whether globalization benefits or harms national economies. We will look at what economic theory has to say about the outsourcing of manufacturing and service jobs to places such as India and China and at the benefits and costs of outsourcing, not just to business firms and their employees, but also to entire economies. First, though, we need to get a better overview of the nature and process o f globalization, and that is the function of the current chapter.
What Is Globalization?
As used in this book, globalization refers to the shift toward a more integrated and interdependent world economy. Globalization has several facets, including the globalization of markets and the globalization of production.
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 cross-border trade have made it easier to sell internationally. It has been argued for some time that the tastes and preferences o f consumers in different nations are
beginning to converge on some global norm, 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, Starbucks coffee, and IKEA furniture are frequently identified as prototypical examples of this trend. Firms such as these are more than just benefactors of this trend: they are also facilitators of it. By offering the same basic product worldwide, they help to create a global market.
A company does not have to be the size of these multinational giants to facilitate and benefit from the globalization of markets. In the United States, for example, nearly 90 percent of firms that export are small businesses employing less than 100 people, and their share of total US exports has grown steadily over the last decade to now exceed 20 percent. Firms with less than 500 employees accounted for 97 percent of all US exporters and almost 30 percent of all exports by value. Typical of these is Hytech, a New York based manufacturer of solar panels that generates 40 percent of its $3 million in annual sales from exports to five countries, or B&S Aircraft Alloys, another New York company whose exports account for 40 percent of its $8 million annual revenues. The situation is similar in several other nations. In Germany, for example, which is the world’s largest exporter, a staggering 98
percent of small and mid-sized companies have exposure to international markets, either via exports or international production. Despite the global prevalence of Citigroup credit cards, McDonald’s hamburgers, Starbucks coffee, and IKEA stores, it is important not to push too far the view that national markets are giving way to the global market. As we shall see in later chapters, significant differences still exist among national markets along many relevant dimensions, including consumer tastes and preferences, distribution channels, culturally embedded value systems, business systems, and legal regulations. These differences frequently require companies to customize marketing strategies, product features, and operating practices to best match conditions in a particular country.
The most global markets currently are not markets for consumer products-where national differences in tastes and preferences are still often important enough to act as a brake on globalization-but markets for industrial goods and materials that serve a universal need the world over. These include the markets for commodities such as aluminum, oil, and wheat. For industrial products such as microprocessors,
DRAMs(computer
memory
chips),
and
commercial jet aircraft, for computer software, and for financial assets from US. Treasury bills to Eurobonds and futures and
futures on the Nikkei index or the Mexican peso.
In many global markets, the same firms frequently confront each other as competitors in nation after nation. Coca-Coca’s rivalry with PepsiCo is a global one, as are the rivalries between General Motors and Toyota, Boeing and Airbus, Caterpillar and Komatsu in earthmoving equipment, and Sony, Nintendo, and Microsoft in video games. If a film moves into a nation not currently serves by its rivals, many of 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. In an increasing number of industries, it is no longer meaningful to talk about the German market, the American market the Brazilian market, or the Japanese market, for many firms there is only the global market.
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, companies hope to lower their overall cost structure or improve the quality or functionality of their product offering, thereby allowing them to compete more effectively. Consider the Boeing 777, a commercial 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 most recent jet airliner, the 787 Boeing has pushed this trend even further, with some 65 percent of the total value of the aircraft scheduled to be outsourced to foreign companies, 35percent 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 activity. A global web of suppliers yields a better final product, which enhances the chances of Boeing winning a greater share of total orders for aircraft than its global rival Airbus Industries. Boeing also outsources some production to foreign countries to increase the chance that it will win significant orders from airline based in that country.
For another example of a global web of activities, consider