Lecture 4: Global Integration Flashcards
(25 cards)
Economic globalisation
A historical process, the result of human innovation and technological progress. It refers to the increasing integration of economies around the world, particularly through the movement of goods, services, and capital across borders.
Four views on the big picture of globalisation
Nothing new is happening, technological determinism (strong and weak form) and political construct
Technological determinism (strong form)
Since the onset of the information technology revolution, there is essentially nothing governments can do to stop global financial flows.
Technological determinism (weak form)
Most persuasive for multinationalisation of production, but not for international financial integration
Political construct / ideological change
The trend towards market integration mostly comes from political power then via the diffusion of economic ideas
Positive effects of globalisation (6)
Growth of free trade, infusion of foreign capital and technology to poor countries, economic development, information between countries, increasing competition and reduction of prices.
Negative effects of globalisation (4)
Trade barriers still remain, increase income disparities, tax havens for MNEs, MNEs are accused of social injustice (unfair working conditions and lack of environment concern)
Semi-globalisation
Incomplete cross-border integration. Covers the range of situations in which neither the barriers nor the links among markets in different countries can be neglected.
Ghemawat (2003) reviews the empirical evidence on cross-border integration of markets by using different dimensions
- Product market integration: trade flows (intensity), FDI (shift from raw materials to services) and price integration (prices equalise across countries)
- Factor market integration: Capital (price-based measures of capital market integration), labour (cross-border convergence of wages) and knowledge (would imply that knowledge is available everywhere)
There are many specific ways in which firms try to add value through cross-border operations under conditions of incomplete integration, but they can be grouped in terms of two fundamental economic functions that organisations try to fulfill by crossing borders:
- aggregation (vertical MNE) = involves exploiting similarities across countries, while somehow sidestepping the differences among them, so as to tap increasing returns to sale.
- arbitrage (horizontal MNE) = involves exploiting differences among countries by taking advantage of variations in absolute costs or willingness-to-pay (e.g. outsourcing to countries with low wages).
Global MNE
> 20% sales in all three regions, <50% in one
Bi-Regional MNE
> 20% of sales in 2 regions, < 50% in one
Host region oriented MNE
> 50% of sales in triad other than the home region
Home region oriented MNE
> 50% of sales in their home region in a triad
Global integration
MNEs can freely leverage same assets on a global scale
National isolation
No synergies across markets
Semi-globalisation
MNEs can treat countries, regions, and the world as complementary
The Triad Power Concept
The triad is home to most innovations in the industry and is the geographic economic space including the three largest markets in the world for most new products: North-America, Europe and Japan (Asia)
Triad Power
A company that has equal penetration and exploitation capabilities, and no blind spots, in each of the triad regions
MNEs have difficulties with getting a balanced geographical dispersion of sales. There are five underlying reasons for this:
- Sales are unevenly distributed
- Lack of global market success
- Observed lack of market performance
- No different competitive strategies
- inappropriate governance structure
The internalisation model of foreign expansion suggests that firms will establish foreign affiliates in the case of strong
Ownership, location, and internalisation advantages.
The internationalisation model argues that firms will
Incrementally build foreign operations, starting with low resource commitments in culturally proximate countries, and then expanding these commitments and geographical scope
Porter has suggested that international competitiveness at the level of specific industries depends critically on a favourable configuration of home country diamond conditions
- Factor conditions
- Demand conditions
- Related and supporting industries
- Strategy, structure and rivalry
At the downstream and, MNEs attempt to add value mainly by
Aggregation theory - add value mainly by capitalising similarities across markets
