Concepts of globalization and international business Factors affecting globalization; Reasons for international business expansion; Drivers of market globalization; Domestic vs international business; Modes of International Business; Entrepot.

1. Globalization and International Business
Instructor:
Prerana Bhattarai
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2. Content
Concepts of globalization and international business;
Factors affecting globalization;
Reasons for international business expansion;
Drivers of market globalization;
Domestic vs international business
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3. 1. Concept of globalization
• Globalization is the free flow of factors of production beyond a national boundary.
• It is the process of integration of national economies and businesses into the global
factors of production including capital, goods, technology and most importantly, labour.
• Globalization includes “process that promotes:
- Economic interdependence of countries in the world.
- Integrating national economies into one global economy, and
national business into global business.
- Free movement of products across borders, and
- Free flow of factors of production ( capital, labour and technologies)
across the national borders”.
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4. 2. Definition of Globalization
• Sundaram and Black (2005) described globalization as the process by which an activity or
undertaking become world-wide in scope.
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5. 3. Characteristics of Globalization
• Integration of national economies into one global economy:
• Economic interdependence:
• No country can be fully dependent on itself, but it must depend on others for one commodity
• Based on free market economy:
• Globalization not only requires open market mechanism or free market economy but also liberalization of socio-economic
life
• Free movement of products across borders:
• Free flow of factors of production:
• Factors of production which are the inputs of the Production Process are supposed to move freely as a result of globalization
• Standardised technology:
• As globalisation makes technology transfer easy, companies across the world have to adopt globally accepted, standardised
technologies. The windows-based computer technology is the best example.
• Extensive use of ICET:
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6. 4. Concept of International Business
• International business is producing and marketing a firm’s products beyond the national
frontier.
• International business is also defined as business whose activities are carried out across
national borders.
• In the international business, the major actors or agents are:
• Multi-National Corporations (MNCs)
• Multi-National Enterprises (MNEs)
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7. 5. Characteristics of International Business
1. Multiple countries involved
2. Economic interdependence
3. Currency exchange:
• IB activities involves dealing with multiple currencies from different nations. So
currencies are commonly exchanged with US dollars or even euro or even any
currency that business requires.
4. Movement of product across borders
5. Based on free market economy
6. Free flow of factors of production
7. Standardized technology
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8. 6. Advantages of globalization
• Trade expansion
• Transfer of Technology, Capital and Management:
• Globalization offers benefits of transfer of technology, capital and management. It
helps fulfil gaps in technology, capital supply and management skills
• Higher productivity and income:
• Transfer of technology, capital and management enhances productivity of production
systems and human resources. It enlarges income of the firms and their stakeholders
including shareholders, employees and suppliers
• Employment opportunities:
• Globalization increases trade that creates more demands for the goods and services. It
requires increasing production volumes which in turn creates employment
opportunities across the world for different types of workers.
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9. • Industrialization:
• Globalization helps fulfil all gaps in the production process and promote different
types of supporting industries and auxiliary services so that economies gradually
reach to the stage of the industrialization
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10. 7. Disadvantage of globalization
• Threats to socio-cultural values in countries:
• Inequitable Distribution of Income and Benefits:
• Erosion of National Sovereignty:
• Because of globalization, consumers do not give value to the national sovereignty. The rise in
international agreements eliminate country government’s restrictions on how goods are bought and
sold and may dimmish a nation’s sovereignty
• Insecurity in Job and Income Sources:
• Because of globalization, off-shoring has been popular. Workers involved in production always have
the risk of losing their jobs.
• Environmental Degradation:
• Globalization leads to more consumption of non-renewable natural resources. It increases
environmental damage including air and water pollution.
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11. 8. Factors affecting globalization
• Expansion of technology:
• Advances and expansion of technologies encourages an increased flow of ideas and information
across borders and enables customers to learn about foreign products and services
• Liberalization of Economies and Cross-Border trade:
• Liberalization removes barriers to international trade, the cross-border trade and resource
movements increase expanding their market to other countries also
• Cost concerns:
• Firms can locate production plants in countries where costs of factors of production are lower.
• Growing consumer pressures:
• Firms will have to respond to such consumer pressures to supply the demanded goods,
distributing goods in different parts of the world. Thus, firms go global to reach out to demanding
buyers in foreign markets. This results in globalization.
• Expanded Cross-national cooperation
• International media outreach
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12. 9. Reasons for international business
expansion
• Taking Comparative Advantage of Business:
• Comparative cost advantage is the reason why firms expands their business
internationally
• Comparative Cost Theory of international trade
• Matching with consumer pressures:
• Benefitting from international product life cycle:
• Gaining higher profit margins and growth opportunities:
• The economic criterion forces the companies to locate international markets to sell
their surplus production and to gain cost advantages
• Foreign markets, at times, offer high profit margins that adds motivation to go
international
• Government shall as well support and provide incentives to promote international
trade
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13. 9. Reasons for international business
expansion cont’d
• Adjusting excess capacity:
• Firms undertake foreign business to minimize their fixed cost per unit
• Since firms wish to benefit from economies of production scale, they have to
sell to foreign countries their excess products manufactured from the higher
scale of production
• Benefitting from technological advances:
• Technological advances in the areas of ICT, internet and transportation and
production systems have made firms expand their business
• ICT development has also considerably reduced transaction costs
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14. 9. Reasons for international business
expansion cont’d
• Geographic Diversification:
• Diversifying geographically instead of extending product line alone is a
strategy that a company adopt for its business growth and sustenance
• Firms go for international business when it is required to diversify its business
geographically
• Managing and Escaping Competition:
• Firms choose to globalize their markets for two competition-related reasons:
• To avoid unwanted, tough competition in domestic markets, or
• To exploit competitive potential in international markets
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15. 10. Domestic
Business VS
International
Business
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16. 11. Drivers of market globalization
• Crisis in Capitalism:
• First was over production that forced capitalists to sell products beyond
national boundary
• Second was over accumulation of capital, led to crisis of utilization of capital
in an optimal way
• Technological Advances:
• It is a strong driver of market globalization. Four things have brought
immense changes to human lives:
• Computerization and development of microprocessors
• Development of Information and Communication Technology (ICT)
• Production technology
• Transportation technology (Organized and high speed travel and efficient transportation)
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17. 11. Drivers of market globalization cont’d
• World Economic Boom:
• Comparative/Competitive Advantage:
• Comparative cost advantage is important reason for globalization as it prompts international
business activities
• As per comparative cost theory of international trade, gains from trade will occur even in a
country that has absolute advantage in all products, because the country must sacrifice less
efficient output to product efficient output.
• Decreasing Barriers to Trade and Investment:
• After the world war II, the GATT(General Agreement of Tariff and Trade) was signed, and
countries gradually started reducing trade barriers
• International Media Outreach:
• Media have expanded their outreach today, thus, the happenings in one part of the world
will be instantly known to the other part
• Products in one market will be instantly known to the other part; it creates demand from
across the world
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18. 11. Drivers of market globalization cont’d
• Competition:
• Firms choose to globalize their markets for two competition-related reasons:
• To avoid domestic competition
• To exploit competitive potential in international markets
• Increasing Market Size and Geographic Diversification:
• To increase the market size and if the home country market is saturated, it will have
to go to foreign markets
• Political Trend towards Promoting Regional Economic blocs:
• Nepal has also been integrated with SAFTA and BIMSTEC which bind together several
nations into a single market offering significant market and trade opportunities
• There has been reduction in trade barriers
• Growing Consumer Pressure:
• Consumers today not only know about products and services, but can afford them as
well which has increased pressures on companies to do more on their R&D activities
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19. 12. Components of International
Business/Modes of IB
Modes of IB
International
Trade/Sales
Imports-
Exports
Merchandise
Import Export
Service Import
Export
Asset/IPR
Import Export
Entrepot
International
Investment
Direct
Investment
Portfolio
Investment
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20. 12. Components of International
Business/Modes of IB cont’d
• International Trade/Sales:
1. Import and Export:
• It usually involves imports and exports of physical or merchandise goods, services and
intellectual properties.
2. Entrepot:
• It is a mode of import that is not meant for domestic consumption but for re-export to
another country
• Before early 1990s, Nepal imported big caches of gold and exported to India
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21. 12. Components of International
Business/Modes of IB cont’d
• International Investments:
• They consist of Foreign Direct Investments (FDIs) and Joint Ventures (JVs)
• Foreign investment refers to ownership of foreign property in exchange for financial returns, such as interest
and dividends
1. Direct Investments:
• They are fully foreign where a company purchases a sufficient share in another foreign country company to
obtain its significant management control
• When two or more companies share ownership of an FDI, the operation will be known as a Joint Venture (JV)
• When a government joins a company in an FDI in a foreign country, the operation will become a mixed
venture
2. Portfolio Investments:
• They are the purchase of shares and bonds to obtain a return on the funds invested.
• Generally, such investments have no intention to control the organization
• So, they are also known as a non-controlling interest
• Companies use portfolio investments for short-term financial gains as a means to extract more returns on its
money with relative safety
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22. References
• Prof. Dr. Arhan Sthapit’s “International business: Text & cases” (2017:
ISBN 978-9937-688-10-9), Taleju Prakashan (For Masters & Bachelors
levels). [2005 and 2009 ed: ISBN 978-9937-535-04-5, 2014 ed: ISBN
978- 9937-535-66-3; and 2015 ed: ISBN 978-9937-535-91-5]
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23. Thank You!
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