Hello and welcome to this module on global strategy. You might recall that we described vertical integration and horizontal integration or diversification as the first two dimensions of corporate strategy, with geographic or Global strategy being the third dimension, which we had set aside earlier. We return to it now. In this module will begin with an introduction to the phenomenon of globalization and its drivers. We then turn our attention to a few key topics in global strategy beginning with foreign market entry strategies. We will then examine how location in a particular country can help companies have a competitive advantage using a framework called The Diamond Model. Finally we will look at key strategic choices available to multinational enterprises or MNEs. Sometimes also called multinational corporations or MNCs. This module also incorporates Professor Mahoney's expertise quite intensively in the lectures, which you might notice. We begin with a description of the phenomenon of globalization and the factors that have contributed to it. Quite simply, globalization is the process of closer integration and exchange between countries and peoples worldwide. Another way to see it is as a decrease in the effective distance between otherwise distant and distinct nation states. Of particular interest to us here is the economic dimension of globalization. Which includes international trade and investment flows, as well as the movement of labor across borders and the cross-border integration of companies into multinational firms. And we have in fact seen a remarkable increase in global trade and investment flows over the last several decades, particularly since the 1960s. A nice metric to appreciate these trends is trade as a share of global GDP, which has grown a lot from a level of about 22% of GDP to over 50%. However, it's also interesting to make a historical footnote here about the significant increases in global trade during the late 1800s and early 1900s. Which Thomas Friedman famously called globalization 1.0. This period of early globalization ended quite dramatically in the interwar years with a series of retaliatory trade wars, which may have been a significant contributing factor to World War II. In contrast with those times, however, the global economy is much more integrated today. Along with the increases in trade, there has also been a remarkable increase in investment across international boundaries. Foreign direct investment or investment in productive assets is an isometric of such investment flows. And total FDI has grown very rapidly since, say the 1970s by a couple of orders of magnitude. Again, this illustrates the extent to which economic globalization has occurred over the last 50 years or so. There are many forces responsible for the surge in economic globalization, but the major ones are listed here. First, there are technological improvements in communication and transportation in particular, which have made it much more efficient to conduct business worldwide. In shipping for example, the use of containers and the creation of multimodal logistics using containers has had a very big impact, along with a number of other efficiencies in building and operating large ships. As a result, the cost of sea freight in real terms has fallen by 80% since 1940. Similarly air transport costs, which are important for the travel of all kinds of professionals and business people, who are like lubrication that facilitates international business has fallen by nearly 90%. And most of all, the costs of telecommunications has really plummeted. I remember how a single 10-minute phone call to India would cost me a few dollars when I first arrived in the United States. And I can now have a video call anywhere in the world essentially for free. The Internet, email, social media, etc, have dramatically reduced the cost of conducting business globally today. Another factor that's had a big impact on globalization is the reduction in trade investment barriers. These reductions did not come about automatically, they had to be engineered through painstaking negotiations and treaties between countries. Some of these treaties have been bilateral or within regional groups of countries such as the European Union or the NAFTA region that includes the United States, Canada and Mexico. However, the biggest efforts were centered on the global treaty called GATT, the General Agreement on Trade and Tariffs, which went through multiple rounds and eventually ended in the creation of the World Trade Organization in 1994. There have also been a number of investment treaties that have followed a similar course. The effects of these treaties have been remarkable. Let's just take the US as an example. Although we think of the US as a pretty open economy, it has not always been so. And it wasn't until the 1970s or thereabouts that the tariffs in the United States really came down for imports. And tariffs were only the beginning of the story. There were a number of political barriers to trade worldwide that were systematically brought down by these multiple rounds of treaties and agreements. Interestingly, although developing countries were initially hesitant to sign on to such treaties, many of them have subsequently embraced more open trade and investment policies as a pathway to economic growth. You can see evidence for this in the growing share of exports for China and India shown here as a fraction of their GDP. In the case of China, this growth of exports has coincided with a significant trade surplus. But India has carried a trade deficit, meaning that imports have also gone up significantly. Regardless, these policy changes towards a more open economy appear to have had significant positive impact on the economies of many countries. But there now appears to be a backlash against such policies, particularly in developed countries. The effective US tariff rate, for example, was raised in a series of unilateral actions to levels that are higher than it has been for many decades. This recent political backlash against globalization is an important development to keep in mind as we think about the global strategies of companies. Companies themselves, particularly multinational enterprises and the foreign investments they make are another important driver of globalization that we have witnessed. Multinational enterprises or MNEs are quite simply companies that operate in two or more countries. And they may do many things internationally, including procurement of raw materials or components, actual production and/or sales and distribution of their products and services. As you can imagine most companies tend to operate locally or domestically. And in the US multinational enterprises are a very small fraction of firms. But they tend to be large and significant firms for the economy. For example MNEs employ 19% of all US workers and conduct nearly three-quarters of private R&D in the United States. Foreign direct investment or FDI is one of the significant activities conducted by multinationals. A useful way to clarify what FDI is, particularly to understand what we mean by direct investment, is to contrast it with foreign portfolio investment or FPI. Now, FPI is what you and I might typically think of as investment, buying stocks or bonds, or putting money in a fixed deposit or bank account. FDI is not that. FDI is investment in actual productive assets undertaken by companies. So for example a multinational when they build a production plant in a foreign country or spend money on an R&D center or a sales office or to acquire another company, these would be examples of FDI. And you can readily see how multinational companies can contribute towards globalization by undertaking operations that span multiple countries including investments in the form of FDI.
