Globalization and International Business

Chapters 1 & 5

Globalization Defined

•Globalization is the process of growing interdependence among countries.

•Or the ongoing social, economic, and political process that deepens and broadens the relationships and inter-dependencies amongst nations—their people, their firms, their organizations, and their governments

Globalization TrendGlobalization Trend• The interaction with other economies

has been in a rising since the travel of Marco Polo.

• Big expansion occurred in the 16th century (discovery of new world) and the 19th century (colonization)

• Since the end of WWII, the speed of global economic integration has accelerated.

The Forces Behind Globalization• Expansion of Technology

– Particularly in transportation and communications

• Liberalization of cross-border movements– products and resource movements– expanded cross-national treaties and

agreements (bilateral, multilateral) – Development of services that support

international business activities

• Growing consumer demand for foreign products and increased global competition

• Changing political and economic situations

Globalization TypeGlobalization Type• Globalization of markets: merging of

historically distinct and separate national markets into one huge global marketplace (e.g. Coca-Cola, Sony)

• Globalization of production: sourcing goods and services from locations around the world to take advantage of national differences in the cost and quality of factors of production (Boeing, GM).

• Globalization of finance: seeking profit opportunities around the world through financial loans and portfolio investment (e.g. George Soros, Goldman Sachs).

Globalization DebateGlobalization Debate

•Prosperity or impoverishment?

•Effects on the environment

•Effects on labor conditions

•Effects on culture

•Widening income inequality?– Within and among countries

•Visit www.globalisationguide.org

The Criticisms of Globalization•Threats to national sovereignty•Negative costs of economic growth• Increasing income inequality

Anti-globalization forces may use both peaceful and violent means to stop or slow the globalization process. Offshoring (the transferring of production to foreign sites) is particularly controversial.

Globalization IndexGlobalization Index•This index is based on (1) economic

integration to the world and (2) the level of personal contact across national borders.

•This index is reported by Foreign Policy Magazine (Visit www.foreignpolicy.com and click on “Special reports”)

•Currently Singapore ranks first, and the US is the 7th.

International Business Defined• International business: all

commercial transactions between parties in two or more countries– Private firms are profit-oriented.– Government organizations may or

may not be profit-oriented. •The international business

environment is more complex and diverse than the domestic business environment.

Reasons That Firms Engage in International Business

•Demand factor (market-seeking): to expand sales

•Volkswagen [Germany]

•Ericsson [Sweden]

•Michelin [France]

•Nestlé [Switzerland]

•IBM [USA]

•Seagram [Canada]

•Sony [Japan]

•Supply factor (resource-seeking):

to acquire resources•Products, components, services•Foreign capital•Technologies•Information

•Risk factor: to minimize risk•Take advantage of business cycle

differences amongst countries•Diversify suppliers across countries•Counter competitors’ advantages

Modes of Entry into IB

•Merchandise exports and imports•Service exports and imports

– Tourism, transportation, communications– Performance of services

•Use of assets [licensing and franchising agreements]

•Foreign investment– FDI (foreign direct investment)– Portfolio investment

• Strategic Alliance (collaborative arrangement)

Patterns of Patterns of internationalizationinternationalization

•From passive to active expansion

•From external to internal handling of operations

•Deepening mode of commitment

•Geograpical diversification

Multinational Enterprise (MNE)

•A firm that takes a global approach to its foreign markets and production

•Multinational corporation [MNC] and transnational company [TNC]

may be used in this same context.• Involved in most modes of

international business•Globally integrated strategy vs.

locally responsive strategy

MNEsMNEs

•Main engine of globalization– Mainly FDI– Exports and imports– Technology transfer

•Some have sales larger than many nations’ GNPs

•Main target of anti-globalization movements.

Effects of FDI and MNEEffects of FDI and MNE

• Balance of payments effect– Capital inflow to host country Positive effect

on B/P for host country initially– FDI may increase exports or decrease imports

Positive effect on B/P later – Demand for home country equipments and

related products and earning repatriation Negative effect on B/P for host country later

Effects of FDI and MNE Effects of FDI and MNE

• Growth and Employment Effect– Positive effect on host country: additional job creation

and transfer of technology and management skills– Negative effect on host country: 1)suppression of

local enterprises and entrepreneurs, 2)creaming off premium resources and driving up local labor costs

– Home country’s labor claims that their jobs are taken by host country’s workers.

– Desirable FDI for host country: highly differentiated product and possession of scarce resources

Effects of FDI and MNEEffects of FDI and MNE

• Political Concerns– Home country government may apply their

laws to MNEs in host countries)– Concern over control of sensitive sectors of

host countries– Self-interest seeking powerful economic

animals with no consideration of their impacts on environments, labor, societies and culture.

– Causing government corruptions (lobbying, bribery)

Fig. 1.4: Physical and Societal Influences on International

Business

Fig. 1.5: Competitive Factors Affecting International

Business

International Business vs. Domestic Business

•Managing an international business differs from managing a domestic business because:

-countries and cultures are different-international business operations are more complex than domestic

operations[continued]

•A company’s own competitive strategy influences how and where it can best operate.

•From one country to another, a company’s relative competitiveness will vary because of the differences in the local and foreign competitors that are present.

Cultural Foundations of Ethical Cultural Foundations of Ethical Corporate BehaviorCorporate Behavior

• Cultural relativism holds that ethical truths depend upon the groups subscribing to them; thus, intervention in local issues and traditions by outsiders is clearly unethical.

• Cultural normativism holds that there are universal standards of behavior that everyone should follow; thus, non-intervention in local violations of global standards is clearly unethical.

• Non-governmental organizations (NGOs) and Multilateral agreements aid in ethical decision-making.

Other Legal IssuesOther Legal Issues• Extraterritoriality: the extension by a

govern-ment of the application of its laws to the foreign operations of its domestic firms

In cases of health and safety standards, differences may not be insurmountable, but in other instances, differences in home- and host-country laws may pose challenging conflicts.

• Externalities: the by-products of activities that affect the well-being of people and/or the environment

Although externalities are not reflected in standard cost accounting practices, they must be included in the determination of stakeholder value.

Ethics and BriberyEthics and Bribery

• Bribery consists of payments, or promises to pay cash or something else of value, to public officials and/or other people of influence.

• The U.S. Foreign Corrupt Practices Act of 1997:– outlaws the payment of bribes by U.S. firms to foreign

officials, political parties, party officials, or party candidates– applies to firms registered in the U.S. and to any foreign

firms that are quoted on any U.S. stock exchange– was extended in 1998 to include bribery by foreign firms

operating in U.S. territory

Bribery affects the performance of countries and companies alike.

Multilateral Efforts to Confront Multilateral Efforts to Confront BriberyBribery

• Transparency International’s Business Principles for Confronting Bribery (2003)

• The OECD’s Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (1997)

• The revised OECD Guidelines for Multinationals

• The ICC’s Rules of Combat to Combat Extortion and Bribery (1999)

• The UN Convention Against Corruption (2003)

Fig. 5.4: Likelihood of Paying Fig. 5.4: Likelihood of Paying Bribes Abroad by Nationality Bribes Abroad by Nationality

of Companiesof Companies

Corruption Corruption

•Level of corruption perceived to exist among public officials and politicians. (www.transparency.org)

•179 countries are ranked in 2007.

•Worldwide corruption crisis

•Rich countries – less corruption

•Poor countries – more corruption

Ethical Behavior and Ethical Behavior and Environmental IssuesEnvironmental Issues

• Sustainability: meeting the needs of the present without compromising the ability of future generations to meet their own needs, while taking into account what is best for people and for the environment

• The Kyoto Protocol: signed in 1997, the Protocol is an extension of the UN Framework Convention on Climate Change that obligates signatory countries to reduce their greenhouse gas emissions to 5.2 percent below 1990 levels between 2008 and 2012

Global warming results from the release of greenhouse gases that trap heat in the atmosphere, rather than allowing the heat to escape.

Ethical Dimensions of Labor Ethical Dimensions of Labor ConditionsConditionsInternational labor issues that firms,

governments, trade unions, and NGOs must deal with include: - fair wages- child labor - working conditions - working hours- freedom of association

Child Labor IssuesChild Labor Issues

• According to the International Labor Organization:– more than 250 million children between 5 and 17 are

working worldwide – nearly three-quarters of those children who work are very

young or are working in ways that endanger their health or well-being because of hazards, sexual exploitation, trafficking, and/or debt bondage

• Those who argue in favor of child labor claim that in many instances, children are better suited to perform certain tasks than adults, and that if the children were not employed, they would in fact be worse off.

• While some firms simply avoid operating in countries where child labor is used, other firms work to establish responsible operating policies in those locales.

Ethical Trading Initiative Base Ethical Trading Initiative Base CodeCode

ETI is a British-based organization that focuses on the ethical ETI is a British-based organization that focuses on the ethical employment practices of MNEs. Members include employment practices of MNEs. Members include

representativesrepresentativesfrom companies and trade union organizations. from companies and trade union organizations. 1. Employment is freely chosen.

2. Freedom of association and the right to collective bargaining are respected.

3. Working conditions are safe and hygienic.4. Child labor shall not be used.5. Living wages are paid.6. Working hours are not excessive.7. No discrimination is practiced.8. Regular employment is provided.9. No harsh or inhuman treatment is allowed.Source: Ethical Trading Initiative, “Base Code”

Corporate Codes of EthicsCorporate Codes of Ethics

In creating its code of corporate conduct a firm should:

• set global policies that must be complied with wherever the firm operates

• communicate the code to all employees within the organization, and to all suppliers, subcontractors, and customers

• ensure that its policies are carried out in all instances

• report results to its stakeholders