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Global Business Today Ninth Edition Chapter 1
Globalization
Chapter Outline
OPENING CASE: The Globalization of Production at Boeing
INTRODUCTION
WHAT IS GLOBALIZATION?
The Globalization of Markets
The Globalization of Production
Management Focus: Vizio and the Market for Flat Panel TVs
THE EMERGENCE OF GLOBAL INSTITUTIONS
DRIVERS OF GLOBALIZATION
Declining Trade and Investment Barriers
The Role of Technological Change
THE CHANGING DEMOGRAPHICS OF THE GLOBAL ECONOMY
The Changing World Output and World Trade Picture
Country Focus: India’s Software Sector
The Changing Foreign Direct Investment Picture
The Changing Nature of the Multinational Enterprise
Management Focus: China’s Hisense – An Emerging Multinational
The Changing World Order
The Global Economy of the Twenty-First Century
THE GLOBALIZATION DEBATE
Antiglobalization Protests
Country Focus: Protesting Globalization in France
Globalization, Jobs, and Incomes
Globalization, Labor Policies, and the Environment
Globalization and National Sovereignty
Globalization and the World’s Poor
MANAGING IN THE GLOBAL MARKETPLACE
Global Business Today Ninth Edition Chapter 1
CRITICAL THINKING AND DISCUSSION QUESTIONS
CLOSING CASE: Who Makes the Apple iPhone?
Learning Objectives
1. Understand what is meant by the term globalization.
2. Recognize the main causes of globalization.
4. Explain the main arguments in the debate over the impact of globalization.
5. Understand how the process of globalization is creating opportunities and challenges for
business managers.
Chapter Summary
This opening chapter introduces the reader to the concepts of globalization and international trade,
and provides an introduction to the major issues that underlie these topics. The components of
globalization are discussed, along with the drivers of globalization and the role of the General
Agreement on Tariffs and Trade (GATT) and its successor the World Trade Organization (WTO)
in lowering trade barriers. The influence of technological change in facilitating globalization is
also discussed, along with the role of multinational firms in international business.
The chapter also describes the changing demographics of the global economy, with a special
emphasis on the increasingly important role of developing countries in world trade. This
discussion is complemented by a description of the changing world order, which was brought on
by the collapse of communism in Eastern Europe and republics of the former Soviet Union. The
chapter ends with a candid overview of the pros and cons of the trend towards globalization.
Opening Case: The Globalization of Production at Boeing
Summary
The opening case explores U.S. aircraft manufacturer Boeing’s approach to the production of its
Dreamliner 787 airplane. Boeing’s strategy was unlike any of its previous strategies. Instead of
producing much of the aircraft itself, Boeing, noting that 80 percent of its customers were foreign
airlines, decided to outsource some 65 percent of the value of the Dreamliner to suppliers located
around the world. This strategy introduced a number of challenges for Boeing, and production of
the 787 was often delayed. A discussion of the case can revolve around the following questions:
QUESTION 1: Reflect on Boeing’s decision to outsource much of the production of the
Dreamliner 787. What benefits does this strategy offer? Are there any drawbacks?
Global Business Today Ninth Edition Chapter 1
ANSWER 1: Boeing has traditionally outsourced some of the production of its aircraft, but it took
QUESTION 2: How has globalization made Boeing’s approach to the production of the
Dreamliner possible?
ANSWER 2: Students should recognize the importance of technology that facilitated Boeing’s
Chapter Outline with Lecture Notes, Video Notes, and Teaching Tips
INTRODUCTION
A) Globalization refers to the trend towards a more integrated global economic system where
barriers to cross-border trade and investment are declining, perceived distance is shrinking thanks
to advances in transportation and telecommunications, and material cultures are more similar
across borders. The effects of globalization can be seen everywhere, from the cars people drive
Global Business Today Ninth Edition Chapter 1
and the food they eat, to the jobs where they work and the clothes they wear. In 2012, some $18.3
trillion of goods, and $4.3 trillion of services were sold across borders. Today, more than $5
trillion in foreign exchange transactions are made daily.
Lecture Note: To extend this discussion, consider {http://www.businessweek.com/articles/2014-
01-16/at-davos-the-state-of-globalization-in-2014} and
{http://www.businessweek.com/news/2014-01-15/davos-defenders-of-globalization-fight-to-show-
2014-is-not-1914#p1}.
Teaching Tip: The trend towards globalization has not gone unnoticed at many premier
universities around the world. An organization called the Network of International Business
Schools {http://www.nibsnet.org/} provides a forum for schools with international business
programs to discuss their curriculums. Consider visiting this web site, and providing your students
some examples of how colleges and universities are integrating the realities of globalization into
their business curriculums.
Lecture Note: The U.S. Census Bureau offers an extensive web site that maintains, among other
things, monthly statistics on trade between the United States and its trading partners. The web site
is {http://www.census.gov/foreign-trade/top}.
B) The rapidly emerging global economy raises a multitude of issues for businesses including all
sorts of new opportunities for business to expand their revenues, drive down their costs, and boost
their profits. It also gives rise to challenges and threats such as how best to expand into a foreign
market, whether and how to customize product offerings, marketing policies, human resources
practices, and business strategies in order to deal with national differences in culture and how best
to deal with the threat posed by efficient foreign competitors entering the home market place.
C) Globalization is also unleashing new anxieties for people who, until recently, had felt fairly
secure in their jobs. Thanks to advances in technology, lower transportation costs, and an increase
in skilled workers in low cost nations such as India, and China, services that had been performed
locally can be exported.
Lecture Note: Having a global mindset is becoming an important variable in the hiring selection
process at some companies. To learn more, go to {http://www.businessweek.com/articles/2014-
10-01/international-experience-will-help-you-get-a-job-at-goldman-sachs}.
D) The accounting services industry is just one of many that have been transformed as a result of
globalization. Today, many accountants in India, trained in the U.S. accounting code, perform
work for U.S. accounting firms. These accountants access individual tax returns stored on
computers in the United States, perform routine calculations, and save their work. A U.S.
counterpart then inspects their work, and bills the U.S. client for services.
WHAT IS GLOBALIZATION?
A) Globalization refers to the shift towards a more integrated and interdependent world economy.
Global Business Today Ninth Edition Chapter 1
Video Note: There are several videos in the International Business Library on Pinterest
(http://www.pinterest.com/mheibvideos/) that look at globalization from various perspectives. To
explore globalization from the perspective of a CEO, consider CEO Weighs Consequences of
Globalization. To see globalization as viewed by graduate students, see Graduate Students
Recount Experiences with Globalization.
The Globalization of Markets
B) The globalization of markets refers to the merging of historically distinct and separate national
markets into one huge global marketplace in which the tastes and preferences of consumers in
different nations are beginning to converge upon some global norm. The global acceptance of
Coca-Cola, Citigroup credit cards, IKEA furniture, and McDonald's hamburgers are all examples.
These firms not only benefit from the globalization of markets, they also, by offering the same
basic products worldwide, facilitate the trend. Yet there are still significant differences between
markets that frequently require that marketing strategies, product features, and operating practices
be customized for a country. In fact, the most global markets are for industrial goods and
materials that serve a universal need around the world like microprocessors, rather than for
consumer products. In many industries, there is no such thing as a “German market” or an
“American market,” there is only a global market.
The Globalization of Production
C) The globalization of production refers to the 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 (such as land, labor, capital, and energy), thereby allowing them to compete more
effectively against their rivals. Building Boeing’s 777 for example, involves eight Japanese
suppliers, and a supplier from Singapore. Boeing outsources 65 percent of its 787 aircraft to
foreign companies. Similarly, American maker of flat panel TVs, Vizio, is outsourcing parts from
China, South Korea, and the United States, assembling them in Mexico, and selling them in the
United States. The Internet is also facilitating efforts by service companies to outsource activities
to low-cost nations. Some hospitals for example, outsource radiology work to India, and IBM and
Microsoft outsource software testing to engineers in India.
Management Focus: Vizio and the Market for Flat Panel TVs
Summary
This feature explores the evolution of the flat panel television industry over recent decades. While the
technology for flat panel televisions was developed in the United States in the 1960s, virtually all
production now takes place in low-cost locations. The feature examines the strategy of one company,
American-based Vizio, and clearly demonstrates the impact of globalization, and in particular the
globalization of production.
Suggested Discussion Questions
Global Business Today Ninth Edition Chapter 1
international trade, and the status current talks.
Teaching Tip: To extend this discussion and to explore the potential for a Trans-Pacific
Partnership go to {http://www.businessweek.com/articles/2013-11-21/bloomberg-view-free-trade-
and-secrecy-dont-mix} and {http://www.businessweek.com/articles/2013-12-12/global-trade-in-
retreat-world-economys-future-depends-on-revival}.
C) This removal of barriers to trade has taken place in conjunction with increased international
trade, world output, and foreign direct investment. World Trade Organization data shows that the
volume of world merchandise trade has grown at twice the rate of the world economy since 1950.
In 2012, the volume of world merchandise trade was three times larger than it was in 1990.
International trade in services has also grown significantly since the 1980s, and now accounts for
about 19 percent of the value of all world trade.
D) The growth of foreign direct investment is a direct result of nations liberalizing their
regulations to allow foreign firms to invest in facilities and acquire local companies. With their
investments, these foreign firms often also bring expertise and global connections that allow local
operations to have a much broader reach than would have been possible for a purely domestic
company. In 2013, FDI flows were about $1.5 trillion, below the peak of $2 trillion in 2007, but
showing a strong upward trend.
The Role of Technological Change
E) While the lowering of trade barriers made globalization of markets and production a theoretical
possibility, technological change made it a tangible reality.
Microprocessors and Telecommunications
F) Since the end of World War II, there have been major advances in communications and
information processing.
G) Moore’s Law predicts the power of microprocessor technology doubles and its cost of
production falls in half every 18 months. As this happens, the cost of global communication
plummets, lowering the cost of coordinating and controlling a global organization.
The Internet and the World Wide Web
H) The Internet and the World Wide Web, which have experienced explosive growth worldwide,
promise to develop into the information backbone of tomorrow's global economy. The Internet
effectively allows its 2.4 billion users in 2012 to find each other. For business, it can be a
goldmine. In the United States, online retails sales in 2012 were about $365 billion and global e-
commerce sales surpassed $1 trillion in 2012.
Video Note: Internet use in China is exploding. However, as shown in the video Growing Internet
Use in China Reflects Changing Society in the International Business Library on Pinterest
Global Business Today Ninth Edition Chapter 1
(http://www.pinterest.com/mheibvideos/), it is also creating a cultural divide between those who
have access and those who do not.
I) The Web is being seen as an equalizer in that it reduces some of the constraints such as location,
scale, and time zones that typically limit global expansion by companies.
Video Note: There are several videos in the International Business Library on Pinterest
(http://www.pinterest.com/mheibvideos/) that look at globalization from various perspectives. To
explore how companies used the Internet to start the Black Friday shopping tradition in the United
Kingdom, consider: Black Friday Goes Global.
Transportation Technology
J) In addition to these developments, several major innovations in transportation technology have
occurred since World War II. In economic terms, the most important are probably development of
commercial jet aircraft and super freighters and the introduction of containerization, which greatly
simplifies trans-shipment from one mode of transport to another.
Implications for the Globalization of Production
K) Improvements in transportation technology, including jet transport, temperature controlled
containerized shipping, and coordinated ship-rail-truck systems have made firms better able to
respond to international customer demands. The Internet has been a major force facilitating
international trade in services.
Implications for the Globalization of Markets
L) As a consequence of these trends, a manager in today's firm operates in an environment that
offers more opportunities, but is also more complex and competitive than that faced a generation
ago. While there has been some convergence of consumer tastes and preferences between markets,
firms must still address differences between countries.
THE CHANGING DEMOGRAPHICS OF THE GLOBAL ECONOMY
A) As late as the 1960s, four stylized facts described the demographics of the economy. The first
was the U.S. dominance in the world economy and the world trade picture. The second was U.S.
dominance in world foreign direct investment. The third fact was the dominance of large,
multinational U.S. firms on the international business scene. The fourth was that roughly half of
the globe- the centrally planned economies of the Communist world, was off limits to Western
international business.
The Changing World Output and the Changing World Trade Picture
B) In the early 1960s, the U.S. was still by far the world's dominant industrial power. In 1960, for
example, the U.S. accounted for 38.3 percent of world manufacturing output. By 2012, the United
Global Business Today Ninth Edition Chapter 1
States accounted for only 23.1 percent. This decline in the U.S. position was not an absolute
decline, rather, it was a relative decline, reflecting the faster economic growth of several other
economies, most notably those in Asia.
C) Given the rapid economic growth now being experienced by countries such as China, Brazil,
Russia, and India, further relative decline in the U.S. share of world output and world exports
seems likely.
Video Note: The video in the International Business Library on Pinterest
(http://www.pinterest.com/mheibvideos/) Brazil Seeks to Break New Ground in Global
Marketplace explores how Brazil is currently trying to become a leader in the production and
export of ethanol.
D) If we look into the future, most forecasts now predict a rapid rise in the share of world output
accounted for by developing nations such as China, Russia, India, Indonesia, Thailand, Mexico,
Brazil, and South Korea, and a commensurate decline in the share enjoyed by rich industrialized
countries such as Great Britain, Germany, Japan, and the United States. For international
companies, these trends suggest that future economic opportunities may be greater in developing
nations, and that new competitors are like to emerge from these countries.
Country Focus: India’s Software Sector
Summary
This feature explores the growth of India’s software industry. Starting from nothing just twenty-
five years ago, the industry now generates revenues in excess of $60 billion, and exports of $70
billion. With global spending on information technology expected to be over $250 billion by
2010, Indian companies are primed to capture a significant share of the pie, forcing their Western
counterparts to make changes to their strategies.
Suggested Discussion Questions
1. What factors have contributed to the growth of India’s software industry?
2. How has India’s software industry changed in recent years? What are the implications of these
changes for American companies like IBM and Microsoft?
Global Business Today Ninth Edition Chapter 1
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10
Discussion Points: There has been a gradual shift in the Indian software industry in recent years.
Initially, Indian firms focused on the low end of the industry to supply basic software development
and testing services to Western firms. Today however, many companies have moved into higher
end services to compete for large software development projects, business outsourcing contracts,
and information technology consulting services. This new competitive threat is forcing American
firms like IBM and EDS to rethink their global strategies. Some Western companies are now
investing in India with the goal of capturing some of the cost advantages Indian companies like
Infosys Technologies enjoy.
Lecture Note: India’s smartphone industry is growing rapidly and Google is just one company that
is looking to capitalize on this growth. To learn more, go to
{http://www.businessweek.com/articles/2014-10-21/googles-big-plans-for-low-cost-android-one-
phones-in-india}.
Video Note: The video in the International Business Library on Pinterest
(http://www.pinterest.com/mheibvideos/) India's Economy Remains Robust Despite Global
Downturn examines India’s economic strength even during the recent global recession.
The Changing Foreign Direct Investment Picture
E) As shown in Figure 1.1 in the textbook, the share of world output generated by developing
countries has been on a steady increase since the 1980s, while the stock of foreign direct
investment (total cumulative value of foreign investments) generated by rich industrial countries
has been on a steady decline. This trend is expected to continue.
F) Similarly as shown in Figure 1.2, there has been a sustained growth in cross-border flows of
foreign direct investment, and the flow of foreign direct investment (amounts invested across
national borders each year) has been directed at developing nations especially China.
The Changing Nature of the Multinational Enterprise
G) A multinational enterprise is any business that has productive activities in two or more
countries.
Non-U.S. Multinationals
H) In the 1960s, large U.S. multinationals dominated the global business environment, accounting
for about two-thirds of all foreign direct investment. By 2012, a different picture had emerged.
The globalization of the world economy has resulted in a relative decline in the dominance of U.S.
firms in the global marketplace. While most of the world’s largest multinationals were from
developed countries, firms from developing economies had also begun to play a major role in the
global economy. Looking to the future, we can reasonably expect the growth of new multinational
enterprises (any business that has productive activities in two or more countries) from the world's
developing nations.
Global Business Today Ninth Edition Chapter 1
The Rise of Mini-Multinationals
I) Another trend in international business has been the growth of medium-sized and small
multinationals. These businesses are referred to as mini-multinationals.
Management Focus: China’s Hisense – An Emerging Multinational
Summary
This feature examines the growth of Hisense which began in 1969 as a state-owned factory with
just 10 employees. Over the years, the company emerged as one of China’s leading makers of
television sets. In 1994, China relaxed its hold on the company and Zhou Houijan was appointed
CEO. Under Zhou’s leadership Hisense has become as one of China’s premier manufacturers of
consumer appliances and telecommunications equipment.
Suggested Discussion Questions
1. What makes Hisense different from other manufacturers of consumer electronics? What factors
have contributed to its success?
2. Why has Hisense established multiple R&D centers? How do these R&D centers fit into the
firm’s global strategy?
The Changing World Order
J) The collapse of communism in Eastern Europe presented a host of export and investment
Global Business Today Ninth Edition Chapter 1
opportunities for Western businesses. However, because there is still unrest and totalitarian
tendencies in many states, companies must be cautious.
K) The economic development of China presents huge opportunities and risks, in spite of its
continued Communist control. In addition, firms must be aware of the threat posed by China’s
emerging multinationals.
L) For North American firms, the growth and market reforms in Mexico and Latin America also
present tremendous new opportunities both as markets and sources of materials and production.
However, given the history of economic mismanagement in Latin America, the favorable trends
may not continue.
The Global Economy of the 21st Century
M) The path to full economic liberalization and open markets is not without obstruction.
Economic crises in Latin America, South East Asia, and Russia all caused difficulties in 1997 and
1998. While firms must be prepared to take advantage of an ever more integrated global economy,
they must also prepare for political and economic disruptions that may throw their plans into
disarray. The 2008-2009 financial crisis that began in the United States, for example, quickly
spread to much of the rest of the world.
THE GLOBALIZATION DEBATE
A) Is the shift toward a more integrated and interdependent global economy a good thing? While
many economists, politicians and business leaders seem to think so, globalization is not without its
critics. Globalization stimulates economic growth, raises the incomes of consumers, and helps to
create jobs in all countries that choose to participate in the global economy. Yet, there is a rising
tide of opposition to globalization.
Anti-Globalization Protests
B) Since 1999, when protesters against globalization targeted the WTO meeting in Seattle, anti-
globalization protesters have turned up at almost every major meeting of a global institution.
Protesters fear that globalization is forever changing the world in a negative way. However,
despite their protests, most citizens seem to welcome the higher living standards that progress
brings.
Globalization, Jobs, and Incomes
C) In developed countries, labor leaders lament the loss of good paying jobs to low wage
countries. However, supporters of globalization argue that free trade will result in countries
specializing in the production of those goods and services that they can produce most efficiently,
while importing goods and services that they cannot produce as efficiently. Free trade advocates
suggest that despite some job dislocation, the whole economy is better off with free trade. They
make a similar argument to support the outsourcing of services like call centers to low-wage
