business global class help?

Another institution in the news is the G20. Established in 1999, the G20 comprises the finance ministers and central bank governors of the 19 largest economies in the world, plus representatives from the European Union and the European Central Bank. Originally established to formulate a coordinated policy response to financial crises in developing nations, in 2008 and 2009 it became the forum though which major nations attempted to launch a coordinated policy response to the global financial crisis that started in America and then rapidly spread around the world, ushering in the first serious global economic recession since 1981.   G20 Established in 1999, the G20 comprises the finance ministers and central bank governors of the 19 largest economies in the world, plus representatives from the European Union and the European Central Bank. ANOTHER PERSPECTIVE G20 Relevant Statistics There have been six G20 Leaders’ Summits (Washington, London, Pittsburgh, Toronto, Seoul, and Cannes). At the Leaders’ level, this is the second time, following the Republic of Korea, that an emerging country holds the presidency of the Group. Mexico will become the first Latin American country to chair the annual presidency of the Group. According to estimates by the International Labor Organization, the G20 has created or preserved between 7 and 11 million jobs by end of 2009. G20 members represent almost 90 percent of global GDP and 80 percent of international global trade; 64 percent of the world’s population lives in G20 member countries, and 84 percent of all fossil-fuel emissions are produced by G20 countries. Source: www.g20.org/index.php/en/numeralia. QUICK STUDY 1. What is meant by the globalization of markets? Which product markets tend to be the most global? 2. What is meant by the globalization of production? Why are production systems being globalized? 3. What is the main purpose of global institutions such as the WTO, IMF, and World Bank? LEARNING OBJECTIVE 2 Recognize the main drivers of globalization. Drivers of Globalization Two macro factors underlie the trend toward greater globalization.14 The first is the decline in barriers to the free flow of goods, services, and capital that has occurred since the end of World War II. The second factor is technological change, particularly the dramatic developments in recent decades in communication, information processing, and transportation technologies. DECLINING TRADE AND INVESTMENT BARRIERS   During the 1920s and 1930s, many of the world’s nation-states erected formidable barriers to international trade and foreign direct investment. 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. Many of the barriers to international trade took the form of high tariffs on imports of manufactured goods. The typical aim of such tariffs was to protect domestic industries from foreign competition. One consequence, however, was “beggar thy neighbor” retaliatory trade policies, with countries progressively raising trade barriers against each other. Ultimately, this depressed world demand and contributed to the Great Depression of the 1930s.   International Trade Occurs when a firm exports goods or services to consumers in another country.   Foreign Direct Investment (FDI) Direct investment in business operations in a foreign country. Having learned from this experience, the advanced industrial nations of the West committed themselves after World War II to removing barriers to the free flow of goods, services, and capital among nations.15 This goal was enshrined in the General Agreement on Tariffs and Trade. Under the umbrella of GATT, eight rounds of negotiations among member states worked to lower barriers to the free flow of goods and services. The most recent negotiations to be completed, known as the Uruguay Round, were finalized in December 1993. The Uruguay Round further reduced trade barriers; extended GATT to cover services as well as manufactured goods; provided enhanced protection for patents, trademarks, and copyrights; and established the World Trade Organization to police the international trading system.16 Table 1.1 summarizes the impact of GATT agreements on average tariff rates for manufactured goods. As can be seen, average tariff rates have fallen significantly since 1950 and now stand at about 4 percent. Page 12 TABLE Average Tariff Rates on Manufactured Products as Percent of Value Sources: 1913–1990 data are from “Who Wants to Be a Giant?” The Economist: A Survey of the Multinationals, June 24, 1995, pp. 3–4. Copyright © The Economist Books, Ltd. The 2010 data are from World Trade Organization, 2011 World Trade Report (Geneva: WTO, 2011). In late 2001, the WTO launched a new round of talks aimed at further liberalizing the global trade and investment framework. For this meeting, it picked the remote location of Doha in the Persian Gulf state of Qatar. At Doha, the member states of the WTO staked out an agenda. The talks were scheduled to last three years, but, as of 2012, they were effectively stalled due to opposition from several key nations. The Doha agenda includes 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 antidumping laws. If the Doha talks are ever completed, the biggest gain may come from discussion on agricultural products; average agricultural tariff rates are still about 40 percent, and rich nations spend some $300 billion a year in subsidies to support their farm sectors. The world’s poorer nations have the most to gain from any reduction in agricultural tariffs and subsidies; such reforms would give them access to the markets of the developed world.17 In addition to reducing trade barriers, many countries have also been progressively removing restrictions to foreign direct investment. According to the United Nations, some 90 percent of the 2,700 changes made worldwide between 1992 and 2009 in the laws governing foreign direct investment created a more favorable environment for FDI.18 Such trends have been driving both the globalization of markets and the globalization of production. The lowering of barriers to international trade enables firms to view the world, rather than a single country, as their market. The lowering of trade and investment barriers also allows firms to base production at the optimal location for that activity. Thus, a firm might design a product in one country, produce component parts in two other countries, assemble the product in yet another country, and then export the finished product around the world. According to WTO data, the volume of world merchandise trade has grown faster than the world economy since 1950 (see Figure 1.1).19 From 1970 to 2010, the volume of world merchandise trade expanded more than 30-fold, outstripping the expansion of world production, which grew close to 10 times in real terms. (World merchandise trade includes trade in manufactured goods, agricultural goods, and mining products, but not services.) Since the mid-1980s, the value of international trade in services has also grown robustly. Trade in services now accounts for about 20 percent of the value of all international trade. Increasingly, international trade in services has been driven by advances in communications, which allow corporations to outsource service activities to different locations around the globe (see the opening case). Thus, as noted earlier, many corporations in the developed world outsource customer service functions from software testing to customer call centers, to developing nations where labor costs are lower. It is worth noting that the relatively slow growth in trade during the 2000–2010 period that can be seen in Figure 1.1 reflects a steep drop in world trade that occurred in 2008 and 2009. In 2009, the global economy contracted by 2.5 percent as the global financial crisis that began with problems in the U.S. subprime mortgage lending market reverberated Page 13around the world. The volume of merchandised trade dropped by 12.2 percent in 2009, the largest such decline since World War II. The main reason seems to have been a drop in global consumer demand, although an inability to finance international trade due to tight credit conditions may have also played a role. However, trade did rebound in 2010 with a 14.5 percent growth in volume. World trade grew another 5 percent in 2011. While the long-term trends still seem firmly in place, the WTO is forecasting relatively slow growth in trade for a few years as the world grapples with the after-effects of the global financial crisis and the great recession it spawned, as well as the continuing fiscal problems in many European nations and the United States.20 FIGURE Average Annual Percentage Growth in Volume of Exports and World GDP, 1950–2010 The data summarized in Figure 1.1 imply several things. First, more firms are doing what Boeing does with the 777 and 787, and Apple with the iPhone: dispersing parts of their production process to different locations around the globe to drive down production costs and increase product quality. Second, the economies of the world’s nation-states are becoming more intertwined. As trade expands, nations are becoming increasingly dependent on each other for important goods and services. Third, the world has become significantly wealthier since 1950, and the implication is that rising trade is the engine that has helped to pull the global economy along. Evidence also suggests that foreign direct investment is playing an increasing role in the global economy as firms increase their cross-border investments. The average yearly out-flow of FDI increased from $25 billion in 1975 to a record $2 trillion in 2007. However, FDI outflows did contract to $1.1 trillion in 2009 and 2010 in the wake of the global financial crisis, although they grew again to reach $1.5 trillion in 2011.21 In general, over the past 30 years the flow of FDI has accelerated faster than the growth in world trade and world output. For example, between 1992 and 2010, the total flow of FDI from all countries increased around ninefold while world trade by value grew fourfold and world output by around 55 percent.22 As a result of the strong FDI flow, by 2010 the global stock of FDI was about $20 trillion. At least 82,000 parent companies had 810,000 affiliates in foreign markets that collectively employed more than 77 million people abroad and generated value accounting for about 11 percent of global GDP. The foreign affiliates of multinationals had more than $32 trillion in global sales, higher than the value of global exports of goods and services, which stood at close to $20 trillion.23 Page 14The globalization of markets and production and the resulting growth of world trade, foreign direct investment, and imports all imply that firms are finding their home markets under attack from foreign competitors. This is true in China, where U.S. companies such as Apple, General Motors, and Starbucks are expanding their presence. It is true in the United States, where Japanese automobile firms have taken market share away from General Motors and Ford (although there are signs that this trend is now reversing). And it is true in Europe, where the once-dominant Dutch company Philips has seen its market share in the consumer electronics industry taken by Japan’s Panasonic and Sony and Korea’s Samsung and LG. The growing integration of the world economy into a single, huge marketplace is increasing the intensity of competition in a range of manufacturing and service industries. However, declining barriers to cross-border trade and investment cannot be taken for granted. As we shall see in subsequent chapters, demands for “protection” from foreign competitors are still often heard in countries around the world, including the United States. Although a return to the restrictive trade policies of the 1920s and 1930s is unlikely, it is not clear whether the political majority in the industrialized world favors further reductions in trade barriers. Indeed, the global financial crisis of 2008–2009 and the associated drop in global output that occurred led to more calls for trade barriers to protect jobs at home. If trade barriers decline no further, this may slow the rate of globalization of both markets and production. THE ROLE OF TECHNOLOGICAL CHANGE   The lowering of trade barriers made globalization of markets and production a theoretical possibility. Technological change has made it a tangible reality. Since the end of World War II, the world has seen major advances in communication, information processing, and transportation technology, including the explosive emergence of the Internet and World Wide Web. Telecommunications is creating a global audience. Transportation is creating a global village. From Buenos Aires to Boston, and from Birmingham to Beijing, ordinary people are watching MTV, they’re wearing jeans, and they’re listening to iPods as they commute to work. Microprocessors and Telecommunications   Perhaps the single most important innovation has been development of the microprocessor, which enabled the explosive growth of high-power, low-cost computing, vastly increasing the amount of information that can be processed by individuals and firms. The microprocessor also underlies many recent advances in telecommunications technology. Over the past 30 years, global communications have been revolutionized by developments in satellite, optical fiber, wireless technologies, and the Internet. These technologies rely on the microprocessor to encode, transmit, and decode the vast amount of information that flows along these electronic highways. The cost of microprocessors continues to fall, while their power increases (a phenomenon known as Moore’s law, which predicts that the power of microprocessor technology doubles and its cost of production falls in half every 18 months).24 As this happens, the cost of global communications plummets, which lowers the costs of coordinating and controlling a global organization. Thus, between 1930 and 1990, the cost of a three-minute phone call between New York and London fell from $244.65 to $3.32.25 By 1998, it had plunged to just 36 cents for consumers, and much lower rates were available for businesses.26 Indeed, by using the Internet and services such as Skype, the cost of an international phone call is rapidly plummeting toward zero.   Moore’s Law The power of microprocessor technology doubles and its costs of production fall in half every 18 months. The Internet   The explosive growth of the Internet since 1994 when the first web browser was introduced is the latest expression of this development. In 1990, fewer than 1 million users were connected to the Internet. By 1995, the figure had risen to 50 million. By 2011, the Internet had 2.3 billion users.27 The Internet has developed into the information backbone of the global economy. In the United States alone, e-commerce retail sales reached $202 billion in 2011 (up from almost nothing in 1998) and are forecasted to approach $350 billion by mid-decade.28 Viewed globally, the web is emerging as an equalizer. It rolls back some of the constraints of location, scale, and time zones.29 The web makes it much easier for buyers and sellers to find each other, wherever they may be located and whatever their size. It allows businesses, both small and large, to expand their global presence at a lower cost than ever before. It enables enterprises to coordinate and control a globally dispersed production system in a way that was not possible 20 years ago. Page 15Transportation Technology   In addition to developments in communication technology, several major innovations in transportation technology have occurred since World War II. In economic terms, the most important are probably the development of commercial jet aircraft and super-freighters and the introduction of containerization, which simplifies transshipment from one mode of transport to another. The advent of commercial jet travel, by reducing the time needed to get from one location to another, has effectively shrunk the globe. In terms of travel time, New York is now “closer” to Tokyo than it was to Philadelphia in the Colonial days. Containerization has revolutionized the transportation business, significantly lowering the costs of shipping goods over long distances. Before the advent of containerization, moving goods from one mode of transport to another was very labor intensive, lengthy, and costly. It could take days and several hundred longshoremen to unload a ship and reload goods onto trucks and trains. With the advent of widespread containerization in the 1970s and 1980s, the whole process can now be executed by a handful of longshoremen in a couple of days. Since 1980, the world’s containership fleet has more than quadrupled, reflecting in part the growing volume of international trade and in part the switch to this mode of transportation. As a result of the efficiency gains associated with containerization, transportation costs have plummeted, making it much more economical to ship goods around the globe, thereby helping to drive the globalization of markets and production. Between 1920 and 1990, the average ocean freight and port charges per ton of U.S. export and import cargo fell from $95 to $29 (in 1990 dollars).30 The cost of shipping freight per ton-mile on railroads in the United States fell from 3.04 cents in 1985 to 2.3 cents in 2000, largely as a result of efficiency gains from the widespread use of containers.31 An increased share of cargo now goes by air. Between 1955 and 1999, average air transportation revenue per ton-kilometer fell by more than 80 percent.32 Reflecting the falling cost of airfreight, by the early 2000s air shipments accounted for 28 percent of the value of U.S. trade, up from 7 percent in 1965.33 Implications for the Globalization of Production   As transportation costs associated with the globalization of production have declined, dispersal of production to geographically separate locations became more economical. As a result of the technological innovations discussed earlier, the real costs of information processing and communication have fallen dramatically in the past two decades. These developments make it possible for a firm to create and then manage a globally dispersed production system, further facilitating the globalization of production. A worldwide communications network has become essential for many international businesses. For example, Dell uses the Internet to coordinate and control a globally dispersed production system to such an extent that it holds only three days’ worth of inventory at its assembly locations. Dell’s Internet-based system records orders for computer equipment as they are submitted by customers via the company’s website, then immediately transmits the resulting orders for components to various suppliers around the world, which have a real-time look at Dell’s order flow and can adjust their production schedules accordingly. Given the low cost of airfreight, Dell can use air transportation to speed up the delivery of critical components to meet unanticipated demand shifts without delaying the shipment of final product to consumers. Dell has also used modern communications technology to outsource its customer service operations to India. When U.S. customers call Dell with a service inquiry, they are routed to Bangalore in India, where English-speaking service personnel handle the call. The Internet has been a major force facilitating international trade in services. It allows hospitals in Chicago to send MRI scans to India for analysis, accounting offices in San Francisco to outsource routine tax preparation work to accountants living in the Philippines, and software testers in India to debug code written by developers in Redmond, Washington, the headquarters of Microsoft. We are probably still in the early stages of this development. As Moore’s law continues to advance and telecommunications bandwidth continues to increase, almost any work processes that can be digitalized will be, and this will allow that work to be performed wherever in the world it is most efficient and effective to do so. Page 16The development of commercial jet aircraft has also helped knit together the worldwide operations of many international businesses. Using jet travel, an American manager need spend a day at most traveling to his or her firm’s European or Asian operations. This enables the manager to oversee a globally dispersed production system. Implications for the Globalization of Markets   In addition to the globalization of production, technological innovations have facilitated the globalization of markets. Low-cost global communications networks such as the World Wide Web are helping to create electronic global marketplaces. As noted earlier, low-cost transportation has made it more economical to ship products around the world, thereby helping to create global markets. For example, due to the tumbling costs of shipping goods by air, roses grown in Ecuador can be cut and two days later sold in New York. This has given rise to an industry in Ecuador that did not exist 20 years ago and now supplies a global market for roses. In addition, low-cost jet travel has resulted in the mass movement of people between countries. This has reduced the cultural distance between countries and is bringing about some convergence of consumer tastes and preferences. At the same time, global communication networks and global media are creating a worldwide culture. U.S. television networks such as CNN, MTV, and HBO are now received in many countries, and Hollywood films are shown the world over. In any society, the media are primary conveyors of culture; as global media develop, we must expect the evolution of something akin to a global culture. A logical result of this evolution is the emergence of global markets for consumer products. The first signs of this are already apparent. It is now as easy to find a McDonald’s restaurant in Tokyo as it is in New York, to buy an iPod in Rio as it is in Berlin, and to buy Gap jeans in Paris as it is in San Francisco. Despite these trends, we must be careful not to overemphasize their importance. While modern communication and transportation technologies are ushering in the “global village,” significant national differences remain in culture, consumer preferences, and business practices. A firm that ignores differences between countries does so at its peril. We shall stress this point repeatedly throughout this book and elaborate on it in later chapters. QUICK STUDY 1. How do declining trade and investment barriers contribute toward the globalization of production and markets? 2. Explain the role of new technology in facilitating the globalization of production and markets. LEARNING OBJECTIVE 3 Describe the changing nature of the global economy. The Changing Demographics of the Global Economy Hand in hand with the trend toward globalization has been a fairly dramatic change in the demographics of the global economy over the past 30 years. As late as the 1960s, four stylized facts described the demographics of the global economy. The first was U.S. dominance in the world economy and world trade picture. The second was U.S. dominance in world foreign direct investment. Related to this, the third fact was the dominance of large, multinational U.S. firms on the international business scene. The fourth was that roughly half the globe—the centrally planned economies of the communist world—was off-limits to Western international businesses. As will be explained here, all four of these qualities either have changed or are now changing rapidly. THE CHANGING WORLD OUTPUT AND WORLD TRADE PICTURE   In the early 1960s, the United States was still by far the world’s dominant industrial power. In 1960 the United States accounted for 38.3 percent of world output, measured by gross domestic product (GDP). By 2010, the United States accounted for 23.1 percent of world output, still the world’s largest industrial power but down significantly in relative size (see Table 1.2). Nor was the United States the only developed nation to see its relative standing slip. The Page 17same occurred to Germany, France, and the United Kingdom, all nations that were among the first to industrialize. This change in the U.S. position was not an absolute decline, because the U.S. economy grew significantly between 1960 and 2010 (the economies of Germany, France, and the United Kingdom also grew during this time). Rather, it was a relative decline, reflecting the faster economic growth of several other economies, particularly in Asia. For example, as can be seen from Table 1.2, from 1960 to 2010, China’s share of world output increased from a trivial amount to 9.4 percent, making it the world’s second largest economy. Other countries that markedly increased their share of world output included Japan, Thailand, Malaysia, Taiwan, and South Korea.