Business 3

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International Business Lecture 2
Perspectives on globalization
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Aims of the lecture

• To define and contrast globalization of markets
  and globalization of production
• To identify methods of internationalizing
  operations
• To apply theories of internationalization and
  foreign direct investment (FDI)
• To follow trends in FDI outflows and inflows,
  highlighting the growing influence of emerging
  economies
• To outline the impacts of globalization on
  societies, together with the roles (actual and
  potential) of MNEs

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What is globalization?

• Definition Increasing and deepening interactions
  between individuals and organizations across the
  globe.
• Processes are ongoing, at varying pace between
  countries and between sectors.
• Globalization of markets, implying growing
  uniformity, has been partially realized, but
  local preferences predominate in many sectors.
• Globalization of production, implying
  co-ordination of operations across borders, has
  transformed manufacturing, but country
  differences are important.

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Classifying countries in terms of economic
development

• Developed countries Industrialized and
  economically advanced countries, with high levels
  of prosperity.
• Developing countries Countries changing from
  mainly agricultural or natural resource-based
  economy to industrial production.
• Transition economies Countries moving from
  communist or state-planned systems to
  market-based systems. (They overlap with
  developing countries, as modernization of their
  industries is a priority.)
• Emerging economies or markets Fast-growing
  developing and transition economies.

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Figure 2.1 Globalization
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Table 2.1 What does globalization mean for
business, society and government?
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Methods of internationalizing operations

• Outsourcing contracting with another company to
  carry out operations, usually more cheaply than
  the firm can do in-house. Includes
• Business process outsourcing (BPO)
• Offshoring (contracting out of a function to a
  low-cost location)
• FDI ownership and control of foreign assets.
  Includes
• Greenfield investment
• Acquisition of an existing business
• Joint venture

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Figure 2.2 Methods of internationalizing
operations
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Theories of internationalization

• Early theories of FDI were based on location and
  ownership advantages
• Product life cycle theory
• Theory of incremental internationalization
• Concept of psychic distance
• Dunnings eclectic paradigm, known as the OLI
  paradigm configuring ownership, location and
  internalization advantages

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Figure 2.3 Product Life Cycle
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Figure 2.4 Incremental internationalization
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Figure 2.5 Dunnings eclectic paradigm
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Changing patterns of FDI

• FDI has been a driver of globalization.
• FDI inflows
• into developed countries have focused on
  proximity to large markets.
• into to developing and emerging economies are
  growing, due to the benefits of globalized
  production and growth in emerging markets.
• Outward investors have been predominantly from
  the developed countries, but emerging MNEs are
  now rapidly internationalizing investing in
  both developed and developing countries.

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Figure 2.6 Growth in value of FDI stock
Source UN, World Investment Reports 2005 and
2007 (Geneva UN)
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Figure 2.7 FDI inflows, 1994-2006
Source UN, World Investment Reports 2005 and
2007 (Geneva UN)
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Figure 2.8 Number of MNEs based in developed,
developing and transition economies
Source UN, World Investment Report 2007 (Geneva
UN)
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Figure 2.9 FDI outflows from developing and
transition countries
Source UN, World Investment Reports 2005, 2006
and 2007 (Geneva UN)
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Impacts of globalization on societies

• Economic impacts
• For host societies, FDI and outsourcing bring
  jobs and prosperity in favoured sectors but,
  especially in low-skill sectors, work is insecure
  as investors may shift production to another
  country
• Loss of low-skill jobs in home countries of
  investors
• Widening inequality both within and between
  countries.
• Diffusion of technology
• Host societies benefit from technology transfer
  and spillover effects, but risk of stifling local
  innovative capacity.

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Source ILO (2004) A Fair Globalization (Geneva
ILO)
Figure 2.10 Share of the top 1 of earners in
gross income in selected industrialized countries
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Figure 2.11 Number of internet users per
thousand people
Source UNDP (2007) Human Development Report
2007-2008 (Basingstoke Palgrave Macmillan)
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Figure 2.12 Globalized production and social
impacts
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Global financial markets

• Global finance is often cited as at the forefront
  of globalization, facilitated by
• The revolution in IT and the internet
• Liberalization of national financial systems,
  opening up to outside investors.
• The benefits for emerging economies have been
  rapid economic integration, capital investment
  and economic growth.
• However, risks of global financial volatility
  have grown.

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Cultural and environmental impacts of
globalization

• Cultural
• Culture change through industrialization and
  urbanization.
• Convergence in lifestyles as consumer societies
  grow.
• On the other hand, cultural differences persist.
• Environmental
• Industrialization, power generation and
  extraction of natural resources have gathered
  pace, bringing environmental degradation and
  hastening climate change.
• Developed and emerging countries have differing
  perspectives of on the need to promote
  environmental protection

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Conclusions

• Globalization has shrunk the world due to IT,
  communications and modern transport, combined
  with opening up of countries to outside
  investors.
• Globalization of production has transformed
  manufacturing, but markets, especially in
  consumer products, remain localized.
• MNEs have been at the forefront of
  internationalization of production, especially
  through FDI, now increasingly encompassing
  emerging MNEs and markets.
• New jobs and greater consumer choice have
  resulted, but negative social impacts represent
  the dark side of globalization.