Walmart and Globalization

International Concerns

1. Globalization - Trade, Foriegn Investment, Crossing National Boarders

• Raises global standard of living
• Inequality - benefits of globalization don't effect everyone

1. Offshoring - Supports Comparative Advantage, Takes US Jobs
2. Foriegn Competition for US Businesses - Protectionism v. Free Trade
3. United States Trade Deficit with China

The Wal-Mart Success Story

• Wal-Mart’s success comes primarily from globalization.
• Beginning in the late 1970's, Wal-Mart began its search for cheap imports. Yet, its main rivals (JC Penny, Kmart, etc.) started importing their products before Wal-Mart. What gave Wal-Mart the comparative advantage over the other chain stores was its use of computers. It allowed Wal-Mart to be more organized and more efficient. Using computers Wal-Mart knows what product is selling where, how much of it is being produced, where it is available, and then is able to communicate all this information to its suppliers around the world.
• Wal-Mart’s dependence on offshore sourcing continued to increase during the 80's and 90's but was limited to a degree because of the company’s “Buy American” campaign.
• Wal-mart finally gave up their “Buy American” campaign when were exposed by the media.
• Around this time, China adopted a more capitalistic approach to their economy. They encouraged foreign investors by changing restrictions on foreign businesses. Also, the city of Shenzhen didn’t tax foreign businesses.
• A combination of devaluing China’s currency and the increase in foreign investment caused the explosion of China’s economy.
• Wal-Mart was one of many companies to capitalize on the low cost of production in China.
• The next strategic decision that moved even more of Wal-Mart’s suppliers to China was encouraging competition between brands in their own stores. They offered cheap generic brands to compete with the name brands. American manufactures were forced to move to China in order to compete with low prices. Today, many companies put their name brand on goods their company didn’t make in order to gain the marketing edge of their brand. They also are forced to only use manufacturing companies in China that are pre-approved by Wal-Mart.
• Wal-Mart is the largest importer of Chinese goods
• Foreign products make up all of Wal-Mart low opening price goods.
• Though imports Wal-Mart is able to offer its guaranteed low prices and still increase its profits.
  • "Wal-Mart gets its economic power because it is a gateway to the consumer. The demand for Wal-Mart stores is what provides China and other countries in Asia with their access to the most powerful capitalist economy in the world. - Professor Gereffi, Duke

Wal-Mart’s Economic Power

• Wal-Mart has been able to change the way business works. In the past, a manufacturer makes a good and then sells that good to whoever will pay the most for it. Wal-Mart has enough power that they can dictate prices and products to the manufacturer.
• “Now things are very different. You have large-scale retailing that’s very high-productivity, that has a lot of bargaining power. And they can go to the smaller manufactures and say, ‘If you want to be on our shelves, you have to do it our way.’…Wal-Mart – they’re very demanding, and they’ve got a lot of bargaining clout to back up their demands.” – Brink Lindsay, Economist at the Cato Institute
• Since Wal-Mart has this power with manufacturers and all their manufactures are foreign, Wal-Mart plays a big role in shaping the global economy. After all, Walmart has behind it the buying power of everyone who shops at one of the biggest chain stores in the world.
• For Example, Five Rivers a small television manufacturing company was almost put out of business because of the large amount of Chinese made TVs that were placed into the market. This practice is called dumping; Its the process of flooding the market with really cheap merchadise in order to put competitors out of business. In the case of Five Rivers, they were not put out of business because they complained to the International Trade Organization who then imposed 23% duties on foriegn televisions.
• Another growing concern between China and the US is the trade deficit; a problem walmart played a large part in creating. Economists can only speculate as to the effects of such a large trade deficit.
  • "Theoretically, the gains from trade offset the losses from trade but nothing says there were more winners than losers, and nothing says that for the bottom three-fourths of America that they are net gainers. In fact, I believe that most people have been losers from trade." - Larry Mishel, president of the Economic Policy Institute
  • "Trade policy, or trade flows, one way or another don't have an effect on overall employment numbers. They affect the kinds of jobs we have and so some number of jobs have definitely been eliminated because of Chinese competition. Elsewhere in the economy, other jobs have been created because of Chinese competition. Because American consumers have saved at Wal-Mart buying Chinese goods, they've got more money in their pocket to buy something else, which creates business opportunities for those other business, which means they hire workers they would not have hired, otherwise. The net effect, most economists think, is a wash." - Brink Lindsey, Cato Institute

• On November 27, Wal-Mart annoced it was going to explore business oppurtunties in India.

Sources

http://www.pbs.org/wgbh/pages/frontline/shows/walmart/

http://www.forbes.com/markets/2006/11/27/wal-mart-bharati-markets-emerge-cx_rd_1127markets03.html

http://www.epi.org/content.cfm/wp276

Class Discussion for International Relations, Professor Bova - 11/14/06