Firms in the Global Market Place

Module 1
The Internationalization of Firms:
What Makes Firms Go Global?
•
Recent Trends: Globalization &
International Linkages
•
Characteristics of Global Firms
•
Outcomes of Global Firms
Module 2
International Strategies: How Do
Firms Go Global?
•
Outsourcing, Offshoring &
Transaction Costs
•
International Production, Global
Sourcing & Transaction Costs
• Offshoring, Employment & Inequality
• Deindustrialization, Offshoring & Firm
Reorganization
• Product Portfolio, Quality & Globalization
• Trade Reform & Gains in Firm Efficiency
• The Rise & Future of China
• Impacts of China’s Export on Global
Economy
• Decoupling: US-China Trade War, Brexit
Module 3
Globalization and Firms Organization

No Textbook
• Globalization is a very recent phenomenon.
• To study a recent phenomenon, you need to use recent and updated materials.
• Nearly all the materials used for this course has been published after 2000.
– 50% of the materials has been published after 2010.
• Instead of a course textbook, you will have a collection of materials coming from various sources.
• Materials are easy to grasp and will reflect the economic and business contents of the various topics we will cover in the course.
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Course Materials
•
Compulsory readings:
–
General-interest articles written by academics specialists
–
Extracted from reports published by international organizations (e.g. OECD, WTO,
World Bank…)
–
Extracted from books
•
Further readings and applications (optional):
–
Academic papers behind the general-interest articles
–
Deepen your knowledge on a given topic
–
Potential BA thesis materials
–
Articles from the business press, practitioner websites…
•
Group business case study (compulsory):
–
For some of the topics, we will have a small group business case study.
–
Each group consists of 4 to 5 students.
–
Aim: apply what we learn on a concrete business case or example.
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Group Business Case Study
• Group business case study is an important part of this course.
– Opportunity to practice exam questions (not the exact content, but the format).
• Frequency: We will have a case study approximately every two weeks.
• Before the class:
– Read the case, the related materials, and the case questions.
– Each group meets and prepares a set of slides (5 mins) to answer the questions.
– Also, they must raise a question for class discussion.
• During the class:
– Some groups are randomly selected to present answers, using prepared slides.
– The teacher and students may ask questions and discuss.
– Discussions are highly encouraged.
• After the class: Send me the slides and I will share them.
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Form Your Group!
• Each group consists of 4 to 5 students.
• Form your group with other students today and stick together for the semester.
• (
!!Important
) By end of next Tuesday, each group please sends me the following:
– Names, genders, nationality, and emails of group members
– Bachelor program at AU-BSS (or exchange) of group members
– Send to jmlchan@econ.au.dk
• If you are not able to find a group, send me an email.
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Module 1
The Internationalization of Firms What
Makes Firms Go Global?

Topic 1
Recent Trends: Globalization and
International Linkages

Outline
• Internationalization: facts
• Major recent changes
• Definitions
• Case: Ancient trade
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Internationalization/Globalization
• Globalization characterized by increasing trade, capital flows, labor movement
• International business is not a new phenomenon.
• But the volume of international trade has increased dramatically over the last
30 years.
• Today, every nation and an increasing number of companies buy and sell goods in the international marketplace
• A number of developments around the world have helped fueled this activity.
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Internationalization/Globalization
• Two ways to measure internationalization and international trade:
• Trade intensity: exports and imports of goods and services
– Exports as a share of GDP
– Sum of exports and imports as a share of GDP
– Measure of openness (to trade)
• Foreign direct investment (FDI)
– Investment in property, plant, or equipment in another country
– FDI inflows – how much is invested in a given country
– FDI outflows – how much is invested by a given country worldwide
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Trade Intensity
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Trade Intensity
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Leading Traders
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Source: International Trade Statistics 2014,
WTO
DENMARK: exporter #38 (106 billion $) importer #35 (92 billions $)

International Economic Power
• Shifting landscape due to:
– Economic integration and rapid growth of emerging markets
– Economic potential of emerging markets
• BRICS countries (Brazil, Russia, India, China, South Africa) could be among the most dominant economies by 2050.
• N-11 (the next wave of emerging markets): Bangladesh, Egypt, Indonesia,
Iran, Mexico, Nigeria, Pakistan, Philippines, Turkey, South Korea, and Vietnam.
• African countries may follow.
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Foreign Direct Investment Inflow, by Region
22

Foreign Direct Investment Outflow, by
Region
23

Size of Foreign Direct Investment
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Recent Trends: Trade
• International Trade
– Huge increase in trade intensity, especially from “new” countries.
– In 2009 global exports declined, but increased again in 2011.
– World exports of manufactured goods increased from $8 trillion in 2006 to $11 trillion in 2016.
– World exports of services increased from $2.9 trillion in 2006 to $4.8 trillion.
• Covid-19 Pandemic:
– World merchandise trade recorded a decline of 7.4% in 2020 during the COVID-19.
– This was the biggest annual decline since 2009, when trade fell by 22%.
– The decline in global services trade value was much stronger, with a contraction of
20% in 2020 compared with 2019.
– Among services, travel was most severely affected, shedding an immense 63% in
2020 and strongly upsetting tourism-oriented economies.
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Recent Trends: Trade (con.)
• Covid-19 Pandemic:
– Exports of business, intellectual property, financial and insurance services showed more resilience, declining by 3%.
– Meanwhile, trade in telecommunications, computer and information services continued growing throughout the pandemic, except in Africa.
– Maritime shipping is central for goods trade. Illustratively, more than 85% of EU imports from China including iron and steel products, furniture and bedding, toys games and sports equipment, travel by sea.
– Global container shipping, which is at the heart of global supply chains, continued to recover in both late 2020 and in 2021.
– Nevertheless, both bulk freight rates and container freight rates have been rising
… Record high freight rates contributed to record revenues and earnings for shipping companies.
–
https://www.oecd.org/coronavirus/policy-responses/international-trade-during-th e-covid-19-pandemic-big-shifts-and-uncertainty-d1131663/
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27

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Recent Trends: FDI
•
Foreign direct investment (FDI)
–
Growing at healthy rate.
–
Outpacing domestic growth in most countries.
–
Declined in 2009 due to the global recession.
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By 2015, FDI reached $1.8 trillion, the highest since the global economic and financial crisis of 2008-2009.
•
According to UNCTAD’s World Investment Report 2021:
–
Global foreign direct investment (FDI) flows fell by 35% in 2020, reaching $1 trillion, from $1.5 trillion in 2019.
–
This is the lowest level since 2005 and almost 20% lower than the 2009 trough after the global financial crisis.
–
The lockdowns around the world in response to the COVID-19 pandemic slowed down existing investment projects, and the prospects of a recession led multinational enterprises (MNEs) to re-assess new projects.
–
The fall in FDI was significantly sharper than the fall in gross domestic product (GDP) and trade.
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Outline
• Internationalization: facts
• Major recent changes
• Definitions
• Case: Ancient trade
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Recent Major Developments
• Over the last 30 years, three major developments in the world economy have shaped the participation of firms in international trade:
• Information and communication technology (ICT) revolution
• Increased trade liberalization and reduction in transportation costs
• Political developments expanding the reach of globalization
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ICT Revolution
• Processing power and memory capacity of computers have doubled approximately every two years (Moore’s law).
• Cost of transmitting information over an optical network has decreased by half roughly every nine months (Butter’s law).
• Number of internet users has increased by a factor 100, growing from 20 million users in 1994 to more than 4,5 billion users in 2019.
32 1983 – Dynatac 8000X
1986 – Sharp PC-4501

Phones and Internet
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Increased Trade Liberalization
• Global and regional integration
• Global Agreements
– General Agreement on Tariffs and Trade (GATT)
– World Trade Organization (WTO)
• China’s accession to the WTO (2001)
• Regional Agreements
– North American Free Trade Agreement (NAFTA), 1994
– USMCA agreement, effective July 1, 2020
– U.S.-Central American Free Trade Agreement (CAFTA, CAFTA-DR)
– European Union (EU), ongoing
– Association of Southeast Asian Nations (ASEAN), ongoing
– Trans-Pacific Partnership (TPP), extinct, now CPTPP (ratified Dec 2018)
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Increased Trade Liberalization
• Industry-targeted agreements
– Expiration of the Multi-fiber Agreement in 2005: lifting of quotas on textile and apparel products exported by developing economies to developed economies.
• The gradual dismantling of man-made barriers during the 1990s and 2000s has lead to increased trade liberalization.
• Recent trends in trade de-liberalization:
– US-China trade war
– Brexit
– Changes in existing trade agreements
– COVID-19 pandemic: more or less trade
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Removal of Man-made Trade Barriers
36

Removal of Man-made Trade Barriers
(cont’d)
37

Deeper Global Trade Integration
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Decrease in Trade Costs
• Technological developments since 1994 have also reduced quality- (or time-) adjusted costs of transporting goods across countries
• Investments in infrastructure in LDCs have also contributed to the spread of globalization.
• General decrease in trade costs
– Containerization
– Infrastructure
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Transportation and Communication Costs
40

Hummels (2007, JEP)
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Political Developments
• The end of Cold War brought about a remarkable increase in the share of world population actively participating in the process of globalization.
• Ensuing ideological shift to the right in large parts of the globe.
• Mainstream capitalist policies became more friendly towards globalization…
until recently.
• e.g., trade war between US (started by Trump) and China
• We’ll keep an eye to see what will happen in the following years.
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Developments in Intra-Industry Trade
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Developments in Intra-Firm Trade
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Outline
• Internationalization: facts
• Major recent changes
• Definitions
• Case: Ancient trade
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A Few Useful Definitions
• Those recent major developments have given rise to an increase in globalization
• Globalization
– Process of social, political, economic, cultural, and technological integration among countries around the world
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International Firm
• A firm whose any of the following dimensions is international
– Production of goods or services
– Inputs, materials, or services used
– Sales and distribution of final goods and services
– Ownership
– Location of (any) activities
• A global firm is usually a very successful international firm.
• A firm having operations in more than one country, international sales, and a nationality mix among managers and owners
• Also known as Transnational company or Multinational enterprise (MNE)
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Multinational Company (MNC)

The World’s Top Nonfinancial MNCs
• Ranked by Foreign Assets, 2015 48

Offshoring & Outsourcing
• Offshoring: The process by which companies undertake some activities at offshore locations instead of their countries of origin
– Defined by location of an activity
• Outsourcing: the subcontracting of contracting out of activities to external organizations that had previously been performed by the firm
– Defined by delegation of an activity to suppliers (ownership)
• An offshoring firm can be
– An outsourcing firm if it delegates some activities/tasks to other domestic/foreign firms.
– A vertically-integrated firm if it performs all its offshored activities in its foreign subsidiaries.
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Conclusions
• Increased trade intensity and FDI over the last 30 years
• Driven by three major developments
– ICT revolution
– Decrease in barriers to trade, decrease in transportation costs
– Political changes
• Recently, shift towards anti-globalization
• Definitions
– Trade intensity
– Globalization, international firm, multinational firm
– Outsourcing & offshoring
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Case Study – Ancient Trade
1. What are the similarities between ancient trade and today’s trade?
– Can you identify ancient developments or policies that helped foster ancient trade?
– Do those ancient developments or policies resemble recent or current trade policies?
2. According to the text, what are the positive impacts of trade?
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