International Business Ch1 Notes

Case Study: Outsourcing Legal Work Sacha Baron Cohen, comedian, was sued – someone claimed Cohen

defamed her during a sketch in the Da Ali G Show. Suit was dismissed – nothing on the show could be considered factual,

rather comedy. Majority of legal prep work done by 6-member team of lawyers and

legal assistants in India. Without outsourcing, mounting a defence for this suit wouldn’t have

been economic. Defendants would’ve paid plaintiff to avoid legal fees, despite lack of merit.

Indian attorneys trained in US law doing majority of legal work was less expensive than settling out of court.

Legal outsourcing growing in the Philippines and India. Of $180billion spent in US on legal services, $1billion is outsourced. Growth rate 20-30% annually

Due to increased legal fees – 1998-2009, hourly rates increased 65% Routine tasks outsourced – contracts drafted, reviewing documents

etc. 2008-09 GFC clients rebelled against use of fresh law graduates

doing grunt work billed at steep rates push for outsourcing to decrease rates. US lawyers $100-500, India $20-60/h.

Pangea3 benefitted from this trend. Founded 2004, headquarters in Mumbai and NYC, with 650 staff.

o Indian universities produce stream of lawyers trained in common

law – legal tradition India inherited form the British, which also underlies American law.

o Speak good English

o 10-12hr time difference – work done overnight

responsivenesso Serves corporations and US law firms. 75% business from

Fortune 1000 companies, 25% law firms. o Helps law firms and companies improve efficiency and minimize

their business and legal risks by having routine, labour-intensive legal work that requires a low degree of judgement done in India.

o Market opportunity to expand from $1billion today, to $5billion by

decade’s end.

LO1. Understand what is meant by the term globalization.

Globalization

Past 30 years, fundamental shift occurred in world economy. Away from self-contained national economies, isolated by barriers to

cross-border trade and investment, distance, time zones, language, differences in government regulation, culture and business systems.

Towards declined barriers to trade, perceived distance shrinking due to transport and telecommunication advances, homogeneity of material culture, national economies becoming interdependent, integrated global economic systems.

Shift towards a more integrated and interdependent world economy.

Globalization of Markets

Merging of historically distinct and separate national markets into one global marketplace.

Falling barriers to cross-border trade easier to sell internationally. Argued consumer taste is converging internationally, aiding the global

market. Firms e.g. McDonald’s, Coca-Cola, Sony PlayStation are both

benefactors and facilitators of trend – same product worldwide global market.

Small multinationals play major role, not just giants – in USA, 98% firms that export are small businesses (less than 100 people), and share of total US exports grown over past decade to 20%.

Firms with less than 500ppl accounted for 97% all US exporters, and 30% of all exports by value.

Germany (world’s largest exporter) – 98% small/midsize companies have exposure to international markets, through exports or international production.

Significant differences still exist among national markets – consumer tastes and preferences, distribution channels, culturally embedded value systems, business systems, legal frameworks etc. customization of marketing, product feature, operation practises.

Global markets more for industrial goods and materials (e.g. oil, microprocessors, commercial jet aircraft, software) that consumer products – national difference in preference are a ‘brake’ to globalisation

Same firms are competitors globally e.g. Coca-Cola vs. PepsiCo, or Ford vs. Toyota. One rival entering a new market ensures the other will to prevent competitor having an advantage.

Firms bring assets that worked well elsewhere – products, marketing, brand names etc. Therefore uniformity not diversity global market, not “American market” or “Indian market”

Globalization of Production

Sourcing of goods and services globally to take advantage of national differences in the cost and quality of factors of production (labour, energy, land, capital)

Lowers overall cost structure and/or improves quality/functionality more competitive

Early outsourcing confined to manufacturing (e.g. Boeing and Vizio). New outsourcing takes advantage of telecommunications technology,

esp. Internet, to outsource service activities to low-cost producers. o E.g. radiology work to India – MRI scans read at night when US

doctors sleep, results ready in the morning. o IBM & Microsoft use Indian engineers to perform test functions

on US designed software. Time difference corrected code transmitted over secure connections ready for work next day.

o Call centres – customer service

o Health care – transcription of American medical files – 34,000 in

Philippines in 2008. Outsourcing admin tasks could reduce US health care costs by $70 billion.

Dispersing value-creation activities can compress time and lower costs. production of “global products” Barriers to total global production: barriers to FDI, transport costs,

economic and political risk.

Boeing E.g. Boeing 787 commercial jet airliner – 65% total value aircraft

outsourced to foreign companies, 35% of which goes to 3 major Japanese companies.

Rationale: o Best quality in the world – global suppliers better product

winning greater share of total orders for aircraft than rival Airbus Industries.

o Increases chances of receiving orders from airlines based in

countries that supply.Vizio and Flat Panel TVs

Taiwan, Korea, Japan produce glass panels cut in Mexico, combined with electronics from Asia and the US, assembled US for retail.

Flat panel TV technology invented in 1960s in US by RSA RSA, rival Westinghouse and Xerox didn’t pursue Japanese “Sharp” invested, started selling first plat panels in 1990s. Japanese recession --? South Korea invested e.g. Samsung. Asian crisis hit Korea Taiwanese took over. Today, Chinese companies also manufacturing.

Efficient manufacturers take advantage of globally dispersed supply chains make and sell low cost, high quality TVs. E.g. Vizio.

Vizio (Taiwanese) – sales from $0 to $2billion from 2002-2008. In 2009, largest US market with 21.7% share.

Has less than 100 employees for sales, design, customer service – outsources engineering, manufacturing and logistics.

Scour the globe for cheapest manufacturers and components. Sell most stock to large discount retailers e.g. Costco. Good order

visibility form retailers + tight management of global logistics 3 week inventory turn-over = 2x as fast as competitors major cost savings.

Global Institutions

As markets globalize, institutions needed to o Help manage, regulate and police the global marketplace;

o Promote the establishment of multinational treaties to govern the

global business system. Organizations – created by voluntary agreement between nation-states

o General Agreement on Tariffs and Trade (GATT)

o World Trade Organization (WTO)

o International Monetary Fund (IMF)

o World Bank

o United Nations (UN)

WTO (like predecessor GATT) Primarily responsible for policing world trading system Makes sure nation-states adhere to rules laid down in trade treaties

signed by WTO member states. Responsible for facilitating establishment of additional multinational

agreements between member states. Promotes lower barriers to cross-border trade and investment –

members try to create an open global business system. 2011 – 153 nations that accounted for 97% world trade were members

large influence

IMF (1944 by 44 nations) Purpose: to maintain order in the international monetary system Stated objectives: to stabilise international exchange rates and

facilitate development 188 member countries Member countries contribute to a pool from which other countries with

a payment imbalance may borrow from temporarily. Designed to prevent disruption to the international financial system that

would occur through a country failing to meet its commitments to other nations.

Past 2 decades – money to Thailand, Argentina, Indonesia, Mexico, Russia, South Korea, Turkey.

Role in coping with 2008-09 GFC Loans are conditional – must adopt specific economic policies aimed at

returning troubled economy to stability & growth. o Able to renegotiate terms of debt on behalf of nations in financial

difficulties – to prevent further problems, impose conditions (stabilisation programme) on financial assistance structural adjustment changes fundamental conditions of the economy to make it more competitive.

World Bank (1944 by 44 nations) Purpose: to promote economic development Comprises 2 institutions owned by 187 member countries –

International Bank for Reconstruction and Development and the International Development Association

Less controversial than IMF – focused on making low-interest loans to cash-strapped governments to aid developing countries to achieve development and reduce poverty – helping countries to develop and environment for investment, jobs and sustainable growth – promoting economic growth through investment

Criticism – loans often result in greater debt (cycle), represents 187 countries but run by small group of rich countries, and has contradictory roles – politically must meet demands of donors and borrowers, and practically, must be neutral and specialise in aid and loans.

United Nations (1945 by 51 nations) To preserve peace through international cooperation and collective

security. 193 member countries Members accept UN Charter – 4 main principles:

o Maintain international peace and security;

o Develop friendly relations among nations;

o Cooperate in solving international problems and in promoting

respect for human rights;o Be a centre for harmonizing the actions of nations.

Central mandates – promotion of higher living standards, full employment, conditions of economic and social progress and development.

G20 (1999) Finance ministers and central bank governors of the 19 largest

economies, plus representatives from the EU and European Central Bank.

Original purpose: to formulate a coordinated policy response to financial crises in developing nations.

2008-09: became forum where major nations attempted to launch coordinated policy response to GFC.

LO2. Recognize the main drivers of globalization.

Drivers of Globalization

Definitions:International trade

When a firm exports goods or services to consumers in another country.

FDI When a firm invests resources in business activities outside of its home country.

Two macro factors underlie the trend towards greater globalization

1. Declining Trade and Investment BarriersLower barriers to trade & investment mean firms can

View the world as their market Base production in the optimal location for that activity.

Decline in barriers to free flow of goods, services and capital since end WWII.

1920s-30s – many nations erected strong barriers to international trade and FDI. E.g. high tariffs on imports of manufactured goods.

Aim of tariffs: to protect domestic industry from foreign competition.o Consequence - countries raised barriers against each other

depressed world demand Great Depression (1930s)

Post WWII removal of barriers to the free flow of goods, services and capital between nations General Agreement on Tariffs and Trade (GATT)

In GATT, 8 rounds of negotiations between members worked to lower barriers. Uruguay Round (most recent, 1993) further reduced, extended GATT to cover services as well as manufactured goods; provided enhanced protection for patents, trademarks and copyrights; and established WTO to police international trading system.

o Result: average tariff rates have fallen significantly since 1950

and now stand at about 4%.

2001 – WTO launched another round (Doha Agenda) – aimed at 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.

o Stalled in 2011 – major opposition from key nationso Biggest gain to be made re agricultural product discussion

Current tariff rate 40% Rich nations spend $300billion p.a. on subsidies Poor nations have most to gain from reduced tariffs and

subsidies gives access to developed markets. Countries opening markets to FDI

o UN - 90% of 2,700 changes made worldwide between 1992-

2009 in laws governing FDI created more favourable environment

o Drives globalization of markets and production

WTO data – volume of world merchandise trade has grown faster than the world economy since 1950.

o 1970-2010 – volume expanded more than 30-fold, outstripping

expansion of world production (10-fold). Includes manufactured goods, agricultural goods and mining products, not services)

Since mid 1980s, international trade of services has grown. Accounts for 20% of value of all international trade now.

o Driven by telecommunication advances outsource services

globally. Slow growth in trade during 2000-2009 – reflects GFC drop.

o 2009 – Global economy contracted by 2.3% as the crisis in the

US from subprime mortgage lending markets affected the world. o Volume merchandise trade dropped 12.2% - largest decline

since WWII, due to drop in consumer demand and possibly the inability to finance international trade due to tight credit conditions.

o Rebounded 2010, with WTO forecast 14.5% growth in volume.

FDI playing an increasing role in global economy.o Average yearly outflow of FDI increased from $25 billion (1975)

to $1.8 trillion (2007)o Drop to $1.1 trillion (2009 & 2010) - GFC, recover 2011

o General trend past 30 years – FDI outflows accelerated faster

than growth in world trade and world output. E.g. 1992-2008 – FDI flow increased 8x, world trade 1.5x and world output 0.45x.

Globalization of markets and production growth of world trade, FDI, imports home markets under attach from competitors.

o E.g. Japan – US Apple and Proctor & Gamble expanding.

o E.g. US – Japanese automobile firms taken market share from

General Motors.

2. Technological ChangeTechnological change means

Lower transportation costs helps create global markets Lower information and communication costs Low-cost global communications networks helps create an

electronic global marketplace Global communications networks and global media creates a

worldwide culture, and global market for consumer products

Technological change reality of globalization, facilitated by lowering trade barriers.

Internet, transport technologies, WWW etc. global audience

Microprocessors and Telecommunications Microprocessor growth of high-power, low-cost computing

increasing amount of info that can be processed by firms/individuals.

Past 30 years – developments in satellites, optical fibre, wireless, Internet – all rely on microprocessor to encode, transmit and decode information that flows along electronic highways.

Costs fall, power increases – Moore’s Law – predicts the power of microprocessor technology doubles and cost of production falls in half every 18 months cost of global communication decreases, lowering cost of coordinating and controlling global organizations.

Internet and World Wide Web 1990 – less than 1 million users 1995 – 50 million 2011 – 2.3 billion users Information backbone of global economy. In US, e-commerce retail

sales reached $165 billion (2010), up from nothing in 1998. Works as equalizer – roles back constraints of location, scale and time

zones time-space convergence.

Transport Technology Reduced time to cover distances – for most of history, speed and

efficiency of transport were low, costs of overcoming friction of distance were high

Movement over land slow and difficult before railways Major breakthrough: invention and application of steam power; use of

iron and steel for trains, railway tracks and ocean vessels Mid-late 20th C – acceleration in process of time-space convergence –

introduction of commercial jet aircraft, superfreighters, containerisation (intermodal transportation – simplifies shipment between transport modes)

Jet aircraft and development of TNCs are connected – 1950s Containerization revolutionized transport – low operating costs over

long distances – major development in intermodal transport Used since 18thC, but not until after World War II that became widely

used and not until the 1960's that size was standardized easier transfer between trains, ships, lorries

Since 1980 – no. of containers has quadrupled. 1920-1990 – average ocean freight and port charges per ton of US

export and import cargo fell from $95 to $29. Cost of shipping freight per ton-mile on railroads in the US fell from

3.04cents (1985) to 2.3cents (2000) – due to use of containers (intermodal)

Falling cost of airfreight – by 2000s, air shipments = 28% of the value of US trade, up from 7% (1965)

Implications

Globalization of Production Globalization of Markets Low transport costs

dispersal of production to separate locations is more economical.

Costs of information processing and communication decreased possible to create and manage a globally dispersed production system.

Low cost airfreight air transport speeds up delivery of critical components to meet unanticipated demand shifts without delaying shipment of final product to consumers.

Modern communications outsource customer service e.g. India.

Jet aircraft aids worldwide operations for businesses. Max 1 day to travel overseas for international operations oversee a globally dispersed production system.

Low cost communication networks (Internet) electronic marketplaces.

Low cost transport economical to ship products globally, helping create global markets.

Low cost jet travel movement of people across countries reduces cultural distance convergence of consumer taste.

Global communication networks global consumer/worldwide culture.

LO3. Describe the changing nature of the global economy.

Changing Demographics of the Global Economy

Dramatic change in demographics of the world economy in the last 30 years.

1960s demographicso US dominance in world economy and world tradeo US dominance in world FDIo Dominance of large, multinational US firms in international

businesso Half the globe (centrally planned economies of the communist

world) was off-limits to Western international business.

Changing World Output and World Trade Picture Early 1960s – US dominant industrial power. 1963 – 40.3% world

economic activity (GDP) 24.1% in 2009 (GNI). Similar trend in Germany, France, UK etc.

Not an absolute decline, but relative decline – they still grew, but so did other emerging economies, especially Asia.

1963-2009, China’s share of world output increased from NA to 8.2%, surpassing Japan in 2010 (becoming world’s second largest economy. Similar trend in Japan, Thailand, Malaysia, Taiwan and South Korea

End of 1980s – US position as world’s leading exporter was threatened. US dominance over past 30 years in export markets waned. Japan, Germany and NICs including China & South Korea taken larger share.

o 1960s – US accounted for 20% world exports manufactured goods.

o 2010 – down to 8.6%, behind China’s 10.6% Emerging economies (China, India, Brazil) grow further relative

decline in share of world output and exports accounted for by MEDCs Forecasts predict rapid rise in share of world output by developing

nations (China, India, Russia, Indonesia, Thailand, Mexico etc.), and commensurate decline in share enjoyed by industrialized countries (GB, Germany, US, Japan)

Trends continue China economy becomes larger than US on purchasing power parity (PPP) basis, and India’s approaches Germany’s.

World Bank – LEDCs account for more than 60% of world economic activity by 2020. MEDCs currently account for more than 55% 38%

Suggested shift in economic geography under way.

Changing FDI Picture US dominance in 1960s – 66.3% FDI flows, then British (10.5%),

Japanese were 8th (2%) US dominance European talk, especially France, of limiting inward

investment by US firms. As barriers to flow of goods, services and capital decreased, and other

countries increased their share of world output, non-US firms invested. Motivation – desire to disperse production activities to optimal

locations, and build direct presence in major foreign markets. 1970s – Japanese and European firms shifted labour-intensive

manufacturing operations to developing nations (low labour costs) Japanese invested in North US and Europe – hedge against

unfavourable currency movement and possible imposition of trade barriers.

o E.g. Toyota increased investment in car production facilities in US & Europe in 1980s. Believed a stronger Jap Yen would price Jap car exports out of foreign markets, therefore production in most important foreign markets, as opposed to exports from Japan, made sense.

Consequence share of total stock accounted for by US firms declined from 38% (1980) to 23% (2008), whereas France’s and developing nation’s shares increased. Reflects trend for firms from these countries (US, UK, Germany, Netherlands, Japan, France) to invest outside their borders.

2009 – firms based in developing nations 14.1% of stock of FDI. Up from 1.1% (1980). Mainly in Hong Kong, South Korea, Singapore, India, China.

Noticeable sustained growth in cross border flows of FDI in the 1990s, at both developed and developing nations. Reflects increasing internationalization of businesses. Surge form 1998-2000 followed by

slump 2001-20013 (slowdown in economic activity after collapse of financial bubble).

FDI resumed 2004-2007, hit record levels, then slowed in 2008-09 (GFC).

China largest recipient of FDI – 2004-09 received $60billion to $100billion in inflows a year.

Changing Nature of Multinational EnterpriseDefinitions:Multinational enterprise

Any business that has productive activities in two or more countries.

Two trends in the demographics of the MNE since 1960s:

1. Rise of non-US multinationals Relative decline in the dominance of US firms in the global marketplace 1960s – US firms accounted for 2/3 of FDI, therefore reasonable to

assume MNEs would be mainly US enterprises.o 1973 – 48.5% of world’s 260 largest MNEs were US firms

reflected US economic dominance for 30yrs post WWII.o Second – UK (18.8%) reflected country’s industrial

dominance in early 20th century.o Japan – 3.5%

2008 – 19 world’s 100 largest nonfinancial MNEs were US firms; 13 French; 13 German; 14 British; 10 Japanese.

Largest MNEs still dominated by firms from developed economies. But 7 firms from developing economies have entered top 100 by 2008. Largest = Hutchison Whampoa (Hong Kong, rank 22)

Developing nation firms expected to emerge as competitors in global markets, shifting axis of world economy away from N. America and Europe.

2. Growth of mini-multinationals Most international trade and investment conducted by large firms, but

many medium and small business becoming increasingly involved. Rise of Internet lowers barriers that small firms face in building

international scales. E.g. Lubricating Systems, Inc. of Kent, Washington.

o Manufactures lubricating fluids for machine tools, employs 25 people, generates sales of $6.5million.

o $2illion sales are generated by exports to Japan, Israel, UAEo Joint venture with German company to serve European market.

Changing World OrderSoviets & Communist States

1989-1991 – democratic revolutions swept Communist world Communist governments in the Soviet Union and Eastern Europe collapsed SU into 15 independent republics, Czechoslovakia into 2 states, Yugoslavia into civil war, then 5 states.

Former Communist nations of Europe & Asia shared commitment to democratic politics and free market economies.

o Were closed to Western international business for 50yrs.o Now open opportunity for export/investment. o Growing unrest and totalitarian tendencies still seen in many

Eastern European and Central Asian states e.g. Russia – signs of shifting back to greater state involvement in economic activity and authoritarian government risks in doing business are high, so are returns.

China China moves progressively toward greater free market reforms. If current trends continue for 20 years, China may move from

developing world to industrial superpower status faster than Japan did. If their GDP per capita grows by average 6-7% (slower than 8% growth

in last 10yrs), then by 2020, average national income per capita of $13,000 (equivalent to Spain today).

FDI increased from $2billion (1983) to $100billion (2010) New firms are capable competitors – could take global market share

from Western and Japanese enterprises presents opportunities and threats for established international business.

Latin America Democracy and free market reforms evident. Were ruled by dictators who saw Western business as imperialism

domination restricted FDI. Poorly managed economies – low growth, high debt, hyperinflation – all

discouraged FDI. Changed in past 2 decades – debt and inflation down, governments

sold state-owned enterprises to private investors, FDI welcomed. Attractive market for exports and site for FDI But some countries e.g. Venezuela, showed shifts back to greater state

involvement, and FDI less welcome than in 1990s. Here, governments seize control of oil and gas fields from foreign investors and limit rights of foreign energy companies to extract oil/gas from their land.

Hence, high opportunity and high risk.

Global Economy of the 21st Century Large changes past 25 years – decreased barriers to free flow of

goods, services, and services. Volume of cross-border trade and FDI has grown more rapidly than

global output indicates national economies are more closely integrated into single, interdependent global economic system.

Move to global economy strengthened by widespread adoption of liberal economic policies by countries that had firmly opposed them. Suggests Czech Republic, Mexico, Brazil, China etc. may build powerful market-oriented economies in next 20 years.

o State-owned business privatizedo Widespread deregulation adoptedo Markets opened to completion

o Commitment to removing barriers to cross-border trade/investment

Globalization is not necessarily inevitableo Countries may pull back from recent commitment to liberal

economic ideologies.o Signs of retreat from liberal economic ideology in Russia. If

permanent/widespread, global economy based on free market principles may not occur as quickly.

Globalization brings riskso Financial crisis that swept through Southeast Asia in late 1990s

showed this, then to Russia and Brazil. Threatened to plunge economies of developed world, including US, into a recession.

o 2008-09 – recent financial crisis started in financial sector of America where banks were too liberal in lending policies to homeowners. Moved around world, plunged global economy into deepest recession since 1980s.

o Interconnected world – severe crisis in one region impacts entire world.

LO4. Explain the main arguments in the debate over the impact of globalization.

Globalization Debate

Argued that falling barriers to international trade and investment will drive the global economy to prosperity.

Supporters believe increased trade and cross-border investment will:o Lower prices for goods and serviceso Result in greater economic growth (stimulus)o Will raise incomes of consumerso Help create jobs in countries that participate in global trade

system

Antiglobalization Protests

Critics worry globalization will causeo Job losseso The cultural imperialism of global media and MNEs – seen to be

dominated by the interests and values of the US. o Downward pressure on the wage rates of unskilled workerso Environmental degradation

Anti-globalization protestors now regularly show up at most major meetings of global institutions, after the failure to reach agreement at a WTO meeting in Seattle.

Protesting Globalisation in France 1999 – 10 men went to Millau (central France) and vandalized a

McDonald’s restaurant under construction $150,000 damage.

Protest against unfair American trade policies. The EU banned imports of hormone-treated beef form the US due to possible health problems.

WTO state EU ban wasn’t allowed under trading rules. If EU didn’t lift it, they would face retaliation.

EU failed to comply US government imposed 100% tariff on imports of some EU products e.g. foie gras, mustard, Roquefort cheese.

Anti-globalization movement in France – protested loss of national sovereignty and unfair trade policies, invasion of French culture by alien US values (McDonald’s)

France – favoured location for FDI - $450 billion between 2006-2009.

Globalization, Jobs and Income

Jobs Critics argue that falling barriers to international trade destroy

manufacturing jobs in wealthy advanced economies (US, Europe)o Entry of China, India and Eastern European states into global

trading system, with global population growth pool of global labour quadrupled 1985-2005, mostly after 1990.

o This expansion in labour force, with expanding international trade, would’ve depressed wages in developed nations.

o E.g. US Harwood Industries, clothing manufacturer. Moved operations ($9hr pay) to Honduras (48 cents/hr pay) wages of poorer Americans fallen significantly.

o Exportation of service jobs to low-wage nations contributes to higher unemployment and lower living standards in home nations.

Supporters of globalisation contend that the benefits of this trend outweigh the costs.

o Countries will specialize and produce what they can most efficiently, and import what they can’t.

o Some job loss in particular industries, but economy benefits. E.g. importing textiles from China lower prices for

clothes in the US consumers spend more money on other items. And increased income in China helps Chinese to purchase more US produced products (e.g. pharmaceuticals, Boeing jets, Intel-based computers etc.)

o Outsourcing services to low-wage countries e.g. India, can reduce cost structure and thereby prices. As prices fall, Americans spend more money on other goods and services. Increase in income in the developing countries allows people to purchase more US goods and services, helping create jobs in the US.

Income Over past 2 decades, share of labour in national income has declined –

more pronounced in Europe and Japan than US and UK. But skilled labour share has increased – fall in labour share due to fall

in share of unskilled labour.

Earnings gap between workers in skilled and unskilled sectors has widened 25% over past 2 decades shows unskilled labour in developed nations has declined a lto.

Living standards haven’t necessarily decreased for unskilled workers in developed nations – economic growth has offset fall fall in share of national income, raising living standards.

OECD study – despite gap widening between richest and poorest, income levels have increased for all. 1985-2008 income increased by 1.7% annually among member states.

Globalisation critics argue decline in unskilled wage rates is due to migration of low-wage manufacturing jobs overseas decreased demand for unskilled workers.

Supporters claim the weak growth rate in real wage rates for unskilled workers is due to a technology-induced shift within advanced economies. Shift from ‘turning up’ jobs to ones that require skills/education.

o Advanced economies reporting shortage of highly skilled workers, surplus of unskilled.

o Growing income inequality due to wages for skilled workers being pushed up by the labour market, and wages for unskilled being discounted.

o Suggests solution to slow real income growth among unskilled is to increase education investment and reduce unskilled workers, not stopping globalisation or limiting free trade.

Globalization, Labour Policies, and the Environment

Critics argue that firms avoid costly efforts to adhere to labour and environmental regulations, that would otherwise put them at a competitive disadvantage, by moving production to countries where these regulations don’t exist or aren’t enforced.

Free trade increased pollution firms from advanced nations exploiting labour of LEDCs.

o Argument used to oppose 1994 formation of NAFTA (North American Free Trade Agreement) between Canada, Mexico and the US.

Idea of US firms moving to Mexico to pollute, employ child labour, ignore workplace safety and health issues, for higher profits.

Supporters argue tougher environmental regulations and stricter labour standards come with economic progress.

o Therefore, by creating wealth and incentives for enterprises to produce technological innovations, free trade and market system could make it easier to cope with pollution and population growth.

o Pollution levels rising in LEDCs, falling in MEDCs. US – carbon monoxide concentration and sulphur dioxide pollutants decreased 60% between 1978 and 1997, lead increased 98%.

Hump shape trend – as economy grows and income rises, initially pollution rises. Then rising incomes demand for environmental protection, pollution levels fall. Except in case of CO2.

o Solution: agree to limit carbon emissions.o Unsuccessful despite 1992 Earth Summit, 1992 Kyoto

agreement, and Copenhagen, 2009. o Because largest emitters (US & China) won’t change. China

doesn’t wish to adopt tighter controls. In US, political divisions impede tight legislation on climate change being made.

Supporters of free trade show ties between free trade agreements and tougher environmental and labour laws in LEDCs.

o NAFTA only passed after signed agreements that committed Mexico to tougher enforcement of environmental protection.

Globalization and National Sovereignty

Global economy shifts power away from national governments toward supranational organizations (WTO, EU, UN)

Unelected bureaucrats impose policies on democratically elected governments of nation-states, undermining sovereignty, and limiting a nation’s control.

WTO arbitrates trade disputes between 153 states. Arbitration panel can issue a ruling instructing a member state to change trade policies that violate GATT regulations. No compliance other countries able to impose trade sanctions.

Supports of globalization argue that the power of organizations is limited to what nations-states collectively agree to grant. Power of organization lies in ability to get countries to agree, and serve the collective.

Fail to serve collective withdraw collapse. Therefore, states hold power.

Globalization and the World’s Poor

Critics argue that despite benefits of free trade and investment, the gap between rich and poor has increased.

1870 – average income per capita in world’s 17 richest nations was 2.4x higher than other countries

1990 – same group was 4.5x the rest. Despite some LEDCs capable of rapid periods of economic growth

(e.g. Thailand, Malaysia), there are strong forces for stagnation among poorest.

o ¼ of countries with GDP less than $1000per capita in 1960 had growth rate less than 0 from 1960-1995, and 1/3 less than 0.05%.

o Causes: endemic corruption, totalitarian government, economic policies that destroyed wealth, war, population growth etc.

LEDCs Held back by debt. 40 highly indebted poorer countries (HIPCs), where 85% of the value of the economy is debt burden, and

cost of serving government debt consumed 15% country’s export earnings little to invest in education, health care etc. cycle of poverty.

Globalization supporters claim the best way to improve LEDC situation is to reduce barriers to trade and investment, and implement economic policies based on free market economies, and to receive debt forgiveness for debts incurred by totalitarian regimes.

Debt relief programs must be matched by investment in public projects to boost economic growth (e.g. education) to have a lasting effect, and by the adoption of economic policies that facilitate trade and investment.

Rich nations help by reducing barriers to importation of products from LEDCs, especially tariffs on agricultural products and textiles.

WTO estimates if MEDCs eradicated subsidies to agricultural produces and removed tariff barriers to trade in agriculture, it would raise global economic welfare by $128 billion, with $30 billion to LEDCs.

LO5. Understand how the process of globalization is creating opportunities and challenges for business managers.

Definitions:International business

Any firm that engages in international trade or investment.

Managing an international business differs from managing a domestic business because:

Countries are different – culture, political systems, economic systems, legal, economic development.

Range of problems confronted in an international business is wider and the problems more complex than in a domestic business. E.g. where in the world to produce activities to minimize cost and maximize value added, if it’s ethical to adhere to lower labour and environmental standards etc.

How to best coordinate and control globally dispersed production. Decide which foreign markets to enter, and the appropriate mode for

each country. Firms must find ways to work within the limits imposed by government

intervention in the international trade and investment system. Governments often intervene to regulate cross-border trade and investment must develop strategies and policies for these interventions.

International transactions involve converting money into different currencies. Exchange rates vary with economic conditions, so must develop policies to deal with exchange rate movements.