The globalisation of markets

Globalisation: Definition

•       Increasing interconnectedness of national economies and the growing interdependence of buyers, producers, suppliers, and governments across the national borders. 

•       allows firms to view the world as one large marketplace for goods, services, capital, labor, and knowledge.

Sports as an Example

•       The most globalized legitimate business in the world (LaFeber, 1999 in “Michael Jordan and the New Global Capitalism”)

•       FIFA (Federation Internationale de Football Association) has more members than United Nations

•       National Federations operate under the Fifa codes of conduct, rather than their local governments

•       World Cup

•       Long and though qualifying games

•       2010 games: held in Africa; first games in Middle east confirmed for Qatar

•       A globally-produced product watched by audience across the globe

•       Same as major football leagues

•       Fans, everywhere, demand to view the best

•       Emergence of global standards

•       Satellite TVs bring live events from anywhere in the world to fans all over the world

•       Search for talents has become global too

•       Messi (Argentinian football superstar) joined Barcelona at the age of 11

•       US and European professional basketball scouts look for high-potential youngsters in remote areas of Nigeria

•       Baseball agents opened live-in training campuses in Dominican Republic [in exchange for a percentage of players’ future income]

Phases of globalization

•       Phase 1: 1830 to late 1800s
                Aided by railroads and ocean transport; the rise                of manufacturing and trading companies

•       Phase 2: 1900 to 1930
                Fueled by electricity and steel; early MNEs

•       Phase 3: 1948 to 1970s
                GATT, post-war era; reduction of trade barriers                 worldwide; rise of global capital markets

•       Phase 4: 1980 to present
                Fueled by Internet and other technologies; rapid             liberalization in emerging markets

The drivers, dimensions, and consequences of market globalization

1. Drivers of market globalisation

•       Worldwide reduction of barriers to trade and investment

•       Market liberalization and adoption of free markets

•       Industrialization, economic development, and modernization

•       Integration of world financial markets

•       Advances in technology

2. Dimensions of market globalisation
   • Integration and interdependence of national   economies

• Rise of regional economic integration blocs

                • Growth of global investment and financial flows

                • Convergence of buyer lifestyles and preferences

                • globalisation of production activities

                • globalisation of services

3a. Societal consequences of market globalisation

                • Contagion: Rapid spread of financial or monetary crises from one country to another

                • Loss of national sovereignty

                • Offshoring and the flight of jobs

                • Effect on the poor

                • Effect on the natural environment

                • Effect on national culture

3b. Firm-level consequences of market globalisation: Internationalization of the firm’s value chain

                • Countless new business opportunities for internationalizing firms

                • New risks and intense rivalry from foreign competitors

                • More demanding buyers who source from suppliers worldwide

                • Greater emphasis on proactive internationalization

                • Internationalization of firm’s value chain

The drivers, dimensions, and consequences of market globalization

Dimensions of market globalisation

• Integration and interdependence of national   economies

                • Rise of regional economic integration blocs

                • Growth of global investment and financial flows

                • Convergence of buyer lifestyles and preferences

                • globalisation of production activities

                • globalisation of services

•       Integration and interdependence of national economies:

•       firms’ collective international activities.

•       lowered trade and investment barriers.

•       emergence of super-national institutions: World Bank, IMF, & WTO

•       Rise of regional economic integration blocs:
Free trade areas are formed by two or more countries to reduce or eliminate
barriers to trade and investment,
such as the EU, NAFTA, and
MERCOSUR. 

•       Growth of global investment
and financial flows:
Associated with rapid growth
in foreign direct investment
(FDI), currency trading, and
global capital markets.

•       Convergence of buyer
income, lifestyles and tastes:

•       Global customers due to increased travel & organizational buying

•       Global media, emphasizes US and European lifestyles

•       Increasing number of global brand and global advertising for standardized products

•       globalisation of production: To cut costs, firms manufacture in low labor-cost locations, such as Mexico and Eastern Europe. Firms also source services from abroad.

•       globalisation of services: Banking, hospitality, retailing, and other service industries are rapidly internationalizing. Firms outsource business processes and other services in the value chain to vendors overseas. And, in a new trend, many people go abroad to take advantage of low-cost services.

Drivers of market globalisation

•       Worldwide reduction of barriers to trade and investment

•       Market liberalization and adoption of free markets

•       Industrialization, economic development, and modernization

•       Integration of world financial markets

•       Advances in technology

•       Worldwide reduction of barriers to trade and investment: Over time, national governments
have greatly reduced trade and investment barriers.  The trend is partly facilitated by the World Trade Organization (WTO), an organization of some
150 member nations.

•       Market liberalization and adoption of free markets: The launch of free market reforms in China and the former Soviet Union marked the opening of roughly one-third of the world to freer trade.

•       Industrialization, economic development, and modernization: These trends transformed many developing economies from producers of low-value goods to higher-value goods, such as electronics and computers.
Simultaneously, rising
living standards have
made such countries
more attractive as
target markets for
sales and investment.

GNI & Globalization

Perhaps the most important measure of economic development is Gross National Income (GNI) per head. This exhibit maps the levels of GNI worldwide and shows the highest incomes are mostly in Europe and North America.

Drivers of market globalisation

•       Integration of world financial markets: Enables firms to raise capital, borrow funds, and engage in foreign currency transactions wherever they
go. Banks now provide a
range of services that
facilitate global
transactions.

•       Advances in technology: Reduces the cost of doing business internationally by allowing firms to interact cheaply with suppliers, distributors, and customers worldwide. Facilitates the internationalization of companies, including countless small firms.

Information and communications technology (ICT)

•       Profound advances have occurred in computers, digital technologies, telephony, and the Internet. 

•       MNEs leverage ICTs to optimize their performance, managing operations around the world.

•       ICTs opened the global
marketplace to firms
that historically lacked
the resources to
internationalize.

Manufacturing and transportation technologies

•       In transportation, key advances include fuel-efficient jumbo jets, giant ocean-going freighters, and containerized shipping. The cost of international transportation has declined substantially, spurring rapid growth in global trade. 

•       Collectively, technological advances have greatly reduced the costs of doing business internationally.

Societal consequences of globalization

•       Contagion—Rapid spread of monetary or Financial crises: Beginning in late 2008, the world economy experienced a severe financial crisis and global recession, the worst in decades. The crisis emerged when pricing bubbles occurred in housing and commodities markets worldwide.

•       As bubbles in real estate markets burst, home values crashed and many homeowners could not repay their debts. Meanwhile, thousands of mortgages had been securitized, and their values plunged or became uncertain.

•       Loss of national sovereignty: The ability of a nation to govern its own affairs is a fundamental principle that underlies global relations.

•       Globalisation can threaten national sovereignty in various ways. MNE activities can interfere with the sovereign ability of governments to control their economies, social structures, and political systems.

•       MNE activities can interfere with governments’ ability to control their own economies and social-political systems.

•       Some firms are bigger than the economies of many nations (e.g., Wal-Mart, Shell).

•       Loss of national sovereignty: However, some argue that global competition in the context of global free trade makes MNEs less powerful (e.g., the U.S. auto industry declined as foreign rivals from Japan and Europe entered the U.S. market. Someday, Wal-Mart may be overtaken by a giant Chinese retailer).

•       Offshoring and the flight of jobs: Jobs are lost as firms shift production of goods and services abroad in order to cut costs and obtain other advantages. Firms benefit, but communities and industries are disrupted.

•       Effect on the poor: In poor countries, while globalisation usually creates jobs and raises wages, it also tends to disrupt local job markets. MNEs may pay low wages, and many
exploit workers or employ
child labor. globalisation’s
benefits are not evenly
distributed.

Example: Nike’s foreign factories

•       Nike has hundreds of factories in Asia, Latin America, and elsewhere.

•       Nike has been criticized for paying low wages and operating factories with sweatshop conditions.

•       Labor exploitation and sweatshop conditions are genuine concerns in many developing economies.

•       However, consideration must be given to the other choices available to people in those countries.

•       Nike and numerous other MNEs are making efforts to improve working conditions in their foreign plants.

Societal consequences of globalization

•       Effect on the natural
environment: globalisation
harms the environment by
promoting industrialisation
and other activities that
generate pollution, habitat
destruction, and other
environmental harm. 
E.g., as China and India
industrialise, air and
water pollution have
become major hazards.

•       Effect on the natural environment:

•       However, as nations develop their economies, they tend to pass laws that protect the environment.

•       For example, this happened in Japan from the 1960s to the 1980s. In Mexico, the government is gradually adopting policies to protect the air, water, etc.

•       Effect on National Culture: globalisation opens the door to foreign firms, global brands, unfamiliar products, and new values.

•       Increasingly, consumers buy similar products, modeled according to Western countries, especially the U.S. 

•       In this way, traditional norms, values, and behaviors may homogenize over time.

•       Some argue that National identity may be lost to “global” culture.

Globalisation, economic freedom, and national prosperity

•       Economic freedom refers to the extent of government interference in business; the strictness of a nation’s regulatory environment and; the ease with which economic activity can be carried out.

•       National prosperity is strongly associated with:

•       Participation in international trade and investment

•       The nation’s level of economic freedom

•       Thus, nations should emphasize economic freedom and participation in international trade and investment.

Company internationalization and the value chain

•       The most significant implication of market globalisation for companies is that a purely domestic focus is no longer viable in most cases.  

•       Market globalisation compels firms to internationalise their value chain and access the benefits of international business.  

•       Value chain: The sequence of value-adding activities performed by the firm in the process of developing, producing, and marketing a product or a service.

•       Globalisation allows the firm to internationalise its value chain, leading to various advantages.

•       The truly international firm configures its
sourcing, manufacturing, marketing, and
other value-adding activities on a global scale.

•       Rationale:

•       Cost savings

•       Increase efficiency, productivity, and flexibility of value chain activities

•       Access to customers, inputs, labor, or technology

•       Benefit from foreign partner capabilities