Gbm unit-01 (gobalization)

07/06/10 1
By :
Prof. Amit Kumar

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“A student pursuing management education from IILM-
Graduate School of Management, for example may find
himself or herself placed in a firm located in a totally
different country. Knowledge about international
business keeps the youngster mentally prepared to
accept assignment in an alien environment. Forewarning
is definitely forearming, for the fresh management
graduate”.
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Importance of this course
Global Business Management

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Course: International Business Management
1. Globalization
2. Global Trade & Theory
3. Global Technological Environment
4. Global Economic Environment
5. Global Political-Legal Environment
6. Foreign Direct Investments
7. Regional Economic Integration
8. Strategy and Structure of International Business
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Global Business Management

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Global Business Management Globalization

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Contents
• What is Globalization?
• Globalization of Markets
• Phases of Market Globalization
• Drivers of Market Globalization
• Internationalization of Firm’s Value Chain
• Globalization of Production
• Emergence of Global Economy
• Ripple Effect of Globalization
• Routes of Globalization
• Case-Study: ‘Arrow & Apparel Industry’
• Presentation: Latest Global Happenings (See Name-Lists)
• Case-Study: ‘Going Global and Taking Charges-The Road
Ahead for Indian Manager’
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What is Globalization?
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• Globalization is synonymously used with
international business.
• People often use the term ‘global village’.
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A fundamental shift is occurring in the world economy.
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National
Economy
Integrated
Global
Economy
A Shift From

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Characteristics of National Economy:
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National
Economy
• Self –contained entities
• Isolated from each other
• By barriers to cross-border
trade & investment
• By distance, time-zones and
languages
• By national differences in
government regulation. Culture
and business system

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Characteristics of Global Economy:
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Global
Economy
• Barriers to cross-border trade &
investment declining
• Perceived distance is shrinking
due to advance in transportation
& telecommunication technology
• Material culture is starting all
over world.

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In their own way, globalization and technological
advances are resulting in the ‘death of distance’.
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Death of Distance
In this time
Period……
Fastest transportation
was via……..
At a speed of….
1500 to 1840s
1850 to 1900
Early 1900s
to Today
Human-powered ships &
horse-drawn carriages
10 miles per hour
Steamships
Steam Locomotive Trains
36 miles per hour
65 miles per hour
Motor Vehicles
Propeller airplane
Jet aircraft
75 miles per hour
300-400 miles per hour
500-700 miles per hour

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A fundamental shift is occurring in the world economy.
Process by which this shift occurs is commonly
referred as Globalization.
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National
Economy
Integrated
Global
Economy
A Shift From

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In this integrated, interdependent economy, an American
might drive to work in a car designed in Germany that was
assembled in Mexico by DaimlerChrysler from components
made in the United States and Japan that were fabricated
from Korean steel and Malaysian rubber. She may filled the
car with gasoline at a BP service station by British
multinational. The gasoline could have been made from oil
pumped out of a well off the coast of Africa by a French oil
company that transported in to the US in a ship owned by a
Greek shipping line. While driving to work, she might talk to
her stockbroker on a Nokia cell phone that was designed in
Finland and so on…………………………..
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Effect of Globalization

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Globalization refers to the shift towards a
more integrated and interdependent world economy.

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Facets of Globalization
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Globalization has several facets, including
Globalization of Markets & Globalization of Production.
Globalization
Of
Markets
Globalization
Of
Production

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The Globalization of markets refers to the merging of
historically distinct and separate national markets into
one huge global marketplace.
The falling barriers to cross-border trade have made it
easies to sell internationally.
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Globalization of Markets

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Consumer products such as Citigroup credit cards,
Coca-Cola soft drinks, Sony Play station video
games, McDonald’s Hamburgers and Starbucks
coffee…….by offering the same product worldwide,
these companies help to create a global market.
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Most global markets currently are not markets for
consumer products- where national differences in
tastes and preferences are still often important
enough to act as a brake on globalization- but
markets for industrial goods and materials that serve
a universal need the world over.
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These include the markets for commodities such as
aluminum, oil and wheat; market for industrial
products such as microprocessor, DRAM,
commercial a jet airlines; market for computer
software and market for financial assets from U.S
Treasury bills to Eurobonds and Futures on the Nikki
index.
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In many global markets, the same firms frequently
confront each other as competitors in nation after
nation.
Coca-Cola’s Rivalry with PepsiCo
Ford’s Rivalry with Toyota
Boeing’s Rivalry with Airbus
Caterpillar’s Rivalry with Komatsu
Sony, Nintendo and Microsoft
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Phases of Market Globalization
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Since the 1800, we can identify four distinct phases in the
evolution of market globalization.
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Phase of Period Triggers Key Characteristics
Globalization
First
Phase
1830 to
late
1900s,
Peaking
in 1880
Introduction
of railroads
& ocean
transport
Rise of manufacturing:
cross-border trade of
commodities, Largely by
trading companies

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In first phase, Invention of the telegraph
and telephone in the late 1800s facilitated
information flows between and within
nations, greatly efforts to manage
companies’ supply chain.
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Globalization
Second
Phase
1900 to
1930s
Rise of
Electricity
and steel
production
Emergence & dominance
of early MNEs (primarily
European & North
American) in
manufacturing, extractive
and agricultural industries

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Second phase reached its height just before the Great Depression,
a worldwide economic downturn that began in 1929. Europe’s
colonization of countries in Asia, Africa and Middle East led to the
establishment of some of the earliest subsidiaries of multinational
firms like BASF, BP, Nestle, Shell & Siemens.
In the years before WW-I (pre-1914), many firms
were already operating globally. The Italian
manufacturer Fiat supplied vehicles to nations on
both sides of the war.
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Globalization
Third
Phase
1930 to
1970s
Formation of
GATT;
conclusion
of WW-II;
Marshall
Plan to
reconstruct
Europe
Western countries to
gradually reduce barriers to
trade; rise of MNCs, cross-
border trade of branded
products & flow of money
paralleling the development
of global capital markets

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Third phase began after WW-II. At the war’s end, in 1945,
substantial pent-up demand existed for consumer products, as well
as input goods to rebuild Europe and Japan. The US was least
harmed by war and became the world’s dominant economy.
Several industrialized countries including GB, Australia &
US, sought to reduce barriers. The result of this effort was
the GATT formation in 1947.
In 1960s, recovered from WW-II, MNEs in Europe & Japan
began to challenge the global dominance of US MNEs.
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Globalization
Fourth
Phase
1980s
to
present
Radical advances
in information,
communication,
manufacturing;
privatization of
MNEs and
economic reforms
emerging country
Unprecedented rate of
growth in global trade of
products, services and
capital; focus on emerging
markets for export, FDI and
sourcing activities;
participation in international
business of SMEs

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Fourth phase is the current phase of globalization. The
1980s witnessed huge increase in FDI, specially in capital
and technology intensive sectors.
Mergers of major firms, GM acquired Saab in Sweden, Ford
acquire Mazda in Japan and Daimler Benz bought Chrysler
in the United States.
Multinational firms began to seek cost advantages by
locating factories in developing countries with low labor
costs.
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Drivers of Market Globalization
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“The term ‘drivers’ refers to the global forces that have
fueled the process of globalization. These global
factors have acted as catalyst that have contributed to
the growth of international business”.
• Declining Trade and Investment Barriers
• Technological Change
• Emergence of Global Institutions
• Integration of World Financial Markets
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1. Declining Trade and Investment Barriers
• After Independence in 1947, India adhered to socialist
policies…as the "License Raj"; …slow growth rate
was named the "Hindu rate of growth".
• The economic liberalization in India-1991, refers to
ongoing reforms in India. In 1991, the government of
P. V. Narasimha Rao and his finance minister
Manmohan Singh started breakthrough reforms
(proposed LPG).
Declining trade and investment barriers (by government)
have vastly contributed to globalization.
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2. Technological Change
• Most powerful instrument that triggered globalization
is technology. Technology is expanding, especially in:
 Microprocessors and Telecommunication
 Internet and World Wide Web
 Transportation Technology
Thus we find that telecommunications is creating a global
audience and transport is creating a global village.
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2. Technological Change (cont’)
Microprocessors and Telecommunication
• Single most important innovation of this century has
been the microchip enabling the explosive growth of
high-power, low-cost computing, enabling huge amounts
of information to be processes by individual and firms.
• This has been accompanied by developments in
satellite, optical fiber and wireless technologies resulting
in communication revolution.
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Internet and World Wide Web
• In 1990 there were less than 1 million users of internet.
The number had gone up to 655 million by 2002 and
1.12 billion users by 2005.
• The internet and world wide web are the information
backbone of the global economy.
• The value of web-based transaction rose to $657 billion
in 2000 from virtually nothing in 1994, to $6.8 trillion by
2004. These transactions include both business to
business and B2C or e-commerce.
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Transportation Technology
• Several major innovation in transportation technology
since World War-II, are development of commercial jet
aircraft and super-freighter, and
• Introduction of containerization, which simplifies
transshipment from one mode of transport to another
and lowering the cost of shipping goods over long
distances.
• There has also been an increase in the share of cargo
traveling by air as a result of improvements in air travel.
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3. Emergence of Global Institutions
• Trading block, WTO seeks to promote international
business by removing trade and investment barriers.
• The United Nations, along with its associated financial
institutions (World Bank, IMF), is committed to
preserving world peace through international
cooperation and collective security.
• Regional trading blocks (EU, NAFTA, ASEAN) are
adding to the pace of globalization.
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4. Integration of World Financial Markets
• Integration of world financial markets makes it possible
for internationally active firms to raise capitals, borrow
funds and engage in foreign currency transactions.
• Financial services firms follow their customers to
foreign markets. Funds can be transferred between
buyers and suppliers, through a network of international
commercial banks i.e. SWIFT.
.
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4. Integration of World Financial Markets
Connecting 9,700 financial institutions in some 209
countries, SWIFT facilitates the exchange of financial
transaction. Globalization of finance contributes to firms’
ability to develop and operate world-scale production
and marketing operations.
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Each value-adding activity is subject to internationalization;
that is, it can be performed abroad instead of at home.
The most typical reasons for locating value-chain activities in
particular countries are to reduce the costs of R&D and
production or to gain closer access to customers.
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Internationalization of Firm’s Value Chain
Stages in the Firm’s Value Chain
R&D
Procurement
(Sourcing)
Manufacturing Marketing Distribution Sales &
Services

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The pharmaceutical firm Pfizer conducts R&D in Singapore,
Japan and other countries to gain access to scientific talent
or collaborate with local partner firms.
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R&D
Procurement
(Sourcing)
Services

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Office furniture manufacturer Steelcase sources low-cost
parts from suppliers in China and Mexico.
Dell has business processes such as data entry, call
centers and payroll processing performed in India.
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R&D
Procurement
(Sourcing)
Services

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Genzyme Crop. Does much of the manufacturing and
testing of its surgical and diagnostic products in Germany,
Switzerland and the UK.
Renault produces cars via low-cost factories in eastern
Europe.
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R&D
Procurement
(Sourcing)
Services

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BMW and Honda locate marketing subsidiaries in the US to
more effectively target their vehicles to the huge US market.
Carrefour and Barclays Bank establish worldwide networks
of stores and offices to be near their customers.
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R&D
Procurement
(Sourcing)
Services

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Wolverine World Wide, marketers of popular shoe brands
( e.g. Hush Puppies, Bates), contracts with independent
retail stores abroad to reach its customers.
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R&D
Procurement
(Sourcing)
Services

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Direct sales company such as Amway and Avon employ
their own independent sales office in China, Mexico and
elsewhere, in order to reach end-users.
Toyota maintains sales & customer service operations
abroad in order to meet customer requirements more
effectively.
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R&D
Procurement
(Sourcing)
Services

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GOP refers to the sourcing of goods & services from locations
around the globe to take advantage of national differences in the
cost and quality of factor of production (such as labor, energy,
land and capital).
By doing this, companies hope to lower their
overall cost structure and improve the quality or
functionality of their product offerings, thereby
allowing them to compete more effectively.
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Globalization of Production

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Consider the Boeing Company’s commercial jet airlines, the
777. Eight Japanese suppliers make parts of the fuselage, doors
and wings; a supplier in Singapore makes the doors for the nose
landing gear; three suppliers in Italy manufacture wing flaps; and
so on.
In total, some 30% of the 777, by value, is built by foreign
companies/ suppliers who are best in the world at their
particular activity. For the next jet airlines 787, Boeing is
pushing this trend even further, with some 65% of the total
value to be outsourced.
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Outsourcing of production also increase the
chance that it will win orders from airlines
based in that country than its global rival,
Airbus Industry.
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Another, Consider the IBM ThinkPad X31 laptop computer.
This product was designed in the US by IBM engineers because
IBM believed that was the best location in the world to do basic
design work. The case, keyboard, and hard drive were made in
Thailand; the display screen and memory were made in South
Korea; built-in wireless card was made in Malaysia; and
microprocessor in the US.
In each case, these components were manufactured in the
optimal location given an assessment of production costs
and transportation costs. These components were shipped
to Mexico, where the product was assembled, before being
shipped to US for final sale.
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Ripple Effects of Globalization
Effects of globalization are varied, ranging from cultural degradation to the
fear of loss of sovereignty. We focus on the effects of internationalization
on management, Jobs, wages, child labor, women and lastly, developing
countries.
GLOBALIZATION
JobsDeveloping
Countries
Women at the
Workplace
Management
WagesChild
Labor
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Routes of Globalization
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The usual routes of globalizations are exports and imports,
use of assets, performance of services……..
Presence in Foreign Markets
Foreign
Investment
High
High
Low
Low
Exports &
Imports
Tourism &
Transportation
Use of
Assets
Performance
of
Services
Direct Investment
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Exports and Imports
• Exports & Imports do not take place only in tangible
goods, but also include services such as those
provided by international airlines, hotels, cruise etc.
Export of Goods & Services as a percentage of GDP
Country % of GDP
Netherlands 74.7
Germany 38.5
Canada 37.1
France 27.9
UK 24.2
Brazil 17.7
India 16.6
Japan 14.3
US 9.8
Source: World Development Report, 2008
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Tourism & Transportation
• Tourism & Transportation are the routes of
globalization for such industries as shipping,
airlines, hotel and travel agency.
• Some countries, Greece and Thailand for
example, depend on international tourism and
transportation for employment, profit and foreign
exchange earnings.
• Similarly, in recent years the US has earned
more from foreign tourism than from its exports
of agricultural goods.
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Use of Assets
Licensing & Franchising are the modes
which facilitate companies to allow
others to use their assets.
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Use of Assets (Licensing)
• Under a License Agreement, one firm permits another
to use its intellectual property for compensation called
royalty, as it happened between Arrow Company and
Arvind Clothing Ltd.
• The firm that makes the offer is the licensor and the
recipient firm is act as the licensee. The property
licensed generally includes such assets as patent,
trademarks, copyrights, trade-secrets, technical
know-how, business skills.
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Use of Assets (Licensing)
Few disadvantages of licensing are:
• Possible loss of quality control
• Risk of technology being stolen
• Licensing fees are likely to be lower than FDI
profits.
• Possible loss of opportunity to enter the
licensee’s market with FDI later.
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Use of Assets (Franchising)
• Franchising which involves the granting of right by a
parent company (franchiser) to another (franchisee)
to do business in a prescribed manner.
• This right can take the form of selling the franchiser’s
products, using its name, production and marketing
techniques or using its general business approach.
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• Franchising is adaptable to the international arena,
and with some minor adjustments for the local
market, it can result in a highly profitable business.
• In fast foods- McDonald’s, In Hotel business-Le
Meridian, and others like Midas, GE and Coca-Cola.
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• Franchising agreement typically involves the
payment of a fee upfront and then a percentage
on sales.
• In return, the franchiser provides assistance, and
in some instances, may require the purchase of
goods or supplies to ensure the same quality of
goods and services worldwide.
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Performance of Services (Turnkey Operations)
• International businesses earn money in the form
of fees for service rendered. This is true in
banking, insurance, rentals, engineering,
management services.
• Turnkey Operations are typical modes for
earning such fees. Here, the company contracts
with a foreign entity to design and build an entire
operations. On completion, the operation is
handed over to the owner who can use the
facilities straightway.
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Performance of Services (Turnkey Operations)
• The Italian company, Fiat, for example
constructed a complete automobile plant in
the Russia under this type of agreement.
• Tata Consulting engineers, India, are
specialists in executing turnkey projects. like,
3*60 MW hydro-electric project in Iran,180
room hotel project in Yemen etc.
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Performance of Services( Management Contracts)
• Companies also earn fees through management
contracts - arrangements in which one firm
contracts with a foreign corporation or
government to manage an entire project or
undertaking for a specific period.
• Most management contracts provide for training
of local personnel who will eventually take over
the management responsibilities.
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Performance of Services( Management Contracts)
• An example, Disney receives management fees
from managing theme parks in France & Japan.
• For a ten-year period(1969-79), Citibank had lent
its managerial expertise to Grindlays Bank.
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Direct Investment (Joint Venture)
• A direct investment is one that allows the investor
a controlling interest in a foreign company. FDI
may take the form of a joint venture or a wholly
owned subsidiary.
• Joint Venture is a shared ownership in a foreign
business. Generally, the venture is 50-50
ownership in which there are two parties, each of
which holds a 50 % ownership stake and
contributes a team of managers to share
operating control.
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Direct Investment (Joint Venture)
• Fuji-Xerox is one of the most enduring and
successful joint ventures between two
companies of different countries.
• There are 868 Indian joint ventures abroad,
out of which 286 are in operations. Joint
venture works well if an international
business finds a right local partner.
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Direct Investment (Joint Venture: Advantages)
• A local partner can provide competent
management to the venture.
• If the host country requires local participation in
the equity, wholly owned subsidiary will not help.
• The local partner understand the culture of the
local market. An international business takes
years to acquire such knowledge if it enters a
foreign market through wholly owned subsidiary.
• Sometimes, another name for joint venture is
being used as strategic alliances.
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Direct Investment (Joint Venture: Disadvantages)
• A foreign firm’s apprehension about a local
partner’s interference in managerial decisions
and actions.
• Likely increase in political risk, if a wrong partner
is selected.
• Transfer pricing on products or components
bought from or sold to related companies triggers
conflict.
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Direct Investment (Wholly Owned Subsidiary)
• A wholly owned subsidiary can be set up in a foreign
market in either of two ways.
• The subsidiary that is established starting from the
ground up is called Greenfield investment.
• Compared to Greenfield investment, a cross-border
Acquisition has a number of benefits.
 Acquisition is quicker than establishing a firm.
 Second, it takes less time to gain a presence.
In a wholly owned subsidiary, the company owns
100 % of the equity.
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http://trak.in/tags/business/2010/12/24/top-10-ma-mergers-acquistions-2010/

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Portfolio Investment
• Portfolio investment represents a non-controlling
interest, return-motivated interest in a company, or a
loan to another company.
• Purchase of debt securities, bonds, interest-bearing
bank accounts and the like are typical examples of
portfolio investment. They do not offer voting rights
or any form of control over a firm.
• Foreign portfolio investments are important for most
international businesses. They use such investments
primarily for short-term financial gains.
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Discussion Questions
1.Discussion on latest “ Dragon Multinational, Micro-
multinational, The Born Global, Global Niche Players”.
2. Trace the evolution of international business.
3.“The study of international business is fine if you are going
to work in an MNC, but it has no relevance for individuals
who are going to work in small firms”. Evaluate the
statement.
4.What do you believe makes foreign business activities
more complex than purely domestic ones?
Evolution of International Business
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Discuss Critically:
“In one sense, international marketing does not differ
from domestic marketing; international marketing
involves the same basic marketing tools, concepts,
techniques and know-how. Differences arise in terms of
the applications of these fundamental domestic
marketing practices to international markets which are
characterized by complex environmental differences,
enhanced risks and operational complexities”.
Question- Class Test
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Gbm unit-01 (gobalization)

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