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2-1

Globalization

Trade and investmentbarriers are disappearing.

Perceived distances areshrinking due to advances intransportation andtelecommunications.

Material culture is beginningto look similar.

National economies merging

into an interdependent globaleconomic system.

Sources:

Hill, Daniels, Radebaugh and Sullivan, Shenker & Luo, Nag

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2-2

Globalisation

No Comprehensive Definition Available

Current conjecture through liberalisation and rapid

technological progress is new

Neo-Liberalism in 1980s and 1990s. Tendency ofprescribing same policies throughout

However, global challenges are not solved.

Global Consensus about balanced development

W. Bank: Poverty eradication Strategy

WTO: Doha Development Agenda

UN: MDGs, WSSD, Monterrey Consensus

UNCTAD: Mutual reciprocity among

developed and developing countries

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2-3Globalisation: Some Issues

- Poverty level has come down but not equally. In somecases, it has increased. Growth and openness has a positiveimpact on poverty reduction in general.

- More globalised countries have experienced highergrowth and also witnessed declining poverty

- In general inequality across the world shows a decline but

within countries it is rising.

- Poor management of globalisation could lead to furthermarginalisation and impoverishment

-

Growth, Openness and Poverty

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2-4Volume of world trade and production, 1950-2002

Fig: 1.1

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2-5Globalisation: Some IssuesTrade Liberalisation

- World Trade growth is more than world GDP growth.

- Globalising developing countries have shifted tomanufactured goods exports from primary product exports

- The relationship between trade liberalization andgrowth is debatable

The impact of trade liberalization and poverty alleviation

is indirect. Empirical evidence of trade and reduction in wageinequality is mixed.

- Unemployment may rise due to trade liberalization inthe short run, especially in the import competing sector.

DDA issues not being pursued properly resulted intoCancun Failure

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2-6Globalisation: Some Issues

Transport and ICT

Transport and Communication cost is coming down butdigital divide is increasing.

Reduction in transportation cost and accessibility of

modern communication technology has a positive impact

on trade and growth.

It has also increased the efficiency with which goods,

services, capital, ideas and people move around the

world.

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Relative Transportation and Communication Cost

Source: Response to the Challenges of Globalisation; Commissionof the European Communities (2002)

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2-8Globalisation: Some Issues

Issues in Finance

Financial crisis leads to depreciation of currency and

wide scale unemployment

Handling financial crisis is difficult as it is contagious,

driven by market mechanism and there are presence of

moral hazards and financial scams

Poorer countries receive very less FDI. They remain

underdeveloped and can not attract further FDI. The

situation needs attention as ODA has also slowed

down.

Many developing countries are hesitating to globalise

their economies due to insufficient domestic resources,

lack of efficient financial system and institutions and

low level of investment

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2-9

Globalization: Pros& Cons

ProsIncreased revenue

opportunity through globalsales.

Reduced costs byproducing in low costcountries.

ConsDifferent nations =

different problems.Similarities betweennations may be superficial.

Global planning may beeasy, but global executionis not.

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What is Globalization?

The shift toward amore integrated andinterdependent world

economy.

Markets

Production

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International Trade: When a firm exports goodsor services to consumers in another country.

Foreign Direct Investment: When a firm investsresources in business activities outside its home

country.

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2-12

The Role of Technological Change

Microprocessors andTelecommunications

The Internet and WorldWide Web

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The Shrinking Globe1500-1840

1850-1930

1950s

1960s

Best average speed ofhorse-drawn coaches and

sailing ships, 10mph.

Steam locomotives average 65mph.Steamships average 36mph.

Propeller aircraft300-400 mph.

Jet passenger aircraft500-700mph.

Figure 1.2

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2-14

The Changing World OrderThe fall of Communism in Eastern Europe and theformer Soviet Union.

Czechoslovakia has divided itself into two states.

Yugoslavia has divided into 5 (often warring) successorstates.

Pro-democracy movement (suppressed) in China.

Latin America has seen both democracy and freemarket reforms.

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Globalization and National Sovereignty

WTOEU

UN

WTO Founded 1994

140 members

Police GATT trading system

Supranational organizationsare limited to powers grantedby member countries and servethe collective interests of itsmembers.Power is derived fromthe organizations ability to swaymembers to action.

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Globalization and the Worlds Poor

Critics argue that globalization has not helped poor.

1870:per capitaincome of 17 richest nations was2.4x 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.Little protection of property rights.Expanding populations.War.

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2-17

Managing in the Global Marketplace

An International Businessis any firm that engages ininternational trade or investment.

Managing an international business is differentthan managing a domestic business:

1. Countries are different.2. Problems are more complex.3. Must work within government

regulations.4. Currency conversion presents

unique problems.

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Pattern of declining tariffs

More on Trade Liberalisation

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Declining barriers to trade

Globalization of markets and production has been

facilitated byReduction in trade barriersRemoval of restrictions to foreign directinvestment

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The changing pattern of world output andtrade

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Percentage share of total FDI stock

Fig: 1.3

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Volume of FDI inflows, 1994-2002($ billions)

Fig: 1.4

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The role of technological change

Microprocessors and telecommunications

The internet and world wide web

Transportation technology

2-24

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Changing demographics of the world economyWorld output and trade

Changing foreign direct investment

Changing nature of multinationalsMini multinationals

Non US multinationals

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National origin of largest multinationalcorporations

Fig: 1.5

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Globalization debate-Pro

Lower prices for goods and services

Economic growth stimulation

Increase in consumer incomeCreates jobs

Countries specialize in production of goods andservices that are produced most efficiently

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Environmental performance and income

Fig 1.6

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Globalization debate-Con

Destroys manufacturing jobs in wealthy,advanced countries

Wage rates of unskilled workers in advanced

countries declinesCompanies move to countries with fewer laborand environment regulations

Loss of sovereignty

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Globalization and International

BusinessGlobalization does not mean the advance of ahomogeneous civilization and uniform businesssystem.

Growing interaction makes people more aware ofthe differences among them.

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What is International BusinessThe business activities that involve the transferof resources, goods, services knowledge, skills orinformation across national boundaries.

May involveIndividuals

Companies

Government bodiesInternational institutions

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What is International BusinessInternational transactions

Economic transactions that cross bordersInternational trade

Occurs when companies import or export acrossborders

International investmentOccurs when a companies invests its resourcesacross national boundaries

International firmThose engaged in international business

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What is International BusinessMultinational Enterprise (MNE)

A firm that has directly invested abroad

Has at least one working affiliate in a foreigncountry

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International versus Domestic

BusinessInternational business is the outgrowth ofdomestic business.

Most major corporations started their operationsin the domestic market.

International entrepreneurs

Individuals or companies that invest and operate in

another country without a home base

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International versus Domestic

BusinessSignificantly different due to differences in:

Environmental Dynamics

Currency, inflation, interest rates, accountingpractices, cultures, social customs, laws, politicalstability

Operational NatureCommunication, coordination, motivation, differences

in organizational principles and managementphilosophies

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Why Do Firms Expand

Internationally?Firms expand internationally for various motives:

Market motives

Economic motivesStrategic motives

Motives vary from one business activity toanother.

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Why Do Firms Expand

Internationally?Market Motives:

Offensive motive seize market opportunities inforeign countries through trade or investment.

Defensive motiveto protect and hold a firmsmarket power or position in the face of threatsfrom domestic rivalry or changes in governmentpolicy.

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Why Do Firms Expand

Internationally?Strategic Motives

Capitalize on distinctive resources or capabilitiesalready developed at home

Be the first mover in a target foreign market

Benefit from vertical integration involvingdifferent countries

Followthe companys major customers abroad

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Why Do Firms Expand

Internationally?Economic Motives

Increase return through higher revenues and/orlower costs.

Enables the company to benefit from thedifferences in:

Costs of labors

Natural resources

Capital

Differences in regulatory treatment

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Modes of International Business

Importing and exporting

Tourism and transportation

Licensing and franchisingTurnkey operations

Management contracts

Direct and portfolio investment

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Levels/Terms of International Companies

Multinational Enterprise (MNE): global approach to marketsand production

Multinational Corporation (MNC)

Transnational Company (TNC)Globally integrated company: integrated operations locatedin different countries

Multidomestic company: multinational companies that allow

local responsiveness

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National Operations for International

CompaniesMultidomestic strategy: countries operateautonomously

Global strategy: integrate various countryoperations into an international headquarterscontrol

Transnational strategy: integrate various country

operations while dispersing the location of control

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Operations and Influences

1-10

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Influences on International Business

External InfluencesPhysical/Societal factors

Political policies and

legal practicesCultural factors

Economic factors

Geographicalinfluences

Competitive environment

OperationsObjectives

Strategy

Means

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Influences on International Business