ANALYZING GLOBAL TRENDS for Business and Society. Week 1. Globalization. Mauro F. Guillén

ANALYZING GLOBAL TRENDS for Business and Society Week 1 Globalization Mauro F. Guillén

Mini-Lecture 1.1 What s this class about? Manifestations of globalization. What s the global economy?

Welcome to Analyzing Global Trends! Global trends and their effects on: Consumer markets. Labor markets. Financial markets. Politics. Geopolitics. Natural resources. Global relationships.

I m Mauro Guillén Professor at the Wharton School. Director of the Lauder Institute at the University of Pennsylvania. I am originally from Spain. I have a passion: analyzing global trends. I ve written 10 books and myriad articles on various aspects of globalization.

Trends Global trends affect regions, countries, industries, and even firms in heterogeneous ways. They are tornadoes, not tsunamis. Trends entail both challenges and opportunities. Uncertainty will be a key feature of the 21 st century: the new normal.

What s needed? New programs, new products? New business models? New decision models? New mindset?

Some Initial Discussion Questions As of today, do more people in the world live in cities or in the countryside? Are there more people suffering from hunger or from obesity? Are the largest consumer markets, in the U.S. and Europe, or in China and India? Is the number of failed states greater or smaller than the number of dictatorships?

Some answers More people live in cities than in the countryside since 2009. There are more people suffering from obesity than from hunger since about 2010. The largest consumer markets are in Europe and the U.S. today, but within 20 years they will be in India and China. There are more failed states than dictatorships since the late 1980s.

What you will learn Concepts and tools to analyze how the world is changing. The direction and intensity of trends in the global marketplace. The relevance of the main risks threatening businesses and societies around the world.

How to Take this Class 1. Take each week s opinion survey. I will post the results 24 hours after the deadline. 2. Watch the mini-lectures. 3. Try to answer the discussion questions. 4. Consult the powerpoint presentations. 5. Do the readings. 6. Answer the quiz or test at the end of each week. 7. Participate in discussion forums and social media.

Manifestations of Globalization Increased cross-border activity. Supra-national organizations and forums. Attempts at supra-national political organization. Spread of ideas and practices. Awareness.

What is the Global Economy? Increasing flows of labor, money, goods, services, and information. It is not just a discrete linking of nation-states. It s an economy with the capacity to work as a unit in real time on a planetary scale. * It is very different from the world economy of the 14 th, 16 th, and 19 th centuries. In its present form, it came into being during the 1980s. * Manuel Castells, The Rise of the Network Society. Cambridge, MA: Blackwell (1996), p. 92.

Why so Fascinating? Because it puts two kinds of liberalism on a collision course: Liberalism of the market, which is boundarytransgressing. The division of labor is limited by the extent of the market. Liberalism of citizenship, which seeks to establish and maintain boundaries. Relationship between an individual and a state, with associated individual rights and obligations.

Join the international anti-globalization movement.

Mini-Lecture 1.2 Can we measure globalization? Basic definitions and conventions. Making projections into the future.

Two Approaches to Measurement Aggregate indicators such as trade, investment, Internet use, tourism, etc. Networks: Data on dyadic relationships.

Aggregate Globalization Indicators Indicators: 1980 1985 1990 1995 2000 2005 2010 A. Economic: Exports + imports of goods & services, % world GDP 38.4 37.8 38.0 41.8 48.8 53.7 56.0 Developed countries, % GDP 39.5 39.1 38.0 40.9 48.1 52.0 55.9 Emerging & Developing countries, % GDP 32.8 31.2 38.1 46.4 52.5 62.0 56.7 Inward foreign direct investment stock, % world GDP 6.5 8.3 9.4 11.3 23.1 25.2 29.7 Developed countries, % GDP 4.9 6.5 8.9 10.8 22.7 25.3 30.7 Emerging & Developing countries, % GDP 11.8 14.7 13.6 16.4 40.1 50.2 60.3 Emerging & developing economies: % of global GDP, at purchasing power parities 31.7 32.7 32.7 33.0 34.2 38.5 45.2 % of global outward foreign direct investment stock 13.1 9.6 7.0 9.2 11.0 11.5 17.8 % of global foreign exchange reserves 32.9 37.1 51.9 66.6 B. Financial: Daily currency exchange turnover, % world GDP a 0.7 1.3 3.8 5.6 6.8 4.6 k 6.3 Cross-border banking external assets, % world GDP b 13.7 19.9 28.1 28.5 34.2 54.0 47.9 Cross-border bank loan & deposit stock, % world GDP b 13.9 19.9 34.3 33.1 37.6 39.1 34.9 C. Internet: Users, % world population: 0.1 0.8 6.7 16.0 30.2 Developed countries, % population 0.3 3.7 30.5 59.4 73.4 Emerging & Developing countries, % population 0.0 0.0 1.5 7.3 21.5 D. Demographic: Stock of international migrants, % world population 2.2 2.3 3.0 2.9 2.9 3.0 3.1 Refugee population, % world population 0.3 0.2 0.1 0.2 Worker s remittances, % of world GDP 0.41 0.39 0.42 0.36 0.43 0.63 0.75 m E. Political: Nation-states with membership in the United Nations 154 159 159 185 189 191 192 International organizations, number: Intergovernmental 337 i 378 300 j 243 244 253 Non-governmental 4265 i 4676 4621 j 6357 7412 8198 F. Social & Cultural International tourist arrivals, % world population 3.5 6.7 8.6 9.5 11.4 13.0 13.7 Books on the topic of globalization e 577 1107 2152 4853 10525 22405 38440

Notes: Data not available. a Data are for 1979, 1984, 1989, 1995, 1998 and 2004. b Data are for 1981, 1986, 1991, 1995, 2000, and 2006. d Excludes international calls using cellular phones or private networks. e Books with the subject or title keywords global or globalization, published in any language until each year, as searched on August 20, 2010. f 1991. g 2002. h 1998. i 1981. j 1989. k 2004. l 2007. m 2009. Sources: World Development Indicators; World Investment Report; Bank for International Settlements; United Nations; International Monetary Fund; International Telecommunication Union, Key Global Telecom Indicators; Yearbook of International Organizations; Bowker s Global Books in Print. For background information, see Mauro F. Guillén, Is Globalization Civilizing, Destructive or Feeble? A Critique of Five Key Debates in the Social-Science Literature. Annual Review of Sociology 27 (2001):235-260. Compiled by Mauro F. Guillén, The Wharton School of the University of Pennsylvania, guillen@wharton.upenn.edu

How Fast is Fast? Variable Index 2010 (1980=100) Exports plus imports 146 Foreign direct investment stock 457 Daily currency exchange turnover 900 Nongovernmental international organizations 192 International migration stock 141 International tourism 391 Books in print on globalization 6662

Global Internet Traffic Source: TeleGeography : www.telegeography.com. Reproduced by permission.

Submarine Cables Free reproduction allowed: https://github.com/telegeography/www.submarinecablemap.com

Definitions Gross Domestic Product: The total value of goods and services produced in an economy during a given year. The economy consists of: Households. Firms. Financial institutions. Government.

Simple Calculations: Ratio Ratio: one number divided by another. Example: The total dependency ratio is the ratio of the sum of the population aged 0-19 and that aged 65+ to the population aged 20-64. For China, it is about 0.5 nowadays but is predicted to grow to 1.0 by 2075. A ratio can also be expressed as a percentage (%) by multiplying it by 100.

Simple Calculations: Rate Rate: is the pace or rhythm at which a magnitude changes over a certain period of time. Typically expressed as a percentage. Example: The GDP growth rate in 2012 was 7.8% in China, compared to just 2.2% in the United States. Example: The inflation rate in China during 2012 was 2.6%. Nota bene: The unemployment rate is more properly called the unemployment ratio.

Simple Calculations: Index Number Index number: reveals the change in a magnitude between two points in time. The first of those two points is called the base. The base is typically set at a value of 100. Example: If Chinese GDP grew by 7.8% during 2012, then the index number for the end of the year is 107.8.

Simple Calculations: Proportion Proportion: A measure of a part with respect to the whole. Typically expressed as a percentage (%). Example: The income of the one-percent richest Americans was 7.8% of total income in 1970. By 2012, it had grown to 19.3%.

Large Numbers In the United States: 1 billion = 1,000,000,000 1 trillion = 1,000,000,000,000 In your part of the world, perhaps: 1 billion = 1,000,000,000,000 1 trillion = 1,000,000,000,000,000,000 In this class, we will use the U.S. convention.

World population projections 2011-2100 (in billions) Source of the data: United Nations Population Division, World Population Prospects: The 2012 Revision.

Discussion Question Which of the four projections do you believe is least likely?

Mini-Lecture 1.3 International trade. Foreign investment. Multinational firms.

International Trade Cross-border flows of goods & services. Why does it take place? Theory of comparative advantage. Free trade may be good overall, but it does generate winners & losers.

Absolute Advantage Adam Smith (1776) If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage.

Relative Advantage David Ricardo (1819) Unit Labor Costs Cloth Wine Britain 100 110 Portugal 90 80

Other Considerations Transportation costs. Other costs of trade. Scale economies. Product differentiation.

The Multinational Enterprise (MNE) A company with operations in at least two different nation-states. Another important term: foreign direct (as opposed to portfolio) investment, or FDI. It is a very controversial species

How Important are MNEs? There are 104,000 MNEs in the world. They control about 790K subsidiaries. 71% of all MNEs are based in rich countries. The 500 largest MNEs account for 25% of world product, and 50% of world trade. MNEs receive 80% of all payments for technology royalties and fees.

Multinationals as Citizens of the World The Tommy Hilfiger Corporation [is] headquartered in Hong Kong, incorporated in the British Virgin Islands, listed on the New York Stock Exchange, owned primarily by international institutional investors, held its annual meeting [of shareholders] in Barbados, sourced production to manufacturers in Mexico and Asia, licensed its name to producers globally, and retailed its classic American clothing in Europe and North America. Gerald F. Davis, in the Handbook of Economic Sociology, pp. 480-481.

Discussion Questions Which do you think is the country whose firms have invested the most abroad right up to the present time? And the country ranked in second place?

$ billion % of GDP Country 1990 2012 1990 2012 China 4.5 509.0 1.1 6.3 Hong Kong 11.9 1,309.8 15.5 509.1 Taiwan 30.4 226.1 18.4 47.5 India 0.1 118.2 0.0 6.4 Singapore 7.8 401.4 21.2 148.4 South Korea 2.3 196.4 0.9 17.0 Malaysia 0.8 120.4 1.7 39.7 Argentina 6.1 32.9 4.3 6.9 Brazil 41.0 232.8 9.4 10.3 Chile 0.2 97.1 0.5 36.5 Colombia 0.4 31.6 1.0 8.6 Mexico 2.7 137.7 1.0 11.7 Panama 3.9 37.7 73.4 106.5 Peru 0.1 4.0 0.4 2.0 Venezuela 1.2 20.9 2.6 5.5 Stocks of Foreign Direct Investment Russia 413.2 20.9 Turkey 1.2 30.5 0.6 3.9 UAE 0.1 60.3 0.0 17.1 Egypt 0.2 6.3 0.4 2.5 South Africa 15.0 82.4 13.4 21.1 Ireland 14.9 357.6 31.2 170.5 Spain 15.7 627.2 3.0 46.4 USA 731.8 5,191.2 12.6 33.1 France 112.4 1,496.8 9.0 57.3 Germany 151.6 1,547.2 8.8 45.6 Italy 60.2 565.1 5.3 28.1 Holland 106.9 975.6 35.9 126.3 United Kingdom 229.3 1,808.2 23.1 74.3 Japan 201.4 1,054.9 6.7 17.8 Source: World Investment Report (2013). Developed countries 1948.6 18,672.6 11.1 43.3 Emerging and developing countries 145.2 4,459.4 4.1 17.5 World total 2086.8 23,592.7 9.9 33.1

Firm Country Industry Global Market Position Arcor Argentina Confectionery #1 candy manufacturer Bimbo Mexico Food processing #1 in bread JBS Brazil Food processing #1 in meat Modelo Mexico Beverages #1 import beer brand Vale Brazil Mining #3 Tenaris Argentina Steel #1 in seamless tubes Bharat Forge India Metals #2 in forgings Cemex Mexico Cement #1 in ready-mix concrete Haier China Household appliances #1 in white goods Braskem Brazil Bioplastics #1 BYD China Batteries #1 in Ni-Cd batteries Acer Taiwan Personal computers #2 Lenovo China Personal computers #4 Samsung Electronics S Korea Consumer electronics #1 in chips & LCDs, #2 in phones Embraer Brazil Aircraft #1 in regional jets Cosan Brazil Energy #1 in biofuels Tata Communications India Telecom operator #1 wholesale voice carrier

Mini-Lecture 1.4 Financial globalization. Financial interconnectedness.

Global Financial Markets Foreign portfolio investment. Currency markets: Only 10% are commercial transactions. Discussion Question: What accounts for the other 90%? Financial globalization has grown faster than economic globalization.

Globalization Indicators Indicators: 1980 1985 1990 1995 2000 2005 2010 A. Economic: Exports + imports of goods & services, % world GDP 38.4 37.8 38.0 41.8 48.8 53.7 56.0 Developed countries, % GDP 39.5 39.1 38.0 40.9 48.1 52.0 55.9 Emerging & Developing countries, % GDP 32.8 31.2 38.1 46.4 52.5 62.0 56.7 Inward foreign direct investment stock, % world GDP 6.5 8.3 9.4 11.3 23.1 25.2 29.7 Developed countries, % GDP 4.9 6.5 8.9 10.8 22.7 25.3 30.7 Emerging & Developing countries, % GDP 11.8 14.7 13.6 16.4 40.1 50.2 60.3 Emerging & developing economies: % of global GDP, at purchasing power parities 31.7 32.7 32.7 33.0 34.2 38.5 45.2 % of global outward foreign direct investment stock 13.1 9.6 7.0 9.2 11.0 11.5 17.8 % of global foreign exchange reserves 32.9 37.1 51.9 66.6 B. Financial: Daily currency exchange turnover, % world GDP a 0.7 1.3 3.8 5.6 6.8 4.6 k 6.3 Cross-border banking external assets, % world GDP b 13.7 19.9 28.1 28.5 34.2 54.0 47.9 Cross-border bank loan & deposit stock, % world GDP b 13.9 19.9 34.3 33.1 37.6 39.1 34.9 C. Internet: Users, % world population: 0.1 0.8 6.7 16.0 30.2 Developed countries, % population 0.3 3.7 30.5 59.4 73.4 Emerging & Developing countries, % population 0.0 0.0 1.5 7.3 21.5 D. Demographic: Stock of international migrants, % world population 2.2 2.3 3.0 2.9 2.9 3.0 3.1 Refugee population, % world population 0.3 0.2 0.1 0.2 Worker s remittances, % of world GDP 0.41 0.39 0.42 0.36 0.43 0.63 0.75 m E. Political: Nation-states with membership in the United Nations 154 159 159 185 189 191 192 International organizations, number: Intergovernmental 337 i 378 300 j 243 244 253 Non-governmental 4265 i 4676 4621 j 6357 7412 8198 F. Social & Cultural International tourist arrivals, % world population 3.5 6.7 8.6 9.5 11.4 13.0 13.7 Books on the topic of globalization e 577 1107 2152 4853 10525 22405 38440

Economic & Financial Governance Capitalism needs certain institutions: Protection of property rights. Rule of law. Stable payment system and financial system. Can global capitalism exist in the absence of global governance? Options: Multilateral organizations: IMF, World Bank. Hegemonic economic power (USA, China, etc.). G5, G7, G8, G20? Global body with elected officials.

Financial Interconnectedness http://www.imf.org/external/np/pp/eng/2010/100410.pdf

Cross-Border Bank Lending Reproduced with permission. http://www.imf.org/external/pubs/ft/wp/2011/wp1174.pdf

The Great Recession Proportion of OECD Countries with at least two consecutive quarters of GDP decline Source: Figure 2.2 in Guillen and Ontiveros, Global Turning Points (Cambridge Univ Press, 2012).

Mini-Lecture 1.5 Globalization and the concept of isomorphism. Drivers of globalization.

Isomorphism Is the tendency of actors, organizations or other types of entities to become more similar or to adopt common patterns of behavior over time. Isomorphism can result from several dynamics, which we shall call drivers.

Examples of Isomorphism The modern nation-state. The ministry of foreign affairs. Prohibition of child labor. General schooling. Tourism promotion offices. Newspapers. Blue jeans. Pop music.

Drivers of Globalization: Isomorphic Pressures Driver: Mechanism: Examples: Normative Shared ideologies, worldviews, frameworks, or templates Keynesianism, neoliberalism, democracy, legal traditions, culture Coercive Power, dependency Hegemonic states, multilateral organizations, multinational firms Mimetic Emulative Frequency-based imitation to cope with uncertainty and/or secure legitimacy Trait-based imitation driven by the legitimacy of the source Competitive Performance Markets Bandwagons, fads, fashions Hegemonic states, states considered to be successful or innovative

Boundary Conditions Certain countries are more exposed to isomorphic pressures: Dependent states. States more embedded in trade. Democratic states. States with smaller levels of public spending. Discussion question: Why are countries with smaller levels of public spending more exposed?

Mini-Lecture 1.6 The paradoxes of globalization.

Three Paradoxes Paradox of predictability: The global system is highly structured and predictable. It is also prone to unpredictable disruptions, crises, and even systemic breakdown. Paradox of coupling: Tight coupling among system components, especially financially, economically, environmentally, and demographically. There is increasing institutional decoupling between adoption dynamics and outcomes. Paradox of differentiated convergence: Isomorphic pressures towards convergence. Differentiation and specialization.

Mini-Lecture 1.7 The consequences of globalization. Winners and losers.

Effects of Globalization Civilizing. Destructive. Feeble.

Discussion Questions Is there more or less inequality in the world today compared to, say, 10, 20 or 30 years ago? Is globalization responsible for changes in inequality?

Income Inequality Across Countries Gini coefficients measured vertically. Mauro F. Guillén. Source: World Development Indicators.

Inequality Within Countries: Income Gini Coefficients: Developed Countries Mauro F. Guillén. Data Source: All the Ginis Dataset, World Bank.

Inequality Within Countries: Income Gini Coefficients: Developing Countries Mauro F. Guillén. Data Source: All the Ginis Dataset, World Bank.

Winners & Losers (?) Capital. Educated workers. Strong states. Economy ministry. Rich countries. Labor. Unskilled workers. Weak states. Labor & social ministry. Poor countries.

Mini-Lecture 1.8 Tensions and institutions. Systemic global disruptions.

Key Tensions They occur at the border between the four key subcomponents: Economic (including financial). Socio-Demographic. Political. Geopolitical.

Key Institutions Labor market. Political representation system. The state. The international system of states.

Week 1 Suggested Readings Mauro F. Guillén and Emilio Ontiveros, Global Turning Points, chapter 1. ALL READINGS ARE FREE AND AVAILABLE ONLINE.

Global Literacy Test Now that we have covered the basics, please take the Global Literacy Test. I will ask you to take it again upon completion of this course.