Drivers Of Globalization Technology Examples
Posted by John Spacey, August 08, 2018. Globalization is the process whereby systems expand from being regional or national to encompass the entire planet. This is a broad trend that has been underway for centuries. The following are common examples of globalization. Refer to one of the critical forces of globalization. Every- country restricts the movement of goods and services across its border. It imposes tariffs and quotas on the goods and services imported in its country. In addition, the random changes in the regulations create a chaos in global business environment.
Chapter 2 The Globalization of Companies and Industries“Going global” is often described in incremental terms as a more or less gradual process, starting with increased exports or global sourcing, followed by a modest international presence, growing into a multinational organization, and ultimately evolving into a global posture. This appearance of gradualism, however, is deceptive.
It obscures the key changes that globalization requires in a company’s mission, core competencies, structure, processes, and culture. As a consequence, it leads managers to underestimate the enormous differences that exist between managing international operations, a multinational enterprise, and managing a global corporation. Research by Diana Farrell of McKinsey & Company shows that industries and companies both tend to globalize in stages, and at each stage, there are different opportunities for and challenges associated with creating value. Farrell (2004, December 2). 2.1 The Five Stages of Going GlobalIn the first stage (market entry), companies tend to enter new countries using business models that are very similar to the ones they deploy in their home markets. 2.2 Understanding Industry GlobalizationExecutives often ask whether their industry is becoming more global and, if so, what strategies they should consider to take advantage of this development and stake out an enduring global competitive advantage. This may be the wrong question.
Simple characterizations such as “the electronics industry is global” are not particularly useful. A better question is how global an industry is, or is likely, to become. Virtually all industries are global in some respects. However, only a handful of industries can be considered truly global today or are likely to become so in the future.
Many more will remain hybrids, that is, global in some respects, local in others. Acronis true image 2015 download full version crack. Industry globalization, therefore, is a matter of degree. What counts is which elements of an industry are becoming global and how they affect strategic choice. In approaching this issue, we must focus on the drivers of industry globalization and think about how these elements shape strategic choice.We should also make a distinction between industry globalization, global competition, and the degree to which a company has globalized its operations. In traditionally global industries, competition is mostly waged on a worldwide basis and the leaders have created global corporate structures. But the fact that an industry is not truly global does not prevent global competition. And a competitive global posture does not necessarily require a global reorganization of every aspect of a company’s operations.
Economies of scale and scope are among the most important drivers of industry globalization; in global industries, the minimum volume required for cost efficiency is simply no longer available in a single country or region. Global competition begins when companies cross-subsidize national market-share battles in pursuit of global brand and distribution positions. A global company structure is characterized by production and distribution systems in key markets around the world that enable cross-subsidization, competitive retaliation on a global basis, and world-scale volume. Hamel and Prahalad (1985, July-August).So why are some industries more global than others? And why do global industries appear to be concentrated in certain countries or regions? Most would consider the oil, auto, and pharmaceutical industries global industries, while tax preparation, many retailing sectors, and real estate are substantially domestic in nature. Others, such as furniture, lie somewhere in the middle.
What accounts for the difference? The dominant location of global industries also poses interesting questions. Although the machine tool and semiconductor industries originated in the United States, Asia has emerged as the dominant player in most of their segments today. What accounts for this shift? Why is the worldwide chemical industry concentrated in Germany while the United States continues to dominate in software and entertainment? Can we predict that France and Italy will remain the global centers for fashion and design? These issues are important to strategists.
They are also relevant as a matter of public policy as governments attempt to shape effective policies to attract and retain the most attractive industries, and companies must anticipate changes in global competition and locational advantage. Minicase: Cemex’s Globalization Path: First Cement, Then ServicesWhen Lorenzo Zambrano became chairman and chief executive officer of Cemex in the 1980s, he pushed the company into foreign markets to protect it from the Latin American debt crisis. Now the giant cement company is moving into services. Lindquist (2002, November 1); andZambrano first focused on the United States. But attempts to sell cement north of the border were greeted by hostility from producers, who convinced the U.S.
International Trade Commission to levy a stiff antidumping duty. Despite a a General Agreement on Tariffs and Trade’s (GATT) ruling in Cemex’s favor, the company was still paying the fine a dozen years later.Rebuffed in the world’s biggest market, Zambrano turned to Spain, investing in port facilities and outmaneuvering European rivals for control of the country’s two largest cement firms.
When he discovered how inefficiently they were run, Zambrano sent a team of his Mexican managers to Spain to introduce his distinctive way of doing business. Called the “Cemex Way,” it is a culture that blends modern, flexible management practices with cutting-edge technology.From Spain, where profits increased from 7% to 24% during Cemex’s first 2 years there, the company expanded around the globe. Blending state-of-the-art technology with the making and selling of one of the world’s most basic products, Cemex has achieved remarkable customer service in some of the most logistically challenged countries.
Whether Venezuela, Mexico, or the Philippines, Cemex trucks equipped with GPS navigational systems promise deliveries within 20 minutes.After gaining a solid international footing, Zambrano went back to the United States. In 2000, he bought Houston-based Southdown Cement—one of the largest purchases ever by a Mexican company in the United States. Soon, Cemex was the biggest U.S.
Cement seller. In less than two decades, Zambrano had transformed Cemex from a domestic company into the world’s third-largest cement firm by investing heavily and imaginatively not only in plants and equipment, which is what one would expect in the cement industry, but also in information technology and particularly in Cemex’s people.The corporation has consistently been more profitable than either of its two biggest competitors, France’s Lafarge and Switzerland’s Holcim. Sales in 2008 were almost $22 billion, with an operating margin of almost 12%.Today, Cemex has a presence in more than 50 countries across 5 continents.
It has an annual production capacity of close to 96 million metric tons of cement, approximately 77 million cubic meters of ready-mix concrete and more than 240 million metric tons of aggregates. Its resource base includes 64 cement plants, over 2,200 ready-mix concrete facilities, and a minority participation in 15 cement plants, and it operates 493 aggregate quarries, 253 land-distribution centers, and 88 marine terminals.Zambrano’s embrace of technology is central to Cemex’s efficiency. Fiber optics link the system, and satellite communications are used to connect remote outposts. Whether at the Monterrey headquarters or on the road, the chief executive officer can tap into his computer to check kiln temperatures in Bali or cement truck deliveries in Cairo.Because he believes many companies use technology ineffectively, Zambrano spun off Cemex’s technology arm to sell its services. Organized under the CxNetworks Miami subsidiary, which is devoted to creating growth by building innovative businesses around Cemex’s strengths, Zambrano formed a consulting service called Neoris.
With more than half of its customers coming from outside Cemex, the operation has already become hugely profitable. It has been grouped with another start-up—Arkio, a distributor of building material products to construction companies in developing nations. “We’re selling logistics,” says the president of CxNetworks. “We can assure our customers that they can have the materials from our warehouse to their construction site within 48 hours.”. 2.3 Clustering: Porter’s National DiamondThe Theory that holds that as a result of natural endowments, some countries or regions of the world are more efficient than others in producing particular goods. Holds that as a result of natural endowments, some countries or regions of the world are more efficient than others in producing particular goods.
Australia, for example, is naturally suited to the mining industry; the United States, with its vast temperate landmass, has a natural advantage in agriculture; and more-wooded parts of the world may have a natural advantage in producing timber-based products. This theory is persuasive for industries such as agriculture, mining, and timber. But what about industries such as electronics, entertainment, or fashion design? To explain the clustering of these industries in particular countries or regions, a more comprehensive theory of the geography of competition is needed.In the absence of natural comparative advantages, Occurs as a result of a relative competitive advantage that is created by the industry itself. Occurs as a result of a relative advantage that is created by the industry itself.
Krugman (1993). Producers tend to locate manufacturing facilities close to their primary customers. If transportation costs are not too high, and there are strong economies of scale in manufacturing, a large geographic area can be served from this single location. This, in turn, attracts suppliers to the industry. A labor market is likely to develop that begins to act like a magnate for “like” industries requiring similar skills. This colocation of “like” industries can lead to technological interdependencies, which further encourage clustering. Clustering, therefore, is the natural outcome of economic forces.
A good example is provided by the semiconductor industry. Together, American and Asian firms supply most of the world’s needs. The industry is capital intensive, research and development costs are high, the manufacturing process is highly complex, but transportation costs are minimal. Technology interdependencies encourage colocation with suppliers, whereas cost and learning curve effects point to scale efficiencies.
Clustering, therefore, is mutually advantageous.Only when transportation costs are prohibitive or scale economies are difficult to realize—that is, when there are disincentives to clustering—do more decentralized patterns of industry location define the natural order. The appliance industry illustrates this. Companies such as GE and Whirlpool have globalized their operations in many respects, but the fundamental economics of the industry make clustering unattractive. The production of certain value-added components, such as compressors or electronic parts, can be concentrated to some extent, but the bulky nature of the product and high transportation costs make further concentration economically unattractive. What is more, advances in flexible manufacturing techniques are reducing the minimum scale needed for efficient production.
This allows producers to more finely tailor their product offerings to local tastes and preferences, further thwarting the globalization of the industry.Thus, classical economic theory tells us why clustering occurs. However, it does not fully explain why particular regions attract certain global industries. Porter addressed this issue using a framework he calls a “ Seeks to fully explain 'clustering,' why particular regions attract certain global industries.” Porter (1990). It has six components: factor conditions, home-country demand, related and supporting industries, competitiveness of the home industry, public policy, and chance. Factor ConditionsThe explanation why particular regions attract particular industries begins with the degree to which a country or region’s endowments match the characteristics and requirements of an industry. Such factor conditions include natural (climate, minerals) as well as created (skill levels, capital, infrastructure) endowments. But to the extent that such factors are mobile, or can be imitated by other countries or regions, factor conditions alone do not fully explain regional dominance.
In fact, the opposite is true. When a particular industry is highly profitable and barriers to entry are low, the forces of imitation and diffusion cause such an industry to spread across international borders. Oster (1994). The Japanese compete in a number of industries that originated in the United States; Korean firms imitate Japanese strategies; and Central European nations are conquering industries that were founded in Western Europe. Industries that depend on such mobile factors as capital are particularly susceptible. Home-Country DemandPorter’s second factor is the nature and size of the demand in the home country. Large home markets act as a stimulus for industry development.
And when a large home market develops before it takes hold elsewhere in the world, experienced firms have ample incentives to look for business abroad when saturation at home begins to set in. The motorcycle industry in Japan, for example, used its scale advantage to create a global presence following an early start at home. Oster (1994).
Porter found that it is not just the location of early demand but its composition that matters. A product’s fundamental or core design nearly always reflects home-market needs. As such, the nature of the home-market needs and the sophistication of the home-market buyer are important determinants of the potential of the industry to stake out a future global position. It was helpful to the U.S.
Semiconductor industry, for example, that the government was an early, sophisticated, and relatively cost-insensitive buyer of chips. These conditions encouraged the industry to develop new technologies and provided early opportunities to manufacture on a substantial scale. Competitiveness of the Home IndustryFirm strategies, the structure, and the rivalry in the home industry define the fourth element of the “national diamond” model.
In essence, this element summarizes the “five forces” competitive framework described earlier. The more vigorous the domestic competition is, the more successful firms are likely to compete on a global scale.
There is plenty of evidence for this assertion. The fierce rivalry that exists among German pharmaceutical companies has made them a formidable force in the global market.
And the intense battle for domestic market share has strengthened the competitive position of Japanese automobile manufacturers abroad. Public Policy and ChanceThe two final components of Porter’s model are public policy and chance. There can be no doubt that government policy can—through infrastructure, incentives, subsidies, or temporary protection—nurture global industries. Whether such policies are always effective is less clear.
Picking “winners” in the global marketplace has never been the strong suit of governments. The chance element allows for the influence of random events such as where and when fundamental scientific breakthroughs occur, the presence of entrepreneurial initiative, and sheer luck. For example, the early U.S. Domination of the photography industry is as much attributable to the fact that George Eastman (of Eastman Kodak) and Edwin Land (of Polaroid) were born here than to any other factor.
2.4 Industry Globalization DriversYip identifies four sets of “industry globalization drivers” that underlie conditions in each industry that create the potential for that industry to become more global and, as a consequence, for the potential viability of a global approach to strategy. Yip first developed this framework in his book Total global strategy: Managing for worldwide competitive advantage (1992), chaps. How customer behavior distribution patterns evolve. Define how customer behavior distribution patterns evolve, including the degree to which customer needs converge around the world, customers procure on a global basis, worldwide channels of distribution develop, marketing platforms are transferable, and “lead” countries in which most innovation takes place can be identified.
Scale or scope economics, experience effects, sourcing efficiencies, and technology advantages that shape the economics of an industry.—the opportunity for global scale or scope economics, experience effects, sourcing efficiencies reflecting differentials in costs between countries or regions, and technology advantages—shape the economics of the industry. Defined by the strategic actions of globally competing firms in deciding in which markets to compete. Are defined by the actions of competing firms, such as the extent to which competitors from different continents enter the fray, globalize their strategies and corporate capabilities, and create interdependence between geographical markets. Include such factors as favorable trade policies, a benign regulatory climate, and common product and technology standards. Include such factors as favorable trade policies, a benign regulatory climate, and common product and technology standards. Market DriversOne aspect of globalization is the steady convergence of customer needs.
As customers in different parts of the world increasingly demand similar products and services, opportunities for scale arise through the marketing of more or less standardized offerings. How common needs, tastes, and preferences will vary greatly by product and depend on such factors as the importance of cultural variables, disposable incomes, and the degree of homogeneity of the conditions in which the product is consumed or used. This applies to consumer as well as industrial products and services. Coca-Cola offers similar but not identical products around the world. McDonald’s, while adapting to local tastes and preferences, has standardized many elements of its operations.
Software, oil products, and accounting services increasingly look alike no matter where they are purchased. The key to exploiting such opportunities for scale lies in understanding which elements of the product or service can be standardized without sacrificing responsiveness to local preferences and conditions.Global customers have emerged as needs continue to converge. Large corporations such as DuPont, Boeing, or GE demand the same level of quality in the products and services they buy no matter where in the world they are procured. In many industries, global distribution channels are emerging to satisfy an increasingly global customer base, further causing a convergence of needs. Finally, as consumption patterns become more homogeneous, global branding and marketing will become increasingly important to global success. Cost Globalization DriversThe globalization of customer needs and the opportunities for scale and standardization it brings will fundamentally alter the economics of many industries.
Economies of scale and scope, experience effects, and exploiting differences in factor costs for product development, manufacturing, and sourcing in different parts of the world will assume a greater importance as determinants of global strategy. At bottom is a simple fact: a single market will no longer be large enough to support a competitive strategy on a global scale in many industries.Global scale and scope economics are already having far-reaching effects. On the one hand, the more the new economies of scale and scope shape the strategies of incumbents in global industries, the harder it will be for new entrants to develop an effective competitive threat. Thus, barriers to entry in such industries will get higher. At the same time, the rivalry within such industries is likely to increase, reflecting the broadening scope of competition among interdependent national and regional markets and the fact that true differentiation in such a competitive environment may be harder to achieve. Competitive DriversIndustry characteristics—such as the degree to which total industry sales are made up by export or import volume, the diversity of competitors in terms of their national origin, the extent to which major players have globalized their operations and created an interdependence between their competitive strategies in different parts of the world—also affect the globalization potential of an industry. High levels of trade, competitive diversity, and interdependence increase the potential for industry globalization.
Industry evolution plays a role, too. As the underlying characteristics of the industry change, competitors will respond to enhance and preserve their competitive advantage. Sometimes, this causes industry globalization to accelerate. At other times, as in the case of the worldwide major appliance industry, the globalization process may be reversed.
Government DriversGovernment globalization drivers—such as the presence or absence of favorable trade policies, technical standards, policies and regulations, and government operated or subsidized competitors or customers—affect all other elements of a global strategy and are therefore important in shaping the global competitive environment in an industry. In the past, multinationals almost exclusively relied on governments to negotiate the rules of global competition. Today, however, this is changing. As the politics and economics of global competition become more closely intertwined, multinational companies are beginning to pay greater attention to the so-called nonmarket dimensions of their global strategies aimed at shaping the global competitive environment to their advantage (see the following section). This broadening of the scope of global strategy reflects a subtle but real change in the balance of power between national governments and multinational corporations and is likely to have important consequences for how differences in policies and regulations affecting global competitiveness will be settled in the years to come. 2.5 Globalization and Industry StructureYoffie suggests 5 propositions that help explain how the structure of an industry can evolve depending on, among other factors, the dynamics that shape competition in the industry and the role governments play in stimulating or obstructing the globalization process. Yoffie (1993), chaps.
Drivers Of Globalization Pdf
The reader is encouraged to consult this excellent book for further details.Proposition 1 is that when industries are relatively fragmented and competitive, national environments (factors of production, domestic market and domestic demand, and so forth) will largely shape the international advantage of domestically headquartered firms and the patterns of trade. A correlate to this proposition is that in emerging industries, country advantages also play a dominant role in determining global competitive advantage.In other words, in fragmented industries relative cost is a key determinant of global success, and since countries differ in terms of their factor costs, as long as entry barriers remain low, production will gravitate to the lowest cost, highest efficiency manufacturing location. Another way of saying this is that the presence of multinational firms, by itself, should not influence the pattern of international trade in globally competitive, fragmented industries; other things being equal, country factors determine the location of production and the direction of exports. Oligopolistic global industry structures define a very different strategic context, as the next proposition illustrates.Proposition 2 stipulates that if an industry becomes globally concentrated with high barriers to entry, then location, activity concentration, export, and other strategic decisions by multinational companies are determined to a greater extent by the nature of the global oligopolistic rivalry. Thus, while in concentrated industries country characteristics remain important, the dynamics of the global, oligopolistic competitive climate become the principal drivers of global strategy. This is intuitive.
In global oligopolies, more so than in fragmented market structures, the success of one firm is directly affected by that of a few, immediate competitors. Entry into the industry is often restricted in some way—by factors such as economies of scale or scope, high levels of capital investment, and the like, or by restrictions imposed by governments. Furthermore, in many global oligopolies, participating firms earn above-average returns, which may make the difference in cost between producing locally and exporting a less critical determinant of strategy. Opportunities to cross-subsidize businesses and geographies further reduce the importance of geography in production or export decisions.
As a consequence, the moves and countermoves of direct, global competitors heavily influence company strategies. For example, it is quite common for companies to enter some other firm’s home market, not just because that market is likely to generate additional profits but mainly to weaken its global competitive position.
This line of reasoning directly leads to a third proposition, which relates organizational and strategic attributes of global competitors to global strategic choice.Proposition 3 suggests that in global oligopolies, specific firm characteristics—the structure of ownership, strategies employed, and organizational factors, to name a few—directly affect strategic posture, the pattern of trade, and, sometimes, the competitiveness of nations. In global oligopolies with a relatively small number of competitors, issues such as who owns the resources necessary for creating value and who sets the global priorities take on a greater strategic significance.
Executives from different cultures approach strategy differently—state-owned enterprises are often more motivated by public policy considerations, employment, and other nonprofit concerns. These differences can have a direct impact on the relative attractiveness of global strategy options. The influence of governments in global markets is captured further in the fourth proposition.Proposition 4 suggests that extensive government intervention in global oligopolistic industries can alter the relative balance between firms of different countries—even in fragmented industries, it can alter the direction of trade and affect major corporate trade decisions. The degree and influence of government intervention varies from industry to industry. Whereas in fragmented industries the influence of governments is naturally somewhat limited by market conditions, government intervention can have a pronounced influence in industries with significant economies of scale effects or other market imperfections.
For example, governments can protect “infant” industries with such characteristics. While a case can be made for the temporary protection of strategically important industries, in reality, such protection is rarely temporary. This can create a global strategic environment in which anticipating and capitalizing on the actions of governments become the driving forces of global strategy.Proposition 5 suggests that in industries where firms make long-term commitments, corporate adjustments and patterns of trade tend to be “sticky.” This fifth and final proposition addresses the issue of corporate inertia. Although the global competitive climate changes every day, choices made by multinational companies and governments tend to have an enduring impact on the industry environment.
This proposition has at least two implications. First, the study of how industries evolve globally and what decisions different competitors made and how they made them is relevant to understanding what drives strategy in a particular global context.
Second, the commitments already made by industry participants and governments may spell opportunity or impose constraints for years to come.These 5 propositions define 2 important dimensions for classifying globalizing industries according to the nature of the strategic challenge they represent: the degree of global concentration and the extent to which governments intervene. In industries with a relatively low degree of concentration and little government intervention, the classical economic laws of comparative advantage are the primary drivers of international competition. Here, factor costs are a primary determinant of global competitiveness. It would seem natural, therefore, to focus on a global strategy aimed at minimizing costs.
But this can be extremely difficult in a fast-changing world. Comparative country costs change continuously. In cars, semiconductors, and computers, among other industries, the comparative (cost) advantage has shifted a number of times since World War II from the United States to Japan to East Asia to Southeast Asia.
What is more, there is good reason to believe it will shift again, perhaps to Africa or Latin America. And, with new technological breakthroughs, Western nations may once again become the low-cost production centers. So what should companies do? While companies should definitely take advantage of opportunities to minimize costs, especially in their initial investments, Yoffie suggests that long-term global strategic choices should emphasize commitments to countries that are likely to act as the best platforms over time for a broad array of activities. Yoffie (1993), 432.In globally concentrated industries where the role of governments is limited, characterized by oligopolistic competition, company strategies are often heavily influenced by the moves and countermoves of direct competitors.
Strategies such as making significant investments in competitors’ markets, regardless of their short- or medium-run profitability—which would not work in highly competitive markets—can only be explained in terms of a strategic posture aimed at maintaining a long-term global competitive balance between the various participants. Caterpillar invested heavily in Japan while Komatsu and European construction equipment manufacturing moved into the United States at a time when such moves offered limited immediate returns. In this kind of competitive environment, the potential for overglobalization—the globalization of different aspects of strategy well in advance of proven benefits—exists as the relatively small number of competitors and high barriers to entry encourage “follow-the-leader” competitive behavior. On the other hand, not responding directly to major competitors can be equally dangerous. Komatsu’s challenge to Caterpillar, in part, was made possible because, early on, Caterpillar focused its strategy on keeping John Deere, International Harvester, and Dresser Industries at bay rather than on beating Komatsu. This suggests a number of strategic implications. First, while imitation cannot be the sole basis for developing strategy, in oligopolies, it may be necessary, at times, to match a competitor in order to reduce the risk of competitive disadvantage.
A related implication is that in global oligopolies, companies cannot allow their competitors to have uncontested home markets in which profit sanctuaries can be used to subsidize global competitive moves. This explains Kodak’s extraordinary efforts to pry open the Japanese market—it knew Fuji would be at a considerable advantage if it remained dominant in Japan. Finally, the use of alliances can make such global moves more affordable, flexible, and effective. Alliances can be powerful vehicles for rapidly entering new countries, acquiring new technologies, or otherwise supporting a global strategy at a relatively low cost.
Yoffie (1993), 433, 434.Dealing effectively with governments is a prerequisite for global success in oligopolistic industries such as telecommunications, where extensive government intervention creates a global competitive climate known as Occurs in oligopolistic industries where the direct effect of extensive government intervention creates a global competitive climate. Here, nonmarket dimensions of global strategy may well be as important as market dimensions. Political involvement may be necessary to create, preserve, or enhance global competitive advantage since government regulations—whether in infant or established industries—are critical to success. As a consequence, strategy in global, regulated industries should be focused as much on shaping the global competitive environment as on capitalizing on the opportunities it offers.The indirect effect on global competition of government policies that pit one country or region of the world against another., characteristic of fragmented industries with significant government intervention, also calls for a judicious mix of market and nonmarket-based strategic thinking. In contrast to regulated competition, in which government policy has a direct impact on individual companies, however, government intervention in political competition often pits one country or region of the world against another. This encourages a whole range of cooperative strategies between similarly affected players and strategic action at the country-industry level.Finally, it is worth remembering that patterns of competition are not static.
Industries evolve continuously, sometimes dramatically. Similarly, the focus of government action in different industries can change as national priorities change and the global competitive environment evolves. 2.6 Points to Remember. Industries and companies tend to globalize in stages, and at each stage, there are different opportunities for, and challenges associated with, creating value. Simple characterizations such as “the electronics industry is global” are not particularly useful.
A better question is how global an industry is or is likely to become; industry globalization is a matter of degree. A distinction must be made between industry globalization, global competition, and the degree to which a company has globalized its operations. Porter explains industry clustering using a framework he calls a “national diamond.” It has six components: factor conditions, home country demand, related and supporting industries, competitiveness of the home industry, public policy, and chance. Yip identifies four sets of “industry globalization drivers”—underlying conditions in each industry that create the potential for that industry to become more global and, as a consequence, for the potential viability of a global approach to strategy.
These drivers are market drivers, cost drivers, competitive drivers, and government drivers. Yoffie offers five propositions that help explain how the structure of an industry can evolve depending on, among other factors, the dynamics that shape competition in the industry and the role governments play in stimulating or obstructing the globalization process. These propositions define two important dimensions for classifying globalizing industries according to the nature of the strategic challenge they represent: the degree of global concentration and the extent to which governments intervene.
During the last decades we saw a rapid increase of economic globalization. This fact is due to technological progress and different levels of scarcity of resources in individual countries. Sometimes it seems that the increase of cross-border exchange of goods, services, capital and other factors of production is inevitable. But as a matter of fact, the development of globalization is not determined by any laws of nature. Political decisions and institutions are central adjustment screws.Drivers of economic globalizationEconomic globalization stands for the economic interconnectedness of countries with the global economy as a whole. This interdependence relates both to the exchange of factors of production (labor, capital, technologies, know-how) and the exchange of products (material goods and services, finished and unfinished products, consumer and capital goods). In my opinion, there are three main drivers for economic globalization and its different characteristics such as trade (see figure 1), international capital markets, currency markets, migration and more:.
Demography: The size of the population of a country is important for factor endowment differences between countries. If a certain economy has a large number of workers but only a small stock of physical capital, the country is labor-abundant and capital-poor. Such a country has an international competitive advantage in manufacturing labor-intensive products. Concerning international division of labor, it will specialize on the production and export of labor-intensive products.
Technology: Due to technical progress, costs of transportation and of communication decreased strongly during the last decades. Without these reductions of costs, phenomena such as outsourcing, long-distance trade and global value chains would not be possible. Political decisions: Economic processes are not operating in a political or institutional vacuum. Reducing or even eliminating barriers to trade in goods, services, labor and capital are political decisions. At the end of the day, whether economically motivated cross-border activities do actually take place or not depends on the policy frameworks in place. It is this framework which decides whether cross-border activities are facilitated, made more difficult or even completely forbidden. Political decisions and the extent of globalizationThe extent of globalization is shaped by political decisions which promote or impede economic cross-border interconnections.
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Just a few examples for the role of political decisions are the following:. The decision of a country to reduce import tariffs is essential for the size and structure of international trade in goods and services. Lower barriers in trade increase the incentive to trade with other countries. This decisions is in the hand of the national government respectively parliament. In case of the European Union, these national competences are transferred to the EU. Additional trade policy instruments are bilateral or regional free trade agreements which are used in order to reduce or even eliminate tariff and non-tariff barriers to trade.
The conclusion or non-completion of such an agreement is a political decision, too. The same applies to the decision to reduce capital controls which are used by national governments in order to regulate in inflow and outflow of capital. Closely linked to capital controls is the topic of foreign exchange controls respectively the design of foreign exchange markets (fixed versus flexible exchange rates). Finally, immigration regulations of individual countries are an important limitation of international migrations flows. Therefore, political decisions and institutions decide whether those persons, who suffer from the market processes in a globalized world, are finally the losers of globalization or not.
In case of a strong welfare state (extensive redistribution policy, high level of protection against dismissal and more), economic and social policies could compensate the income losses of those persons who lost their job due to international competition. In that case, looking at the disposable income (= market income minus taxes minus social security contribution plus social transfers), these persons might not be classified as ‘losers of globalization’ anymore.Limits of political influenceHowever, it must be pointed out that due to increasing globalization, national capacities to manage the consequences of a globalized world are limited. An impressive example of this limitation is. Because all markets need institutions, global markets require global rules, too. These rules have to be established on the global level. Hence national self-determination is violated.
On the other hand, if national governments have too much power, they will apply rules and institutional arrangements according to the preferences of local population. Since preferences concerning rules and institutions are supposed to differ between countries, the result of national sovereignty is institutional heterogeneity which is not compatible with uniform global standards.Nevertheless, even limited room for maneuvers allows national governments to shape globalization, both its extent and its consequences. If, for example, globalization has gone, it is not impossible to turn back some elements of globalization. And even more important: Any government has the possibilities to change the market outcomes of globalization in its own country.Note:The content of this blog post is a modified pre-release of one section of my paper for the “Vision Europe Summit 2017” which will take place on 14 and 15 November 2017 in Turin. You can visit the Summit’s website by clicking!