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Globalization & International Business

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Globalization & International Business

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Globalization & International Business

  1. 1. T.J. Joseph Globalization & International Business
  2. 2. Contents • Introduction to International Business • Debate on Globalization • Political Economy of International Business • Cultural Environment of IB • Ethical Issues in IB • International Trade Theory and Applications • Instruments of Trade Policy • International Economic Integration and Institutions • Balance of Payments and Foreign Exchange Market • Foreign Direct Investment and MNEs
  3. 3. Distribution of Marks Component Marks Group Project 10 Case Analysis and Presentations 10 Class participation 05 Attendance 05 Mid-Term Examination 20 End-term Examination 50 TOTAL 100
  4. 4. What is International Business? Resources: Raw materials, capital, and people Goods: Semi-finished or finished Services: Accounting, legal, banking, insurance, healthcare, education, tourism, consultancy, etc.. Knowledge and skills: Technology, innovations, various skills, IPRs, brand names, etc. Information flows: Databases and networks Business activities that involves the transfer of resources, goods, services, knowledge, skills, or information across national boundaries/borders
  5. 5. Participants in International Business Parties involved in International Business • Individuals (individual investors, tourists, employees, students, etc.) • Companies (private or public) • Government (central bank, government institutions, etc.) • International institutions (World Bank, IMF, WTO, etc.) Among these companies are the dominant players in International Business
  6. 6. How International Business? • International Business Transactions: Activities crossing national boundaries • Mainly manifested in two ways: International trade refers to exports and imports of goods and services across the borders of a country Bilateral trade, multilateral trade, pluri-lateral trade International investments implies cross-border transfer of resources to carry out business activities outside home country
  7. 7. 7 Modes of International Business International Trade  Merchandise exports and imports – Tangible items (e.g., cars, televisions, etc.)  Service exports and imports – Tourism and transportation – Performance of services – Use of intangible assets
  8. 8. 8 Foreign Investments Direct investment : Key features –Control and ownership –Access to foreign markets –Access to foreign resources –Higher foreign sales than exporting (often) Portfolio investment: Key features –Non-control of foreign operations –Financial benefit Modes of International Business
  9. 9. International Vs. Domestic Business • International business is mostly the outgrowth of domestic business (eg. Japanese car makers) • International business is more riskier than domestic business (because countries are different)  Differences in environmental dynamics – Diversity between countries with respect to economic growth, inflation, interest rates, cultures, social customs, business practices, laws, political systems, technology, etc.  Operational nature become more complex – Receipts and payments in multiple currencies, different accounting methods, consumers, employees, regulators, and the competitors
  10. 10. International versus Domestic Business  Differences in environment of their operations • Economic Environment: – Differences in tariff structures and trade promotion schemes – Differences in currencies (exchange rate), inflation, interest rates, accounting practices, etc. – GDP growth and purchasing power (Economic stability) • Socio-Cultural Environment: – Cultures, social customs, business practices, etc. – Social and cultural norms and values differ between countries
  11. 11. International Vs. Domestic Business • Political and Legal Environment – Political stability and government policies affects international business – Changes in trade policies, fiscal policies and other policies are taken in view of the political priorities of the govt. – Foreign exchange regulations and foreign investment policies – Well-developed sound legal system may provide unbiased and fair treatment in international business – Uniformity in interpretation of laws and clarity of legal procedures
  12. 12. International Vs. Domestic Business • Competition – More severe competition in international market than in domestic market because of various similar products from different countries • Infrastructure – Financial, institutional and physical infrastructure – More important is physical infrastructure in the form of roads, telecommunication, ports, etc. • Technology – Opportunity for knowing and getting highly cost-effective technologies, especially for developing countries
  13. 13. Why do Firms Expand Internationally?
  14. 14. Why do Firms Expand Internationally? Market Motives: • To expand their sales • Seize market opportunities in foreign countries through trade or investment Economic Motives: • For higher returns (profitability) through higher revenues and/or lower costs by obtaining cheap resources • Achieving economies of scale • Spreading R&D cost Ref: SL, pp11-12
  15. 15. Why do Firms Expand Internationally? Strategic Motives: • To capitalize on their distinctive resources or capabilities already developed at home – Technological leadership, brand image, customer loyalty, and competitive position • To take first mover advantage • Vertical integration involving different countries • To follow the major customer’s abroad (proximity to customers) – Japanese tire maker Bridgestone entering US market Ref: SL, pp11-12
  16. 16. What is Globalization? “Globalization is the closer integration of the countries and peoples of the world, brought about by the enormous reduction in the costs of transportation and communication and the breaking down of artificial barriers to the flow of goods and services, capital, knowledge, and (to a lesser extent) people across the borders” Ref: Joshi, p-7 Westernization, Americanization, Walmartization, McDonaldization, Disneyfication, Coca-Colanization, etc.
  17. 17. What is Globalization? Globalization of markets (Economies of scale): National markets are giving way to global markets (examples) Globalization of production: To take advantage of national differences in the cost and quality of factors of production (examples) Emergence of Global Institutions like WTO, IMF, World Bank, United Nations Globalization refers to the shift toward a more integrated and interdependent world economy
  18. 18. What is Globalization?  Economic Globalization: The internationalization of production and markets for goods and services, integration of financial systems, corporations and industries, technology, and competition  Financial Globalization: Liberalization of capital movements and spurt in cross-border capital flows Globalization may be defined as the process of integration and convergence of economic, financial, cultural, and political systems across the world
  19. 19. What is Globalization?  Cultural Globalization: The convergence of cultures across the world, which is evident by its impact on people and their lives  Political Globalization: The convergence of political systems and processes around the world (the decline of communist systems and the rise of democratic systems)
  20. 20. Drivers of Globalization Macro Factors: (a) Declining Trade and Investment Barriers  Liberalization and privatization, changing world order, etc. (b) Technological Change  Microprocessors and telecommunications  The Internet and World Wide Web (services trade)  Transportation technology (containerization)
  21. 21. Drivers of Globalization  Reasons for Recent International Business Growth  Expansion of technology: • Transportation is quicker • Communications enable control from afar • Internet: drastic decline in the transaction cost of transferring ideas and information • Transportation and communications costs are more conducive for international operations  Liberalization of cross-border movements • Lower governmental barriers to the movement of goods, services, and resources enable companies to take better advantage of international opportunities
  22. 22. 23 Development of supporting institutional arrangements • Institutional arrangements – Are made by business and government – Ease flow of goods – Reduce risk Increase in global competition • More companies operate internationally because – New products quickly become global – Companies can produce in different countries – Domestic companies’ competitors, suppliers, and customers become international Drivers of Globalization
  23. 23. 24  Initial years of human history, people remained confined to their communities, villages, or local regions  Hardly any formal barriers such as tariffs or non-tariff restrictions for the movement of goods or visa requirements for people  Pre-World War I period (1870-1914): rapid integration of economies in terms of trade flows and people movement  Two World Wars (1914-1945): brought various restrictions on the movements of goods and services  After 1945: there was a drive to increased integration (World Bnak, GATT, IMF, etc.) Globalization: Historical Perspective
  24. 24. How to Measure Globalization? Components of Globalization Index:- (A.T.Kearney) • Economic Integration: trade, FDI, portfolio capital flows, income flows (profits, wages, etc.) • Personal Contact: Travel & tourism, telephone traffic • Technology: No. of internet users, technology collaborations • Political Engagement: memberships in international organizations, foreign embassies, participation in UN missions
  25. 25. Who Benefits from Globalization? • Developed countries are high on globalization while developing countries are not (Why?) • Widening gap between the rich and the poor • Globalization can be a threat to the sovereignty of nations • It exposes national economies to uncertainties of global economy Globalization is a complex phenomenon. It has winners and losers at various levels
  26. 26. The Globalization Debate • Job losses at home (1999 Seattle anti-globalization protests and protests against outsourcing) • It comes at the expense of the environment • Human right violations (e.g., sweatshops) • Cultural imperialism of global media and MNCs • It enhances the monopoly power of large MNCs
  27. 27. The Globalization Debate To a consumer, globalization means more choices at better quality and lower prices For job seekers, more employment opportunities For business, wider market for their products and services (economies of scale) For producers, expanded availability of resources and technology and knowledge transfer For the economy, economic development and growing prosperity Reduce global divide by advancing to a homogeneous civilization and a uniform business system
  28. 28. Success of Globalization-Conditions • Globalization could be more advantageous to participating nations if global infrastructure is better developed • Global infrastructure includes Institutional framework (multilateral agreements in trade, investment, and service) Market efficiency (capital market and foreign exchange market)
  29. 29. • In the long run, globalization generally leads to: – higher living standards – more efficient resource usage – greater access to technology, products, and services In particular, liberalization of markets appears to enhance income levels Consequences of Globalization
  30. 30. • Countless new business opportunities for internationalizing firms • New risks and intense rivalry from foreign competitors • More demanding buyers who source from suppliers worldwide • Greater emphasis on proactive internationalization • Internationalization of firm’s value chain Consequences of Globalization
  31. 31. Restraining factors Movers
  32. 32. The Drivers and Consequences of Market Globalization - Summary
  33. 33. Online Resources 1. Global Fortune 500 companies in 2010. http://money.cnn.com/magazines/fortune/global500/2010/f ull_list/ 2. China duties to hit US chicken imports: http://www.bbc.co.uk/news/business-11415036 3. US Congress approves China sanctions bill: http://www.bbc.co.uk/news/business-11407254 4. Car Industry: Around the World - interesting articles: http://www.bbc.co.uk/news/business/global_car_industry/ 5. Best Global brands: http://images.businessweek.com/ss/06/07/top_brands/sour ce/1.htm
  34. 34. References 1. Chapters 1, ‘International Business’ by Charles W. Hill and Arun K. Jain, Tata McGraw Hill publication. 2. Chapter 2, ‘International Business’ by Oded Shenkar and Yadong Luo, Wiley publication. 3. Chapter 1, ‘International Business’ by Rakesh Mohan Joshi, Oxford Publications

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