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Doing Business in Globalized
Economy
Dr hab. G. Jedrzejczak
March 28, 2015
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Doing Business in Globalized Economy
Business new challenges
• Global financial crisis highlited a number of
fundamental changes in the global economy
which have profound impact on the business
activities.
• The lecture will address the impact on
business of the economic and social changes
due to globalization
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Doing Business in Globalized Economy
Great Moderation
• From the early 1980s on, most advanced economies
experienced what has been dubbed the “Great
Moderation,” a steady decrease in the variability of
output and its major components— such as
consumption and investment.
• There were, and are still, disagreements about what
caused this moderation.
– Central banks would like to take the credit for it, and it is
indeed likely that some of the decline was due to better
monetary policy, which resulted in lower and less variable
inflation.
– Others have argued that luck, unusually small shocks
hitting the economy, explained much of the decrease.
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Doing Business in Globalized Economy
Before storm
• The mid-2000s was a period of strong economic
performance throughout the world. Economic growth was
strong; inflation low; international trade and financial flows
expanded; and the emerging and developing world
experienced widespread progress and a notable absence of
crises.
• This favorable trends was underpinned, however, by three
trends that appeared increasingly unsustainable as time
went by:
– real estate values were rising at a high rate
– a number of countries were simultaneously running high and
rising current account deficits
– leverage had built up to extraordinary levels in many sectors
across the globe among consumers and financial institutions
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Doing Business in Globalized Economy
Impact of globalization:
• Flows of goods, services, and finance rose from 24 percent of global
output in 1980 to a peak of 52 percent in 2007
• In 1990, 60 percent of trade in goods was among the high income
economies, another 34 percent was between high income and
emerging market economies, and just 6 percent was among
emerging market economies. By 2012, these ratios were 31
percent, 45 percent, and 24 percent, respectively.
• In 1980, FDI was negligible. Today, it is a large flow averaging 3.2
percent of global output between 2005 and 2012
• Total cross-border financial flows peaked at 21 percent of global
output in 2007, before collapsing to 4 percent in 2008 and 3
percent in 2009.
• By 2014, the world had 96 mobile phone subscriptions and 40
Internet users for every hundred inhabitants from zero 20 years
earlier
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Doing Business in Globalized Economy
Globalization: Ricardo’s Comparative Advantage at
Work:
• Developed countries have comparative advantage
in high value added parts of the production
stream: design, financing, marketing
• Developing countries have comparative
advantage in low value added parts of
production
• Technological progress in transport and
communication make it feasible
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Doing Business in Globalized Economy
Impact of energy revolution
• Not long ago, the prevailing concern was that there wasn’t enough
energy to power the world. Now, among players from oil producers
to electric utilities to multinational manufacturers, there’s a new
worry: that a proliferation of new energy technologies and supplies
is starting to undermine world powers.
• From a boom in fossil-fuel production to a flowering of renewable
energy to the rollout of an array of contraptions and business
models to cut energy waste, the new energy riches of the 21st
century are destabilizing the old economic order.
• The energy revolution is starting to remake the global energy
landscape:
– They’re shifting the center of gravity of global oil production
westward, to North America from the Middle East.
– They’re reorienting the adolescent renewable-energy industry
eastward, to China from the United States and Europe.
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Doing Business in Globalized Economy
Impact of global politics:
• Sanctions
• Global warming (fosil fuels)
• Human rights (access to net)
• Local conflicts (blood money)
• New trade blocks
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Doing Business in Globalized Economy
Trade channels of global economy
• In 1990, 60 percent of trade in goods was among the
high income economies, another 34 percent was
between high income and emerging market
economies, and just 6 percent was among emerging
market economies. By 2012, these ratios were 31
percent, 45 percent, and 24 percent, respectively.
• Before World War I, the big opportunity was to
incorporate undeveloped land, particularly in the
Americas, into production for the global market. This
time, the biggest opportunity is incorporating billions
of previously isolated people as workers and then
consumers and savers.
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Doing Business in Globalized Economy
Traditional approach to production function
Q = f (L, K )
where L is a quantity of labor, K a quantity of
capital and Q an output of commodities.
• Augmented with Total Factor Productivity
Y = A x 𝐿𝛼 x 𝐾𝛽
A - residual “black box” good enough when
small impact
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Doing Business in Globalized Economy
Forces at the firm level
“The defining challenge for competitiveness has shifted,
especially in advanced countries. The challenges of a decade
ago were to restructure, lower cost, and raise quality. Today,
continued operational improvement is a given, and companies
in many countries are able to acquire and deploy the best
current technology. In advanced nations with relatively high
labor costs and equal access to global markets, producing
standard products using standard methods will not sustain
competitive advantage. Instead, advantage must come from
the ability to create and then commercialize new products
and processes, shifting the technology frontier as fast as their
rivals can catch up.” National Innovative Capacity; Porter, Stern
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Doing Business in Globalized Economy
Knowledge role in the economy:
• Knowledge as a dominating substance of a
product (e.g. DVD, apps, software)
• Knowledge as source of monopoly
(pharmaceuticals)
• Knowledge as source of competitive edge
(lower costs, better product functionality)
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Doing Business in Globalized Economy
How scarce is knowledge?
– more in use it becomes more valuable
– temporarily when legally protected
– scarce by costs of replication (reverse engineering
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Doing Business in Globalized Economy
PERSONBYTES
• The amount of knowledge in the world has
increased tremendously, but our individual
capacity to hold it has not.
• Knowledge is now divided into chunks —
personbytes—and distributed across people.
• How does the personbyte economy work?
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Doing Business in Globalized Economy
WHO HAS MORE PRODUCTIVE KNOWLEDGE?
An Eskimo?
Or a modern man?
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Doing Business in Globalized Economy
Modern man: but WHY?
The answer: progress in division of labor
• Division of labor in the archaic societies: NONE
• Each Eskimo could provide food, clothing and
build a shelter (igloo) but societal value just a
sum of individual efforts
• Cooperation regulated by tradition
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Doing Business in Globalized Economy
Division of labor in industrial societies
• Division of labor in the past centuries in
developing societies by profession oriented on a
single product: butcher, baker, teacher, doctor,
soldier.
• Economy built on the exchange of products - each
participant had a product to offer.
• Societal value increased by specialization but still
the sum of individual productivity
• Coordination mostly via market
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Doing Business in Globalized Economy
Division of labor now
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Doing Business in Globalized Economy
Post-industrial societies
• Functional, knowledge-based division of labor
• None of professional able to produce a
product ready to use
• Societal value of labor increased by synergies
across the economy between specialized firms
• …but only in well functioning systems
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Doing Business in Globalized Economy
The main difference between a postindustrial
knowledge-based economy and a traditional
economy using knowledge is in the way
knowledge is generated, introduced as
innovation and rewarded
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Doing Business in Globalized Economy
Modern economy is based on smoothly functioning networks
of networks.
• A modern firm is a network of people with different
expertise: production, logistics, marketing, sales,
accounting, human-resource management, and so on. But
the firm itself must be connected to a web of other firms –
its suppliers and customers
• Firms and households need access to networks that deliver
water and dispose of sewage and solid waste. They need
access to the grids that distribute electricity, urban
transportation, goods, education, health care, security, and
finance. Lack of access to any of these networks causes
disproportional declines in productivity.
New approach to economic problem: how to create synergy
between available resources (positive feedbacks)
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Doing Business in Globalized Economy
How individuals acquire productive knowledge?
• Increased schooling alone is not generating
the expected income pay-off
• Even the science-based jobs require
apprenticeship
• The tricks of the trade are acquired from
experienced senior workers
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Doing Business in Globalized Economy
How do firms acquire productive knowledge?
THE BIRTH OF SUCCESSFUL INDUSTRIES
• a successful firm is established
• employees learn from the firm
• employees leave the firm to set up new firms
• spin-offs are often much more successful than
other firms…
• ... and generate a new wave of spin-offs
A CLUSTER OF HIGH PERFORMING FIRMS ARISE
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Doing Business in Globalized Economy
HOW DO SOCIETIES ACQUIRE PRODUCTIVE KNOWLEDGE?
–
–
–
–
Productive knowledge is tacit: very hard to acquire
Knowledge resides in the brains of people.
It is easier to move the brains than the knowledge
As a result, knowledge diffuses only slowly and across narrow
channels
– ... and requires teams with complementary skills
– In a world of increasing complexity, teams become more and more
intricate
– This makes the coordination problem exponentially harder
What the world needs is mobility, diversity and stability
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Doing Business in Globalized Economy
Bad news 1: throwing money on the problem is
not a solution
More money spent on R&D will not generate
more knowledge to be used by producers to
build knowledge based economy
Embarrassing failure of Lisbon Agenda
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Doing Business in Globalized Economy
Bad news 2: Social capital which has profound impact on
development changes very slowly and changes may have
unexpected outcomes:
Cultural dimension:
 Trust
 Tolerance
 Dialogue
 Diversity
 Mobility
Institutional dimension:
 Good laws
 Effective institutions
 Professional administration staff
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Doing Business in Globalized Economy
Size the moment: Ireland
• Challenge: become a competitive EU member
• Opportunity: English, educated young
population, US Diaspora
• Risks: marginalized late comer in EU
• Response: Opening to ICT FDI, using EU
structural funds
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Doing Business in Globalized Economy
Size the moment: Israel
• Challenge: accommodate 1 million immigrants
from FSU
• Opportunity: highly educated professionals
• Risks: no market skills, disappointment
• Response: Technological Incubators Model provide support services and resources in
advancing ideas from a conceptual stage to
viable, working enterprises.
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Doing Business in Globalized Economy
Size the moment: Finland
• Challenge: collapse of the SU market
• Opportunity: excellent education, hard-work
ethics, Nokia
• Risks: cut-throat competition in ICT markets,
high labor costs, market rigidities
• Response: top-level ownership of KE Agenda,
Foundation for Finnish Inventions, spreading
KE beyond Nokia
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Doing Business in Globalized Economy
Internet economy is different
• Market transaction:
• who is:
– seller?
– buyer?
• what is:
– commodity?
– price?
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Doing Business in Globalized Economy
Busines consequences of Internet Economy:
• Some vital parts of the Internet Economy barely register in
the GDP. While GDP measures the market value of all goods
and services produced within a country, many stars of IE
(think Wikipedia, Facebook, Twitter, Mozilla, Netscape, and
so on) produce no goods and provide free services.
• IE tend to undercut both, the traditional and IE businesses.
Skype is killing the international phone calls. Free
navigation apps have shrunk sales for Garmin, the GPS
pioneer that was once one of the fastest-growing
companies in the US.
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Doing Business in Globalized Economy
Gene from the bottle:
• In the last decade the global business
environment has changed radically. EU industry
competes with China, Brazil, India and other
emerging economies also on high-value products.
Hope to put it back:
• You can produce comparatively expensive
product in developed countries b/c of
automatization and robotization reduce
dramatically labor component of costs
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Doing Business in Globalized Economy
Reindustrialization as a challenge
• Reindustrialization a sustained increase in both the
share of manufacturing in total employment and the
share of manufacturing in GDP.
• Reindustrialization, not simply a case of ‘inverse
deindustrialization’ as there would be different
dynamics at work
• There is an asymmetry in that reindustrialization is less
likely to ‘just happen’ under market forces than is the
case with a similar magnitude of deindustrialization
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Doing Business in Globalized Economy
Work in the time of robots
• As computer-processing power grows and artificialintelligence software advances, machines are increasingly
able to perform complex tasks requiring abstract thinking,
such as inferring meaning and making judgments, far
beyond routine physical and clerical activities.
• As a result, companies are beginning to automate more
highly skilled knowledge-based jobs in fields like law and
medicine.
• While this process will generate a significant amount of
value – more than $5 trillion in 2025, according to MGI
estimates – it will not be distributed evenly.
McKinsey Global Institute
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Doing Business in Globalized Economy
Robotization 1st step:
Robots and automation have been in many types of
manufacturing for decades. In the US and China fewer people
work in manufacturing today than in 1997.
Robotization 2nd step:
A change with a potentially far larger impact on employment,
is taking place in clerical work and professional services.
Countless traditional white-collar jobs, such as many in the
post office and in customer service, have disappeared.
Robotization 3rd step:
Technologies like the Web, artificial intelligence, big data, and
improved analytics are automating many non-routine tasks.
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Doing Business in Globalized Economy
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Doing Business in Globalized Economy
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Doing Business in Globalized Economy
IE and Labor Market
• Generates new type of entrepreneurs:
– Experience does not matter
– Formal education does not matter – university
dropout
– “Instant rich” motivation
• Employees:
– Brainy kids
– No loyalty to the firm
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Doing Business in Globalized Economy
Labor and capital in IE:
• One consequence is the striking phenomenon
of huge wealth creation with very little labor
and capital input.
• Facebook has an equity valuation of $170
billion but employs only around 6,000 people.
• The investment that went into building the
software that runs it entailed no more than
around 5,000 software engineer man-years.
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Doing Business in Globalized Economy
trust index
100
90
indulgence
80
GNP/capita
70
60
50
40
30
20
pragmatizm
inn. index
Poland
10
Germany
0
UK
uncertainty
power dist.
masculinity
individualizm
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Doing Business in Globalized Economy
2010 or latest available year
2000 or first available year
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
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Doing Business in Globalized Economy
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