Overview of The global economy

Global Economy• Common to buy clothing anywhere in US which has a tag labeled, ‘Made in Malaysia, China or Sri Lanka’ • Simple observation reminds us that our consumption of goods has a

The Global Economy

Global Economy

• Common to buy clothing anywhere in US which has a tag labeled, ‘Made in Malaysia, China or Sri Lanka’

• Simple observation reminds us that our

consumption of goods has a strong international character

• Increasingly true to speak not only of national

economies but a larger, highly inter-connected and interdependent- GLOBAL ECONOMY

• Before discussing basic mechanisms of

industrialization and economic change within

Third World, important to look at the broader

global industrial environment within which these

Setting the Stage: Origins of the Global

Economy

• Since 1970s world economy hit by

turbulent forces

• Unemployment in western countries

• Traditional industries (iron and steel) have declined

• LDCs bearing huge financial debts which threaten drive for development

• Trading tensions have emerged between industrial countries and the newly

industrializing countries

Causes of These Conditions?

• Some argue that continuing OPEC

escalation of oil prices through limited

production is root cause

• Had some effect but too simple an answer

• More profound changes in world economic structure were underway before this

• Increasingly growing consensus that world economy has become more volatile,

complex and tightly connected

• Countries affected by what is happening abroad and at larger geographical scale

Internationalization of Trade and Labor

• As with Japanese autos, American

computers and Taiwanese calculators

there is an emergence of a “new

international division of labor”

• Basically a change in geographical pattern

of specialization at the global

scale-constantly changing and very dynamic

• Example: movement of textile and shoe

production from Indonesia to China

International Division of Labor

• Division of labor has taken on spatial

dimensions- some areas come to specialize in certain types of economic activity

• At broad scale : industrialized countries - manufactured goods while non-industrialized countries - raw materials

• However this simple pattern no longer exists

• Now much more complex structure involving fragmentation of many processes and their

geographical relocation on a global scale

Forces Surrounding Global System of

• Increasingly these firms have local production

points and suppliers that operate across national boundaries providing and securing labor, capital and other resources from a variety of places and which have become very powerful and important influences in the global economy

Sequential Model of TNC Development

• Stage I- Serve domestic market only

• Stage II- Export to overseas markets through

independent channels (sales agents)

• Stage III- Establish sales outlets in overseas

markets by acquiring local firm and/or setting up new facility

• Stage IV- Establish production facility overseas

by acquiring local firm and/or setting up new

facility

Geographical Growth of a Multinational

Corporation

Center Nation

Forces Surrounding Global System of

Production

• 2 National governments- through their

industrial, trade and foreign policies especially liberalization policies

• Liberalization refers to the way in which policies facilitate transactions (trade and sales) of a

variety of products and services

• Deregulation refers to the easing of taxation,

entry and pricing of products or services dictated

by government policy

• Privatization refers to the ownership of former

public sector operations and firms by private

corporations and enterprises

Forces Surrounding Global System of

Production

• 3 Enabling Technologies- transport,

communications, production and organizational improvements

• Explosion of enhanced transport and

communication services such as air cargo,

integrators offering definite time delivery (FedEx and UPS), electronic mail and electronic data

Produc tio n Unit

Just-in-Time and its Logistic

Mo ving s to rag e

units

As s e mbly Line

% of Products Shipped for “Just-in-Time”

Manufacturing

Forces Surrounding Global System of

Production

• 4 Shifts in Market Conditions and Demand

• Economic cycles affect markets and production, e.g the Asian financial crisis

• Dramatic shifts in demand affect over time

influence type of good being produced and

production schedules

• Application of new technology can mean product obsolescence

• These changes can be described in part through

product life cycle

Product Life Cycle

• Essence of PLC is that growth in sales of product follows systematic path, from

initial introduction to market through

development, growth, maturity, decline

and obsolescence

Product Life Cycle

First competitors Mass production

Co mp eti tor s

Cellular Phones of Nokia

• Evolution of basic Cellular phones are an example

of a product which is especially applicable to the notion of the product life cycle

• phone to color enhancement to camera and email device

New York Los Angeles

Singapore

Hong Kong Tokyo

Global Production Chains and Networks

• Production Chain: Materials >

Procurement > Transformation >

Marketing and Sales >Distribution >

Service

• Definition: transactionally linked sequence

of functions where each stage adds value

to the process of goods and services

KIA Auto Parts Flow

• Assembled in S Korea KIA Sorrento clear example of global supply chain

• Uses 30K parts from all around world

• Parts shipped from places as diverse as Wales and Mexico—but very risky

• War in Iraq and piracy in Malacca Straits

• Demonstrate surprising adaptability due to advance planning, multiple sourcing of

parts and ability to shift routes on short

KIA Auto Parts Flow

• Communicates regularly with suppliers-at least once a week

• Order several months in advance

• If necessary use air freight instead of sea freight

• Greater demand forced KIA to air freight airbags from Swedish company which

makes them in the U.S.

• Greater expense of trans-Pacific flight

better than slowing down production line