School of Management Fudan University
Double Degree in International Management
Evolution of International Business 2013
Veronica Binda
Class 2.
The rise of global firms in the First Global Economy
Today's topics
(1) Case discussion on International Business before the First
Global Economy: Andrea Barbarigo, merchant of Venice
(2) The First Global Economy (approximately 1880-1930):

(a) introduction

(b) the background

(c) “micro” effects

(d) home and host economies

(e) sectors
Material: Case: Andrea Barbarigo; G. Jones (1996), chapter 2,
section: “Growth 1880-1930”
(1) Case discussion on International
Business before the First Global Economy:
Andrea Barbarigo, merchant of Venice
Andrea Barbarigo – Merchant of Venice
The Republic
of Venice
“La Serenissima”
Andrea Barbarigo – Merchant of Venice
The Republic
of Venice
“La Serenissima”
Andrea Barbarigo – Merchant of Venice
Who was
Andrea Barbarigo?
Andrea Barbarigo – Merchant of Venice
Which main problems did
merchants have to face
with regard to preindustrial business?
Andrea Barbarigo – Merchant of Venice







Prices unknown/customized
Markets not transparent
Variability supply/demand
High agency costs
High risk of physical violence
Absence of legal enforcement
Culture, language...
(today???)
Andrea Barbarigo – Merchant of Venice
How could merchants make huge profits?
Andrea Barbarigo – Merchant of Venice

Asymmetric information

Risk diversification strategy
» Product diversification
» Geographical diversification

Risk sharing strategy

Scale economies and transaction costs

Venice
Andrea Barbarigo – Merchant of Venice
Venice as an
hourglass
Andrea Barbarigo – Merchant of Venice
Venice as an
“airport
hub”
Andrea Barbarigo – Merchant of Venice
What role for government?
The
Marriage
Andrea Barbarigo – Merchant of Venice

Physical protection and
violence

Provision of hardware
(the Arsenal)

Regulation of business

The equilibrium
(2) The First Global Economy
(approximately 1880-1930):
(a) introduction
(b) the background
(c) “micro” effects
(d) home and host economies
(e) sectors
The First Global Economy
(a) Introduction
 During the 19th Century the globalization process
accelerated on an unprecedented scale
 From the 1820s international trade grew around 3.5 percent
per annum for the rest of the century
 Beginning in the early 19th Century, and accelerating from
the mid-19th Century, thousands of firms crossed borders,
building the webs of the First Global Economy
 Quantitative work has shown that world capital, commodity,
and labor markets had become closely integrated by 1914
The First Global Economy
(b) The background
Technology and Economy
•
•
•
Political and Social context
The First Industrial Revolution •
(since approx 1760)
•
The revolution in transports
and communications (since
•
approx 1850)
•
The Second Industrial
•
Revolution (since approx
1880)
•
Peace
Economic policies on capital
and trade
Legal reforms
High labor mobility
Imperialism
...
The First Industrial Revolution
(since approximately 1760 - UK)
The extensive use of mechanically powered machinery (the
factory)
The introduction of new, inanimate, source of energy (especially
fossil fuels)
The widespread use of materials that do not normally occur in
nature (“artificial” or synthetic materials)
The largest scale of enterprises in most industries (cotton and wool
textiles, metalworking, and mechanics)
The First “ICT” Revolution
(since approximately 1850)


Transport: trains and
steam boats
Communication: telegraph
and telephone
Opening new markets:

Speed

Regularity

Reliability

Price
The Second Industrial Revolution
(since approximately 1880 - US)
• New process technology in some industries (steel, chemicals,
pharmaceuticals, refining, food processing, tobacco)





High intensity of capital
High energy requirements
Continuous productive process
Large batch
Economies of scale and scope
• The technological opportunities of the Second Industrial
Revolution must be translated in economic terms
– Factories at the minimum efficient scale
– Link between raw materials, production and distribution
– Enrollment and promotion of management
The First Global Economy
(c) “micro” effects – the impact on foreign trade
The First Global Economy
(c) “micro” effects – the impact on foreign investment
From the 1850s on the amount of cross-border investments
grows with a trend never seen before
Big business crossing borders: drivers



Natural resources: supply chain, raw materials, foodstuffs
Manufacturing and services: markets (Second Industrial Revolution
– mass markets)
Multinational pursuing integration (backwards and forwards)
The First Global Economy
(c) “micro” effects – the impact on foreign investment
Two kinds of multinational companies
The “free-standing” companies
Firms that did not grow out of an existing
domestic business but were established
specifically to operate in a foreign country
Single business, project oriented
Legally incorporated in the country of origin
but with a small head office
Why? Industrialization:
- increasing need for primary materials
especially in Britain
- “peripheral” countries needed
infrastructures and technology
They served as venture capitalist in countries
where capital markets were
underdeveloped, identifying
opportunities, financing them, and
ultimately bringing them to markets
The “modern” multinational
enterprises
“Traditional” model of FDI: establishment of a
cross-border activity replicating the
competencies present in the home
country (e.g. Siemens, Singer Sewing
Machines)
They are only a portion of total FDIs
Life cycle:
(1) consolidation at home
(2) expansion abroad (exports, agents,
greenfield or brownfield investments)
(3) global enterprises
Compagnie Française de Tramways et
d'Eclairage Electrique de Shanghai
Shanghai, 1910
The First Global Economy
(d) Home and host economies
% share of FDI stock
by home economy
% share of FDI stock
by host economy
1914
1914
USA
UK
Latin America
Asia
Netherlands
Canada
Germany
Eastern Europe
France
Africa
Other Western Europe
Western Europe
Rest of the World
USA
Rest of the World
The First Global Economy
(e) Sectors
Approx 50% of world FDI was invested in natural
resources
Approx 33% of world FDI was invested in services
(financing, insuring, transporting commodities and
foodstuffs)
MNEs in manufacturing was overwhelming located in
Western Europe and North America
Summarizing
Globalization transformed companies' behavior while
companies were building the webs of the First Global
Economy
There was no single model of a global firm during the First
Global Economy
Strategies, structures, and forms of global enterprises are
modeled on the general conditions of the environment