International Business Lecture 2: Perspectives on globalization

1. International Business Lecture 2: Perspectives on globalization

2. 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

3. 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.

4. 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.

5. Figure 2.1:Globalization

6. Table 2.1: What does globalization mean for business, society and government?

7. Methods of internationalizing operations • Outsourcing – contracting with another company to carry out operations, usually more cheaply than the firm can do ‘in-house’. 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

8. Figure 2.2:Methods of internationalizing operations

9. 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

10. Figure 2.3: Product Life Cycle

11. Figure 2.4: Incremental internationalization

12. Figure 2.5:Dunning’s eclectic paradigm

13. 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.

14. Figure 2.6:Growth in value of FDI stock Source: UN, World Investment Reports 2005 and 2007 (Geneva: UN)

15. Figure 2.7:FDI inflows, 1994-2006 Source UN, World Investment Reports 2005 and 2007 (Geneva: UN)

16. Figure 2.8:Number of MNEs based in developed, developing and transition economies Source UN, World Investment Report 2007 (Geneva: UN)

17. Figure 2.9: FDI outflows from developing and transition countries Source UN, World Investment Reports 2005, 2006 and 2007 (Geneva: UN)

18. 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.

19. 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

20. Figure 2.11: Number of internet users per thousand people Source UNDP (2007) Human Development Report 2007-2008 (Basingstoke: Palgrave Macmillan)

21. Figure 2.12:Globalized production and social impacts

22. 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.

23. 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

24. 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.