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Globalization 1. Increasing trend of international trade of goods and services and international capital flows. 2. This has been facilitated by lowering trade barriers across countries through organizations such as the WTO. International trade has also been greatly facilitated by the sharp reduction in transportation (container shipping) and communication costs (large cable, wireless and internet investments were made during the tech boom of the 1990s). This has enabled the deconstruction of the value chain allowing suppliers from different countries to specialize and participate in the value chain. 3. Huge labor force of China and India has in the last decade entered the global labor force resulting in far reaching changes. 4. China has become one of the most efficient low-medium skilled manufacturing economies and has been shifting up the value chain. China has been able to sustain an average GDP growth rate of about 10% over the last 25 years. This has made manufacturing very competitive and many manufacturing facilities in the developed world have had to shut down and shift to lower cost facilities elsewhere. Services have also become very competitive with a great deal of outsourcing taking place to countries like India. 5. This was initially a factor in keeping inflation low throughout the world (despite easy liquidity driven by low interest rates) due to their lower costs driven by lower labor costs and high productivity. 6. It also has enabled significant wealth creation in these economies and a reduction in the population living in poverty. 7. The rapid growth of China and to some extent India has been one major determinant of the rise in oil and commodity prices including food prices. 8. The commodity price boom has created significant wealth in commodity rich countries like the middle eastern countries and some latin american countries like Brazil. Sovereign wealth funds now run in the hundreds of billions of dollars and will become major players in global capital markets. 9. Several asian and latin american economies have been running trade surpluses for a number of years and have significant foreign currency reserves. There are now in much better financial shape than in the past. Central banks in countries like China, Japan and South Korea now have foreign currency reserves than run in the hundreds of billions of dollars. 10. Their large investments in US treasury bonds have been a factor in keeping long term U.S. interest rates low and the dollar relatively strong. One motive is to place the reserves in safe and liquid instruments. The other motive is to keep their currencies from strengthening against the dollar to preserve their export growth. 11. The emergence of these economies will enable global growth to be more balanced and not be over reliant on the U.S. consumers who are overleveraged and also enable the U.S. to work down its deficits. Internal demand is developing in these countries and there will be less reliance on exports in the future. This will reduce their incentive to keep their currencies undervalued and may result in a shift in the way they invest their reserves. If there is major shift away from U.S. dollar assets, U.S. interest rates would rise and the U.S. dollar would fall. 12. The costs and benefits of globalization are typically born by different segments. Large firms (MNCs) are on average better able to exploit the benefits of globalization than small or medium sized firms. Wealthy individuals and higher level management benefit more from globalization than middle or lower level workers who are more liable to be laid off. The transition of these laid off workers to similar paying jobs is not easy or smooth and this can cause political pressures and protectionist sentiment. 13. Functions such as design, branding and marketing become critical and can capture a significant portion of the final selling price (e.g. branded shoes, IPODs etc.). The challenge for the developed economies is to come up with more innovation and new technologies where they have an edge over the lower cost countries. And here the ability to protect intellectual property rights (patents, copy rights, trade marks etc.) is critical to protecting the investment in innovation and new technology to ensure an adequate return on them. Several emerging market economies do not have adequate protection of intellectual property rights and so companies should be careful in sharing key technologies. 14. Summing up, the world has become flat and the playing field has become global. Threats to existing businesses can come from any where in the world and opportunities arising from all over the world should be exploited. This is already happening with over 50% of sales of some of the largest U.S. firms arising from non-U.S. markets. Euro: Advantages: 1. Increases political and economic links between European members. 2. Increases depth of capital markets with a single currency instead of fragmented markets with different currencies. This generally lowers the cost of capital for issuers. 3. Reduces costs of transaction within the eurozone – no currency exchange costs, no need to hedge foreign exchange risks, reduces uncertainty. 4. Makes companies more competitive since they are subject to free competition from companies in the eurozone. There are no tariffs and other barriers between eurozone countries which allow freer competition. Disadvantages: 1. Eurozone countries no longer have independent monetary policy and exchange rate policy to deal with country specific shocks. Hence, shocks have to be absorbed through wage and fiscal flexibility. 2. As can be seen from the current euro debt crisis, monetary union without fiscal union can create risks for the entire eurozone. There is also a risk of contagion with problems in Greece spreading to Ireland, Portugal, Spain and Italy. Responses to the current sovereign debt crisis in the eurozone: 1. A EFSF (European Financial Stabilization Facility) has been set up and funded by eurozone countries to help support the troubled countries. 2. The IMF (International Monetary Fund) has also been providing support. 3. The ECB (European Central Bank) has been buying bonds of the troubled countries. 4. Most of the support has been accompanied by conditions that require the troubled countries to reduce deficits and debt levels (austerity measures) which is political unpopular.
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