintains international peace and security, develops friendly relations among nations, cooperates in solving international problems and promotes respect for human rights, and is a center for harmonizing the actions of nations.

DRIVERS OF GLOBALIZATION

A) Two macro factors seem to underlie the trend toward greater globalization. First, the decline in barriers to the free flow of goods, services, and capital that has occurred since the end of World War II and second, technological change.

Declining Trade and Investment Barriers

B) International trade occurs when a firm exports goods or services to consumers in another country. Foreign direct investment (FDI) occurs when a firm invests resources in business activities outside its home country. After WWII, the industrialized countries of the West started a process of removing barriers to the free flow of goods, services, and capital between nations. Under GATT, nations negotiated even further decreases in tariffs and made significant progress on a number of non-tariff issues (e.g. intellectual property, trade in services). With the establishment of the WTO, a mechanism now exists for dispute resolution and the enforcement of trade laws. Talks that began in late 2001 were initially expected to last just three years, and were focused on cutting tariffs on industrial goods, services, and agricultural products, phasing out subsidies to agricultural producers, reducing barriers to cross-border investment, and limiting the use of anti-dumping laws. As of 2014, the talks were effectively stalled.

Teaching Tip: A comprehensive overview of GATT is available at

{http://www.ciesin.org/TG/PI/TRADE/gatt.html}.

Teaching Tip: The World Trade Organization maintains an excellent web site at {http://www.wto.org/}. This site provides information about recent trade disputes, "hot" areas of international trade, and the status current talks.

Teaching Tip: To extend this discussion and to explore the potential for a Trans-Pacific Partnership go to {http://www.businessweek.com/articles/2013-11-21/bloomberg-view-free-trade-and-secrecy-dont-mix} and {http://www.businessweek.com/articles/2013-12-12/global-trade-in-retreat-world-economys-future-depends-on-revival}.

C) This removal of barriers to trade has taken place in conjunction with increased international trade, world output, and foreign direct investment. World Trade Organization data shows that the volume of world merchandise trade has grown at twice the rate of the world economy since 1950. In 2012, the volume of world merchandise trade was three times larger than it was in 1990. International trade in services has also grown significantly since the 1980s, and now accounts for about 19 percent of the value of all world trade.

D) The growth of foreign direct investment is a direct result of nations liberalizing their regulations to allow foreign firms to invest in facilities and acquire local companies. With their investments, these foreign firms often also bring expertise and global connections that allow local operations to have a much broader reach than would have been possible for a purely domestic company. In 2013, FDI flows were about $1.5 trillion, below the peak of $2 trillion in 2007, but showing a strong upward trend.

The Role of Technological Change

E) While the lowering of trade barriers made globalization of markets and production a theoretical possibility, technological change made it a tangible reality.

Microprocessors and Telecommunications

F) Since the end of World War II, there have been major advances in communications and information processing.

G) Moore’s Law predicts the power of microprocessor technology doubles and its cost of production falls in half every 18 months. As this happens, the cost of global communication plummets, lowering the cost of coordinating and controlling a global organization.

The Internet and the World Wide Web

H) The Internet and the World Wide Web, which have experienced explosive growth worldwide, promise to develop into the information backbone of tomorrow's global economy. The Internet effectively allows its 2.4 billion users in 2012 to find each other. For business, it can be a goldmine. In the United States, online retails sales in 2012 were about $365 billion and global e-commerce sales surpassed $1 trillion in 2012.

Video Note: Internet use in China is exploding. However, as shown in the video Growing Internet Use in China Reflects Changing Society in the International Business Library on Pinterest (http://www.pinterest.com/mheibvideos/), it is also creating a cultural divide between those who have access and those who do not.

I) The Web is being seen as an equalizer in that it reduces some of the constraints such as location, scale, and time zones that typically limit global expansion by companies.

Video Note: There are several videos in the International Business Library on Pinterest (http://www.pinterest.com/mheibvideos/) that look at globalization from various perspectives. To explore how companies used the Internet to start the Black Friday shopping tradition in the United Kingdom, consider: Black Friday Goes Global.

Transportation Technology

J) In addition to these developments, several major innovations in transportation technology have occurred since World War II. In economic terms, the most important are probably development of commercial jet aircraft and super freighters and the introduction of containerization, which greatly simplifies trans-shipment from one mode of transport to another.

Implications for the Globalization of Production

K) Improvements in transportation technology, including jet transport, temperature controlled containerized shipping, and coordinated ship-rail-truck systems have made firms better able to respond to international customer demands. The Internet has been a major force facilitating international trade in services.

Implications for the Globalization of Markets

L) As a consequence of these trends, a manager in today's firm operates in an environment that offers more opportunities, but is also more complex and competitive than that faced a generation ago. While there has been some convergence of consumer tastes and preferences between markets, firms must still address differences between countries.

THE CHANGING DEMOGRAPHICS OF THE GLOBAL ECONOMY

A) As late as the 1960s, four stylized facts described the demographics of the economy. The first was the U.S. dominance in the world economy and the world trade picture. The second was U.S. dominance in world foreign direct investment. The third fact was the dominance of large, multinational U.S. firms on the international business scene. The fourth was that roughly half of the globe- the centrally planned economies of the Communist world, was off limits to Western international business.

The Changing World Output and the Changing World Trade Picture

B) In the early 1960s, the U.S. was still by far the world's dominant industrial power. In 1960, for example, the U.S. accounted for 38.3 percent of world manufacturing output. By 2012, the United States accounted for only 23.1 percent. This decline in the U.S. position was not an absolute decline, rather, it was a relative decline, reflecting the faster economic growth of several other economies, most notably those in Asia.

C) Given the rapid economic growth now being experienced by countries such as China, Brazil, Russia, and India, further relative decline in the U.S. share of world output and world exports seems likely.

Video Note: The video in the International Business Library on Pinterest (http://www.pinterest.com/mheibvideos/) Brazil Seeks to Break New Ground in Global Marketplace explores how Brazil is currently trying to become a leader in the production and export of ethanol.

D) If we look into the future, most forecasts now predict a rapid rise in the share of world output accounted for by developing nations such as China, Russia, India, Indonesia, Thailand, Mexico, Brazil, and South Korea, and a commensurate decline in the share enjoyed by rich industrialized countries such as Great Britain, Germany, Japan, and the United States. For international companies, these trends suggest that future economic opportunities may be greater in developing nations, and that new competitors are like to emerge from these countries.

Country Focus: India’s Software Sector

Summary

This feature explores the growth of India’s software industry. Starting from nothing just twenty-five years ago, the industry now generates revenues in excess of $60 billion, and exports of $70 billion. With global spending on information technology expected to be over $250 billion by 2010, Indian companies are primed to capture a significant share of the pie, forcing their Western counterparts to make changes to their strategies.

Suggested Discussion Questions

1. What factors have contributed to the growth of India’s software industry?

Discussion Points: Four key factors have contributed to the growth of India’s software industry. First is the huge number of engineers in India. Some 400,000 engineers graduate from Indian universities every year. A second factor is India’s low wage structure. Indian engineers make about 12 percent of what an American colleague might make. Third, coordination between Western firms and Indian firms is facilitated by the large number of English-speaking Indians. Finally, because of the differences in time zones, Indian firms operate while American firms are closed.

2. How has India’s software industry changed in recent years? What are the implications of these changes for American companies like IBM and Microsoft?

Discussion Points: There has been a gradual shift in the Indian software industry in recent years. Initially, Indian firms focused on the low end of the industry to supply basic software development and testing services to Western firms. Today however, many companies have moved into higher end services to compete for large software development projects, business outsourcing contracts, and information technology consulting services. This new competitive threat is forcing American firms like IBM and EDS to rethink their global strategies. Some Western companies are now investing in India with the goal of capturing some of the cost advantages Indian companies like Infosys Technologies enjoy.

Lecture Note: India’s smartphone industry is growing rapidly and Google is just one company that is looking to capitalize on this growth. To learn more, go to {http://www.businessweek.com/articles/2014-10-21/googles-big-plans-for-low-cost-android-one-phones-in-india}.

Video Note: The video in the International Business Library on Pinterest (http://www.pinterest.com/mheibvideos/) India's Economy Remains Robust Despite Global Downturn examines India’s economic strength even during the recent global recession.

The Changing Foreign Direct Investment Picture

E) As shown in Figure 1.1 in the textbook, the share of world output generated by developing countries has been on a steady increase since the 1980s, while the stock of foreign direct investment (total cumulative value of foreign investments) generated by rich industrial countries has been on a steady decline. This trend is expected to continue.

F) Similarly as shown in Figure 1.2, there has been a sustained growth in cross-border flows of foreign direct investment, and the flow of foreign direct investment (amounts invested across national borders each year) has been directed at developing nations especially China.

The Changing Nature of the Multinational Enterprise

G) A multinational enterprise is any business that has productive activities in two or more countries.

Non-U.S. Multinationals

H) In the 1960s, large U.S. multinationals dominated the global business environment, accounting for about two-thirds of all foreign direct investment. By 2012, a different picture had emerged. The globalization of the world economy has resulted in a relative decline in the dominance of U.S. firms in the global marketplace. While most of the world’s largest multinationals were from developed countries, firms from developing economies had also begun to play a major role in the global economy. Looking to the future, we can reasonably expect the growth of new multinational enterprises (any business that has productive activities in two or more countries) from the world's developing nations.

The Rise of Mini-Multinationals

I) Another trend in international business has been the growth of medium-sized and small multinationals. These businesses are referred to as mini-multinationals.

Management Focus: China’s Hisense – An Emerging Multinational

Summary

This feature examines the growth of Hisense which began in 1969 as a state-owned factory with just 10 employees. Over the years, the company emerged as one of China’s leading makers of television sets. In 1994, China relaxed its hold on the company and Zhou Houijan was appointed CEO. Under Zhou’s leadership Hisense has become as one of China’s premier manufacturers of consumer appliances and telecommunications equipment.

Suggested Discussion Questions

1. What makes Hisense different from other manufacturers of consumer electronics? What factors have contributed to its success?

Discussion Points: The success of Hisense can be attributed to not only its low cost structure, but also the company’s skill in product innovation. In fact, Hisense believes that its main strength is its rapid production innovation. The company feels that to be successful in the highly competitive consumer electronics industry, it must be on the cutting edge of innovation. Consequently, the company’s strategy is to continually launch advanced, high quality, and competitively priced products.

2. Why has Hisense established multiple R&D centers? How do these R&D centers fit into the firm’s global strategy?

Discussion Points: In 1994, Hisense established its first R&D center in China. Since then, the company has also established R&D centers in South Africa and Europe, and is scheduled to open an R&D center in the United States in the near future. Being innovative is central to Hisense’s strategy. Having multiple R&D centers allows Hisense to be closer to its markets, and should help the company better serve customer needs and preferences.

Teaching Tip: To learn more about Hisense go to {http://www.hisense.com/} and click on English.

Lecture Note: Hisense is now expanding its reach into the U.S. market. To learn more and extend the discussion of this feature, go to {http://www.businessweek.com/articles/2014-07-31/chinas-hisense-aims-to-surpass-sony-be-no-dot-3-tv-maker-worldwide}.

The Changing World Order

J) The collapse of communism in Eastern Europe presented a host of export and investment opportunities for Western businesses. However, because there is still unrest and totalitarian tendencies in many states, companies must be cautious.

K) The economic development of China presents huge opportunities and risks, in spite of its continued Communist control. In addition, firms must be aware of the threat posed by China’s emerging multinationals.

L) For North American firms, the growth and market reforms in Mexico and Latin America also present tremendous new opportunities both as markets and sources of materials and production. However, given the history of economic mismanagement in Latin America, the favorable trends may not continue.

The Global Economy of the 21st Century

M) The path to full economic liberalization and open markets is not without obstruction. Economic crises in Latin America, South East Asia, and Russia all caused difficulties in 1997 and 1998. While firms must be prepared to take advantage of an ever more integrated global economy, they must also prepare for political and economic disruptions that may throw their plans into disarray. The 2008-2009 financial crisis that began in the United States, for example, quickly spread to much of the rest of the world.

THE GLOBALIZATION DEBATE

A) Is the shift toward a more integrated and interdependent global economy a good thing? While many economists, politicians and business leaders seem to think so, globalization is not without its critics. Globalization stimulates economic growth, raises the incomes of consumers, and helps to create jobs in all countries that choose to participate in the global economy. Yet, there is a rising tide of opposition to globalization.

Anti-Globalization Protests

B) Since 1999, when protesters against globalization targeted the WTO meeting in Seattle, anti-globalization protesters have turned up at almost every major meeting of a global institution. Protesters fear that globalization is forever changing the world in a negative way. However, despite their protests, most citizens seem to welcome the higher living standards that progress brings.

Globalization, Jobs, and Incomes

C) In developed countries, labor leaders lament the loss of good paying jobs to low wage countries. However, supporters of globalization argue that free trade will result in countries specializing in the production of those goods and services that they can produce most efficiently, while importing goods and services that they cannot produce as efficiently. Free trade advocates suggest that despite some job dislocation, the whole economy is better off with free trade. They make a similar argument to support the outsourcing of services like call centers to low-wage countries. However, given that the wage gap between developed and developing countries is closing, the migration of unskilled jobs to low-cost nations may only be a temporary phenomenon.

Teaching Tip: An interesting site for companies interested in exporting their services is available at {http://www.ita.doc.gov/td/sif/exporting_services_overseas.htm}, and also through the export assistance center at {http://www.export.gov/}.

Video Note: A video clip on exporting is available at {http://www.export.gov/}. For the video, click on “Begin Exporting”.

Country Focus: Protesting Globalization in France

Summary

This feature describes the anti-globalization protests going on in France. The protests, led by activist Jose Bove, started when the U.S. retaliated against EU bans on beef imports by imposing a 100% tariff on some EU products. Bove and his associates targeted McDonald’s, and also California winemaker Mondavi as symbols of their opposition to American investments. Still, despite the protests, foreign investment in France is at record highs, and ironically, so are French investments abroad.

Suggested Discussion Questions

1. Consider the trade war that initiated the protests led by Bove. The EU instituted restrictions on the import of hormone treated beef because it was feared that the product might lead to health problems. The WTO stated that the restrictions were prohibited under WTO agreements and ordered the EU to lift the restrictions or face retaliatory measures. In your opinion, did the WTO act appropriately? Should a government be permitted to make decisions as to what products are or are not available to consumers? Should the WTO? What do you think would have happened if the WTO had ruled in favor of the EU?

Discussion Points: Many students will probably argue that the European Union’s restrictions against hormone treated beef were nothing more than thinly veiled protectionism. Accordingly, students will probably feel that the World Trade Organization was justified in its ruling. Some students however, may suggest that the European Union was looking out for its citizens when it instituted the bans, and that therefore the World Trade Organization was overstepping its bounds.

2. Why was McDonald’s chosen as the target for anti-globalization protests? How can companies like McDonald’s protect themselves from the actions of protesters like Bove?

Discussion Points: Students will probably recognize that as an icon of the United States, McDonald’s is a symbol of America and as such was a natural target for protesters. The fact that its menu is based on beef was probably an added bonus. Many students will note that companies that are actively involved in local communities are less likely to attract negative feelings than those that are not. Students might recommend that companies like McDonald’s work to integrate themselves with the host country through charitable programs, social activities, and so on.

Teaching Tip: To learn more about ongoing WTO disputes, go the WTO’s homepage: {www.wto.org}.

Video Note: Protesting against globalization is not uncommon. The iGlobe Environmental Activist Questions the Goals of Globalization also explores the negative effects of globalization.

Globalization, Labor Policies, and the Environment

D) A second source of concern is that free trade encourages firms from advanced nations to move manufacturing facilities offshore to less developed countries that lack adequate regulations to protect labor and the environment from abuse by the unscrupulous. Supporters of free trade and greater globalization express serious doubts about this scenario. They point out that tougher environmental regulation and stricter labor standards go hand in hand with economic progress. In general, as countries get richer, they enact tougher environmental and labor regulations.

Lecture Note: To extend this discussion, consider {http://www.businessweek.com/ap/2014-10-23/coal-rich-poland-ready-to-block-eu-climate-deal}.

E) Lower labor costs are only one of the reasons why a firm may seek to expand in developing countries. These countries may also have lower standards on environmental controls and workplace safety. Nevertheless, since investment typically leads to higher living standards, there is often pressure to increase safety regulations to international levels. No country wants to be known for its poor record on health and human safety. Thus supporters of globalization argue that foreign investment often helps a country to raise its standards.

Globalization and National Sovereignty

F) A final concern voiced by critics of globalization is that in today's increasingly interdependent global economy, economic power is shifting away from national governments and toward supranational organizations such as the World Trade Organization (WTO), the European Union (EU), and the United Nations. As perceived by critics, the problem is that unelected bureaucrats are now sometimes able to impose policies on the democratically elected governments of nation-states, thereby undermining the sovereignty of those states.

G) With the development of the WTO and other multilateral organizations such as the EU and NAFTA, countries and localities necessarily cede some authority over their actions. Supporters of these organizations claim that if the organizations fail to serve the collective interests of member states, the states will withdraw their support and the organizations will collapse.

Globalization and the World’s Poor

H) Critics of globalization argue that over the last century the gap between rich and poor has gotten wider, and that the benefits of globalization have not been shared equally. However supporters of free trade suggest that the actions of governments have limited economic improvement in many countries. In addition, debt may also be limiting growth in some countries. Today, there are various efforts underway to encourage debt relief programs.

MANAGING IN THE GLOBAL MARKETPLACE

A) An international business is any firm that engages in international trade or investment.

B) As their organizations increasingly engage in cross-border trade and investment, managers need to recognize that the task of managing an international business differs from that of managing a purely domestic business in many ways. Countries differ in their cultures, political systems, economic systems, legal systems, and levels of economic development.

C) These differences require that business people vary their practices country by country, recognizing what changes are required to operate effectively. It is necessary to strike a balance between adaptation and maintaining global consistency, however.

D) As a result of making local adaptations, the complexity of international business is clearly greater than that of a purely domestic firm. Firms need to decide which countries to enter, what mode of entry to use, and which countries to avoid. Rules and regulations also differ, as do currencies and languages.

E) Managing an international business is different from managing a purely domestic business for at least four reasons: 1) countries differ, 2) the range of problems and manager faces is greater and more complex, 3) an international business must find ways to work within the limits imposed by governmental intervention and the global trading system, and 4) international transactions require converting funds and being susceptible to exchange rate changes.

Critical Thinking and Discussion Questions

1. Describe the shifts in the world economy over the last 30 years. What are the implications of these shifts for international businesses based in Great Britain? North America? Hong Kong?

Answer: The world economy has shifted dramatically over the past 30 years. As late as the 1960s, four trends described the demographics of the global economy. The first was U.S. dominance in the world economy and world trade. The second was U.S. dominance in the world foreign direct investment picture. Related to this, the third fact was the dominance of large, multinational U.S. firms in the international business scene. The fourth was that roughly fifty percent of the world - the centrally planned economies of the Communist world - was off-limits to Western international businesses. All of these demographic facts have changed. Although the U.S. remains the world's dominant economic power, its share of world output and world exports have declined significantly since the 1960s. This trend does not reflect trouble in the U.S. economy, but rather reflects the growing industrialization of developing countries such as China, India, Indonesia, and South Korea. This trend is also reflected in the world foreign direct investment picture. As depicted in Figure 1.2 in the textbook, the share of world output (or the stock of foreign direct investment) generated by developing countries has been on a steady increase since the 1960s, while the share of world output generated by rich industrial countries has been on a steady decline. Shifts in the world economy can also be seen through the shifting power of multinational enterprises. Since the 1960s, there have been two notable trends in the demographics of the multinational enterprise. The first has been the rise of non-U.S. multinationals, particularly Japanese multinationals. The second has been the emergence of a growing number of small and medium-sized multinationals, called mini-multinationals. The fall of Communism in Eastern Europe and the republics of the former Soviet Union have brought about the final shift in the world economy. Many of the former Communist nations of Europe and Asia seem to share a commitment to democratic politics and free market economies. Similar developments are being observed in Latin America. If these trends continue, the opportunities for international business may be enormous. The implications of these shifts are similar for North America and Britain. The United States and Britain once had the luxury of being the dominant players in the world arena, with little substantive competition from the developing nations of the world. That has changed. Today, U.S. and British manufacturers must compete with competitors from across the world to win orders. The changing demographics of the world economy favor a city like Hong Kong. Hong Kong (which is now under Chinese rule) is well located with easy access to markets in Japan, South Korea, Indonesia, and other Asian markets. Hong Kong has a vibrant labor force that can compete on par with the industrialized nations of the world. The decline in the influence of the United States and Britain on the global economy provides opportunities for companies in Hong Kong to aggressively pursue export markets.

2. "The study of international business is fine if you are going to work in a large multinational enterprise, but it has no relevance for individuals who are going to work in smaller firms." Evaluate this statement.

Answer: People who believe in this view, and the firms that they work for, may find that they do not achieve their full potential (at best) and may ultimately fail because of their myopia. As barriers to trade decrease and state of the art technological developments take place throughout the world, new opportunities and threats exist on a worldwide basis. The rise of the mini-multinationals suggests there are global opportunities even for small firms. But staying attuned to international markets is not only important from the perspective of seeking profitable opportunities for small firms; it can also be critical for long-term competitive survival. Firms from other countries may be developing products that, if sold internationally, could wipe out small domestic competitors. Scanning international markets for the best suppliers is also important for small firms, for if a domestic competitor is able to tap into a superior supplier from a foreign country, it may be able to seriously erode another firm's competitive position before the small firm understands the source of its competitor's competitive advantage and can take appropriate counter actions.

3. How have changes in technology contributed to the globalization of markets and of production? Would the globalization of production and markets have been possible without these technological changes?

Answer: Changes in technology have significantly contributed to the globalization of markets and of production. Improvements in transportation technology have paved the way for companies like Coca-Cola, Levi Strauss, Sony and McDonalds to make their products available worldwide. Similarly, improvements in communications technology have had a major impact. The ability to negotiate across continents has been facilitated by improved communications technology, and the rapidly decreasing cost of communications has lowered the expense of coordinating and controlling a global corporation. Finally, the impact of information technology has been far reaching. Companies can now gain worldwide exposure simply by setting up a homepage on the Internet. This technology was not available just a few short years ago. The globalization of production and markets may have been possible without improvements in technology, but the pace of globalization would have been much slower. The falling cost of technology has made it affordable for many developing nations, which has been instrumental in helping these nations improve their share of world output and world exports. The inclusion of these nations, such as China, India, Thailand, and South Korea, has been instrumental in the globalization of markets and production. In addition, improvements in global transportation and communication have made it relatively easy for business executives from different countries to converse with one another. If these forms of technology, including air-travel, fax capability, e-mail, and overnight delivery of packages were not available, it would be much more difficult for businesses to conduct international trade.

4. "Ultimately, the study of international business is no different from the study of domestic business. Thus, there is no point in having a separate course on international business." Evaluate this statement.

Answer: This statement reflects a poor understanding of the unique challenges involved in international business. Managing an international business is different from managing a purely domestic business for at least four reasons. These are: (1) countries are different; (2) the range of problems confronted by a manager in an international business is wider and the problems themselves more complex than those confronted by a manager in a domestic business; (3) an international business must find ways to work within the limits imposed by government intervention in the international trade and investment system; and (4) international transactions involve converting money into different currencies. As a result of these differences, there are ample reasons for studying international business as a specific field of study or discipline.

5. How does the Internet affect international business activity and the globalization of the world economy?

Answer: The Internet has changed the way companies do business. This technology makes it easier for individuals and companies in different countries to conduct business with one another, and have lowered the cost of communications. These developments will undoubtedly hasten the already rapid pace of globalization, and act as an equalizer between large (resource rich) and small (resource poor) firms. For instance, it does not cost any more for a small software firm to gain visibility via the Internet than it does for a large software company like Microsoft. As a result, the Internet helps small companies reach the size of audience that was previously only within the reach of large, resource rich firms.

6. If current trends continue, China may emerge as the world's largest economy by 2020. Discuss the possible implications of such a development for:

The world trading system.

The world monetary system.

The business strategy of today's European and U.S. based global corporations.

Global commodity prices.

Answer: The world trading system would clearly be affected by such a development. Currently China enjoys a somewhat privileged status within the World Trade Organization as a “developing” country. Such a rise to eminence, however, would clearly force it to become a full and equal member, with all the rights and responsibilities. China would also be in a position to actively influence the terms of trade between many countries. On the monetary front, one would expect that China would have to have fully convertible and trading currency, and that ultimately it could become one of the “benchmark” currencies of the world. From the perspective of Western global firms, China would represent both a huge market, and potentially the home base of some very capable competitors. Finally, commodity prices would probably fall.

7. Reread the Management Focus on Vizio and answer the following questions:

a) Why is the manufacturing of flat panel TVs migrating to different locations around the world?

b) Who benefits from the globalization of the flat panel industry? Who are the losers?

c) What would happen if the U.S. government required that flat panel displays sold in the United States had to also be made in the United States? On balance, would this be a good thing or a bad thing?

d) What does the example of Vizio tell you about the future of production in an increasingly integrated global economy? What does it tell you about the strategies that enterprises must adopt in order to thrive in highly competitive global markets?

Answer:

a) The market for flat panel televisions is huge. Sales have grown from virtually nothing to more than $2 billion in 2010. However, competition is intense forcing producers to continually look for new ways to cut costs. In their quest for efficiency, most manufacturers have developed global supply chains. American-based Vizio for example, outsources to various suppliers around the globe. Panels come from South Korea, components from China, and processors from the United States. Then, assembly takes place in Mexico. The goal for Vizio is to find the best source, wherever it may be, and bring all the pieces together.

b) Consumers are clearly benefiting from the globalization of the flat panel television market. Thanks to the intense competition in the industry, prices have fallen dramatically. However, because manufacturers are continually looking for ways to cut costs and become more efficient, production changes and outsourcing is common, if not necessary, making jobs in the industry precarious.

c) If the U.S. government required flat panel televisions to be manufactured in the United States, prices would almost surely rise. While such a requirement could bring new jobs to American workers, consumers would probably buy far fewer televisions, and therefore any new jobs that were created as a result of such a requirement could be jeopardized. In addition, because resources that could be put to better use would now be tied up in producing televisions, other areas of the economy could suffer.

Teaching Tip: To extend this discussion, consider {http://www.businessweek.com/news/2012-01-11/vizio-aims-low-price-wrecking-ball-at-pcs-after-shaking-up-tvs.html}.

d) Vizio could be considered a model of how to conduct business in a highly competitive global market. Vizio’s strategy involves a realization that there is no single best production location. Instead, production should take place wherever it makes the most sense. To that end, the company has broken the value chain for the flat panel television into those parts that must be kept at home, and those that can be outsourced. Vizio, with a staff of just 100 people, outsources most engineering work, all of its manufacturing, and nearly all of its logistics. As the example with Vizio demonstrates, flexibility, speed, and innovativeness are all important qualities for successful firms in highly competitive global markets. Vizio is never satisfied with the status quo. To remain competitive, Vizio continually looks for better ways to produce its product.

Closing Case: Who Makes the Apple iPhone?

Summary

This case explores the international expansion of Apple’s production over the last thirty years. In 1983, Apple produced its products in the United States, but by 2004, most production had shifted to foreign countries, and in particular China. Today, Apple’s popular iPhone is assembled in China, but contains parts made around the world. Despite its reliance on foreign manufacturing however, Apple has maintained its R&D and marketing functions in the United States. A discussion of the case can revolve around the following questions:

QUESTION 1: What are the benefits to Apple of outsourcing the assembly of the iPhone to foreign countries, and particularly China? What are the potential costs and risks to Apple?

ANSWER 1: The globalization of production has made the world a much smaller place. Today, thanks to advances in transportation and a decline in trade and investment barriers, companies like Apple are able to take advantage production opportunities around the world. Apple is able to capitalize not only on the much lower cost of production in China, but also on the ability of Chinese subcontractors to quickly respond to changes in production demand. In addition, the large number of qualified industrial engineers together with the clustering of related factories in the country makes China an attractive location for manufacturing. Despite these advantages, Apple’s outsourcing strategy does have some drawbacks. The company has come under fire because of the working conditions in some of its supplier factories where workers are routinely required to work long hours in unsafe environments for low pay.

QUESTION 2: In addition to Apple, who else benefits from Apple’s decision to outsource assembly to China? Who are the potential losers here?

ANSWER 2: Most students will probably recognize that consumers are a main beneficiary of Apple’s decision to outsource the production of its iPhone. Because the cost of production is lower in China as compared to the United States, consumers should see lower prices on not only iPhones, but all cell phones as the market becomes more competitive. In addition, students will probably suggest that Chinese workers benefit. Apple’s production location not only creates jobs for the local economy, it also brings in training and technology. Some students may also point out that other local businesses should also benefit from the greater prosperity of local workers. Students may note that U.S. workers, in contrast to their Chinese counterparts, are probably not happy with Apple’s decision to manufacture the iPhone outside the United States. The decision not only takes jobs away from U.S. workers, it also takes money out of the local economy. Some students may argue however, that by producing the iPhone in China, Apple has more revenues to invest in R&D – and that its next product could generate more jobs and provide additional benefits for consumers.

QUESTION 3: What are the potential ethical problems associated with outsourcing assembly jobs to Foxconn in China? How might Apple deal with these?

ANSWER 3: Apple has come under fire for choosing to work with suppliers that run factories where workers are mistreated and conditions are unsafe. Perhaps the biggest concern for Apple is the tension associated with working conditions at Foxconn. Many students will probably agree that Apple has an ethical responsibility to ensure that its suppliers run factories where working conditions are good and workers are treated well. To that end, Apple needs to establish specific goals and guidelines for its suppliers as well as regularly scheduled checks to ensure that the goals have been met.

QUESTION 4: On balance, do you think that the kind of outsourcing undertaken by Apple is a good thing, or a bad thing for the American economy? Explain your reasoning.

ANSWER 4: This question will probably generate a fair amount of debate among students. Some will probably focus on the loss of jobs associated with Apple’s decision to outsource and argue that the decision to outsource is bad for the U.S. economy. Others however, will probably agree that by outsourcing, Apple is able to keep prices low for consumers and use its revenue to create additional products and keep its U.S. operations running.

Lecture Note: To extend this discussion, consider {http://www.businessweek.com/articles/2014-09-18/some-apple-suppliers-get-cut-off-must-scramble-for-new-business}.

Teaching Tip: Students can explore Apple’s global operations at the company’s web site as {http://www.apple.com/about/}.

Lecture Note: To extend this discussion, consider the perspective of some of Apple’s suppliers. To learn more, go to {http://www.businessweek.com/articles/2014-09-18/some-apple-suppliers-get-cut-off-must-scramble-for-new-business}.

Lecture Note: Students may also want to explore the situation at Foxconn, Apple’s Chinese supplier at {http://www.businessweek.com/articles/2012-09-27/whats-behind-the-foxconn-worker-riots}.

Continuous Case Concept

This feature allows you to integrate the material presented in each chapter of the text using a single industry, the auto industry. For each chapter, ideas will be presented on how to link the chapter contents to the current situation in the auto industry. This discussion can take place at the beginning of a new unit, at the end, or it could be threaded through the chapter material. In some cases, you may want to use the feature more than once. By using the continuous case concept, students will have the opportunity to understand how the elements presented throughout the text apply to an evolving, real situation.

Sketch out a diagram of the auto industry showing the major players such as Ford, Chrysler, Toyota, Nissan, BMW, Mercedes, Tata, and Hyundai. Look at recent changes in corporate structure. For example, Italian automaker Fiat recently took control of Chrysler.

Next, identify the location of each company’s headquarters, where production takes place, which markets are important to each firm, which companies are key rivals, and so on. For example, China and the United States are both strong markets for most automakers right now, but sales in Latin America and Europe are slumping. One problem affecting automakers is the recall of airbags made by Japanese supplier Takata. Takata supplied its airbags to much of the industry including Toyota, Nissan, Honda, General Motors. Students will probably be able to provide most of the information relatively easily. The goal here is to take a few minutes to establish the global nature of the industry.

Finally, reflect on the factors that made the industry a global one, and consider what is likely to happen to the industry in the next three years, five years, and ten years. Students may note for example, that although the U.S. market is getting stronger, emerging markets have become more important. Similarly, students may predict that automakers will continue to look for ways to streamline production. Ford, for example believes that auto buyers are becoming more similar in their buying habits and so has recently implemented a new strategy, One Ford, which will allow it to sell just a few models in every market. The company hopes that by streamlining all phases of product development, production, and marketing it will be able to capture a larger share of the market and bigger profits.

Video Note: The video in the International Business Library on Pinterest (http://www.pinterest.com/mheibvideos/) Detroit Carmakers Look To Expand Across The Globe relates directly to this discussion.

globalEDGE Exercises

The resources for each exercise can be easily located by using the search box at the top of the globalEDGE website at http://globalEDGE.msu.edu

Exercise 1

Search phrase: trade forecasts or HSBC Global Connections

Resource Name: HSBC Global Connections

Website: https://globalconnections.hsbc.com/us/en

globalEDGE Category: Globalization

Additional Info:

Once on the HSBC Global Connections website, the Trade Forecast Tool can be found under the Tools & Data section of the site. It’s an interactive chart, where you can see the trade routes that are forecasted to exhibit the largest annual growth over the next several years.

Exercise 2

Search phrase: FDI Confidence Index

Resource Name: A.T. Kearney: Foreign Direct Investment Confidence Index

Website: http://globaledge.msu.edu/global-resources/rankings

globalEDGE Category: Rankings

Additional Info:
This ranking study, published regularly since 1998 surveys over 300 hundred executives from multinationals with more than $500 million revenues from 28 countries. The Index is calculated as a weighted average of the number of high, medium, and low responses to questions about the likelihood of direct investment in a market over the next three years. Index values are based on non-source-country responses (so the rating for India does not include responses from Indian multinationals).

Additional Readings and Sources of Information

Apple vs. Google: Starkly Different China Experiences

http://www.businessweek.com/articles/2012-06-12/apple-and-google-are-having-very-different-china-experiences

China Imports Pharmaceutical Professionals

http://www.businessweek.com/technology/content/sep2010/tc20100915_284108.htm

Call-It Chimerica: The U.S. and China Grow Ever Closer

http://www.businessweek.com/articles/2012-10-11/call-it-chimerica-the-u-dot-s-dot-and-china-grow-ever-closer#r=hpt-ls

The F-35’s Global Supply Chain

http://www.businessweek.com/magazine/the-f35s-global-supply-chain-09012011-gfx.html

Will Foxconn Findings Change Apple’s Supply Chain

http://www.businessweek.com/videos/2012-03-29/will-foxconn-findings-change-apples-supply-chain

The Must Read Globalization: World’s Vicious Cycle

http://www.businessweek.com/videos/2012-10-15/the-must-read-globalization-worlds-vicious-cycle

Globalization: Key Issues

http://www.imf.org/external/np/exr/key/global.htm

What Would a Fair Labor iPod Cost?

http://www.businessweek.com/managing/content/jul2009/ca20090731_483871.htm

Why Globalization is Going into Reverse

http://www.businessweek.com/articles/2013-11-25/why-globalization-is-going-into-reverse

Vizio’s Outsourcing Hits a Profitable Note

http://www.businessweek.com/management/vizios-outsourcing-hits-a-profitable-note-07292011.html

Rushing to Finish a Global Free-Trade Deal

http://www.businessweek.com/articles/2012-05-31/rushing-to-finish-a-global-free-trade-deal

Foreign Makers Tune into China’s TV Market

http://www.businessweek.com/stories/2010-08-11/foreign-makers-tune-in-to-chinas-tv-market