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week 1.topic of International Trade


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Global Business Today 11e
by Charles W.L. Hill
and G. Tomas M. Hult
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©McGraw-Hill Education.
Education. All
Part 1: Introduction and Overview
Chapter 1: Globalization
©McGraw-Hill Education
Source: ©Kevork Djansezian/Getty Images News/Getty Images
Learning Objectives
Understand what is meant by the term globalization.
Recognize the main drivers of globalization.
Describe the changing nature of the global economy.
Explain the main arguments in the debate over the
impact of globalization.
Understand how the process of globalization is creating
opportunities and challenges for management practice.
©McGraw-Hill Education
Opening Case:
GM and Its Chevrolet Supercar, The Corvette ZR1
Eight distinctive automotive brands under GM umbrella
GM operates on 5 continents and has a strong presence
in China
Chevrolet-branded vehicles sold in all markets
• Corvette introduced in 1953 with ZR1 model reintroduced
in 2019
• Testament to global branding and staying power
©McGraw-Hill Education
The world economy today
• Fewer self-contained national economies
• More integrated global economic system with lower
barriers to trade and investment
• Transformation is called globalization
• The volume of goods, services, and investments crossing
national borders has expanded faster than world output
for more than half a century
• Globalization offers business opportunities
©McGraw-Hill Education
What Is Globalization? 1
Globalization: shift toward a more integrated and
interdependent world economy
Two key facets of globalization
• Globalization of markets
• Globalization of production
©McGraw-Hill Education
What Is Globalization? 2
The Globalization of Markets
• The merging of historically distinct and separate national
markets into one huge global marketplace
• In many markets, the tastes and preferences of consumers
in different nations are converging on some global norm,
creating a global market
• Examples: Coca-Cola, McDonald’s, IKEA, Starbucks, Apple
• The most global of markets are for industrial goods and
materials that serve universal needs around the world
• Aluminum, oil, wheat, microprocessors
©McGraw-Hill Education
What Is Globalization? 3
The Globalization of Production
• 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 (labor, energy, land,
and capital)
• Lower overall cost structure
• Improvement of the quality or functionality of a product
to compete more effectively
©McGraw-Hill Education
Did You Know?
Did you know why your
iPhone was assembled
in China? It’s not what
you might think.
Click to play video
©McGraw-Hill Education
What Is Globalization? 4
The Globalization of Production continued
• Early outsourcing was primarily for manufacturing
• Today, modern communications technology allows
companies to outsource services
• Impediments to globalization
• Formal and informal trade barriers
• Barriers to foreign direct investment
• Transportation costs
• Economic and political risk
• Managerial challenge for coordinating a globally dispersed supply
©McGraw-Hill Education
The Emergence of Global Institutions 1
Global Institutions
• Manage, regulate, and police the global market place
• Promote the establishment of multinational treaties to
govern the global business system
©McGraw-Hill Education
The Emergence of Global Institutions 2
World Trade Organization (WTO)
• Polices world trading system and ensures nations adhere
to the rules established in WTO treaties
• Succeeded the General Agreement on Tariffs and Trade
• 164 nations accounted for 98 percent of world trade
©McGraw-Hill Education
Can the International Court of Justice Be
The International Court of Justice (www.icj-cij.org) is the
principal judicial organ of the United Nations (UN). Of the six
principal organs of the UN, it is the only one not located in New
York (United States); instead, the seat of the Court is at the
Peace Palace in The Hague (Netherlands). The court’s role is to
settle, in accordance with international law, legal disputes
submitted to it by countries and to give advisory opinions on
legal questions referred to it by authorized United Nations
organs and specialized agencies. But how effective can the UN
International Court of Justice really be in the global
marketplace with its many legal systems?
Source: www.icj-cij.org/en/court.
©McGraw-Hill Education
The Emergence of Global Institutions 3
International Monetary Fund (IMF)
• Maintains order in the international monetary system
• Lender of last resort
• Requires nation-states to adopt specific economic policies
in return for loans
World Bank
• Promotes economic development using low-interest loans
• Seen as less controversial than IMF
©McGraw-Hill Education
The Emergence of Global Institutions 4
United Nations (UN)
• Maintains international peace and security
• Develops friendly relations among nations
• Promotes cooperation in solving international problems
• Promotes respect for human rights
• A center for harmonizing the actions of nations
• Includes 193 member countries
©McGraw-Hill Education
The Emergence of Global Institutions 5
Group of Twenty (G20)
• Comprised of finance ministers and central bank
governors of the 19 largest world economies plus the EU
• Represents 90 percent of global GDP
• Became a forum for a coordinated policy response to the
financial crisis of 2008 and 2009
©McGraw-Hill Education
Drivers of Globalization 1
Two macro factors driving the move toward greater
1. Decline in barriers to free flow of goods, services, and
2. Technological change
©McGraw-Hill Education
Drivers of Globalization 2
Declining Trade and Investment Barriers
• International trade occurs when a firm exports goods or
services to consumers in another country
• Foreign direct investment occurs when a firm invests
resources in business activities outside its home country
• During 1920s and 1930s, many nations put up barriers to
international trade to protect domestic industries
• After WWII, advanced Western countries reduced barriers
• GATT, Uruguay Round, and WTO
©McGraw-Hill Education
Table 1.1 Average Tariff Rates on Manufactured
Products as Percentage of Value
21 percent
18 percent
5.9 percent
1.6 percent


United States
Sources: The 1913 to 1990 data are from “Who Wants to Be a Giant?” The Economist: A Survey of the Multinationals, June 24, 1995, pp. 3–4. The
2020 data are estimated based on data from the World Development Indicators, World Bank.
©McGraw-Hill Education
Drivers of Globalization 3
Declining Trade and Investment Barriers continued
• Knowledge Society and Trade Agreements
• World trade is predicted to increase more rapidly than world
production for the foreseeable future
• Produce more today and more of it traded across national borders
• Consumers are more knowledgeable, which drives demand
• Countries have been reducing restrictions to foreign investment and
• Implications of fast-paced volume of world trade
• More companies dispersing parts production
• Economies of nation-states becoming more intertwined
• World becoming significantly wealthier
©McGraw-Hill Education
Figure 1.1 Value of World Trade, World Production, Number of
Regional Trade Agreements and World Population 1960 to 2020
Access the text alternative for these images.
©McGraw-Hill Education
Sources: World Bank, 2019; World Trade Organization, 2019; United Nations, 2019.
Figure 1.2 Comparisons of World Trade and World Population; World
Trade and Number of Regional Trade Agreements; World Population and
World Production; and World Population and World Trade
Access the text alternative for these images.
©McGraw-Hill Education
Sources: World Bank, 2019; World Trade Organization, 2019; United Nations, 2019.
Drivers of Globalization 4
Role of Technological Change
• Communications
• Since World War II, microprocessor created explosive growth of
high-power, lost-cost computing
• Microprocessors also advanced telecommunications
• Moore’s Law: as costs of microprocessors fall, their power increases
©McGraw-Hill Education
Drivers of Globalization 5
Role of Technological Change continued
• Internet of Things
• In 2017, 3.8 billion users (51 percent of global population)
• Makes it easier for buyers and sellers to find each other
• Transportation Technology
• Commercial jets, superfreighters
• Containerization
©McGraw-Hill Education
Drivers of Globalization 6
Role of Technological Change continued
• Implications for the Globalization of Production
• Lower transportation costs makes geographically dispersed
production system more economical
• Allows firms to better respond to customer demands
• Implications for the Globalization of Markets
• Low cost communication networks create electronic global
• Low cost transportation makes shipping products around the
world economical
• Reduced cultural distance
• Converging consumer tastes and preferences
©McGraw-Hill Education
The Changing Demographics of the Global
Economy 1
Early 1960s
• U.S. dominated the world economy, world trade
• U.S. dominated world FDI
• U.S. MNEs dominated international business
• About half the world was off limits to Western
international business
Today, much has changed
©McGraw-Hill Education
The Changing Demographics of the Global
Economy 2
The Changing World Output and World Trade Picture
• Early 1960s
• U.S. was dominant in industrial power, accounting for about 38
percent of world manufacturing output
• By 2018
• U.S. accounts for only 15.8 percent
• Germany, France, the U.K., and Canada had similar decline
• Rapid economic growth now in countries like China, India, Russia,
and Brazil
• Further relative decline by the U.S., Germany, and Japan; U.K. is
©McGraw-Hill Education
Table 1.2 Changing Demographics of World
Output and World Exports
Share of World
Output 1960 (%)
Share of World
Output Today (%)
Share of World
Exports Today (%)
United States
United Kingdom
©McGraw-Hill Education
Sources: Output data from World Bank database, 2019. Trade data from WTO Statistical Database, 2019.
The Changing Demographics of the Global
Economy 3
The Changing Foreign Direct Investment Picture
• World output generated by developing countries steadily
increasing since 1960s
• Stock of foreign direct investment (total cumulative value
of foreign investments) generated by rich industrial
countries declining
• Cross-border flows of foreign direct investment rising
• Largest developing country recipients of FDI are China,
Mexico, and Brazil
©McGraw-Hill Education
Figure 1.3 Share of FDI Stock Outward as a
Percentage of GDP
Access the text alternative for these images.
©McGraw-Hill Education
Sources: OECD data 2017, FDI stocks.
Figure 1.4 FDI Inflows (in millions of dollars)
Access the text alternative for these images.
©McGraw-Hill Education
Source: United Nations Conference on Trade and Development, World Investment Report 2018. (Data for 2019–2020 are forecast.)
The Changing Demographics of the Global
Economy 4
The Changing Nature of the Multinational Enterprise
• A multinational enterprise (MNE) is any business that has
productive activities in two or more countries
• Since the 1960s, a rise of non-U.S. multinationals and
growth of mini-multinationals
• Non-U.S. Multinationals
• Large number of U.S. multinationals reflects U.S. economic
• Today, world economy shifting away from North America and
Western Europe
©McGraw-Hill Education
Figure 1.5 National Share of Largest
Multinational Corporations
Access the text alternative for these images.
©McGraw-Hill Education
Source: Forbes Global 2000 in 2003 and 2017.
The Changing Demographics of the Global
Economy 5
The Changing Nature of the Multinational Enterprise
• The Rise of Mini-Multinationals
• More small- and medium-size businesses (mini-multinationals)
involved in international trade and investment
• Internet lowers barriers that smaller firms face in building
international sales
©McGraw-Hill Education
Which Is More Important—Similarities or
International strategy has seen significant changes in recent years.
Multinational enterprises now have to evaluate their core uniqueness and
how they can drive their uniqueness to be leveraged in the global
marketplace better. For some, such thinking may represent a major shift—to
focus on similarities across nations and customers instead of differences. This
could be an important shift because companies and their people are trained
to look for differences and form strategies based on satisfying the needs of
customers with slight or significant differences across the globe. In the future,
we may be looking for similarities first and then focusing on the similarities
that outweigh the differences in tastes, wants, and needs. Do you agree that
focusing on similarities across countries is a better way to developing
strategy than focusing on differences?
Source: globalEDGE.msu.edu/content/gbr/gbr7-2.pdf.
©McGraw-Hill Education
The Changing Demographics of the Global
Economy 6
The Changing World Order
• Collapse of communism in Eastern Europe
• Greater export and investment opportunities, but political unrest
is increasing risk
• Economic development in China
• Huge opportunities despite continued government control, but
also new competition from Chinese firms
• Free market reforms and democracy in Latin America
• New markets and new sources of materials and production, but
economic and political risk remains high
©McGraw-Hill Education
The Changing Demographics of the Global
Economy 7
Global Economy of the Twenty-First Century
• A more integrated global economy
• New opportunities for firms
• But, political and economic disruptions can upset plans
• The risk of a global financial crisis
©McGraw-Hill Education
The Globalization Debate 1
Is the shift toward a more integrated and
interdependent global economy a good thing?
• Experts believe globalization promotes greater prosperity
in the global economy, more jobs, and lower prices for
goods and services
• Others feel that globalization is not beneficial
©McGraw-Hill Education
The Globalization Debate 2
Antiglobalization Protests
• Began with WTO protest in December 1999 in Seattle
• Protest turned violent
• Protestors fear globalization has detrimental effects on
living standards, wages, and the environment
• Theory and evidence suggests these fears are exaggerated
©McGraw-Hill Education
The Globalization Debate 3
Globalization, Jobs, and Income
• Falling trade barriers destroy manufacturing jobs in
wealthy economies (U.S. and western Europe)
• Service activities increasingly outsourced to nations with
lower labor costs
• Supporters say benefits outweigh the costs
• Outsourcing allows a company to reduce its cost structure
and reduce prices
©McGraw-Hill Education
The Globalization Debate 4
Globalization, Jobs, and Income continued
• Share of labor in national income has declined
• Attributed to a fall in unskilled labor
• Gap between poorest and richest segments of society has widened
• In most countries, real income levels increased for all
• Many advanced economies report shortage of highly
skilled workers and an excess of unskilled workers
©McGraw-Hill Education
The Globalization Debate 5
Globalization, Labor Policies, and the Environment
• Critics argue that the lack of labor and environmental
regulations in less developed countries attract investment
• Adhering to environmental regulations increases costs of
• Supporters argue that tougher regulations lead to
economic progress
• Tougher regulations come with economic progress
• Studies show a hump-shaped relationship between
income levels and pollution levels
©McGraw-Hill Education
Figure 1.6 Income Levels and Environmental
Access the text alternative for these images.
©McGraw-Hill Education
Source: C. W. L. Hill and G. T. M. Hult, Global Business Today (New York: McGraw-Hill Education, 2018).
The Globalization Debate 6
Globalization and National Sovereignty
• Critics worry economic power is shifting away from
national governments and toward supranational
organizations such as the WTO, the European Union, and
the UN
• Supporters say the power of these organizations is limited
to what nation-states collectively agree to grant
• Must be able to persuade members states to follow certain actions
• Without the support of members, the organizations have no
©McGraw-Hill Education
The Globalization Debate 7
Globalization and the World’s Poor
• Critics argue the gap between rich and poor is wider and
the benefits of globalization not shared equally
• Many poor nations are under totalitarian regimes, suffer from
endemic corruption, have few property rights, are involved in war,
have rapidly expanding populations, are burdened by high debt
• No money to invest in public infrastructure
• Debt relief movements
• Rich nations gave to World Bank and IMF
• Reduce import barriers from poor nations
©McGraw-Hill Education
Managing in the Global Marketplace
International business is any firm that is engaged in
international trade or investment
Managing international business differs from managing
domestic business
• Practices vary country by country
• Issues are more complex
• Need to understand rules governing international trade
and investment
• Need to convert currency
©McGraw-Hill Education
In this chapter, we have
• Understood what is meant by the term globalization.
• Recognized the main drivers of globalization.
• Described the changing nature of the global economy.
• Explained the main arguments in the debate over the
impact of globalization.
• Understood how the process of globalization is creating
opportunities and challenges for management practice.
©McGraw-Hill Education

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