Overview of The global economy

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
nations are forced to compete


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 scaleconstantly 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
Production
• These five factors are affecting production
patterns:
• 1. Trans-national or multi-national
corporations (MNCs)-firms that operate in
many nations
• 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


2

Basic Enterprise

Ta
r

if f

1
Nation
Center

er
h
Ot

N

io
at

n

Factory
Distribution center

Penetration of a National Market

Geographical Growth of a Multinational
Corporation

Multinational Corporation

Penetration of Foreign Markets

Representative

3

4


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
interchange (EDI)
• Advanced inventory management such (just-intime (JIT)) and new systems of distribution such
as third party logistics (3PL)


Just-in-Time and its Logistic
De live ry units fo r
parts

Pro duc tio n Unit

De live ry units fo r
finis he d g o o ds

ar
W
o
eh
e
us

Old warehouse before
Just-in-Time

FACTORY
As s e mbly Line
Mo ving s to rag e
units

As s e mbly and ware ho us ing
plac e

Mo ving s to rag e
units


% 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
Competition

Monopoly
rs
it to
pe
m
Co

Sales

Inno
vati
ng

Idea

Promotion

Research and
development
Stage 1

firm

First competitors

Mass production

Decline of
production

Growth

Maturity

Decline

Stage 2

Stage 3

Stage 4


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


Hinterland

Global Financial Centers
Telecommunications

Space
Time

London

Los Angeles

Tokyo

New York

Hong Kong
Singapore

Stock Market Opening Period


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
production
• Two aspects important: coordination and
regulation and geographical configuration
• Production chains may be very localized
but increasingly are global in scale to take
advantage of international division of labor


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
notice


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