Chapter Outline

What is Globalization

As used in this book, globalization refers to the shift toward a more integrated and interdependent world economy. Globalization has two main components: 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. It has been argued for some time that the tastes and preferences of consumers in different nations are beginning to converge on some global norm, thereby helping to create a global market.3 The global acceptance of consumer products such as Citicorp credit cards, Coca-Cola, Levi's jeans, Sony Walkmans, Nintendo game players, and McDonald's hamburgers are all frequently held up as prototypical examples of this trend. Firms such as Citicorp, Coca-Cola, McDonald's, and Levi Strauss are more than just benefactors of this trend; they are also instrumental in facilitating it. By offering a standardized product worldwide, they are helping 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. For example, the accompanying Management Focus describes how a small British enterprise with annual sales in 1997 of just ?6.8 million ($10 million) is trying to build a global market for the traditional British fare of fish 'n' chips.

Despite the global prevalence of Citicorp credit cards, Coca-Cola, Levi blue jeans, McDonald's hamburgers, and (perhaps one day) Harry Ramsden's fish 'n' chips, 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, very significant differences still exist between national markets along many relevant dimensions, including consumer tastes and preferences, distribution channels, culturally embedded value systems, and the like. In the case of many products, these differences frequently require that marketing strategies, product features, and operating practices be customized to best match conditions in a country. Thus, for example, automobile companies will promote different car models depending on a whole range of factors such as local fuel costs, income levels, traffic congestion, and cultural values.

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, the markets for industrial products such as microprocessors, DRAMs (computer memory chips), and commercial jet aircraft; and the markets for financial assets from US Treasury Bills to eurobonds 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-Cola's rivalry with Pepsi is a global one, as are the rivalries between Ford and Toyota, Boeing and Airbus, Caterpillar and Komatsu, and Nintendo and Sega. If one firm moves into a nation that is currently unserved by its rivals, those rivals are sure to follow lest their competitor gain an advantage. These firms bring with them many of the assets that have served them well in other national markets--including their products, operating strategies, marketing strategies, and brand names--creating a certain degree of homogeneity across markets. Thus, diversity is replaced by greater uniformity. As rivals follow rivals around the world, these multinational enterprises emerge as an important driver of the convergence of different national markets into a single, and increasingly homogenous,

The Globalization of Production

The globalization of production refers to the tendency among firms to source 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 so, companies hope to lower their overall cost structure and/or improve the quality or functionality of their product offering, thereby allowing them to compete more effectively. Consider the Boeing Company's latest commercial jet airliner, the 777. The 777 contains 132,500 major component parts that are produced around the world by 545 suppliers. 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.5 Part of Boeing's rationale for outsourcing so much production to foreign suppliers is that these suppliers are the best in the world at performing their particular activity. The result of having a global web of suppliers is a better final product, which enhances the chances of Boeing winning a greater share of total orders for aircraft than its global rival, Airbus. Boeing also outsources some production to foreign countries to increase the chance that it will win significant orders from airliners based in that country.

The global dispersal of productive activities is not limited to giants such as Boeing. Many much smaller firms are also getting into the act. Consider Swan Optical, a US-based manufacturer and distributor of eyewear. With sales revenues of $20 to $30 million, Swan is hardly a giant, yet Swan manufactures its eyewear in low-cost factories in Hong Kong and China that it jointly owns with a Hong Kong-based partner. Swan also has a minority stake in eyewear design houses in Japan, France, and Italy. Swan has dispersed its manufacturing and design processes to different locations around the world to take advantage of the favorable skill base and cost structure found in foreign countries. Foreign investments in Hong Kong and then China have helped Swan lower its cost structure, while investments in Japan, France, and Italy have helped it produce designer eyewear for which it can charge a premium price. By dispersing its manufacturing and design activities, Swan has established a competitive advantage for itself in the global marketplace for eyewear, just as Boeing has tried to do by dispersing some of its activities to other countries.

Robert Reich, the former secretary of labor in the Clinton administration, has argued that as a consequence of the trend exemplified by Boeing and Swan Optical, in many industries it is becoming irrelevant to talk about American products, Japanese products, German products, or Korean products. Increasingly, according to Reich, the outsourcing of 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 markets, one 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.

Nevertheless, we are traveling down the road toward a future characterized by the increased globalization of markets and production. Modern firms are important actors in this drama, fostering by their very actions increased globalization. These firms, however, are merely responding in an efficient manner to changing conditions in their operating environment--as well they should. In the next section, we look at the main drivers of globalization.