MGT520 - International Business - Lecture Handout 04

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What is globalization?

  1. There is a movement towards a globalization of markets, as the tastes and preferences of consumers in different nations are beginning to converge upon some global norm. The global acceptance of Coca-Cola, Levi's jeans, Sony Walkmans, and McDonald's hamburgers are all examples. Yet there are still significant differences - Germany still leads in per capita beer consumption, with a local pub on almost every corner and in some cities, women selling beer out of their front windows to passers by on the street. The French lead in wine consumption, and the consumption of wine is a natural part of life anywhere in France. Italians lead in pasta eaten, and these differences are unlikely to be eliminated any time soon. Hence, often there is still a need for marketing strategies and product features to be customized to local conditions.
  2. There is a movement towards a globalization of production, as firms disperse parts of their production processes to different locations around the globe to take advantage of national differences in the cost and quality of factors of production. The examples of Boeing and Swan Optical illustrate how production is dispersed. While part of the rationale is based on costs and finding the best suppliers in the world, there are also other factors. In Boeing’s case, if it wishes to sell airliners to countries like China, these countries often demand that domestic firms be
    contracted to supply portions of the plane - otherwise they will find another supplier (Airbus) who is willing to support local industry.

Drivers of globalization:

  1. Two key factors seem to underlie the trend towards the increasing globalization of markets and production: 1) the decline of barriers to trade and investment and 2) technological change.
  2. After WWII, the industrialized countries of the West started a process of removing barriers to the free flow of goods, services, and capital between nations. Under GATT, over 140 nations negotiated even further decreases in tariffs and made significant progress on a number of non-tariff issues (e.g. intellectual property, trade in services). With the establishment of the WTO, a mechanism now exists for dispute resolution and the enforcement of trade laws.
  3. This removal of barriers to trade has taken place in conjunction with increased trade, world output, and foreign direct investment.
  4. 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.
  5. While lowering trade barriers has made the globalization of markets and production a possibility, technological changes have made it a reality.

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