WEB: CH. 1, Salvatore’s Introduction to International Economics, 2th Ed.

1. Globalization in Tastes, Production, and Labor Markets in the World Economy

During the past decade we have witnessed an increasingly rapid tendency toward globalization in the world economy. Rapid globalization has occurred in national tastes, in international trade and investments, and in labor markets, and this has sharply increased international competitiveness among industrial countries and between industrial countries and emerging Asian economies.

Convergence of Tastes The tremendous improvement in telecommunications and transportation have lead to a strong cross-fertilization of cultures and convergence of tastes around the world. Tastes in the United States affect tastes around the world and tastes abroad strongly influence tastes in the United States. Coca-cola has 40 percent of the U.S. market and an incredible 33 percent of the world's soft drink market, and today you can buy a McDonald's hamburger in most major cities of the world. As tastes become global, firms are responding more and more with truly global products. For example, in 1990, Gillette introduced its new Sensor Razor at the same time in most nations of the world and used the same advertisement (except for language) in 19 countries in Europe and North-America. By 1999 (when Gillette introduced its Match3 Razor), over 200 million Sensor razors and 4 billion cartridges had been sold. In 1994, Ford spent more than $6 billion to create its "global car" conceived and produced in the United States and Europe and sold under the name of Ford Contour and Mercury Mystique in the United States and Mondeo in the rest of the world. The list of global products is likely to grow rapidly in the future and we are likely to move closer and closer to a truly global supermarket.

In his 1983 article "The Globalization of Markets" in the Harvard Business Review, Theodore Levitt asserted that consumers from New York to Frankfurt to Tokyo want similar products and that success for producers in the future would require more and more standardized products and pricing around the world. In fact, in country after country, we are seeing the emergence of a middleclass consumer lifestyle based on a

taste for comfort, convenience, and speed. In the food business, this means packaged, fasttoprepare, and readytoeat products. Market researchers have discovered that similarities in living styles among middleclass people all over the world are much greater than we once thought and are growing with rising incomes and educational levels. Many small national differences in taste do, of course, remain; for example, Nestle' markets more than 200 blends of Nescafe' to cater to differences in tastes in different markets. But the converging trend in tastes around the world is unmistakable and is likely to lead to more and more global products. This is true not only for foods and inexpensive consumer products but also for automobiles, portable computers, phones, and many other durable products.

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Globalization in Production Globalization has also occurred in the production of goods and services with the rapid rise of global corporations. These are companies that are run by an international team of managers, have research and production facilities in many countries, use parts and components from the cheapest source around the world, and sell their products, finance their operation, and are owned by stockholders throughout the world. In fact, more and more corporations operate today on the belief that their very survival requires that they become one of a handful of global corporations in their sector. This is true in automobiles, steel, aircraft, computers, telecommunications, consumer electronics, chemicals, drugs, and many other products. Nestle', the largest Swiss Company and the world's second largest food company has production facilities in 59 countries, and America's Gillette in 22. Ford has component factories in 26 different industrial sites around the world, assembly plants in six countries, and employs more people abroad (201,000) than in the United States (188,000).

One important form that globalization in production often takes in today's corporation is in foreign "sourcing" of inputs. There is practically no major product today that does not have some foreign inputs. Foreign sourcing is often not a matter of choice for corporations to earn higher profits, but simply a requirement for them to remain competitive. Firms that do not look abroad for cheaper inputs face loss of competitiveness in world markets and even in the domestic market. This is the reason that $625 of the $860 total cost of producing an IBM PC was incurred for parts and components manufactured by IBM outside the United States or purchased from foreign producers during the mid1980s. It is also the reason that 13 of the 33 major parts and components going into the production of the Boeing 777 were made outside the United States. Such lowcost offshore purchase of inputs is likely to continue to expand rapidly in the future and is being fostered by joint ventures, licensing arrangements, and other nonequity collaborative arrangements. Indeed, this represents one of the most dynamic aspects of the global business environment of today.

Foreign sourcing can be regarded as manufacturing's new international economies of scale in today's global economy. Just as companies were forced to rationalize operations within each country in the 1980s, they now face the challenge of integrating their operations for their entire system of manufacturing around the world to take advantage of the new international economies of scale. What is important is for the firm to focus on those components that are indispensable to the company's competitive position over subsequent product generations and "outsource" other components for which outside suppliers have a distinctive production advantage. Indeed, globalization in production has proceeded so far that it is now difficult to determine the nationality of many products. For example, should a Honda Accord produced in Ohio be considered American? What about a Chrysler minivan produced in Canada (especially now that Chrysler has been acquired by Mercedes-Benz)? Is a Kentucky Toyota or Mazda that uses nearly 50 percent of imported Japanese parts American? It is clearly becoming more and more difficult to define what is American and

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opinions differ widely. One could legitimately even ask if this question is relevant in a world growing more and more interdependent and globalized. Today, the ideal corporation is strongly decentralized to allow local units to develop products that fit into local cultures, and yet at its very core is very centralized to coordinate activities around the globe.

Globalization in Labor Markets Globalization also strongly affects labor markets around the world. Work which was previously done in the United States and other industrial countries is now often done much more cheaply in developing countries. And this is the case not only for low-skilled assembly-line jobs but also for job requiring high computer and engineering skills. Most Americans have only now come to fully realized that there is a truly competitive labor force in the world today willing and able to do their job at a much lower cost. If anything, this trend is likely to accelerate in the future.

Even service industries are not immune to global job competition. For example, more than 3,500 workers on the island of Jamaica, connected to the United States by satellite dishes, make airline reservations, process tickets, answer calls to toll-free numbers, and do data entry for U.S. airlines at a much lower cot than could be done in the United States. Nor are highly skilled and professional people spared from global competition. A few years ago, Texas Instruments set up an impressive software programming operation in Bangalore, a city of four million people in southern India. Other American multinationals soon followed. Motorola, IBM, AT&T and many other high-tech firms are now doing even a great deal of basic research abroad. American workers are beginning to raise strong objections to the transfer of skilled jobs abroad, as the fall 1995 strike against Boeing demonstrated. Of course, many European and Japanese firms are setting up production and research facilities in the United States and employing many American professionals. In the future, more and more work will simply be done in places best equipped to do the job most economically. Try to restrict the flow of work abroad to protect jobs in the United States, and the company risks loosing international competitiveness or end up moving all of its operations abroad.

Source: D. Salvatore, “Globalization and International Competitiveness,” in J. H. Denning, ed., Globalization, Trade and Foreign Direct Investment (New York: Pergamon Press, 1998) pp. 3-18; and

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