Implications of Globalization - Principles of Management

The implications of the trends we have just discussed are profound. First, these trends have resulted in a massive surge in the volume of international trade and foreign direct investment. According to data from the World Trade Organization, from 1970 to 2004 the volume of world merchandise trade expanded almost 26-fold, outstripping world production, which grew about 7.5 times in real terms.

Implications of Globalization

(World merchandise trade includes trade in manufactured goods, agricultural goods, and mining products, but not services. World production and trade are measured in real, or inflation-adjusted, dollars.) As suggested by Figure , due to falling barriers to international trade, the growth in world trade seems to have accelerated since the early 1980s.

Foreign direct investment (FDI) has increased even more dramatically. The average yearly outflow of FDI increased from $25 billion in 1975 to a record $1.3 trillion in 2000 before falling back to around $900 billion in 2005. 20 Despite the slowdown in 2001–2005, the flow of FDI not only accelerated over the past quarter century, but also accelerated faster than the growth in world trade.

Between 1992 and 2005 the total flow of FDI from all countries increased by about 420 percent, while world trade doubled and world output grew by 35 percent. Because of the strong FDI flow, by 2004 companies had some $9 trillion in foreign assets.

In total, at least 70,000 parent companies had 690,000 subsidiaries in foreign markets that collectively employed some 54 million people abroad and generated value accounting for about one-tenth of global GDP. The foreign affiliates of multinationals had an estimated $19 trillion in global sales—nearly twice as high as the value of global exports of goods and service combined, which stood at $11 trillion.

These are dramatic figures, but what do they mean for individual enterprises and their managers? They suggest first that the globalization of production is well under way; second, that the globalization of markets is also starting to occur; and third, that advances in technology are facilitating these trends. The result is an environment facing today’s managers that is dramatically different from the one their predecessors faced a generation ago.

THE GLOBALIZATION OF PRODUCTION

The globalization of production refers to the sourcing of goods and services from locations around the globe to take advantage of national differences in the cost and quality of factors of production (such as labor, energy, land, and capital). By doing this, firms hope to lower their overall cost structure and improve the quality or functionality of their products, allowing them to compete more effectively. We have already considered one example of this trend: the outsourcing of U.S. tax return preparation to India.

Consider also the Boeing Company’s 777 jet airliner. Eight Japanese suppliers make parts for the fuselage, doors, and wings; a supplier in Singapore makes the doors for the nose landing gear; three suppliers in Italy manufacture wing flaps; and so on. In total, some 30 percent of the 777, by value, is built by foreign companies. For its next jet airliner, the 787, Boeing is pushing this trend even further, with some 65 percent of the total value of the aircraft scheduled to be outsourced to foreign companies, 35 percent of which will go to three major Japanese companies.

Part of Boeing’s rationale for outsourcing so much production to foreign suppliers is that these suppliers are the best in the world at their particular activities. A global web of suppliers yields a better final product, which enhances Boeing’s chances of winning a greater share of total orders for aircraft than its global rival, Airbus Industrie. Boeing also outsources some production to foreign countries to increase the chance that it will win significant orders from airlines based in that country.

Although historically significant outsourcing has been primarily confined to manufacturing enterprises such as Boeing, increasingly companies are taking advantage of modern communications technology, and particularly the Internet, to outsource service activities to lowcostproducers in other nations.

For example, the Internet has allowed hospitals to outsource some radiology work to India, where images from MRI scans and the like are read at night while U.S. physicians sleep; the results are ready for them in the morning. Similarly, in December 2003 IBM announced that it would move the work of some 4,300 software engineers from the United States to India and China (software production is counted as a service activity).

Many software companies now use Indian engineers to maintain software designed in the United States. Due to the time difference, Indian engineers can run debugging tests on software written in the United States when U.S. engineers sleep, transmitting the corrected code back to the United States over secure Internet connections so it is ready for U.S. engineers to work on the following day.

Dispersing business activities in this way can compress the time and lower the costs required to develop new software programs. Other companies from computer makers to banks are outsourcing customer service functions, such as customer call centers, to developing nations where labor is cheaper.

THE GLOBALIZATION OF MARKETS

The globalization of markets refers to the merging of historically distinct and separate national markets into one huge global marketplace. Falling barriers to international trade have made it easier to sell internationally. It has been argued for some time that the tastes and preferences of consumers in different nations are beginning to converge, thereby helping to create a global market.

Consumer products such as Citigroup credit cards, Coca-Cola soft drinks, Sony PlayStation video games, McDonald’s hamburgers, and Starbucks coffee are frequently cited as examples of this trend. Firms such as Citigroup, Coca-Cola, McDonald’s, Starbucks, and Sony are more than just beneficiaries of this trend; they have also facilitated it. By offering the same basic products worldwide, they help create a global market.

In many global markets the same firms frequently confront each other as competitors in nation after nation. Coca-Cola’s rivalry with PepsiCo is a global one, as are the rivalries between Ford and Toyota; Boeing and Airbus; Caterpillar and Komatsu in earthmoving equipment; and Sony, Nintendo, and Microsoft in video games. If one firm moves into a nation that is not currently served by its rivals, those rivals are sure to follow to prevent their competitor from gaining an advantage.

As firms follow each other around the world, they bring with them many of the assets that served them well in other national markets— including their products, operating strategies, marketing strategies, and brand names— creating some homogeneity across markets. Thus greater uniformity replaces diversity.

TECHNOLOGY: THE GREAT FACILITATOR

As we have seen, due to technological innovations the real costs of information processing and communication have fallen dramatically. These developments allow managers to create and then manage a globally dispersed production system, further facilitating the globalization ofproduction. A worldwide communication network has become essential for many international businesses. For example, Dell uses the Internet to coordinate and control its globally dispersedproduction system to such an extent that it holds only two days’ worth of inventory at its assembly locations.

Dell’s Internet-based system records orders for computer equipment as theyare submitted by customers via the company’s Web site, and then immediately transmits theresulting orders for components to various suppliers around the world, which have a real-timeview of Dell’s order flow and can adjust their production schedules accordingly. Given the lowcost of airfreight, Dell can use air transportation to speed up the delivery of critical componentsto meet unanticipated demand shifts without delaying the shipment of final products to consumers.

Dell also has used modern communication technology to outsource its customerservice operations to India. When U.S. customers call Dell with a service inquiry, they arerouted to Bangalore in India, where English-speaking service personnel handle the call.

The Internet has been a major force facilitating international trade in services. The Web allows hospitals in Chicago to send MRI scans to India for analysis, tax accountants in San Francisco to outsource routine tax preparation work to the Philippines, and software testers in India to debug code written by developers in Redmond, Washington, the headquarters of Microsoft. We are probably still in the early stages of this development. Before long almost any work processes that can be digitized will be, and in theory this will allow that work to be performedwherever in the world it is most efficientand effective to do so.

In addition to the globalization of production, technological innovations have also facilitated the globalization of markets. Low-cost global communication networks such as the World Wide Web are helping to create electronic global marketplaces. Inexpensive transportation has made it more economical to ship products around the world, thereby helping to create global markets. For example, due to the tumbling costs of shipping goods by air, roses grown in Ecuador can be cut and sold in New York 24 hours later while they are still fresh.

This has created an industry in Ecuador that did not exist 20 years ago and that now supplies a global market for roses. Global communication networks and global media are creating a worldwide culture. U.S. television networks such as CNN, MTV, and HBO are now received in many countries, and Hollywood films are shown the world over. In any society the media are primary conveyors of culture; as global media develop, we can expect the evolution of something akin to a global culture.

A logical result of this evolution is the emergence of global markets for consumer products. The first signs of this are already apparent. It is now as easy to find a McDonald’s restaurant in Tokyo as it is in New York, to buy an iPod in either Rio or Berlin, and to buy Gap jeans in both Paris and San Francisco.


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