MGT2100 -

Global Supply Chain Management 2

Week 2

Professor: Peyman Varshoei

Spring/Summer 2025
Week 2 - Globalization and International
Trade
❑ Growth In International Trade
❑ Globalization
❑ Directional Imbalances
Learning Objectives
After completing this week, you should be able to:

▪ Highlight the growth that has occurred in recent decades in international merchandise
trade and the important role played by LSCM in this regard

▪ Explain what is meant by globalization, discuss the drivers for globalization and review
recent trends that are impacting globalization

▪ Look at what happens when unequal volumes or types of freight flow in opposite
directions in freight markets
Introduction
Global trade has grown considerably in recent
decades. Much of this growth has been facilitated
by the reduction of trade barriers between
countries and regions, thus making it easier for
countries to trade with each other.

Regional trade agreements, such as the EU

(European Union) and AFTA (Association of
Southeast Asian Nations Free Trade Area), have
been and continue to be developed, and allow
more open trading within regions.
Introduction
▪ The 20th century saw considerable growth in world merchandise trade especially in the
decades following on from World War II.

▪ Next slide illustrates the growth in world merchandise trade, world seaborne trade, world
GDP and the OECD's industrial production index in recent decades. The figure shows that
while global trade has been on a more or less continuous upward trajectory for many
decades, trade declined with economic recession around 2008.

▪ While trade has grown since then, the pattern of trade growth has become less stable, and,
while it is obviously difficult to predict future growth patterns, this volatility in trade growth is
likely to continue into the future.
Introduction
Decoupling Economic Growth and Transport Growth
The demand for transport is a derived demand,
for example, the demand for transport is
dependent upon someone wishing to move
freight from one point to another. It is not
surprising then to see the close correlation
between seaborne trade, merchandise trade
and GDP.
A key concern for transport policymakers is to weaken the link between transport growth and
GDP growth – in essence trying to ensure that an economy can grow without concomitant
growth in the negative environmental impacts associated with increased transport demand.
Decoupling Economic Growth and Transport Growth
▪ In examining these relationships between trade and transport, there are various practices
and statistical nuances that we need to be aware of and that play an important role in
dictating freight flows.

▪ It is important, too, to note the influence of ‘product tourism’ in international freight flows.
This is where there may be unnecessary flows of freight to take advantage of lower tax
rates, etc. This is known as transfer pricing: when goods or services are transferred between
divisions of the same company, a value is attributed to them called a transfer price,
multinational companies can thus move work‐in‐progress materials between countries and
use transfer pricing to minimize their tax exposure.
Decoupling Economic Growth and Transport Growth
A somewhat related concept is that of parallel
imports (also referred to as grey markets): this is
where a product moves through a particular
distribution channel that is not authorized by the
original manufacturer or copyright owner. For
example, companies sometimes sell products for
different prices in different markets depending
upon prevailing local market conditions.

Distributors might thus import the product into the country where it is cheapest to do so and then
re‐export it to another country where it can be sold for a higher price.
Globalization
The term globalization has been in use for a
number of decades and is generally regarded as
an umbrella term for a complex series of
economic, social, technological, cultural and
political changes which continue to take place
throughout the world.
Globalization
▪ Some argue that it is a force for good, allowing people and companies throughout the
world to be interconnected. Others oppose it, some vehemently, and see it largely as a
proxy for global capital flows exploiting, especially the poor.

▪ Perhaps in truth globalization is a mix of both viewpoints. From our standpoint as

logisticians, globalization and LSCM have been inextricably linked with the latter benefiting
greatly from the former.

▪ It is important to note too that globalization can carry risks – with the world and its
systems increasingly connected threats can spread rapidly (see, for example, how quickly
financial contagion spread in the 2008 recession and more recently the rapid spread
worldwide of the COVID‐19 virus).
Globalization - Think Global, Act Local
Much of what Levitt asserted in his famous 1983 Harvard
Business Review article has stood the test of time and no doubt
one can think of many global companies with global products.
Conscious though of subtle, yet often important, regional and local
differences, many companies now adopt a policy which some https://hbr.org/1983/05/the-globalization-of-markets

refer to as glocalization – thinking on a global, world‐market

scale, but adapting to local wants as appropriate. Just think, for
example, of how McDonald's customizes burgers by varying
toppings etc. to suit local tastes in different countries. We will also
see in later chapters how companies can employ modern
manufacturing and distribution strategies that allow them to tailor,
often at little extra cost, global products to satisfy local wants.
Globalization
❑ In terms of trading relationships, a number of different stages can be identified in the path
towards globalization. First, countries begin to trade with each other, importing and exporting
products. As trade develops, sometimes companies will establish a presence in an overseas
market. Such companies are usually referred to as Multinational Companies (MNCs) when
they have operations in areas beyond their home country.

❑ In turn, entities sometimes referred to as Transnational Corporations (TNCs) emerge,

these are companies that trade across many borders, with operations in multiple countries.
Often it can be difficult to identify the ‘home’ country of a TNC, as they will typically portray a
truly global identity.
Globalization
Three other terms are also worth noting, and these relate to how companies think and behave
as they internationalize:
▪ Ethnocentricity: where the company when doing business abroad thinks only in terms of the home
country environment (thinks and acts as if it were still operating in, for example, the US, where the
company may be headquartered, notwithstanding the fact that many business environments outside
of the US can be quite dissimilar to that country).

▪ Polycentricity: where the company adopts the host country perspective (to coin the old phrase:
‘when in Rome, do as the Romans do).

▪ Geocentricity: where the company acts completely independent of geography and adopts a global
perspective and will tailor to the local environment as appropriate.
Globalization
▪ As companies internationalize, they set up operations in overseas locations. This can range
from relatively simple activities, such as having a sales presence in an overseas market, to
setting up production facilities, and even (in the case of TNCs) having core company
functions located in countries other than where the company was originally established.

▪ Behind such developments lie what are referred to as Foreign Direct Investment (FDI) flows.
FDI flows are financial flows from a company in one country to invest (for example in a
factory) in another country. Such flows are very significant in the overall global economy and
in some cases can be key to dictating a country's success.

▪ Indeed, many countries, and regions, compete quite strongly to attract FDI, and some will
put in place certain conditions (e.g., low rates of corporate taxation) to attract more FDI.
Globalization
Factors that should be considered when deciding on an optimum location for an overseas facility.

Site Selection Factors

Labour costs Political stability
Employment regulations Environmental regulations
Available skills Taxation rates
Land costs and availability of suitable sites Government supports
Energy costs Currency stability
Availability of suitable suppliers Benefits of being part of similar companies
Transport and logistics costs Preferred locations of competitors
Transport linkages Access to markets
Communications infrastructure and costs Community issues and quality of life
Directional Imbalances
▪ One particular characteristic of freight markets, which distinguishes them from passenger
markets, is what are commonly referred to as Directional Imbalances.

▪ Most people who make a journey today aim to make a return trip at some point. This,
however, is not the case with freight, which usually moves to either be consumed at the
destination point or have further value added to it before making another journey.

▪ Most freight makes one‐way, and not return, journeys. This would be fine if the same volume
and type of freight (certain types of freight have particular handling and equipment
characteristics) went in both directions on all routes. This in turn raises interesting
challenges for the transport companies who are faced with variable directional utilization of
their equipment.
Directional Imbalances
According to UNCTAD, in 2018 there were:
▪ 20.9 million TEUs16 on the East Asia–North America trade routes but
just 7.4 million TEUs in the opposite direction (North America–East
Asia).
▪ 17.4 million TEUs on the East Asia–Northern Europe and
Mediterranean trade routes but 7.0 million TEUs in the opposite
direction (Mediterranean and Northern Europe–East Asia).

As a result of such imbalances, rates will vary considerably, for example, on

the China–EU container market:
▪ It can cost the same amount to transport a container unit by road
between Munich and Hamburg in Germany as it does to ship the same
container by sea from Shanghai in China to Hamburg in Germany.
▪ It can cost twice as much to ship a typical 20‐foot container between
Hong Kong and the EU when compared with the opposite direction
(EU–Hong Kong).
In-Class Discussion
1. Explain the linkages between economic growth, trade and shipping. How can they be
decoupled and why might this occur?

2. Identify examples of companies/products which attempt to think global and act local
(‘glocalization’).

3. Differentiate ethnocentricity, polycentricity and geocentricity, and give examples of

companies from your own country that you believe fit into each category.

4. Taking your own country as an example, identify freight routes where you believe
directional imbalances exist.
 Thank you

Source of Content: John Mangan, Chandra Lalwani, Agustina Calatayud, 2020, Global Logistics and Supply Chain Management, Wiley
Source of Decorative Figures: https://www.freepik.com/