Globalization & Economic Geography

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1 Globalization & Economic Geography Ramsin Yakob, PhD IEI/Linköpings Universitet What is Globalization or the Globalization process? What is International Business or the Internationalization process? 2 Linköpings universitet 1

2 Globalization vs International Business Globalization: Globalisation is essentially a process driven by economic forces. Its immediate causes are: the spatial reorganisation of production, international trade and the integration of financial markets. International Business: Is concerned with the manager's challenge to coordinate and organize resources despite large variations in their national origins within the boundaries of a single firm that span their economic activity across borders. 3 Is distance dead or does geography still matter? 4 Linköpings universitet 2

3 Reinforcing pattern or new geographical map -Is the world spiky or flat? 5 The business challenges: How do we make sense of our environment on a macro-, meso-, and/or micro scale? 6 Linköpings universitet 3

4 The Macro scale, a global triad: concentration of world GDP and exports the world economy as organized around a tripolar, macro regional structure Do we see the emergence/ extension of new important players? The global map of service production and growth The global map of manufacturing production and growth The global map of agriculture services and growth Linköpings universitet 4

5 The Meso scale Transborder clusters and corridors Economic activity that crosses, or sometimes aligns with, national boundaries What other important areas do we know off? United states and Mexico: Border activity Linköpings universitet 5

6 Emerging urban corridors in East Asia Mega-Regions of Europe 12 Linköpings universitet 6

7 Mega-Regions of North America 13 Mega-Regions of Asia 14 Linköpings universitet 7

8 The Micro scale Localized Communities - We live in cities, towns, and villages. Economic activity is ultimately in specific places Location still matters! Comparative disadvantage can be eroded through global sourcing. The enduring competitive advantages in a global economy lies increasingly in local things knowledge, relationships, motivation that distant rivals cannot match Linköpings universitet 8

9 Three levels of markets Capital Market INTERNATIONAL/GLOBAL Conflict of national policies (locational policies) Capital Flows Goods & Services Markets REGIONAL REGIONAL REGIONAL Integration, harmonization and protection, regional policies Labour Services Labour Markets National National National National National National National employment, Training and fiscal policies 17 What characterizes the world economy of today? 1. The emergence of intellectual capital as the key wealth creating asset 2. Increasing globalization of economic activity (transport, communication, trade barriers) 3. Alliance capitalism 4. Growth in developing and transition economies driven by domestic demand and high commodity prices 5. Slow expansion of global trade (following financial crisis) 6. Rapid industrialization with growing inequality in Asia 7. Income distribution Linköpings universitet 9

10 Changing Pattern of Economic activity Inward FDI, Million US $ Changing Pattern of Economic activity Outward FDI, Million US $ Linköpings universitet 10

11 Multinational Corporations (MNC): The driving engines of internationalization and Globalization Whydo MNCs Exist? The EclecticParadigm - a framework for explaining the existence of MNC s Ownership Resources and capabilitites give advantage Localization for comparative advantage Internalization carrying out certain activities internally Why do firms invest abroad? 22 Linköpings universitet 11

12 TYPE OF FDI/MOTIVE Variables influencing the location of value added activities (1970s ) Variables influencing the location of value added activities (2000s - ) ResourceSeeking Availability, price and quality of natural resources. Infrastructure to enable resources to be exploited, and products arising from them to be exported. Government restrictions on FDI and/or capital. Investment incentives (tax holidays). As in the 1970s. Local partners for upgrading quality of resources and processing and transportation of output. Availability of local partners to jointly promote knowledge and/or capital intensive resource exploitation. Example: A German company opening a plant I Slovakia to produce and re-export to Germany. Market Seeking Mainly domestic and occasionally adjacent regional markets, Real wage costs, material costs, transport costs, non-tariff trade barriers Large and growing markets. Availability and price of skilled professional labour. Presence and competitiveness of related firms (e.g. suppliers). Quality of national and local infrastructure. Macroeconomic and macro-organizational policies of host governments. Close presence to users in knowledge-intensive sectors. Example: Automotive MNCs have invested heavily in China EfficiencySeeking Mainly production cost related (labour, materials, machinery). To engage in trade in intermediate and final products. Export processing zones. Investment incentives (tax breaks, grants, subsidized land). As in the 1970s but more emphasis on wage and material costs. Increased role of governments in removing economic obstacles and facilitating upgrading of HR (training and education). Availability of specialized spatial clusters (industrial parks). Example: Global sourcing Strategic Asset Seeking Availability of knowledge-related assets and markets necessary to protect or enhance ownership specific advantages. Institutional variables influencing ease or difficulty of which such assets can be acquired by foreign firms. As in the 1970s, but growing importance due to geographical dispersion of knowledge-based assets. Opportunities offered for exchange of localized tacit knowledge, ideas and interactive learning. Access to different cultures, institutions and systems; and different consumer demands and preferences. Example: Acquiring key local firms, R&D, Human Capital, Market knowledge etc.. Changing Motives for Foreign Direct Investment (FDI) The growth of strategic asset-seeking FDI Less concerned with exploiting existing and owned specific advantages More concerned with protecting or augmenting existing advantages The changing locational preference A deepening of value chain activities and propensity to engage in higher order activities Downstream activities ( inputs ) are becoming more knowledge intensive Linköpings universitet 12

13 Global Value Chains Framework Key Variable Complexity of Transactions Ability to Codify Transactions Capability in the Supply-Base Degree of explicit coordination and power asymmetry Governance Type Market Modular LOW HIGH HIGH HIGH HIGH HIGH LOW Relational HIGH LOW HIGH Captive HIGH HIGH LOW Hierarchy HIGH LOW LOW HIGH Firm Value Chain (business unit level) Single Company: Linköpings universitet 13

14 Global Value Chains Single Company: Position in the Value Chain (industry level) Raw Mtrls Base Manufac Upstream Service Compon. Supplier Orig. Equip. Manuf Downstre Service Final Consump. Goods B A, C A, B, C C C D, H, J, N G International Standard Industrial Classification (UN) 27 Single Company: Position in the Value Chain (industry level) Factor Intensity High Medium Low Resource Energy Labour Capital Tech. Knowledge Infrastruc 28 Linköpings universitet 14

15 Single Company: Position in the Value Chain (industry level) Factor Intensity High Medium Low Resource Energy Labour Capital Tech. Knowledge Infrastruc 29 Single Company: Position in the Value Chain (industry level) Factor Intensity High Medium Low Resource Energy Labour Capital Tech. Knowledge Infrastruc Linköpings universitet 15

16 Choice of Parameters: Foreign Market Sectoral Regional Individual Choice of Parameters: Foreign Market Factor Market Linköpings universitet 16

17 Choice of Parameters: Foreign Market Supply Unemployment Choice of Parameters: Foreign Market Public Dept Linköpings universitet 17

18 Choice of Parameters: Foreign Market Libor (currency?) Euroibor National Choice of Parameters: Foreign Market Trade Current Account Payment Linköpings universitet 18

19 Choice of Parameters: Foreign Market Trade Pattern FDI Pattern Macroeconomic Concerns: Foreign Market Crucial Importance Highly Relevant Relevant Partly Relevant Irrelevant Econ. growth Inflation Labour Budget balance Interest rate External balance Exchange rate Linköpings universitet 19

20 Macroeconomic Concerns: Foreign Market Crucial Importance Highly Relevant Relevant Partly Relevant Irrelevant Econ. growth Inflation Labour Budget balance Interest rate External balance Exchange rate Macroeconomic Concerns: Foreign Market Crucial Importance Highly Relevant Relevant Partly Relevant Irrelevant Econ. growth Inflation Labour Budget balance Interest rate External balance Exchange rate Linköpings universitet 20

21 Geographical Position in the production system Foreign Supply Domestic Domestic Market Foreign Geographical Position in the production system Foreign Supply Domestic Domestic Market Foreign Linköpings universitet 21

22 Geographical Position in the production system Foreign Supply Domestic Domestic Market Foreign Geographical Position in the production system Foreign Supply Domestic Domestic Market Foreign Linköpings universitet 22

23 The Global Challenge: Integrating environmental factors with organizational factors and strategy Environmental Factor The macro-environment e.g. Political (and legal) forces, Economic forces, Socio-cultural forces, and Technological forces. These are known as PEST factors The micro-environment e.g. our external customers, agents and distributors, suppliers, our competitors, etc. Organisational Factors and Strategy The internal environment e.g. staff (or internal customers), office technology, wages and finance, etc. Also: Competencies, capabilities and resources Expanding markets Location Economies Experience Effects Leveraging Subsidiary Skills Linköpings universitet 23

24 Linköpings universitet 24

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