Seminar On Global Economy

Contemporary Global Economy
“Nothing endures but change”

(Hereclitis, 5th century B.C. Greek Philosopher)
Professor John Saee, PhD

Editor-in-Chief
Journal of Management Systems (USA)
Email address: professorsaee@aol.com
Copyright: Professor John Saee 2011

Overview
1. The World Business Challenge:
The Diverse International Marketplace
2. Definitions of Globalization
3. Main Catalysts for Globalization:
A Macro-level of Analysis
4. Sources of Motivations Behind the Globalization:
A Micro-level of Analysis
5. Dynamics of Economics: Changing Demographics of the
Global Economy;
Facts and Figures
5.1 Globalization waves in the 19
th th and 20 century
5.2 Foreign trade in goods and services
5.3 Foreign direct investment
5.3 MNCs` influence in the global economy
6. Globalization: Prosperity or Impoverishment?

• Political diversity (Chiefs, Kings, dictators, one-party
government and democracies)
• Economic diversity ( national wealth diversities vary from
$100 per capita (Somalia) to almost $40,000 per capita
(Switzerland)
• Regional diversity (distribution of wealth and population:
North America has 5-6 % of the world population, but controls
one-third of the world GDP: Asia almost 60 % of the world
population, but only about a quarter of world GDP (less than
10 % without Japan and China)
• Cultural and linguistic diversity (world’s 200 nations with
10,000 linguistic/cultural groups)

• Diversities in country size and population (at the turn of
the 20th century, 60 countries ONLY and now 200 countries;
China 1.3 billion inhabitants to 43 countries with less than
one million population)
• Developmental diversities between industrialized nations
(80 % urban populations, 3 % of their GDP from agriculture)
and developing countries, e.g. Sub-Saharan Africa and Asia
(30 % are urbanized but receive 30 % of GDPs from
agriculture).

What is globalization?
•Sociologists’ definition:
“Globalisation is the intensification of worldwide social
relations which link distant localities in such a way that local
happenings are shaped by events occurring many miles away and
vice versa.” (Giddens, cited in Hoogvelt, 1997)
•Economists’ definitions:
Globalization
is a drive toward the “commercial integration of
world economies”
Globalization as a move away from “an economic system in which
national barriers are district entities, isolated from each other by
trade barriers and barriers of distance, time and culture, and
toward a system in which national markets are merging
into one huge global marketplace”. (Hill, 2004)

Definition of globalization describing fundamental

economic dynamics:
Increasingly moving away from a world in which national
economies being relatively isolated from each other (by barriers
to cross-border trade and investment, by distance, time zones
and language, and by national differences in government
regulation, culture, and business systems)
to moving toward a world in which national economies are
merging into an interdependent global economic system,
commonly referred to as globalization (Hill, 2004).

Environmental change and globalization provide firms with

the motivation to internationalize their operations. There are
various catalysts for globalization:
•Technological forces
•Social Forces
•Political and legal forces
•Economic forces

Technological forces:
•Industrialization  Increased role and improvements of
technology:
– Communications
– Transportation
– Information processing (Fisher et al., 2006).
• The second half of the twentieth century has witnessed the
advent of jet aircraft, computers and satellites.

The Role of Technological Change:
• Microprocessors and telecommunications: enabled the
explosive growth of high-power, low-cost computing, vastly
increasing the amount of information that can be processed by
individuals and firms.
• The Internet and World Wide Web: phenomenal recent growth
of the Internet and the associated World Wide Web. (In 1990,
fewer than 1 million users were connected to the Internet.)
• The expanding volume of Web-based electronic commerce (e-
commerce) is increasingly a growing percentage of cross-border
transactions.
• Transportation technology: the most important are the
development of commercial jet aircraft and super-freighters and
the introduction of containerization, which greatly simplifies
transshipment from one mode of transport to another and
significantly lowers the costs of shipping.
Social forces:
•Consumerism
•Convergence in consumers’ tastes and preferences in different
parts of the world, for example:
•Education and training

Political and legal forces:

•Reduced barriers to trade and investment:
 General Agreement on Tariffs and Trade: Treaty designed to
remove barriers to the free flow of goods, services, and capital
between nations; often referred to as GATT.
 World Trade Organization (WTO): Agency established by
agreement of more than 120 economies at the Uruguay Round in
1993 to police the international trading system;
•Dramatic increase in the number of bilateral investment treaties
designed to protect and promote investment between two
countries;
•Increased protection of the intellectual property;
•Reduction of the government interference in the economy and
privatization;

Political and legal forces:

Deregulation in the world economy led to an unprecedented
expansion of international trade;
Meanwhile, recent decades witnessed the most remarkable
institutional harmonization and economic integration among
nations in the world history. While economic integration was
increasing throughout the 1970s and 1980s, the extent of
integration has come sharply into focus only since the collapse of
communism in 1989. By 1995, one dominant global economic
system was emerging.

Economic forces:
• Classic internationalization process:
 Incremental process of increasing commitment and
understanding of foreign market (Uppsala Model).
 Today many companies shortcut this process:
In an internet age, many are even “Born Global”;
• Increased competition, trade, incomes;
• Institutional developments and arrangements;
• New forms of industrial organization.

4. Sources of Motivations Behind the
Globalization: A Micro-level of Analysis
1. To increase profits and sales by entering new markets –
emerging new markets, creation of large new markets due to
economic integration, faster-growing foreign markets;
2. The ability to reduce costs of factors of production (such as labor,
energy, land, and capital) – economies of scope and scale, together
with focused production, reduce the cost of products and services;
3. The ability to provide higher quality (because of economies of
scale and scope);
4. Enhanced customer awareness and loyalty due to the interaction
of three forces: global availability, serviceability and recognition;
5. Increased competitive leverage over competitors by global
companies bringing resources of the worldwide network to bear on
the competitive situation in individual countries;

6. Greater access to human skills and knowledge, because global
companies can access the best people in the world, irrespective of
nationality;
7. Increased access to financial resources and capital, including more
frequent access to a variety of world stock exchanges;
8. Increased availability of information resources is often the
competitive edge;
9. Longer and more diversified use of equipment and technology,
which includes flexible manufacturing using Computer Assisted
Design and Manufacturing (CAD/CAM). Communication technology
is initially expensive, but has little or no maintenance costs after
installation;
10. Broader customer base, so global companies do not rely too heavily
on one market, such as the original domestic market;

11. Geographic flexibility gives choices regarding market and factory
sites;
12. Bargaining power becomes enhanced because of the ability to switch
production between a variety of manufacturing sites;
13. Cultural synergies mean that cultural diversity is seen as a major
source of innovative ideas;
14. Enhanced image and reputation comes from public perception that
global companies “must have” better products and services;
15. Opportunities for alliances and partnerships occur because greater
choices are available; and
16. Power as a global learning organization is closely tied in with the
business goals of the company.

5. Changing Demographics of the Global
Economy: Facts and Figures
The importance of international business has changed dramatically over
time:
• The volume of cross-border trade and foreign investment have
grown more rapidly than the global output.
•Large MNC play increasingly important role in the world economy.
• National economies are becoming more closely integrated into a
single, interdependent, global economic system.
In their drive to expand activities across borders companies are

constantly forced to choose between:
Foreign trade in goods and services,
Foreign investment,
Strategic alliances.

5.1 Globalization waves in the 19th and 20th
century
Table 1: Globalization waves in the 19th and 20th century

(Percentage change unless indicated otherwise). a Refers to period 1870-1913.
Source: Maddison (2001), Lewis (1981), UNCTAD (2007), WTO (2007a).
• Globalization has not been a smooth process: periods of accelerated

integration (as observed in the 19th century and in the second half of the
20th century) and periods of dramatic reversals (as in the inter-war
period) sometimes with costly consequences.
• Two most recent episodes of globalization: increased integration in
trade, capital flows and movement of labor.
5.1 Globalization waves in the 19th and 20th
century
• 1950-73 period: long period of record expansion with world

merchandise exports rising by more than 8 % per annum in real
terms. Trade growth slowed thereafter (impact of two oil price shocks,
burst of inflation).
• In the 1990s: trade expanded again more rapidly, partly driven by
innovations in the IT sector.
• 1950-2007 period: trade expanded on average by 6.2 %, which is
much stronger than in the first wave of globalization from 1850 to
1913.
• Foreign trade in goods and services has since the 2nd World War,
expanded at nearly double pace of world real GDP. As a result the
volume of world trade in goods and services (the sum of both exports
and imports) rose from barely one-tenth of world GDP in 1950 to
about one-third of world GDP in 2000.
• Trade in goods and services is approaching $9 trillion. With world
GDP $30 trillion, it means that nearly one quarter of everything
produced in the world is exported (Saee, 2005).

Share of major exporters in world merchandise trade,
1953-2006
Figure 1: Share of major exporters in world merchandise trade, 1953-2006 (Percentage).

Source: WTO Secretariat.
• The most dynamic traders in the 1950-73 period were the west
European countries and Japan.
• From the 1950s onwards: European integration sustained the
expansion of intra-European trade. The share of intra-west European
trade in world trade rose from 18.3 % in 1953 to 31.2 % in 1973
while extraregional trade expanded somewhat less than global trade.
• In the early 1960s the United States was still by far the world`s
dominant industrial power. (In 1963, for example, the United States
accounted for 40.3 % of world output, by 1997 only for 20.8 %.).
However, the dominant share of the United States in world trade was
eroded in subsequent decades.
• In 1993, after the disintegration of the Soviet Union and the demise
of the Council of Mutual Economic Assistance (CMEA) industrial
countries’ (i.e. western Europe, North America and Japan) share of
world merchandise exports reached a peak, in excess of 70 %
Together with the six newly industrialized economies (NIEs), they
accounted for more than 80 % of world trade in 1993.
• In the 1990s, Japan’s share in world exports started to shrink

significantly owing to the competitive pressure exerted by the NIEs
and China.
• According to the statistics released by the World Trade Organization
and the United Nations, the volume of world trade has grown
consistently faster than the volume of world output since 1950.
• China more than tripled its share in world exports between 1990 and
2007 and is about to become the number one merchandise exporter.
• Direction of Trade:
Developed nations trade primarily with other developed nations and
so do the developing nations.
• Trends: developed countries, especially USA and Japan, increasingly
trade with developing nations, developing nations increasingly trade
with each other.

Trade of goods and services as a percentage of GDP for
selected OECD countries
Figure 2:

Trade balance: exports of goods minus imports of goods
-864.9 261.9
(2008) (2008)
298.1
(2008)
Figure 3: Trade balance: exports of goods minus imports of goods

Billion US dollars, average 2006-2008. Source: OECD Factbook (2010).

Relative annual growth of imports of goods
Figure 4: Relative annual growth of imports of goods

Growth over the period 1998-2008, OECD total = 1.0. Source: OECD Factbook (2010).

Services trade balance: exports of services minus imports of
services
144.3
(2008)
-40.9
(2008)
-11.8
(2008)
Figure 5: Services trade balance: exports of services minus imports of services

Billion US dollars, average 2006-2008. Source: OECD Factbook (2010).

Relative annual growth of imports of services
Figure 6: Relative annual growth of imports of services

Growth over the period 1998-2008, OECD total = 1.0. Source: OECD Factbook (2010).

Evolving trends in investment policies
Figure 7: The evolution of policy approaches towards foreign

Investment. Source: UNCTAD (2010).

• 1991-1994: 94% of the 1035 changes worldwide in the laws

governing foreign direct investment created a more favorable
framework for FDI. Complementing the more welcoming national
FDI regimes, the number of bilateral investment treaties - concluded
increasingly also between developing countries – has risen from 181
at the end of 1980 to 1856 at the end of 1999. Furthermore, double
taxation treaties have also increased from 719 in 1980 to 1982 at the
end of 1990.
• Financial liberalization came last, starting in the early 1980s. This
had two dimensions: the deregulation of the domestic financial
sector in the industrialized countries and the introduction of
convertibility on capital account in the balance of payments. The
latter was not simultaneous. The United States, Canada, Germany
and Switzerland removed restrictions on capital movements in 1973,
Britain in 1979, Japan in 1980, while France and Italy made the
transition as late as 1990. The globalization of finance, moving
forward at a scorching pace since the mid-1980s, is not unrelated to
the dismantling of regulations and controls.
Clear trends (Figure 7):

• The 1950s–1970s focused on State-led growth and the 1980s–early
2000s focused on Market-led growth.
• Recent dichotomy in policy directions: simultaneous moves to
further liberalize investment regimes and promote foreign investment
in response to intensified competition for FDI, on the one hand, and
to regulate FDI in pursuit of public policy objectives, on the other.
• Today’s dichotomy results from a rebalancing of public and private
interests in pursuit of market-harnessing development, with
governments putting in place policies and mechanisms which
enable and incentivize, as well as regulate market actors to better
meet development objectives.
• Multiple global crises (e.g. financial, food, energy, climate change)
have reinforced calls for better regulation of the economy –
including foreign investment – that has further spurred a series of
international and domestic reform processes. Most prominent are
regulatory changes in the financial sector.
FDI inflows, globally and by groups of economies
• Volume of FDI
inflows: Global
inflows are expected
to pick up to over
$1.2 trillion in 2010,
rise further to $1.3-
1.5 trillion in 2011,
and head towards
$1.6-2 trillion in
2012. Figure 8: FDI inflows, globally and by groups of economies,
1980-2009 (Billions of dollars). Source: UNCTAD statistics (2010).
• FDI inflows plummeted in 2009 in all three major groupings – developed, developing and
transition economies. Following their 2008 decline, FDI flows to developed countries
further contracted by 44 % in 2009. Developing and transition economies, which
proved relatively immune to the global turmoil in 2008, were not spared in 2009 but did
better than developed countries. After six years of uninterrupted growth, FDI flows to
developing countries declined by 24 % in 2009.
• The recovery of FDI inflows in 2010 – if modest in global terms – is expected to be stronger
in developing countries than in developed ones. The shift in foreign investment inflows
towards developing and transition economies is expected to accelerate (due to these
economies’ growth and reform, as well as their increased openness to FDI and
international production). Developing and transition economies now account for nearly
half of global FDI inflows.
Inflows of foreign direct investment
319.7
(2008)
147.8
(2008)
24.9
(2008)
Figure 9: Inflows of foreign direct investment (Billion US dollars). Source: OECD Factbook (2010).

Inflows of foreign direct investment
• Industrialized nations invest primarily in other industrialized

nations just as they trade more with them.
• However, global rankings of the largest FDI recipients confirm
the emergence of developing and transition economies: three
developing and transition economies ranked among the
six largest foreign investment recipients in the world in
2009.
• China was the second most popular destination (China has
received the greatest volume of inward FDI in recent years).
While the United States maintained its position as the largest
host country in 2009.

Outflows of foreign direct investment
332.0
(2008)
156.1
(2008)
53.5
(2008)
Figure 10: Outflows of foreign direct investment (Billion US dollars). Source: OECD Factbook (2010).

Outflows of foreign direct investment
• According to the United Nations data, between 1984 and 1996

the average yearly outflow of FDI from all countries increased
by 830% to a US$349 billion. This compares with a 92%
expansion in world trade and a 27% expansion in world
output over the same period (Saee,2005).
• Global FDI outflows in 2009 declined by 43 % to $1,101
billion mirroring the trend in inflows. The global economic
and financial crisis continued to weigh on FDI outflows from
developed countries for the second year in a row.
• While the decline of FDI outflows from developed countries
was widespread in 2009 (with only a few exceptions such as
Denmark, Ireland, Norway and Sweden), the region remained
the largest source of FDI, with outflows largely exceeding
inflows.
• Developing and transition economies further strengthened
their global position as emerging sources of FDI in 2009,
increasing their share to 25 % compared to 19 % in 2008.
Number of cross-border M&As and greenfield investment
cases by host region/economy
Table 2: Number of cross-border M&As and greenfield investment cases, by host

region/economy, 2007–2010a (Percent).

Cross-border M&A sales and greenfield projects,
2005-May 2010
Figure 11: Cross-border M&A sales and greenfield projects, 2005-May 2010

Modes of Entry: M&As and greenfield investments
• The collapse of financial markets has curtailed companies` financing of

M&As. Banks and financial institutions have often been unable or
unwilling to finance acquisitions. Moreover, the collapse of stock
markets has reduced – and in some cases eliminated entirely – the
ability of companies to raise equity capital.
• Most of the drop in FDI in 2008 and 2009 was due to a substantial
decrease in M&A deals rather than greenfield operations. The number of
cross-border M&A transactions declined by 34 % (65 % in terms of
value), compared with a 15 % decline in greenfield projects.
• However, this may not signal a long-term reversal of the preference for
M&As as the dominant mode of FDI, which has been observed over the
past two decades or so, particularly in developed countries.
• The rise of developing countries as FDI destinations is also likely to
weigh on the choice between greenfield projects and M&As, as
developing-country firms become more attractive targets for acquisitions.
• The data available for the beginning of 2010 indeed indicate a more
dynamic growth in M&As than in greenfield investments.

• There are 63,000 MNCs with around 700,000 foreign

affiliates in the world today (Saee, 2005).
• They control close to 52% of world resources, account for
40% of the world’s manufacturing and 25% of world’s
trade.
• 500 largest MNCs account for $ 14 trillion of total sales
revenue and they also represent 90% of the world’s stock
of FDI.
• The national composition of the largest multinationals.
• Industries dominated by MNCs.
• Less than 30 countries in the world have GDP
exceeding total revenues of Exxon (Saee, 2007).

Global 500 Company Revenues
Rank ($ millions)
1 Wal-Mart Stores 219,812.0
• MNEs account for most of the 2
3
Exxon Mobil
General Motors
191,581.0
177,260.0
world's trade and investment. 4 BP 174,218.0
Indeed, the largest 500 MNEs 5

6
Ford Motor
Enron
162,412.0
138,718.0
account for over 90% of the 7 Daimler Chrysler 136,897.3
Royal Dutch/Shell
world's stock of foreign direct 8
Group
135,211.0
investment (FDI) and they, 9

10
General Electric
Toyota Motor
125,913.0
120,814.4
themselves, conduct about half the 11 CitiGroup 112,022.0
12 Mitsubishi 105,813.9
world's trade. 13 Mitsui 101,205.6
14 Cheyron Texaco 99,699.0
• Further, the 500 largest 15 Total Fina Elf 94,311.9
Nippon Telegraph &
companies in the world accounted 16
Telephone
93,424.8
for over $14 trillion of total sales 17

18
Itochu
Allianz
91,176.6
85,929.2
(revenues) in fiscal year 2001. The 19 IBM 85,866.0
20 ING GROUP 82,999.1
average revenues for a firm in the 21 Volkswagen 79,287.3
top 500 were $28 billion, ranging 22

23
Siemens
Sumitomo
77,358.9
77,140.1
from Wal-Mart at $220 billion to 24 Philip Morris 72,944.0
25 Marubeni 71,756.6
Takenaka at $10 billion (Saee, 2007). Table 3: The world’s largest 25 MNCs,
ranked by revenues, 2002 (billions of dollars)
Source: adapted from The Fortune (2002)
• Largest MNEs are as large as (and perhaps more influential

than) mid-sized countries:
– Exxon Mobil value-added 2003: $72 billion
– GDP of Chile in 2003: $72 billion
• Some industries completely dominated by MNEs:
85% of all automobiles, 70% of all computers manufactured
and sold by MNEs (Saee, 2007).
• Since the 1960s, there have been two notable trends in the
demographics of the multinational enterprise:
(1) the rise of non-US multinationals, particularly Japanese
multinationals,
(2) the growth of mini-multinationals.

6. Globalization:
Prosperity or Impoverishment?
• Impact of trade barrier removal on jobs and incomes?
 Do jobs move away from wealthy advanced economies in
search of lower wage rates?
 When a country embraces free trade there is always some
dislocation – lost jobs – but the whole economy is better off!
• Impact of trade liberalization on labor policies and the
environment
 Do manufacturing facilities move to developing countries
with weaker labor laws and environmental protection?
 Or, do tougher environmental regulations and stricter labor
standards go hand and hand with economic progress?
• Impact on national sovereignty; losing power to the
Supranational organizations
 WTO, EU, UN: supplanting national governments?

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Contemporary Global Economy

“Nothing endures but change”

Professor John Saee, PhD

Copyright: Professor John Saee 2011

5.3 Foreign direct investment

5.3 MNCs` influence in the global economy

6. Globalization: Prosperity or Impoverishment?

Copyright: Professor John Saee 2011

Copyright: Professor John Saee 2011

Copyright: Professor John Saee 2011

Definition of globalization describing fundamental

Copyright: Professor John Saee 2011

Environmental change and globalization provide firms with

Copyright: Professor John Saee 2011

Copyright: Professor John Saee 2011

•Education and training

Copyright: Professor John Saee 2011

Political and legal forces:

Copyright: Professor John Saee 2011

Political and legal forces:

Copyright: Professor John Saee 2011

Copyright: Professor John Saee 2011

Copyright: Professor John Saee 2011

Copyright: Professor John Saee 2011

Copyright: Professor John Saee 2011

In their drive to expand activities across borders companies are

Copyright: Professor John Saee 2011

Table 1: Globalization waves in the 19th and 20th century

• Globalization has not been a smooth process: periods of accelerated

• 1950-73 period: long period of record expansion with world

Copyright: Professor John Saee 2011

Figure 1: Share of major exporters in world merchandise trade, 1953-2006 (Percentage).

• In the 1990s, Japan’s share in world exports started to shrink

Copyright: Professor John Saee 2011

Copyright: Professor John Saee 2011

Figure 3: Trade balance: exports of goods minus imports of goods

Copyright: Professor John Saee 2011

Figure 4: Relative annual growth of imports of goods

Copyright: Professor John Saee 2011

Figure 5: Services trade balance: exports of services minus imports of services

Copyright: Professor John Saee 2011

Figure 6: Relative annual growth of imports of services

Copyright: Professor John Saee 2011

Figure 7: The evolution of policy approaches towards foreign

Copyright: Professor John Saee 2011

• 1991-1994: 94% of the 1035 changes worldwide in the laws

Clear trends (Figure 7):

Copyright: Professor John Saee 2011

• Industrialized nations invest primarily in other industrialized

Copyright: Professor John Saee 2011

Copyright: Professor John Saee 2011

• According to the United Nations data, between 1984 and 1996

Table 2: Number of cross-border M&As and greenfield investment cases, by host

Copyright: Professor John Saee 2011

Copyright: Professor John Saee 2011

• The collapse of financial markets has curtailed companies` financing of

Copyright: Professor John Saee 2011

• There are 63,000 MNCs with around 700,000 foreign

Copyright: Professor John Saee 2011

Indeed, the largest 500 MNEs 5

investment (FDI) and they, 9

for over $14 trillion of total sales 17