International Business Lecture 2 Perspectives on globalization International

International Business Lecture 2: Perspectives on globalization International Business: Challenges in a Changing World

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 International Business: Challenges in a Changing World

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. International Business: Challenges in a Changing World

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. International Business: Challenges in a Changing World

Figure 2. 1: Globalization International Business: Challenges in a Changing World

Table 2. 1: What does globalization mean for business, society and government? International Business: Challenges in a Changing World

Methods of internationalizing operations • Outsourcing – contracting with another company to carry out operations, usually more cheaply than the firm can do ‘inhouse’. 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 International Business: Challenges in a Changing World

Figure 2. 2: Methods of internationalizing operations International Business: Challenges in a Changing World

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’ • Dunning’s eclectic paradigm, known as the OLI paradigm – configuring ownership, location and internalization advantages International Business: Challenges in a Changing World

Figure 2. 3: Product Life Cycle International Business: Challenges in a Changing World

Figure 2. 4: Incremental internationalization International Business: Challenges in a Changing World

Export Sales subsidiaries Production/ manufacturing Psychic distance Market knowledge Experiential knowledge Size of market Incremental internationalization International Business: Challenges in a Changing World

Figure 2. 5: Dunning’s eclectic paradigm International Business: Challenges in a Changing World

GLOBALIZATION THEORIES 1. World-System Theory: Synopsis and Analysis 2. World Polity Theory: Synopsis and Analysis 3. World Culture Theory: Synopsis and Analysis Globalization and Its Discontents - Wikipedia, the free encyclopedia Globalization and Its Discontents is a book published in 2002 by the 2001 Nobel. . . Still Discontent with Globalization, article by Stiglitz in Aspenia. . . http: //en. wikipedia. org/wiki/Globalization_and_Its_Discontents - 51 k - Cached - Similar pages International Business: Challenges in a Changing World

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. International Business: Challenges in a Changing World

Figure 2. 6: Growth in value of FDI stock Source: UN, World Investment Reports 2005 and 2007 (Geneva: UN) International Business: Challenges in a Changing World

Figure 2. 7: FDI inflows, 1994 -2006 Source UN, World Investment Reports 2005 and 2007 (Geneva: UN) International Business: Challenges in a Changing World

Figure 2. 8: Number of MNEs based in developed, developing and transition economies Source UN, World Investment Report 2007 (Geneva: UN) International Business: Challenges in a Changing World

Figure 2. 9: FDI outflows from developing and transition countries Source UN, World Investment Reports 2005, 2006 and 2007 (Geneva: UN) International Business: Challenges in a Changing World

US Dollars at current prices and current exchange rates in millions 2000 Flow World Developing economies China: India: Brazil Mexico South Africa Commonwealth of Independent States (CIS) Developed economies Euro area European Union (EU) Developed economies: Europe Developed economies: Asia United States Developed economies: America Developed economies: Oceania % of 2009 World FDI Flow Stock Major FDI Indicators (WIR 2010) 1401466 256465 40715 3588 32779 18098 887 5286 1137976 501755 698224 724878 15280 313997 380859 16959 Stock 7442548 1114189 17743408 100. 0% 1728455 478349 4893490 27. 6% 193348 95000 473083 2. 7% 16339 34613 163959 0. 9% 122250 25949 400808 2. 3% 97170 12522 309523 1. 7% 43451 5696 125085 0. 7% 54444 61620 412229 2. 3% 5653181 565892 12352514 69. 6% 1620467 276181 5146806 29. 0% 2322127 361949 7447904 42. 0% 2440336 378388 8037813 45. 3% 72878 15831 271399 1. 5% 2783235 129883 3120583 17. 6% 2996215 148753 3648577 20. 6% 143752 22920 394724 2. 2% http: //stats. unctad. org/FDI/Table. Viewer/table. View. aspx International Business: Challenges in a Changing World

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. International Business: Challenges in a Changing World

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 International Business: Challenges in a Changing World

Figure 2. 11: Number of internet users per thousand people Source UNDP (2007) Human Development Report 2007 -2008 (Basingstoke: Palgrave Macmillan) International Business: Challenges in a Changing World

Figure 2. 12: Globalized production and social impacts International Business: Challenges in a Changing World

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. International Business: Challenges in a Changing World

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 International Business: Challenges in a Changing World

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. International Business: Challenges in a Changing World