Go Global !Go Global !Managerial Economics :Managerial Economics :The Global Economic The Global Economic EnvironmentEnvironment

By

Stephen OngStephen OngVisiting Fellow, Birmingham City UniversityVisiting Fellow, Birmingham City UniversityVisiting Professor, College of Management, Visiting Professor, College of Management,

Shenzhen UniversityShenzhen UniversityApril 2013April 2013

Learning Objectives

• To define globalisation and show how businesses are affected

• To discuss globalisation’s future and the major criticisms of globalisation

• To understand why companies engage in global business

• To become familiar with different ways in which a company can accomplish its global objectives given the external environment

AgendaAgenda

1. The Global Economy2. Understanding Globalisation3. Global institutions4. Global drivers5. The Globalisation Debate6. Companies & Globalisation

IntroductionIntroduction

Globalization is the ongoing process that deepens and broadens the relationships and interdependence among countries

Introduction

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1. Global Economy 1. Global Economy (2008 estimates CIA yearbook, World Bank)Country GDP($B) Population (m) Agriculture Industry Services (%GDP)USA 14330 301.6 1% 20% 79%EU 18850 324 2% 27% 71%Japan 4844 127.7 2% 25% 73%Brazil 1665 191.6 8% 38% 54%Russia 1757 142.1 5% 37% 58%India 1237 1124.7 20% 19% 61%China 4222 1318.3 12% 48% 40%Hong Kong 223 6.9 0% 9% 91%Taiwan 401 23 2% 25% 73%Singapore 154 4.5 0% 34% 66%Malaysia 214 26.5 8% 48% 44%Indonesia 510 225.6 13% 46% 41%Iran 382 71 11% 42% 47%Botswana 13 1.8 2% 47% 51%

1.1 World economic order 2040

1.2 Developed Economies GDP

1.3 Emerging Economies1.3 Emerging Economies

1.4 reEmerging Economies1.4 reEmerging Economies

1.5 Why Latin America ?

1.6 World exports 20051.6 World exports 2005

1.7 Inflation & deflation

1.8 Energy Use 2005

1.9 Emerging economies & FDI 1.9 Emerging economies & FDI

1.10 BigMac PPP Index

1.11 Car Ownership1.11 Car Ownership

1.12 Demographic Changes

1.13 Business Confidence

1.14 Production costs1.14 Production costs

1.15 Global Business Hubs

1.16 Forces Driving Globalization

1. Increase in and application of technology

2. Liberalization of cross-border trade and resource movements

3. Development of services that support international business

4. Growing consumer pressures5. Increased global competition6. Changing political situations7. Expanded cross-national cooperation

2. What is Globalization?

• The shift towards a more The shift towards a more integrated an interdependent integrated an interdependent world economyworld economy

• Two components:Two components:1.1.globalization of marketsglobalization of markets

2.2.globalization of productionglobalization of production

2.1 Globalization of Markets

The merging of distinctly separate national markets into a global marketplace– Consumer tastes and preferences are

converging into a global norm

– Firms that offer standardized products worldwide help create a global market

2.2 Globalization of Consumer Markets?

Significant differences still exist between national markets on many relevant dimensions:

Consumer tastes, preferences and values

Distribution channels and legal regulations

Business systems

These differences require that product features, marketing and operating strategies be customized (localized) to best match the conditions in a country

2.3 Globalization of Markets?

• Countries are significantly differentCountries are significantly different

• Range of problems are wider and Range of problems are wider and more complexmore complex

• Government intervention in trade Government intervention in trade and investment creates problemsand investment creates problems

• International investment is International investment is impacted by different currenciesimpacted by different currencies

2.4 Globalization of Production

• The sourcing of goods and services The sourcing of goods and services from locations around the world from locations around the world

• Takes advantage of differences in cost Takes advantage of differences in cost or quality of the factors of productionor quality of the factors of production

LabourLabour LandLand EnergyEnergy CapitalCapital

2.5 Impediments to Global Production

• Formal and informal trade barriers

• Restrictions on foreign direct investment

• Transportation costs

• Economic and political risk

2.5 Globalization of Services

• Historically, this has been primarily Historically, this has been primarily confined to manufacturing enterprisesconfined to manufacturing enterprises

• Increasingly, firms are taking Increasingly, firms are taking advantage of modern communications advantage of modern communications technology and the Internet to technology and the Internet to outsource service activities to low-outsource service activities to low-cost producers in other nationscost producers in other nations

• Trade in services currently accounts Trade in services currently accounts for 20% of all international tradefor 20% of all international trade

3. Emergence of Global Institutions

Globalization creates the need for institutions to help manage, regulate and police the global marketplace

– GATT– WTO– IMF– World Bank– United Nations

3.1 General Agreement on Tariffs & Trade

• GATT was established to: police the world trading system remove barriers to the free flow of trade,

services and capital between nations

• Uruguay round created the World Trade Organization

3.2 World Trade Organization

• 150 member nations (97% of world trade)

• assumed prior GATT agreements and extended GATT to include services and intellectual property (TRIPS)

• promotes lower trade and investment barriers

3.3 IMF and World Bank

International Monetary Fund (IMF) International Monetary Fund (IMF) and the World Bank were created in and the World Bank were created in 1944 by 44 nations that met at 1944 by 44 nations that met at Bretton Woods, New HampshireBretton Woods, New Hampshire

IMF was created to maintain order IMF was created to maintain order in the international monetary systemin the international monetary system

World Bank was created to promote World Bank was created to promote economic development through low-economic development through low-interest loansinterest loans

3.4 United Nations

• Established in 1945 by 51 nations committed to preserving peace through

international cooperation and collective security

• Membership is now at 191 countries

• Four main purposes Maintain international peace and security Develop friendly relations among nations Cooperate in solving international problems and in

promoting respect for human rights Serve as a centre for harmonizing the actions of

nations

4. Global Drivers

Two macro factors underlie the trend towards greater globalization

1.Decline in trade and investment barriers

2.Technological change

4.1 Global Drivers of Globalization – Decline in Trade and Investment Barriers

4.1.1 World Exports4.1.1 World Exports

GermanyUnited States

ChinaJapan

FranceNetherlands

United KingdomItaly

0 2 4 6 8 10 12

9.20

8.59

8.025.38

4.063.83

3.71

3.40

Source: World Trade Organization

Percentage Share of World Exports, Selected Nations, 2007

4.1.2 Average Tariff Rates

4.1.3 Average Tariff Rates on Manufactured Products as Percent of Value

4.1.2 Foreign Direct Investment

Firms investing in resources in business activities outside its

home country

4.1.3 Fewer FDI Restrictions

Nations recognize the increasing importance of FDI

Between 1992 and 2005

2,226 changes worldwide in laws governing FDI

94% created a more favorable investment climate

As of 2005

2,495 bilateral FDI treaties involved 160 nations

twelvefold increase from 181 treaties in 1980

4.1.4 Decline in Trade and Investment Barriers

Resulting in:

volume of world trade has grown faster than the world economy

flow of FDI has grown faster than the growth in world trade and world output

4.1.5 Volume of World Trade and Production 1950-2002

4.1.6 Growth of World Trade, Production & FDI 1992-2004

4.1.7 Decline in Trade and Investment Barriers

Globalization of markets and production and the integration of the world economy has resulted in the increasing:

– attacks by foreign competitors in domestic markets

– overall intensity of competition

Measuring GlobalizationMeasuring Globalization

Globalization can be difficult to Globalization can be difficult to measuremeasureThe A.T. Kearney/Foreign Policy The A.T. Kearney/Foreign Policy Globalization Index ranks countries Globalization Index ranks countries byby

– Economic dimensionsEconomic dimensions– Technological dimensionsTechnological dimensions– Personal contactPersonal contact– Political dimensionsPolitical dimensions

recently ranked Singapore and Hong recently ranked Singapore and Hong Kong as most globalized Kong as most globalized

4.1.8 Openness = Trade / GDP4.1.8 Openness = Trade / GDP

4.2 Global Drivers of Globalization Global Drivers of Globalization – – Technological ChangeTechnological Change

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4.2.1 Global Drivers of Globalization - Technological Change

1. Microprocessors and Telecommunications- lower the real costs in information processing

and communication and facilitate global dispersion

2. Transportation Technology- lower costs & transit times due to

containerization

3. Internet and World Wide Web- information backbone of the global

economy

4. Production, Packaging and distribution processes- Machines have increased speed, reliability,

energy efficiency, product shelf life

4.2.2 Implications of Technological Change

• Lower costs of transportation and information processing has facilitated the dispersion of production to geographically separate locations and the growth in international trade in services

• Technological innovations have facilitated the globalization of markets

4.2.3 Global Drivers of Globalization

A Word of Caution

One must not overemphasize these One must not overemphasize these trends!trends!

• Communication and transportation Communication and transportation technologies are creating a “global technologies are creating a “global village”village”

• But significant national differences But significant national differences remain in culture, consumer remain in culture, consumer preferences and business practicespreferences and business practices

4.3 Changing Demographics of the Global Economy

As late as the 1960’s• US dominated the world economy and

trade

• US dominated the global foreign direct investment

• Large, US multinationals dominated the scene

• Half the globe was Communist World and off limits

4.3.1 Changing Demographics of the Global Economy

US is a smaller player in the global economy as a producer and exporter source of and recipient of FDI

A similar trend occurred in other developed countries

The share of world output accounted for by developing nations is rising and is expected to exceed more than 60% of world economic activity by 2020

4.4 Changing Pattern of World Output and Trade

4.5 Percentage Share of Total FDI Stock 1980-2005

4.6 FDI Inflows 1988-2006

4.7 Changing Demographics of the Global Economy

Changing nature of multinationals

– Mini-multinationals grow in importance

– Non-US multinationals play greater role

4.8 Changing Demographics of the Global Economy

• Collapse of the USSR and Collapse of the USSR and Communist nationsCommunist nations

• Emergence of “BRIC’s”Emergence of “BRIC’s” BrazilBrazil RussiaRussia IndiaIndia ChinaChina

4.9 Global Economy of the 21st Century?

• Recently, we have seen the : changing demographics of the global economy removal of trade and investment barriers

• Resulting in national economies integrating into a more interdependent, global economy

• However, it is hazardous to use current trends to predict the future

• The world may be moving towards a The world may be moving towards a more global economic system, but more global economic system, but globalization in not inevitableglobalization in not inevitable

5. The Globalization Debate

Is the shift toward a more integrated and interdependent global economy a

good thing?

5.1 Globalization Debate: The Pro’s

• Improves the efficiency of production

• Lowers the prices for goods and services

• Stimulates economic growth and job creation

• Raises consumer income and prosperity levels

• Rising income levels lead to demands for greater environmental protection (Grossman & Kruger)

5.1.1 Environmental Pollution and Income Levels

Fig 1.6

5.2 Globalization Debate:The Con’s

Limits national sovereignty

Facilitates cultural imperialism

Destroys manufacturing jobs in wealthy countries

Lowers wage rates of unskilled workers in wealthy, advanced countries

Shifts manufacturing to countries with fewer labor and environmental regulations

Costs of GlobalizationCosts of Globalization

• Threats to national sovereigntyThreats to national sovereignty– lose freedom to “act locally”lose freedom to “act locally”

• Economic growth and environmental Economic growth and environmental stressstress– growth consumes nonrenewable natural growth consumes nonrenewable natural

resources and increases environmental resources and increases environmental damagedamage

• Growing income inequality and Growing income inequality and personal stresspersonal stress– promotes global superstars at the promotes global superstars at the

expense of othersexpense of others

Costs of GlobalizationCosts of Globalization

Offshoring involves the transferring of production abroad

– it can be beneficial because it reduces costs

– but, it also means that jobs move abroad Yet, offshoring may also create new, better jobs at home

5.3 Globalization and the World’s Poor

Critics argue that Critics argue that globalization has not helped globalization has not helped poorpoor

1870: per capita income of 17 richest nations was 2.4x that of all other countries

1990: it was 4.5x larger

Other factors may have influenced the gapTotalitarian governmentsEconomic policies that destroyed wealth creationCorruption little protection of property rights Expanding populationsCivil unrest and war

5.4 Pressures for Localization

Non-Tariff Barriers

Cultural Differences

Consumer Preferences

Differences in Infrastructure

Dynamic Distribution Channels

5.5 Forces Against Globalization

Nationalism and Regional Separatism

Cultural Identity and Economic Sovereignty

Limited Natural Resources

Human and Labor Rights

IMF Reformers and Debt Relief

Environmental NGO’s and Anti-Globalization

5.6 Recent WTO Major Setbacks

““Battle in Seattle”Battle in Seattle”

Doha Trade Round Doha Trade Round CollapseCollapse

5.7 Management Challenges in the Global Marketplace

Nations have profound and enduring differences in:

– cultures, – political systems, – economic systems, – legal systems and – levels of economic

development

Requiring firms to vary practices across nations

5.8 Management Challenges in the Global Marketplace

Range of problems confronted in an international business is wider and the problems more complex than those in a domestic business

Firms have to find ways to work within the limits imposed by government intervention in the international trade and investment system

International business transactions involve converting money into different currencies

6. Companies & Globalisation6. Companies & Globalisation

To expand salesTo expand sales– pursuing international sales increases the

potential market and potential profitsTo acquire resourcesTo acquire resources

– may give companies lower costs, new and better products, and additional operating knowledge

To diversify or reduce risksTo diversify or reduce risks– international operations may reduce

operating risk by smoothing sales and profits, preventing competitors from gaining advantage

Global External Environment Global External Environment AnalysisAnalysis

The external environment affects a company’s international operationsManagers must understand social science disciplines and how they affect functional business fieldsConsider

–physical factorsphysical factors–social factorssocial factors–competitive factorscompetitive factors

Physical and Social FactorsPhysical and Social Factors

Geographic influences– natural conditions influence production

locations

Political policies– determines where and how business occurs

Legal policies– influence how a company operates

Behavioural factors– may require changes in operations

Economic forces – explain differences in costs, currency values,

market size

The Competitive EnvironmentThe Competitive Environment

Competitive strategy for products– Cost strategy– Differentiation strategy– Focus strategy

Company resources and experience– market leaders have more resources for

international operations

Competitors faced in each market– local or international

The Competitive EnvironmentThe Competitive Environment

So, a company’s competitive strategy influences how and where it can best operateIts competitive situation may differ from country to country in terms of its relative strength and which competitors it faces

Looking to the FutureLooking to the FutureThree major perspectives on the future of international business and globalization

1.1. Further globalization is inevitableFurther globalization is inevitable

2.2. International business will grow International business will grow primarily along regional rather primarily along regional rather than global linesthan global lines

3.3. Forces working against further Forces working against further globalization and international globalization and international business will slow down both business will slow down both trendstrends

Casestudy : Casestudy : The Global Pharmaceutical industryThe Global Pharmaceutical industry

1.1. Read and prepare the Read and prepare the Casestudy on The Global Casestudy on The Global Pharmaceutical Industry Pharmaceutical Industry (Johnson, Whittington & (Johnson, Whittington & Scholes (2011)) for Scholes (2011)) for discussion and discussion and presentation next week. presentation next week.

2.2. Identify and evaluate the Identify and evaluate the challenges facing global challenges facing global pharmaceutical firms the pharmaceutical firms the External Environment External Environment and Industry analysis – and Industry analysis – PESTEL and Five Forces.PESTEL and Five Forces.

ConclusionConclusion

►““A powerful force drives the world A powerful force drives the world toward a converging commonality, toward a converging commonality, and that force is technology. The and that force is technology. The result is a new commercial reality result is a new commercial reality – the emergence of global markets – the emergence of global markets for standardized consumer for standardized consumer products on a previously products on a previously unimagined scale of magnitude.” unimagined scale of magnitude.” Theodore Levitt

Core ReadingCore Reading

• Keat, Paul G. and Young, Philip KY (2009) Managerial Economics, 6th edition, Pearson

• Samuelson, William F. and Marks, Stephen G.(2010) Managerial Economics, 6th edition, John Wiley

• Pindyck, Robert S. and Rubinfeld, Daniel L.(2013) Microeconomics, 8th edition, Pearson

• Johnson, Gerry, Whittington, Richard & Scholes, Kevan (2011) Exploring Strategy, 9th edition, FT Prentice Hall/Pearson UK.

• Porter, M.E., (2008). On Competition, Harvard Business Press.

Questions?Questions?

Evaluating a Firm’sEvaluating a Firm’sExternal EnvironmentExternal Environment

Appendix I : Appendix I : Case Analysis MethodsCase Analysis Methods

Why External Analysis?

External analysis allows firms to:

• discover threats and opportunities

• see if above normal profits are likely in an industry

• better understand the nature of competition inan industry

• make more informed strategic choices

FirmFirm

BuyersBuyers

SuppliersSuppliers

EntryEntry

RivalryRivalry

SubstitutesSubstitutes

ComplementorsComplementors

TechnologicalTrends

Ecological/ EthicsEcological/ EthicsChange

Socio-Cultural/ Socio-Cultural/ DemographicDemographic

TrendsEconomicEconomicClimate

PoliticalPoliticalConditions

Legal/Regulatory/Globalisation

IndustryIndustry

General External EnvironmentGeneral External Environment

PESTEL Local FactorsPESTEL Local Factors

PESTEL Global FactorsPESTEL Global Factors

Industry Analysis :Industry Analysis :Porter’s 5+1 Forces Porter’s 5+1 Forces ModelModel

Porter’s Five Forces Model

1. Threat of Entry1. Threat of Entry• if firms can easily enter the industry, any above

normal profits will be bid away quickly

• barriers to entry lower the threat of entry

• barriers to entry make an industry more attractive

• this is true whether the focal firm isalready in the industry or thinking aboutentering

Porter’s Five Forces Model

1. Threat of Entry1. Threat of EntryBarriers to Entry:

• economies of scale—firm that can’t producethe minimum efficient scale will be at a disadvantage

• product differentiation—entrants are forced toovercome customer loyalties to existing products

• cost advantages independent of scale—incumbentsmay have learning advantages, etc.

• government policies—governments may imposetrade restrictions and/or grant monopolies

Economies of Scale and the Cost of Production

Porter’s Five Forces Model

2. Threat of Rivalry2. Threat of Rivalry• high rivalry means firms compete vigorously—and

compete away above average profits

Industry conditions that facilitate rivalry:

• large numbers of competitors

• slow or declining growth

• high fixed costs and/or high storage costs

• low product differentiation

• industry capacity added in large increments

Porter’s Five Forces Model

3. Threat of Substitutes3. Threat of Substitutes• substitutes fill the same need but in a different way

- Coke and Pepsi are rivals, milk is asubstitute for both

• substitutes create a price ceiling because consumersswitch to the substitute if prices rise

• substitutes will likely come from outside theindustry—be sure to look

Porter’s Five Forces Model

4. Threat of Powerful Suppliers

• powerful suppliers can ‘squeeze’ (lower profits)the focal firm

Industry conditions that facilitate supplier power:

• small number of firms in supplier’s industry

• highly differentiated product

• lack of close substitutes for suppliers’ products

• supplier could integrate forward

• focal firm is an insignificant customer of supplier

Porter’s Five Forces Model

5. Threat of Powerful Buyers• powerful buyers can ‘squeeze’ (lower profits)

the focal firm by demanding lower prices and/orhigher levels of quality and service

Industry conditions that facilitate buyer power:

• small number of buyers for focal firm’s output

• lack of a differentiated product

• the product is significant to the buyer

Porter’s Five Forces Model

5. Threat of Powerful Buyers5. Threat of Powerful Buyers

Industry conditions that facilitate buyer power:

• buyers operate in a competitive market—they arenot earning above normal profits

• buyers can vertically integrate backwards

• many small buyers can be united around an issueto act as a block

Example: Monsanto’s Life Sciences Strategy

6. Other Stakeholders :6. Other Stakeholders :Complementors As Another ForceComplementors As Another Force

Complementors Increase the Value of the Firm’s Product

• customers perceive more value in the focal firm’sproduct when it is combined with the complementor’sproduct

• complementors may be found outside the focal firm’sindustry

Example: Goodyear Tires on Corvette

ReferencesReferences

• Johnson, Gerry, Whittington, Richard & Scholes, Kevan (2011) Exploring Strategy, 9th edition, FT Prentice Hall/Pearson UK.

• Barney, J.B. & Hesterley,W.S.(2012) Strategic Management and Competitive Advantage, 4th edition, Prentice Hall

• Wheelen & Hunger (2011) Essentials of Strategic Management, 5th edition, Pearson

• Porter, M.E., (2008) On Competition, Harvard Business Press.