Course Curator: Dr. G. Danford (London Business School MBA, Helsinki School of Economics PhD)


Before Starting

The only proven method for measuring learning is to take a pre-quiz and post-quiz of the content covered.

[WpProQuiz 29]

Managing In Global Economy

  • What is global business?
  • Recent trends in global business?
  • Theoretical explanations for global business?

Globalization is the process of international integration arising from the interchange of world views, products, ideas and mutual sharing, and other aspects of culture. Advances in transportation, such as the steam locomotive, steamship, jet engine, container ships, and in telecommunications infrastructure, including the rise of the telegraph and its modern offspring, the Internet, and mobile phones, have been major factors in globalization, generating further interdependence of economic and cultural activities.

Economic globalization is the increasing economic interdependence of national economies across the world through a rapid increase in cross-border movement of goods, service, technology and capital. The globalization of business is centered around the diminution of international trade regulations as well as tariffs, taxes, and other impediments that suppresses global trade, economic globalization is the process of increasing economic integration between countries, leading to the emergence of a global marketplace or a single world market. (source: wikipedia.org)

 

Has Globalization Failed?

Globalization is beneficial under the condition that the economic management is operated by national governments (for example East Asian countries). Those countries (especially South Korea and Taiwan) were built on exports through which they were able to close technological, capital and knowledge gaps. By managing their national pace of change and speed of liberalization on their own, those countries were able to achieve economic growth. The countries who received the benefits from their globalization shared their profits equally.

“Development is about transforming the lives of people, not just transforming economies. The power of markets is enormous, but they have no inherent moral character. We have to decide how to manage them… For all these reasons, it is plain that markets must be tamed and tempered to make sure they work to the benefit of most citizens. And that has to be done repeatedly, to ensure that they continue to do so.”

~ Joseph Stiglitz

Professor Joseph Stiglitz (Nobel Economist) believes that if national economies are regulated by international institutions there could be adverse effects. This is because international institutions (IMF, WTO, and World Bank), lack transparency and accountability. Without government oversight, those institutions reach decisions without public debate and resolve trade disputes involving “uncompetitive” or “onerous” environmental, labor, and capital laws in secret tribunals, without any appeal to a nation’s courts.

 

Has Globalization Failed? (4:00)

NOTE: this video will start and stop at the pre-assigned times 3:01-7:05

 

Internationalization vs. Globalization

Internationalization involves operations across international boarders. The dregree of internationalization can vary (single coutry or multiple countries). The operational modes of internationalization can involve inward (importing), outward (export) and co-operative (licensing, joint ventures etc.). There are many different definitions for an international or global company. Charles Hill, defines the different forms on businesses as follows:

  • International companies have no foreign direct investments (FDI) and make their product or service only in their home country. In other words, they’re exporters and importers. They have no staff, warehouses, or sales offices in foreign countries. The best examples of international companies, in the strict sense, are exotic retail shops that sell imported products, or small local manufacturers that export to neighboring countries.
  • Multinational companies cross the FDI threshold. They invest directly in foreign assets, whether it’s a lease contract on a building to house service operations, a plant on foreign soil, or a foreign marketing campaign. Generally, though. Multinational companies, however, have FDI only in a limited number of countries, and they do not attempt to homogenize their product offering throughout the countries they operate in — they focus much more on being responsive to local preferences than a global company would.
  • Global companies have investments in dozens of countries but maintain a strong headquarters in one, usually their home country. Their mantra is economies of scale, and they’ll homogenize products as much as the market will allow in order to keep costs low. Their marketing campaigns often span the globe with one message (albeit in different languages) in an attempt to smooth out differences in local tastes and preferences.
  • Transnational companies are often very complex and extremely difficult to manage. They invest directly in dozens of countries and experience strong pressures both for cost reduction and local responsiveness. These companies may have a global headquarters, but they also distribute decision-making power to various national headquarters, and they have dedicated R&D activities for different national markets.

 

Introduction to Globalization (6:30)

NOTE: this video will start and stop at the pre-assigned times 0:16-6:57

 

Economic Theory

The principle of absolute advantage refers to the ability of a party (an individual, or firm, or country) to produce a greater quantity of a good, product, or service than competitors, using the same amount of resources. Adam Smith (1723-1790) first described the principle of absolute advantage in the context of international trade, using labor as the only input. Since absolute advantage is determined by a simple comparison of labor productiveness, it is possible for a party to have no absolute advantage in anything; in that case, according to the theory of absolute advantage, no trade will occur with the other party.

David Ricardo (1772-1823), developed the classical theory of comparative advantage in 1817 to explain why countries engage in international trade even when one country’s workers are more efficient at producing every single good than workers in other countries. He demonstrated that if two countries capable of producing two commodities engage in the free market, then each country will increase its overall consumption by exporting the good for which it has a comparative advantage while importing the other good, provided that there exist differences in labor productivity between both countries. an agent has a comparative advantage over another in producing a particular good if he can produce that good at a lower relative opportunity cost or a lower relative marginal cost prior to trade In comparative advantage, one does not compare the monetary costs of production or even the resource costs (labor needed per unit of output) of production. Instead, one must compare the opportunity costs of producing goods across countries.

Competitive advantage of nations is a theory developed by Professor Michael Porter (Harvard), which explains why particular industries in a country become competitive in a particular locations (Diamond Model). Six elements are incorporated into the diamond, and are the tools for the analysis of competitiveness:

  • Factor conditions are human resources, physical resources, knowledge resources, capital resources and infrastructure. Specialized resources are often specific for an industry and important for its competitiveness. Specific resources can be created to compensate for factor disadvantages.
  • Demand conditions in the home market can help companies create a competitive advantage, when sophisticated home market buyers pressure firms to innovate faster and to create more advanced products than those of competitors.
  • Related and supporting industries can produce inputs that are important for innovation and internationalization. These industries provide cost-effective inputs, but they also participate in the upgrading process, thus stimulating other companies in the chain to innovate.
  • Firm strategy, structure and rivalry constitute the fourth determinant of competitiveness. The way in which companies are created, set goals and are managed is important for success. But the presence of intense rivalry in the home base is also important; it creates pressure to innovate in order to upgrade competitiveness.
  • Government can influence each of the above four determinants of competitiveness. Clearly government can influence the supply conditions of key production factors, demand conditions in the home market, and competition between firms. Government interventions can occur at local, regional, national or supranational level.
  • Chance events are occurrences that are outside of control of a firm. They are important because they create discontinuities in which some gain competitive positions and some lose.

(source: wikipedia.org).

State of Global Economy (3:30)

Jan Hatzius (Chief Economist, Goldman Sachs)

NOTE: this video will start and stop at the pre-assigned times 0:04-3:23

 

What Drives Global Economics?

The bankruptcy of Lehman Brothers which touched off the most acute phase of the crisis, generating the worst decline in global economic activity in 70 years. Since that crisis, economic developments can be divided into three periods. In the first phase, global demand was propped up by exceptional stimulus by the emerging markets (most of all China, but also India) while the advanced countries took emergency action to stabilise their banking systems.

A second phase commenced around 2010 when worries about inflation, asset bubbles and resource mis-allocation caused the emerging markets to pull in their horns, even as the euro zone crisis intensified. This combination has resulted in a steady deceleration of real global growth (measured at purchasing-power parity, or PPP exchange rates), from 5.4 per cent in 2010 to a projected 3.1 per cent in 2015 (IMF World Economic Outlook database, October 2015).

‘The advanced economies have gained traction, from 1.2 per cent growth in 2012 (their weakest year as a group) to an estimated two per cent in 2015. The so-called emerging and developing countries, dominated by China, have steadily slowed from 7.4 per cent in 2010 to just around half that, an expected 3.9 per cent for 2015. Real GDP, though important is not the only measure of global influence. Exchange rate of the dollar,and of the possible impact of Fed tightening are also of substantial importance’. (Suman Bery, chief economist, Royal Dutch Shell).

 

International Economics (6:00)

NOTE: this video will start and stop at the pre-assigned times 7:34-13:44

 

The World Is Flat?

The title of Thomas Friedman’s thesis (The World Is Flat), is a metaphor for viewing the world as a level playing field in terms of commerce, where all competitors have an equal opportunity. As the first edition cover illustration indicates, the title also alludes to the perceptual shift required for countries, companies, and individuals to remain competitive in a global market where historical and geographical divisions are becoming increasingly irrelevant.

This flattening, argues Friedman, is a product of a convergence of personal computer with fiber-optic micro cable with the rise of work flow software. He terms this period as Globalization 3.0, differentiating this period from the previous Globalization 1.0 (in which countries and governments were the main protagonists) and the Globalization 2.0 (in which multinational companies led the way in driving global integration). Friedman uses many examples of companies based in India and China as examples of a Flattening World, (labor from typists and call center operators to accountants and computer programmers, have become integral parts of complex global supply chains for companies such as Dell, AOL, and Microsoft).

Professor Pankaj Ghemawat (NYU, Stern School of Business), opposes Friedman’s basis thesis, and counter-argues that 90% of the world’s phone calls, Web traffic, and investments are local, suggesting that Friedman has grossly exaggerated the significance of the trends he describes: “Despite talk of a new, wired world where information, ideas, money, and people can move around the planet faster than ever before, just a fraction of what we consider globalization actually exists.” source: wikipedia.org

 

Flat World (3:00)

Thomas Friedman (New York Times)
NOTE: this video will start and stop at the pre-assigned times 5:29-8:26

 

Challenges for Global Managers

Professor Erin Meyer (INSEAD), says that cultural gaps are most common in a number of management behaviors: communicating, evaluating, persuading, leading, deciding, trusting, disagreeing and scheduling. One key to managing in an increasingly global and diverse business environment is the cultural intelligence (CQ). CQ means is about being interested of culturally diverse settings, motivated to effectively function in them, knowing how cultures are similar and different, being aware of CQ moments, and able to adapt one’s behavior to specific situations.

‘Multinational companies have spent significant time and energy trying to figure out how to appeal to a wide array of consumers, and not enough time figuring out how to help their own employees work together. Most multinational companies think, Cultural differences, that’s about how to exchange business cards, or what kind of gifts to buy,” instead of recognizing that [managing these differences] is really about understanding psychology—the subtle differences in what types of arguments we find persuasive and what leads us to trust a person from another part of the world.’

~Erin Meyer

 

Strategies for Global Managers (3:00)

Professor Erin Meyer (INSEAD)

NOTE: this video will start and stop at the pre-assigned times 0:34-3:32


Recommended reading: Understanding Your Globalization Penalty (McKinsey)


[WpProQuiz 45]

Coming Soon: International Business Environment 2/8