The Learning Objectives for Chapter 1 are To define globalization and international business and show how they affect each other To understand why companies engage in international business and why international business growth has accelerated To discuss globalization’s future and the major criticisms of globalization To become familiar with different ways in which a company can accomplish its global objectives To apply social science disciplines to understanding the differences between international and domestic business
What is globalization? Globalization refers to the widening set of interdependent relationships among people from different parts of a world that is divided into nations. The term also refers to the integration of world economies through the reduction of barriers to the movement of trade, capital, technology, and people. Throughout history, human contacts over ever-wider geographic areas have expanded the variety of available resources, products, services, and markets. Today, so many different components, ingredients, and specialized business activities go into products that we ’ re often challenged to say exactly where they were made. For example Apple’s iPhones are shipped from China and seem to be Chinese, yet less than four percent of their value is actually performed in China!
What is international business? International business consists of all commercial transactions that take place between two or more countries. International business activities allow us to get more variety, better quality, and/or lower prices. International business activities may be performed by private companies motivated by profit, or by governments that undertake them either for profit or for political reasons.
This Figure shows the complex relationships among conditions and operations that a firm may face when its conducts some of its business internationally. We’ll be referring back to this Figure throughout the chapter.
You may wonder what has been driving globalization. The answer is many different factors. One factor is technology. In recent years, we’ve seen tremendous advances in technology. The pace of new product development is faster than ever, and many companies are finding that in order to keep up, they need to team up with companies in other countries to gain financial resources or specialized capabilities. Firms are also finding that to justify their investments in new product development, they need to expand their sales to other markets. Another factor driving globalization is the liberalization of cross-border trade. Today, most governments have reduced restrictions on cross-border trade giving their citizens access to a greater variety of goods and services at lower prices. Increased competition from foreign companies also encourages domestic producers to become more efficient. Governments hope that by opening their countries to trade, other countries will also lower trade barriers. The development of new services that facilitate international business transactions have also increased further driving globalization. In addition, today’s consumers are more informed about foreign products and services and are better able to afford more luxury items. Moreover, more consumers are able to comparison shop to find better deals worldwide. Companies look for growing markets where consumer pressures are highest such as China. Intense global competition is also driving globalization. Today, companies continually look abroad to increase market share and reduce costs in order to better compete with other firms. Expansion abroad can take many forms: so-called born-global companies start out with a global focus because of their founders ’ international experience and because advances in communications give them a good idea of where global markets and suppliers are. Related to this, many new companies locate in areas where there are many competitors and suppliers — a situation known as clustering — which helps them to become quickly aware of foreign opportunities. Finally, changing political situations and increased cross-national cooperation have allowed international business to flourish. Countries of different political systems are more open than before to conducting international trade with each other. Governments are spending more resources on the improvement of infrastructure facilitating the transport of goods and resources. Furthermore, governments have realized the benefits of international cooperation. In particular, governments engage in international cooperation in order to gain reciprocal advantages, to attack problems jointly that one country acting alone cannot solve, and to deal with areas of concern that lie outside the territory of any nation.
How can we measure globalization? Well, it’s not easy. In general, we know that globalization has been increasing at least since the mid-1900s. Indeed, at the moment, more than 20 percent of world production is sold outside of its country of origin as compared to just seven percent in 1950. However, much of the world is still relatively isolated. One of the most comprehensive efforts to explore levels of globalization is the A.T. Kearney/Foreign Policy Index which ranks countries across four dimensions: economic, technological, personal contact, and political dimensions. Interestingly, the Index shows that a country can rank quite high on one dimension, but much lower on another. For example, the United States ranks high on the technological dimension, but much lower on the economic dimension. In contrast, Singapore and Hong Kong have ranked as the most globalized across all dimensions, while India and Iran are at the bottom of the list.
While there are many benefits to globalization, it remains controversial. Antiglobalization protests have become common at international conferences, and the reaction to government policies is sometimes violent. Three issues are of particular concern. First, the threat the globalization poses to national sovereignty. According to critics, globalization undermines the ability of a country to act in its own best interests and can make smaller economies overly dependent on larger ones. Moreover, critics contend that even a country’s cultural sovereignty is threatened as products, companies, work methods, social structures and language are homogenized as a result of globalization. A second concern is the effect of globalization on economic growth and the environment. Because globalization brings growth, more nonrenewable natural resources are consumed and damage to the environment increases. You might think of despoliation through toxic and pesticide runoffs into rivers and oceans, air pollution from factory and vehicle emissions, and deforestation that can affect weather and climate for example. However, others argue that global cooperation actually fosters superior and uniform standards for combating environmental problems, and that companies are encouraged to seek resource-saving and environmentally friendly technologies. Finally, critics are concerned about the effect of globalization on income equality and personal stress. According to critics the income inequality that is present in many countries today is a result of the global superstar system that has emerged as a consequence of globalization. Critics contend that globalization has facilitated access to a greater supply of low-skilled and low-cost labor and encouraged competition that leads to winners and losers. There is also some evidence that the growth in globalization goes hand in hand not only with increased insecurity about job and social status, but also with costly social unrest.
Critics of globalization also worry that the practice of offshoring is shifting too many jobs abroad. But keep in mind, that the practice allows companies to keep costs down, and can actually help create high value jobs at home. IBM’s offshoring strategy for example, allows the company to not only save money and boost sales, but also to create new jobs.
Why should companies engage in international business? A general answer is that going in international can help firms create value. More specifically, going global can help firms expand sales, acquire resources, and diversify or even reduce risks.
All three of these can influence decisions about whether, where, and how to go global.
The most popular modes of international business are merchandise exports and merchandise imports. They represent major sources of international revenues and expenditures for countries.
Services exports and imports are the fastest growing sector in international trade. The most important are tourism and transportation, service performance, and asset use. Many countries depend on tourism and transportation for both foreign exchange earnings and employment. Companies pay fees for services rendered in turnkey operations and management contracts. Turnkey operations are construction projects performed under contract and transferred to owners when they’re operational. Management contracts are arrangements in which one company provides personnel to perform general or specialized management functions for another. Asset use involves allowing another company to use your trademarks, patents, copyrights, or expertise in exchange for royalties. This takes place through licensing and franchising agreements.
Companies can also engage in international business by taking either a controlling or a non-controlling interest in a foreign company. When a firm takes a controlling interest the investment is known as foreign direct investment. If two or more companies share ownership of the investment it’s referred to as a joint venture. A non-controlling interest is called portfolio investment.
We use different terms to refer to the various collaborative arrangements between companies including joint ventures, licensing arrangements, management contracts, and long-term contractual arrangements. Those relationships in which the agreement is of critical importance to one or more partners or to an agreement that doesn’t involve joint ownership are called strategic alliances.
Any company with foreign direct investments is known as a multinational enterprise. Other terms used for these types of companies include multinational company, multinational corporation, or transnational corporation.
Keep in mind that companies doing international business may have to adjust their typical methods of operation depending on the conditions in foreign markets or if the operating modes are different from those used domestically.
Companies involved in international business need to explore how the external environment will affect their operations. In particular, it’s important for managers to understand the social science disciplines and how they affect all functional business fields.
We can organize physical and social factors into four groups. The first is geographic influences or how natural conditions influence the choice of production locations. The second group is political policies which impacts how, and even if, business takes place within a country. Related to this are legal policies. Firms must follow the laws in each country. The fourth group, behavioral factors, may also force a company to alter its operations to better fit with local cultural norms and values. Finally, economic forces affect costs, currency values, market size, and so on. Together, these factors influence how companies produce and market their products, how they staff their operations, and so on. Keep in mind that the factors may require a company to use a different method of operation internationally than is used domestically.
Managers also need to understand how the competitive environment will affect their operations. A company’s competitive strategy - low cost, differentiation, or focus - will influence its international strategy, as will its resources and experience. Companies with greater resources and experience will have more opportunities open to them than companies with more limited resources or experience. Finally, the competitors a firm faces in each market will dictate to some degree a company’s international strategy.
In summary, a firm’s competitive strategy influences how and where it operates. Firms might find that their competitive situation differs from market to market.
What is the future of international business and globalization? Well, there are three different perspectives on what the future might hold. Some believe that future globalization is inevitable. Those taking this perspective note that advances in transportation and communications are so pervasive that consumers everywhere will demand the best products for the best prices regardless of their origins. Moreover because MNEs have so many international production and distribution networks in place, they ’ ll pressure their governments to place fewer rather than more restrictions on the international movement of goods and the means of producing them. The largest challenge to overcome in this scenario will be figuring out how to spread the benefits of globalization equitably while minimizing the hardships placed on individuals and companies affected by increased international competition. Others however, think that in the future international business will grow more along regional rather than along global lines. This argument is based on studies that indicate that companies tend to conduct international business in neighboring countries. It’s logical that when companies first engage in international business, they expand into neighboring countries first and continue outwardly from there. This helps reduce transportation costs and companies can benefit from regional trade agreements that reduce barriers. Still others feel that the pace of both globalization and international business will slow down. Recall that a ntiglobalization sentiments have surfaced over the years, protesting against some of the negative effects of international business activity. This sentiment together with economic recession, growing political instability, and rising fuel costs among other things, threatens to slow international business growth.
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Go Global !Global Economic Environment :Understanding Globalisation and theGlobal Economy By Stephen Ong Edinburgh Napier University Business School firstname.lastname@example.org Visiting Professor, College of Management, Shenzhen University 29 July 2012
Learning Objectives To define globalization and international business and show how they affect each other To discuss globalization’s future and the major criticisms of globalization To understand why companies engage in international business and why international business growth has accelerated To become familiar with different ways in which a company can accomplish its global objectives
Agenda1. The Global Economy2. Understanding Globalisation3. Global institutions4. Global drivers5. The Globalisation Debate6. Companies & Globalisation
IntroductionGlobalization is the ongoing process that deepens and broadens the relationships and interdependence among countriesInternational Business (IB) is a mechanism to bring about globalization
IntroductionInternational business consists of all commercial transactions—including sales, investments, and transportation —that take place between two or more countries – increasingly foreign countries are a source of both production and sales for domestic companies
1.16 Forces Driving Globalization1. Increase in and application of technology2. Liberalization of cross-border trade and resource movements3. Development of services that support international business4. Growing consumer pressures5. Increased global competition6. Changing political situations7. Expanded cross-national cooperation
2. What is Globalization? The shift towards a more integrated an interdependent world economy Two components: – globalization of markets – globalization of production
2.1 Globalization of Markets The merging of distinctly separate national markets into a global marketplace – Consumer tastes and preferences are converging into a global norm – Firms that offer standardized products worldwide help create a global market
2.2 Globalization of Consumer Markets? Significant differences still exist between national markets on many relevant dimensions: Consumer tastes, preferences and values Distribution channels and legal regulations Business systems These differences require that product features, marketing and operating strategies be customized (localized) to best match the conditions in a country
2.3 Globalization of Markets? Countries are significantly different Range of problems are wider and more complex Government intervention in trade and investment creates problems International investment is impacted by different currencies
2.4 Globalization of Production The sourcing of goods and services from locations around the world Takes advantage of differences in cost or quality of the factors of production Labor Land Energy Capital
2.5 Impediments to Global Production Formal and informal trade barriers Restrictions on foreign direct investment Transportation costs Economic and political risk
2.5 Globalization of Services Historically, this has been primarily confined to manufacturing enterprises Increasingly, firms are taking advantage of modern communications technology and the Internet to outsource service activities to low- cost producers in other nations Trade in services currently accounts for 20% of all international trade
3. Emergence of Global Institutions Globalization creates the need for institutions to help manage, regulate and police the global marketplace – GATT – WTO – IMF – World Bank – United Nations
3.1 General Agreement on Tariffs & Trade GATT was established to: – police the world trading system – remove barriers to the free flow of trade, services and capital between nations Uruguay round created the World Trade Organization
3.2 World Trade Organization 150 member nations (97% of world trade) assumed prior GATT agreements and extended GATT to include services and intellectual property promotes lower trade and investment barriers
3.3 IMF and World Bank International Monetary Fund (IMF) and the World Bank were created in 1944 by 44 nations that met at Bretton Woods, New Hampshire IMF was created to maintain order in the international monetary system World Bank was created to promote economic development through low- interest loans
3.4 United Nations Established in 1945 by 51 nations – committed to preserving peace through international cooperation and collective security Membership is now at 191 countries Four main purposes 1. Maintain international peace and security 2. Develop friendly relations among nations 3. Cooperate in solving international problems and in promoting respect for human rights 4. Serve as a center for harmonizing the actions of nations
4. Global DriversTwo macro factors underlie the trend towards greater globalization 1. Decline in trade and investment barriers 2. Technological change
4.1 Global Drivers of Globalization – Decline in Trade and Investment Barriers
4.1.1 World ExportsPercentage Share of World Exports,Selected Nations, 2007 0 2 4 6 8 10 12 Germany 9.20 United States 8.59 China 8.02 Japan 5.38 France 4.06 Netherlands 3.83 United Kingdom 3.71 Italy 3.40 Source: World Trade Organization
4.1.3 Average Tariff Rates onManufactured Products as Percent ofValue
4.1.2 Foreign Direct InvestmentFirms investing in resources in business activities outside its home country
4.1.3 Fewer FDI RestrictionsNations recognize the increasing importance of FDI Between 1992 and 2005 – 2,226 changes worldwide in laws governing FDI – 94% created a more favorable investment climate As of 2005 – 2,495 bilateral FDI treaties involved 160 nations – twelvefold increase from 181 treaties in 1980
4.1.4 Decline in Trade and Investment BarriersResulting in: volume of world trade has grown faster than the world economy flow of FDI has grown faster than the growth in world trade and world output
4.1.5 Volume of World Trade andProduction 1950-2002
4.1.6 Growth of World Trade,Production & FDI 1992-2004
4.1.7 Decline in Trade and Investment Barriers Globalization of markets and production and the integration of the world economy has resulted in the increasing: – attacks by foreign competitors in domestic markets – overall intensity of competition
Measuring Globalization Globalization can be difficult to measure The A.T. Kearney/Foreign Policy Globalization Index ranks countries by – Economic dimensions – Technological dimensions – Personal contact – Political dimensions recently ranked Singapore and Hong Kong as most globalized
4.2.1 Global Drivers of Globalization -Technological Change1. Microprocessors and Telecommunications - lower the real costs in information processing and communication and facilitate global dispersion1. Transportation Technology - lower costs & transit times due to containerization2. Internet and World Wide Web - information backbone of the global economy1. Production, Packaging and distribution processes - Machines have increased speed, reliability, energy efficiency, product shelf life
4.2.2 Implications of Technological Change Lower costs of transportation and information processing has facilitated the dispersion of production to geographically separate locations and the growth in international trade in services Technological innovations have facilitated the globalization of markets
4.2.3 Global Drivers of Globalization A Word of CautionOne must not overemphasize these trends! Communication and transportation technologies are creating a “global village” But significant national differences remain in culture, consumer preferences and business practices
4.3 Changing Demographics of the Global Economy As late as the 1960’s US dominated the world economy and trade US dominated the global foreign direct investment Large, US multinationals dominated the scene Half the globe was Communist World and off limits
4.3.1 Changing Demographicsof the Global Economy US is a smaller player in the global economy as a – producer and exporter – source of and recipient of FDI A similar trend occurred in other developed countries The share of world output accounted for by developing nations is rising and is expected to exceed more than 60% of world economic activity by 2020
4.7 Changing Demographicsof the Global Economy Changing nature of multinationals – Mini-multinationals grow in importance – Non-US multinationals play greater role
4.8 Changing Demographics of the Global Economy Collapse of the USSR and Communist nations Emergence of “BRIC’s” – Brazil – Russia – India – China
4.9 Global Economy of the 21st Century? Recently, we have seen the : – changing demographics of the global economy – removal of trade and investment barriers Resulting in national economies integrating into a more interdependent, global economy However, it is hazardous to use current trends to predict the future The world may be moving towards a more global economic system, but globalization in not inevitable
5. The Globalization DebateIs the shift toward a more integratedand interdependent global economy a good thing?
5.1 Globalization Debate: The Pro’s Improves the efficiency of production Lowers the prices for goods and services Stimulates economic growth and job creation Raises consumer income and prosperity levels Rising income levels lead to demands for greater environmental protection (Grossman & Kruger)
5.1.1 Environmental Pollution and Income LevelsFig 1.6
5.2 Globalization Debate: The Con’s Limits national sovereignty Facilitates cultural imperialism Destroys manufacturing jobs in wealthy countries Lowers wage rates of unskilled workers in wealthy, advanced countries Shifts manufacturing to countries with fewer labor and environmental regulations
Costs of Globalization• Threats to national sovereignty – lose freedom to “act locally”• Economic growth and environmental stress – growth consumes nonrenewable natural resources and increases environmental damage• Growing income inequality and personal stress – promotes global superstars at the expense of others
Costs of GlobalizationOffshoring involves the transferring of production abroad – it can be beneficial because it reduces costs – but, it also means that jobs move abroadYet, offshoring may also create new, better jobs at home
5.3 Globalization and the World’s Poor Critics argue that globalization has not helped poor – 1870: per capita income of 17 richest nations was 2.4x that of all other countries – 1990: it was 4.5x larger Other factors may have influenced the gap – Totalitarian governments – Economic policies that destroyed wealth creation – Corruption – little protection of property rights – Expanding populations – Civil unrest and war
5.4 Pressures for Localization Non-Tariff Barriers Cultural Differences Consumer Preferences Differences in Infrastructure Dynamic Distribution Channels
5.5 Forces Against Globalization Nationalism and Regional Separatism Cultural Identity and Economic Sovereignty Limited Natural Resources Human and Labor Rights IMF Reformers and Debt Relief Environmental NGO’s and Anti-Globalization
5.6 Recent WTO Major Setbacks “ Battle in Seattle” Doha Trade Round Collapse
5.7 Management Challenges in the GlobalMarketplace Nations have profound and enduring differences in: – cultures, – political systems, – economic systems, – legal systems and – levels of economic development Requiring firms to vary practices across nations
5.8 Management Challenges in the GlobalMarketplace Range of problems confronted in an international business is wider and the problems more complex than those in a domestic business Firms have to find ways to work within the limits imposed by government intervention in the international trade and investment system International business transactions involve converting money into different currencies
6. Companies & Globalisation To expand sales – pursuing international sales increases the potential market and potential profits To acquire resources – may give companies lower costs, new and better products, and additional operating knowledge To diversify or reduce risks – international operations may reduce operating risk by smoothing sales and profits, preventing competitors from gaining advantage
Why Companies Engage inInternational Business (IB) These three reasons – sales expansion – resource acquisition – risk minimization guide all decisions about whether, where, and how to engage in international business
Modes of Operations in IBMerchandise exports – goods that are sent out of a countryMerchandise imports – goods that are brought into a countrySometimes referred to as visible exports and imports
Modes of Operations in IBService exports – provider and receiver of paymentService imports – recipient and payer of paymentExamples – Tourism and transportation – Service performance turnkey operations and management contracts – Asset use licensing and franchising
Modes of Operations in IB Investments – Foreign Direct Investment (FDI) investor takes a controlling interest in a foreign company –joint venture – Portfolio Investment a non-controlling financial interest in another entity
Types of International Organizations Collaborative arrangements – Joint ventures – Licensing arrangements – Management contracts – Minority ownership – Long-term contractual arrangements Strategic alliance – companies that work together, but the agreement is critical to at least one partner – an agreement that does not involve joint ownership
Types of International Organizations Multinational enterprises (MNEs) – take a global approach to markets and production or have operations in more than one country Sometimes they are referred to as – multinational corporations (MNCs) – multinational companies (MNCs) – transnational companies (TNCs)
Types of International Organizations In foreign markets, companies may have to adapt their typical methods of doing business – foreign conditions may dictate a particular method – operating modes may be different from those used domestically
Why IB is Different The external environment affects a company’s international operations Managers must understand social science disciplines and how they affect functional business fields Consider – physical factors – social factors – competitive factors
Physical and Social Factors Geographic influences – natural conditions influence production locations Political policies – determines where and how business occurs Legal policies – influence how a company operates Behavioral factors – may require changes in operations Economic forces – explain differences in costs, currency values, market size
The Competitive Environment Competitive strategy for products – Cost strategy – Differentiation strategy – Focus strategy Company resources and experience – market leaders have more resources for international operations Competitors faced in each market – local or international
The Competitive EnvironmentSo, a company’s competitive strategy influences how and where it can best operateIts competitive situation may differ from country to country in terms of its relative strength and which competitors it faces
Looking to the FutureThree major perspectives on the future of international business and globalization – Further globalization is inevitable – International business will grow primarily along regional rather than global lines – Forces working against further globalization and international business will slow down both trends
Casestudy : The Global Pharmaceuticalindustry1. Read and prepare the Casestudy on The Global Pharmaceutical Industry (Johnson, Whittington & Scholes (2011)) for discussion and presentation next week.2. Identify and evaluate the challenges facing global pharmaceutical firms the External Environment and Industry analysis – PESTEL and Five Forces.
Conclusion► “Apowerful force drives the world toward a converging commonality, and that force is technology. The result is a new commercial reality – the emergence of global markets for standardized consumer products on a previously unimagined scale of magnitude.” Theodore Levitt
Next Week : Discussion PaperSachs, Jeffrey (1998),‘International economics:unlocking the mysteries ofglobalization’, Foreign Affairs,Nov- Dec.
Core Reading Juleff, L, Chalmers, A.. and Harte, P. (2008) Business Economics in a Global Environment, Napier University Edinburgh Krugman, P. R., Obstfeld, M. and Melitz, M.J. (2012) International Economics Theory and Policy. 9th Edition. Pearson Daniels, J.D., Radebaugh, L.H. and Sullivan, D.P. (2012) International Business: Environments and Operations. 14th edition, Pearson Todaro, M.P. & Smith, S.C. (2009). Economic Development, 10th edition, Pearson Addison Wesley. Thirlwall, A.P. (2006), Growth & Development. 8th edition, Palgrave Macmillan. Hill, C.,(2009) International Business: Competing In the Global Market Place. 7th edition, McGraw-Hill. Porter, Michael E. (2004)“Competitive Strategy – Techniques for Analyzing Industries and Competitors” Free Press Samuelson, P.A. and Nordhaus, W. D. (2010)“Economics” Irwin/McGraw- Hill, 19th Edition Nolan, P. (2009) Crossroads – the End of Wild Capitalism & the Future of Humanity. London : Marshall Cavendish Stiglitz, J., (2002) Globalization and its discontents, Penguin.