Monday, March 15, 2010

Global Management Perspective and the Start of Q4

Today we started Q4 with Global Management Perspective. It promises to be an interesting class. Prof. Blum was a guest speaker at our Latin America class (he's Brazilian) and gave us his perspective on the interesting developments in that part of the world, focusing on Brazil, Argentina and Chile.

I think Prof. Blum gave a very fair and balanced perspective of globalization. While most capitalists would tout the praises of globalization and competition, he gave what I think is a fair criticism of globalization along with his description of the underlying economics. The key take away summarized (in my humble opinion):
"Globalization will create more wealth, but does not guarantee that it will be
distributed evenly."

It is NOT a zero sum game - I noticed that this is especially prevalent anywhere "efficiency" is involved. Advocates of globalization will often quote "comparative advantage" as one of the primary benefits of globalization even negating the benefits of size. For instance:

Country A (a larger country) can create:
  • Computers at a rate of 50 per year
  • Bread at a rate of 100 per year
  • or any linear combination of the two (Computers are worth 2 bread)

Country B can create:

  • Computers at a rate of 10 per year
  • Bread at a rate of 30 per year
  • or any linear combination of the two (Computers are worth 3 bread)

Country B is much better at creating bread than computers, so using it's comparative advantage it should create bread and trade with Country A for the computers it needs. Even though Country A can "out-manufacture" Country B in any category because of it's size, Country B can more efficiently create certain goods which it can trade with Country A.

It is fairly undisputed that globalization utilizes comparative advantage to increase the total wealth of all countries involved. However, as was brought up by our professor, this does not account for distribution of wealth. Regulations and other mechanisms are needed to ensure income equity. His comment was that criticism on this line against the WTO and globalization in general was certainly valid, whereas criticsm citing globalization as not wealth creating was economically falacious.

It's like in our strategy class when we talked about "double marginalization" where in vertical integration, two companies (as seperate entities) will optimize their cost and pricing structure in order to maximize their individual profits. However, from a more macro view, there is the potential for companies to gain synergies by vertical integration and earn margins that are optimal from a more wholistic view (which makes the case for the acquisition of a supplier or distribution channel by a company).

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