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 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 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

Geographical Growth of a Multinational Corporation Center Nation Other Nation Tariff Basic Enterprise Penetration of a National Market Penetration of Foreign Markets Multinational Corporation Factory Distribution center Representative

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-in- time (JIT)) and new systems of distribution such as third party logistics (3PL)

Moving storage units Delivery units for parts Delivery units for finished goods Warehouse Old warehouse before Just-in-Time FACTORY Assembly and warehousing place Production Unit Just-in-Time and its Logistic Moving storage units Assembly 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 Sales Stage 1Stage 2 Stage 3 Monopoly Competition Research and development Maturity Decline First competitorsMass production Innovating firm Competitors Growth Stage 4 PromotionIdea Decline of production

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 device

London New York Los Angeles Singapore Hong Kong Tokyo Telecommunications Space Time Hinterland Stock Market Opening Period Global Financial Centers

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 Mexicobut 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