1

Jonathan B. Wight, Ph.D.

University of Richmond

The Global Environment of Business

2

Questions for critical thinking:

Part I: What is globalization and how does it fit

into the context of world history?

Part II: Why has the world economy been re-

globalizing over the last sixty years?

Part III: How does a country measure its

experience of involvement in the global economy?

Part IV: How does a global economy change the

way we do business?

3

Globalization: What Does It Mean?

―Globalization‖ refers to the growing reach,

intensity, speed, and impact of networks that

connect people around the world. Networks are

political, economic, social, cultural, environmental,

and technological.

The United Nations, multinational corporations,

rock bands, and the Internet all create global

networks.

[See David Held, et. al., Global Transformations: Politics, Economics, and

Culture (Stanford: Stanford University Press, 1999).]

4

Example of Global

Service Networks:

Outsourcing to India http://www.pbs.org/wnet/wideangle/shows/india2/map.htm

l

Different dimensions of

global business networking:

5

International:

Engage in exporting and importing, but no foreign capital

outside the home country.

Multinational:

Exporting, importing, plus opportunistic foreign investments

(but no coordinated product offerings across countries).

Global:

Exporting, importing, with coordinated foreign investments.

Economies of scale achieved in global branding. Example:

Coca-Cola.

Transnational:

A complex, multinational company with dispersed R&D,

different national headquarters, local product design and

innovation, and a focus on responsiveness to local markets.

Transnational Index (TNI)

6

Source: World Investment Report (UNCTAD, 2008).

7

IBM Worldwide

8

Coca-Cola Worldwide

9

Alcoa Aluminum Worldwide

10

Worldwide: 9 Refineries 27 Smelters

Source: http://www.iphoneincanada.ca/iphone-news/the-iphone-accounts-for-52-of-global-mobile-os-market-map/ 11

Apple iPhone World Penetration

12

13

Taiwan

Special Economic Zones in China attracted huge international

investments.

14 SHANGHAI http://wirednewyork.com/forum/showthread.php?p=256684

Shanghai Irrational Exuberance, False Invincibility,

Gambling and Superstition…

15 http://mirror-us-ga1.gallery.hd.org/_exhibits/places-and-sights/_more2006/_more11/China-Shanghai-new-glass-

steel-skyscrapers-exotic-shapes-on-skyline-1-AJHD.jpg

―In Shanghai, slap your cheeks to make them swell!‖ -- Local saying

16

The process of globalization (creating

networks across borders) is neither new,

nor is it inevitable, nor is it unstoppable.

The world has undergone periodic episodes of

―globalization‖ dating back thousands of years.

Using DNA, homo sapiens alive today can be traced to ancestors who lived in

East Africa 200,000 yrs ago and who began migrating out about 70,000 years

ago. Related Hominid species Homo erectus in Asia (e.g., ―Peking Man‖) and

Homo neanderthalensus (in Europe and W. Asia) were or became extinct.

Source: http://ngm.nationalgeographic.com/big-

idea/02/queens-genes

18

The Roman Empire greatly expanded global networks. The

empire collapsed after the 5th C., A.D.

Why did Julius Caesar covet Cleopatra of Egypt?

Frankincense

Nutmeg, cloves, mace

Cinnamon

The prophet Muhammad (570-632 AD) was an international trader. After his death,

Islam spread over thousands of miles, connecting Southeast Asia west to Africa

through trade. Islam provides a strong rule of law and an ethics of fair trading.

19 http://www.charani.org/sitebuilder/images/Map_Spread_of_Islam__b_-650x464.jpg

20

Asia and Europe connected in 13th century

Dutch East India Company (from 1602)

connected Amsterdam with Asia

21 http://people.hofstra.edu/geotrans/eng/ch2en/conc2en/map_VOC_Trade_Network.html

22

Camel caravan along the Silk Road

Takla Makan Desert, Tibet

23

During the European Industrial Revolution (19th

century), global markets were expanded through

colonialism and imperialism.

Coercive forms of globalization:

* Opium Wars in China

* Admiral Perry in Japan

* Panama Canal

* Shah of Iran

* Saddam Hussein in Iraq

24

Central Planning

(Communism)

UTOPIAN solution

Das Kapital (1867)

The Communist Manifesto (1848 )

Karl Marx (1818-1883)

Russian Revolution (1917)

Chinese Revolution (1949)

Adam Smith (1723 – 1790)

Decentralized Markets

(Competitive Capitalism)

PRAGMATIC solution

The Wealth of Nations

(March 1776)

American Revolution

(July 1776)

French Revolution (1789)

V.I. Lenin

Imperialism: The Highest

Stage of Capitalism (1916)

Virginia

Planters and

Revolutionaries

25

―The maintenance of this monopoly [in trade] has hitherto been the

principal, or more properly perhaps the sole end and purpose of the

dominion which Great Britain assumes over her colonies.‖ --The Wealth

of Nations (1776)

In contrast to colonialism and imperialism, Smith argues:

Free trade produces two beneficial impacts for consumers and

workers:

a) It creates opportunities for labor specialization which

leads to greater productivity which makes higher living

standards possible.

b) It breaks down local monopolies.

26

Part II. Why has the world economy been re-

globalizing over the last fifty years?

By some measures, the world economy was more global 100 years

ago than it is today. WWI, the Great Depression, and WWII caused a

collapse of global networks during the first half of the 20th century.

It has taken 50 years to rebuild.

A. Political Initiatives

--World peace and security:

Trade now possible with safety of the seas.

--Trade used to achieve political ends: - European Union

- China (―constructive engagement‖)

- NAFTA

-FTA (Peru – Dec 2007)

Geo-politics has been a dominant consideration in the

expansion of globalization. Robert Schuman, the French

foreign minister, proposed creating the European Coal and

Steel Community in 1950 as a way to prevent war between

France and Germany. This was the forerunner to the

European Union:

―[T]he French Government proposes that … Franco-

German production of coal and steel as a whole be placed

under a common High Authority…. The solidarity in

production thus established will make it plain that any war

between France and Germany becomes not merely

unthinkable, but materially impossible.‖

Source: http://krugman.blogs.nytimes.com/, Jan 2, 2011.

27

28

B. Economic initiatives

GATT (1947-1994)

General Agreement on Tariffs and Trade (An official framework for discussing on-going reductions in

protectionism.)

WTO (1995 - present)

World Trade Organization (Successor institution to GATT.)

Due to GATT and WTO, average tariff rates in developed

countries have dropped from 45% to 5%.

29

(1930)

(1828)

Smoot-Hawley Tariff Impacts

31

C. Economic conditions i) improvements in transportation technology

lower the cost of moving merchandise between countries.

- Containerized cargo shipping

(―TEU’s‖-- 20-foot equivalent units)

- Supertankers

32

Containerized shipping is generally safer and more

efficient.

Follow a shipping container around the world

33

34

ii) Improvements in

communications technology

have lowered the costs of

moving services and

capital between countries.

- Satellites

- Computers

Boeing Galaxy IIIC communications satellite in

preparation for launch.

35

Capital-saving

technological

innovation…

Cell phones connect villagers to

markets. These mobile phone

networks have a low capital-

output ratio compared to land

phone lines, hence allowing for

faster growth.

36

iii) Rising income changes the tastes of

consumers

- Desire for greater variety

- Desire for greater novelty

- Desire for improved product quality

Ferrari 288 (Italy)

Olive Oil (Greece)

Greater globalizationhigher economic

growthgreater globalization.

37

iv) Changing economic institutions – from communist to

capitalist and from inward-oriented to outward-oriented – all

moving toward markets

China - 1978

India - 1991

E. Europe and Soviet Union - 1992

Latin America

– 1982

38

Source: World Bank, World Development Indicators online.

World GDP: $63 Trillion in 2010

39

Source: http://www.loansandcredit.com/worlds-largest-stock-exchanges/

Slow-down in rich country growth

40

Source: Angus Maddison, cited in Krugman: http://krugman.blogs.nytimes.com/ , 11/05/09 and

World Bank Development Indicators on-line..

41

Emerging Markets—a loose and generic

term for countries with rapidly growing

business potential.

(Economy rank in terms of PPP size.)

BRIC – China (2), India (4), Brazil (9), Russia (10)

[Alternatively: BRICK, with addition of S. Korea]

East Asian Tigers (a.k.a., the Four Dragons) – S. Korea (14),

Taiwan (17), Hong Kong, Singapore

Important Emerging Markets – Mexico (12), Indonesia (15), Argentina,

Chile, Thailand, Turkey, South Africa, etc.

BRICs = 42%

42

Brazil 3%

Russia 2%

India 17%

China 20%

Rest of world 58%

Share of World Population, 2010

43

Economic Data by BRIC and other

Areas

Population (2010) GDP (PPP - 2010) Per Capital GDP

(2010)

Millions %

Billions of

$U.S. % of world $ (PPP)

Brazil 195 3% $2,169 3% $11,127

Russia 142 2% $2,812 4% $19,840

India 1,171 17% $4,199 6% $3,586

China 1,338 20% $10,084 13% $7,536

BRIC 2,846 42% $19,264 25%

Japan 127 2% $4,333 6% $33,994

U.S. 309 5% $14,582 19% $47,184

Euro Union 502 7% $15,904 21% $31,676

World 6,840 100% $76,278* 100% $11,151

Source: World Bank Development Indicators on-line.

* Differs from market GDP value.

44

Trade as an Engine of World Growth

Source: WDI on-line.

0

100

200

300

400

500

600

700

800

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

World Exports and GDP (1970=100)

World GDP World Exports

45

To what extent are U.S. markets globalized?

0

2

4

6

8

10

12

14

16

18

20

19

70

19

72

19

74

19

76

19

78

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

U.S. Exports and Imports (% of GDP)

Exports Imports Source: WDI on-line.

46

While these ratios appear low,

80% of U.S. GDP is services!

The value of U.S. manufacturing is only about

$1.4 trillion.

Ratio of Imports/Manuf. = 86%

Trade based on comparative advantage makes

the U.S. specialize in services and import

textiles and other products.

47

Who gains, and who loses, from

globalization?

Winners are those who own the resources used in

making exports, and those who want to buy imports.

Losers are those who own resources that must compete

against imports, and that cannot be exported.

* Check your own clothing and jewelry!

48 The Group of 20: the world’s top 20 countries, comprising 85% of world GDP. The G20 is the primary

forum for international cooperation on economic matters, replacing the G8 (a subset of Western powers).

Globalization remains a work in progress.

June 2010

Delegates from left to right (front row): Kirchner, Calderón, Yudhoyono, Hu, Lee, Harper, Obama, Abdullah, Sarkozy; (middle

row): Berlusconi, Merkel, Rodríguez, Balkenende, Zuma, Medvedev, Zenawi, Erdogan, Singh, Nguyễn, Cameron; (top row):

Lamy, Strauss-Kahn, Ban, Rompuy, Swan, Kan, Mantega, Barroso, Zoellick.

49

Protesters against globalization

50

Multilateral trade negotiations

GATT (1947-94) - General Agreement on

Tariffs and Trade

WTO (1995 - present) - World Trade

Organization replaces GATT

51

History of Multilateral Trade Negotiations

under GATT and WTO

GATT/WTO Rounds

Geneva Round 1

Annecy (France) Round2

1947

1949

GATT initiated

Tariff reductions

Torquay (England) Round 3 1951 Tariff reductions

Geneva (Switz.) Round 4 1956 Tariff reductions

Geneva ("Dillon‖) Round 5 1960-62 Tariff reductions

Geneva ("Kennedy‖) Round 6 1962-67 Tariff reductions

Tokyo Round 7 1973-79 Tariff reductions

Uruguay Round 8 1986-94 Agricultural subsidies reduced, service trade

opening, intellectual property protections,

established WTO

Doha (Qatar) Round 9 2001- Opening agricultural markets to

developing countries; inequities in

agriculture subsidies

52

Doha Round Meetings

2001 – Doha, Qatar

2003 – Cancun, Mexico

2005 – Hong Kong

2006 – Geneva

The Doha round suffered a (fatal?) setback in July 2006 when rich

and poor countries could not agree on key agricultural issues.

President Bush lost the ―fast-track‖ authority for negotiating trade

treaties July 1, 2007, neither has it been granted to President Obama.

53

While tariffs on imports are much lower today than previously, trade

disagreements now revolve around the growing use of non-tariff

barriers (health and safety regulations, subsidies to exports, and

other forms of protectionism). Key trade issue revolves around

agricultural protections and subsidies in rich countries.

54

With the demise of multilateral agreements,

bilateral free trade agreements abound:

NAFTA, CAFTA, etc.

October 21, 2011:

President Obama

signs a free trade

agreement with South

Korea, Panama, and

Colombia.

For complete

overview of U.S.

FTA’s, click the arrow:

55

Group Discussion:

* What are the pro’s and con’s of multilateral

versus bilateral trade agreements?

* Will America be better off, or worse off,

because of greater merchandise and service

trade with the rest of the world over the next few

years?

* Will you personally be better off, or worse off,

because of expanded global trade?

56

III. How does a country measure its

experience of involvement in the global

economic system?

Answer: While merchandise exports and

imports are the most obvious way, a

complete outlook is needed using the

overall

Balance of Payments.

57

The Balance of Payments is a record of all

transactions between one country and the rest of the world

over some period of time (such as a year).

There are 3 basic components to the BOP:

I. Current Account

-Earnings and Expenditures (exports, imports, profits...)

II. Capital Account

-Changes in Assets and Liabilities (capital flows and errors...)

III. Official Financing

(a.k.a., Official Reserve Transactions --ORT)

-Changes in government reserves of gold, foreign currencies, SDR’s, etc.

58

Because one country’s credit is another country’s debit,

all BOP transactions must cancel each other out.

Hence, I + II + III = 0.

In other words, it is not possible for a country to run a

deficit in one of its components of BOP, without having

an offsetting surplus somewhere else.

We turn now to a hypothetical example of the Balance of

Payments (see handouts).

59

What meaning can we attach to the

Current Account?

Ans: It is a measure of whether a country is ―living within its means.‖

Countries with current account deficits must borrow from the rest of

the world (or run down reserves) in order to buy imports.

(Alternatively, the “Basic Balance” adds in long term investment flows.)

Query: Is a current account deficit ―good‖ or ―bad‖? (Hint:

Is it ―good‖ or ―bad‖ to live beyond your means?) Explain!

60

A country with a sustained current account deficit may require

reducing income through changes in economic policies, or

borrowing reserves from the IMF.

International Monetary Fund (IMF)

Created in 1944 to manage fixed exchange rates, it is

today a ―lender of last resort‖ for central banks who’ve

run out of ―hard‖ reserves because of a BoP crisis.

The IMF’s policies are highly controversial and unpopular. For a

readable critique, see: Joseph Stiglitz, Globalization and Its

Discontents (2002). Stiglitz was formerly the Chief Economist at

the World Bank, and won the Nobel Prize in Economics in 2001.

In April 2009, the G20 agreed to increase IMF lending to $750

billion to help fight the global crisis.

61

Key feature of last forty years: collapse of U.S.

personal saving rate

62

Collapse of the U.S. current account

63

Ben Bernanke

Fed Chairman

What is the major cause of U.S. current

account deficits?

64

Ben Bernanke

Answer: A global savings glut.

“The emerging-market countries and oil producers remain large net suppliers of financial capital to global markets…. The U.S. current account deficit is certainly not sustainable at its current level” (October 2007)

65

FOREIGN HOLDERS OF TREASURY SECURITIES

Aug 2011

(in billions of dollars) Total: $4,573 B.

CHINA, $1,137

JAPAN, $937

UK, $397

OIL EXPORTERS, $236

BRAZIL, $210

CARIB BNK CNTRS, $161

TAIWAN, $150

ALL OTHER, $1,344

Trade finance with China

―Back in the early stages of the financial crisis,

wags joked that our trade with China had turned

out to be fair and balanced after all:

They sold us poison toys and tainted seafood; we

sold them fraudulent securities.”

-- Paul Krugman

―China’s Dollar Trap,‖ New York Times (April 3, 2009)

66

67

Rapid slowdown in

growth of reserves

68

Group Discussion:

1. Are current account deficits

sustainable and/or desirable for

America?

2. Is Chinese financial backing

good for America?

69

IV. How does a global economy

change the way we do business?

A) Exchange Rates: how does the falling

value of the U.S. dollar affect U.S.

companies in the short run and long run?

70

Markets are integrated. Balance of payments

events in one market spill-over into other

markets. Variables affected:

* interest rates

* exchange rates

* growth rates

* unemployment rates

Understanding the global macroeconomic environment

helps companies understand the changing

needs/opportunities/and challenges to their business.

71

Balance of Payments

and Currency Markets

Website for exchange rates:

http://pacific.commerce.ubc.ca/xr/

Every positive (+) transaction on the BOP

represents an int’l demand for local currency and

thus provides a source of foreign currency.

Examples: Exports and capital inflows

Every negative (-) transaction on the BOP

represents an int’l supply of local currency or use of

foreign exchange.

Examples: Imports and capital outflows

72

Market for U.S. Dollar

Price:

Euros/

Dollar S ( M + CAP OUT)

D ( X + CAP IN)

At equilibrium, I+II=0

Q of Dollars

73

The Theory of Purchasing Power Parity:

says exchange rates move to equilibrate

long run abilities to buy.

Example: A loaf of bread costs 1 Euro in France,

and a similar loaf can be bought for $1 in U.S.

If currently the exchange rate is 2 Euros = $1, can

you make money from this situation? What action

would you take?

74

Answer: Since one dollar buys two Euros, use your dollar to

buy two loaves of bread in France! Ship these loaves to the

U.S. and sell them for $2! Your rate of profit is 100%!

As more arbitragers do this, European exports rise (creating

greater demand for Euros) and U.S. imports rise (creating

greater supply of dollars). These factors will cause the dollar

value to fall and the Euro value to rise.

The Theory of Purchasing Power Parity says when the ability

to buy goods and services is equilibrated, there will be stable

exchange rates—e.g., 1Euro = 1 Dollar = 1 loaf of bread.

Are there any problems with this theory?

75

Problems:

a) Non-traded goods. Since some goods and services are not

traded, prices will not equilibrate.

b) Capital flows. People buy and sell currencies for financial

reasons, not just trade flows. These transactions make up the bulk

of currency trades today. Hence commodity prices may not be able

to drive exchange rates when more powerful forces are at work.

Hence, predicting exchange rates using the PPP theory will be

difficult if these problems are important. The BigMac index makes

for interesting conjecture.

76 Pacific Exchange Rate Service: http://fx.sauder.ubc.ca/

Falling value of Dollar – compared to Yen

77 Pacific Exchange Rate Service: http://fx.sauder.ubc.ca/

Value of Dollar – compared to Euro

78

Until July 2005, China pegged its currency to the dollar. Since then it pegs to a

market basket (mainly the dollar, euro, yen, and won). By Nov 2009 the renminbi

has appreciated about 18% against the dollar. By some estimates China’s currency

is still overvalued by 20-25%.

(http://www.iie.com/publications/opeds/oped.cfm?ResearchID=528)

In July 2005,

China began

appreciating the

renminbi

China suspends

appreciation due to

economic crisis

Value of Dollar to Chinese Renminbi

China resumes

appreciation

The value of dollar rose temporarily

during this world financial crisis

because:

* U.S. financial firms were raising liquidity by selling

overseas assets and repatriating funds;

* The dollar has been the ―reserve‖ currency for the world—

a safe haven during crises.

Will these factors continue to outweigh the huge

current account deficits?

79

5/18/09

Will the U.S.

dollar stay

the world’s

reserve

currency?

Conclusion:

The falling dollar makes U.S. production (and

exporting) more attractive.

President Obama (Nov 2, 2009): ―If Germany, a wealthy, highly unionized industrial nation,

can generate 40 percent of its economy as export-based,

then it seems to me that there is something we're missing

that they are doing right, and we have got to figure that out.‖

http://www.cnbc.com/id/33587781

81

82

B) Is the World Really Flat?

83

Implications of a ―Flat‖ World

• Technology allows the global flow of capital and services, in addition to merchandise;

• Capital flows south where labor is cheap;

• Great ―sucking sound‖ of American jobs outsourced to India and China;

• Gradual convergence of world incomes.

Implication: Location no longer matters, and U.S. workers—accountants, managers, and radiologists—will compete with the lowest cost world labor.

84

A ―Flat‖ World implies Commodities,

Not Innovative Products

• The U.S. currently has a comparative advantage

in creative products and services (as Tom

Friedman coins it, HIEC— ―High Imagination

Enabling Country‖)

♦ Hollywood (entertainment)

♦ Silicon Valley (software)

♦ Boston (biotechnology)

♦ New York (finance)

♦ Agriculture (Green Revolution)

♦ Process efficiency (Wal-Mart)

Characteristics: Passion, purpose, personalized

85

The Future is About

Innovation

• Where do new product, process, and service innovations come from?

♦ Accidents

♦ Design: Creative thinking encouraged and rewarded

♦ Critical mass: Clustering of creative resources

• What institutions support technological innovation?

♦ Rule of law (contracts enforced)

♦ Property rights (no undue seizure)

♦ R&D in pure science (public goods—positive spillovers)

♦ Access to capital (venture capital)

♦ Human capital (critical thinking—not rote learning)

♦ Moral and social capital (shared norms and commitments)

86

Societies that have the institutions and incentives to

solve problems creatively will continue to advance rapidly.

The market is an important institution: in many cases it provides

the incentives for risk-taking and innovation that produce positive

outcomes for society. But government plays an important role in

providing needed public goods (e.g., financing of infrastructure,

education, public health), the regulation of financial markets and

macroeconomic stability, and overcoming free-rider problems.

Shared ethical frameworks (norms) can make both markets and

government more efficient. Societies with conflicted moral norms

will use up investment resources in political squabbles and civil

warleaving the key problems unattended.

The Earth is Not Very Flat

87

The un-flat economic landscape

US GDP

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