again the example of Vizio given in the Opening Case. Vizio, an American company with just 75 employees, has become one of the largest sellers of flat panel TVs in the United States in just four years by coordinating a global web of activities, bringing together components manufactured in South Korea, China and the United States, arranging for their assembly in Mexico, and then selling them in the United States.
Early outsourcing efforts were primarily confined to manufacturing activities, such as those undertaken by Boeing and Vizio, increasingly, however, companies are taking advantage of modern communications technology, particularly the Internet, to outsource service activities to low-cost producers in other nations. Many software companies, including IBM, now use Indian engineers to perform maintenance functions on software designed in the United States. The time difference allows Indian engineers to run debugging tests on software written in the United States when US engineers sleep, and the corrected code is transmitted back to the United States over secure Internet connections so it is ready for us engineers to work on the following day. Dispersing value-creation activities in this way can compress the time and lower the costs required to develop new software programs. Other companies, from computer makes to banks, are outsourcing
customer service functions, such as customer call centers, to developing nations where labor is cheaper.
Robert Reich, who served as secretary of labor in the Clinton administration, has argued that as a consequence of the trend exemplified by companies such as Boeing, IBM, and Vizio, in many cases it is becoming irrelevant to talk about American products, Japanese products, German products, or Korean products. Increasingly, according to Reich, outsourcing productive activities to different suppliers’ results in the creation of products that are global in nature, that is global products, but as with the globalization of markers, companies must be careful not to push the globalization of production too far. As we will see in later chapters, substantial impediments still make it difficult for firms to achieve the optimal dispersion of their productive activities to locations around the globe. These impediments include formal and informal barriers to trade between countries, barriers to foreign direct investment, transportation costs, and issues associated with economic and political risk. For example, government regulations ultimately limit the ability of hospitals to outsource the process of interpreting MRI scans to developing nations where radiologists are cheaper. Nevertheless, the globalization of markets and production will continue. Modern firms are important actors in this trend, their very
actions fostering increased globalization. These firms, however, are merely responding in an efficient manner to changing conditions in their operating environment-as well they should.
The Emergence of Global Institutions
As markets globalize and an increasing proportion of business activity transcends national borders, institutions are needed to help manage, regulate, and police the global marketplace and to promote the establishment of multinational treaties to govern the global business system. Over the past half century, a number of important global institutions have been created to help perform these functions, including the General Agreement on Tariffs and Trade(GATT)
and
its
successor,
the
World
Trade
Organization(WTO),the International Monetary Fund(IMF) and its sister institution, the World Bank and the United Nations. All these institutions were created by voluntary agreement between individual nation-states, and their functions are enshrined in international treaties.
The World Trade Organization(like the GATT before it) is primarily responsible for policing the world trading system and making sure nation-states adhere to the rules laid down in trade treaties signed by WTO member states. As of 2007,150 nations
that collectively accounted for 97 percent of world trade were WTO members, thereby giving the organization enormous scope and influence. The WTO is also responsible for facilitating the establishment of additional multinational agreements between WTO member states. Over its entire history, and that of the GATT before it, the WTO has promoted lowering barriers to cross-border trade and investment. In doing so, the WTO has been the instrument of its member states, which have sought to create a more open global business system unencumbered by barriers to trade and investment between countries. Without an institution such as the WTO, the globalization of markets and production is unlikely to have proceeded as far as it has. However, as we shall see in this chapter and in Chapter 6 when we look closely at the WTO, critics charge that the organization is usurping the national sovereignty of individual nation-states.
The International Monetary Fund and the World Bank were both created in 1944 by 44 nations that met at Bretton Woods, New Hampshire. The IMF was established to maintain order in the international monetary system; the World Bank was set up to promote economic development. In the 65 years since their creation, both institutions have emerged as significant players in the global economy. The World Bank is the less controversial of the
two sister institutions. It has focused on making low-interest loans to cash-strapped governments in poor nations that wish to undertake significant infrastructure investments (such as building dams or roads).
The IMF is often seen as the lender of last resort to nation-states whose economic are in turmoil and currencies are losing value against those of other nations. Repeatedly during the past decade, for example, the IMF has lent money to the governments of troubled states, including Argentina, Indonesia, Mexico, Russia, South Korea, Thailand, and Turkey. IMF loans come with strings attached, however, in return for loans, the IMF requires nation-states to adopt specific economic policies at returning their troubled economies to stability and growth. These requirements have sparked controversy. Some critics charge that the IMF’s policy recommendations are often inappropriate, others maintain that by telling national governments what economic policies they must adopt the IMF, like the WTO, is usurping the sovereignty of nation-states. We shall look at the debate over the role of the IMF in Chapter 10.
The United Nations was established October 24 1945 by 51 countries committed to preserving peace through international cooperation and collective security. Today nearly every nation in the