Globalization of Markets vs Globalization of Production

Two Different Concepts

Globalization is often discussed as a single phenomenon, but in international business education it is important to distinguish between two related but distinct processes: the globalization of markets and the globalization of production.

Both are dimensions of the broader globalization process. Both have accelerated dramatically since the 1980s. But they refer to different things, are driven by different forces, and have different strategic implications for companies.

What Is Globalization of Markets?

As explored in depth in our article on what globalization of markets means, this concept refers to the convergence of previously separate national consumer markets into a single global marketplace.

It describes the demand side of globalization: the fact that consumers in different countries increasingly want similar products and services, that global brands operate across borders, and that companies compete for customers worldwide rather than just domestically.

Theodore Levitt was the most influential theorist of this demand-side globalization. His 1983 thesis argued that technology was homogenizing consumer preferences globally, creating opportunities for companies that sold standardized products worldwide.

What Is Globalization of Production?

Globalization of production refers to the dispersal of a company's production activities — research and development, component manufacturing, assembly, customer service, back-office operations — across different countries and locations worldwide.

It describes the supply side of globalization: companies sourcing inputs from wherever they are cheapest or best quality, manufacturing where labor and capital costs are most competitive, and assembling the final product wherever is most efficient.

The iPhone is a frequently cited example: designed in the United States, using chips from Taiwan and South Korea, assembled in China, and sold worldwide. The iPhone's supply chain spans dozens of countries — this is globalization of production.

Key Differences

How They Relate

Globalization of markets and globalization of production are deeply interrelated. Globalization of markets creates the scale that makes globalization of production viable — if you are selling to a global market, you can justify building a globally optimized supply chain. Globalization of production in turn enables globalization of markets — by reducing production costs, it allows companies to price competitively enough to win global market share.

Consider Toyota: it sells in a global market (globalization of markets) and manufactures in over 50 countries, locating production close to key markets (globalization of production). The two strategies are complementary and mutually reinforcing.

The Rise of Global Value Chains

Globalization of production has given rise to what economists call global value chains (GVCs) — the network of activities spread across multiple countries that together produce a finished product or service.

In a global value chain, different stages of production are located wherever they can be performed most efficiently. Design might be in the United States, software development in India, manufacturing in China or Vietnam, assembly in Mexico, and customer service in the Philippines. Each location contributes a piece of the value creation.

Understanding GVCs helps explain why trade statistics can be misleading: a product "made in China" might incorporate components from a dozen countries, and most of its value might have been created elsewhere.

Why It Matters for Business Strategy

For international business strategy, distinguishing between these two forms of globalization matters because they call for different decisions and capabilities:

• Globalization of markets requires decisions about which markets to enter, how to position the brand globally, whether to standardize or adapt products, and how to manage global marketing
• Globalization of production requires decisions about where to locate production, how to manage global supply chains, whether to outsource or keep activities in-house, and how to manage across different regulatory and labor environments

The largest multinationals must manage both simultaneously — competing in global markets while optimizing global production. This is complex, expensive, and requires sophisticated management capabilities.

Current Challenges

Both forms of globalization face challenges in the current environment. Globalization of markets is complicated by rising trade tensions, tariffs, and a reassertion of economic nationalism in some countries. Globalization of production faces scrutiny following supply chain disruptions during the COVID-19 pandemic, which exposed the risks of over-dependence on single-country production.

These challenges are among the disadvantages of globalization of markets that students and practitioners must grapple with.

Summary

Globalization of markets and globalization of production are two complementary but distinct dimensions of the global economy. Markets globalization is about where companies sell; production globalization is about where they make things. Both have transformed international business, both offer significant advantages, and both carry risks and complexities that international business students must understand.