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15.2. Read and translate the text into Ukrainian: What Globalization Is?

Globalization refers to the shift toward a more integrated and interdependent world economy. Globalization has several different 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 of consumers in different nations are beginning to converge on some global norm, thereby helping to create a global market. Consumer products such as Citigroup³ credit cards, Coca-Cola soft drinks, Sony PlayStation, and McDonald’s hamburgers are frequently held up as prototypical examples of this trend. Firms such as Citigroup, Coca-Cola, McDonald’s, and Sony are more than just benefactors of this trend; they are also facilitators of it. By offering a standardized 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, more than 200,000 small businesses with fewer than 100 employees registered foreign sales in 2010. 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 Alloys⁴, another New York company whose exports account for 40 percent of its $8 million annual revenues.

Despite the global prevalence of Citigroup credit cards and McDonald’s hamburg­ers, it is important not to push too far the view that national markets are giving way to the global market. Very significant differences still exist between 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 that mar­keting strategies, product features, and operating practices be customized to best match conditions in a country. For example, automobile companies will promote dif­ferent car models depending on a range of factors such as local fuel costs, income lev­els, traffic congestion, and cultural values. Similarly, global retailers may still need to vary their product mix from country to country de­pending on local tastes and preferences.

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; the markets for com­puter software; and the markets for financial assets from U.S. Treasury bills to eurobonds and futures on the Nikkei index⁵ or the Mexican peso⁶.

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 not currently served by its rivals, those rivals are sure to follow to prevent their competitor from gaining an advantage. Retailers such as Wal-Mart, Carrefour, and Tesco are starting to engage in a global rivalry. 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. Due to such developments, 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 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. 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. 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. 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 SAS (Airbus Industrie)⁷. Boeing also outsources some production to foreign countries to in­crease the chance that it will win significant orders from airlines 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 U.S.- based manufacturer and distributor of eyewear. With annual sales revenues of $20 million 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. The company has dispersed its manufacturing and design processes to different locations around the world to take advantage of favorable skill bases and cost structures. 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 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, 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, by their very actions fostering increased globalization. These firms, however, are merely responding in an efficient manner to changing conditions in their operating environment – as they should.

THE EMERGENCE OF GLOBAL INSTITUTIONS

As markets globalize and an increasing proportion of business activity transcends na­tional borders, institutions need to help manage, regulate, and police the global marketplace, and to promote the establishment of multinational treaties to govern the global business system. During the past 60 years, a number of important global insti­tutions have been created to help perform these functions. These institutions include the General Agreement on Tariffs and Trade (GATT)⁸ and its successor, the World Trade Organization (WTO); the International Monetary Fund (IMF) and its sis­ter institution, the World Bank; and the United Nations (UN). 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 January 1, 2013, 159 nations were members of the WTO, including all significant trading nations, which gives the WTO 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 the lowering of 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, it is unlikely that global­ization would have proceeded as far as it has. However, critics charge that the WTO 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 task of the IMF was to maintain order in the international monetary system, and that of the World Bank was to promote economic development. In the nearly 70 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 rate loans to cash-strapped governments in poor nations that wish to undertake significant infrastructure investments (such as building dams or road systems).

The IMF is often seen as the lender of last resort to nation-states whose economies are in turmoil and currencies are losing value against those of other nations. Repeat­edly during the last decade, for example, the IMF has lent money to the governments of troubled states including Argentina, Indonesia, Mexico, Russia, South Korea, Thai­land, Turkey, and Ukraine to name a few of the more high-profile cases. The IMF loans come with strings attached; in return for loans, the IMF requires nation-states to adopt spe­cific policies aimed at returning their troubled economies to stability and growth. These “strings” have generated the most debate; some critics charge that the IMF’s policy recommendations are often inappropriate, while others maintain that, like the WTO, by telling national governments what economic policies they must adopt, the IMF is usurping their sovereignty.

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 world belongs to the United Nations; membership now totals 193 states (and 2 observer states). When states become members of the United Nations, they agree to accept the obligations of the UN Charter⁹, an international treaty that sets out basic principles of international relations. According to the charter, the UN has four purposes: (1) to maintain international peace and security; (2) to develop friendly relations among nations; (3) to cooperate in solving international problems and in promoting re­spect for human rights, and (4) to be a center for harmonizing the actions of nations. Al­though the UN is perhaps best known for its peacekeeping role, one of the UN’s central mandates is the promotion of higher standards of living, full employment, and conditions of economic and social progress and development – all issues that are cen­tral to the creation of a vibrant global economy. As much as 70 percent of the work of the UN system is devoted to accomplishing this mandate. To do so, the UN works closely with other international institutions such as the World Bank. Guiding the work is the belief that eradicating poverty and improving the well-being of people every­where are necessary steps in creating conditions for lasting world peace.

Text Summary Over the past two decades, we have witnessed the globalization of markets and production. The globalization of markets implies that national markets are merging into one huge marketplace. However, it is important not to push this view too far. 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. The globalization of production implies that firms are basing individual productive activities at the optimal world locations for the particular activities. As a consequence, it is increasingly irrelevant to talk about American products, Japanese products, or German products, since these are being replaced by “global” products. Two factors seem to underlie the trend toward globalization: (1) declining trade barriers and (2) changes in communication, information, and transportation technologies. As a consequence of the globalization of production and markets, in the last decade world trade has grown faster than world output, foreign direct investment has surged, imports have penetrated more deeply into the world’s industrial nations, and competitive pressures have increased in industry after industry.