Globalization & International Business

T.J. Joseph

Contents
Introduction to International Business Debate on Globalization

Political Economy of International Business

Cultural Environment of IB Ethical Issues in IB International Trade Theory and Applications Instruments of Trade Policy International Economic Integration and Institutions Balance of Payments and Foreign Exchange Market Foreign Direct Investment and MNEs

Distribution of Marks
Component
Group Project Case Analysis and Presentations

Class participation
Attendance Mid-Term Examination End-term Examination TOTAL

Marks 10 10 05 05 20 50 100

What is International Business?

Business activities that involves the transfer of resources, goods, services, knowledge, skills, or information across national boundaries/borders Resources: Raw materials, capital, and people Goods: Semi-finished or finished

Services: Accounting, legal, banking, insurance, healthcare, education, tourism, consultancy, etc..
Knowledge and skills: Technology, innovations, various skills, IPRs, brand names, etc. Information flows: Databases and networks

Participants in International Business

Parties involved in International Business
Individuals (individual investors, tourists, employees, students, etc.) Companies (private or public)

Government (central bank, government institutions, etc.)

International institutions (World Bank, IMF, WTO, etc.) Among these companies are the dominant players in International Business

How International Business?

International Business Transactions: Activities crossing national boundaries Mainly manifested in two ways:
International trade refers to exports and imports of goods and services across the borders of a country Bilateral trade, multilateral trade, pluri-lateral trade International investments implies cross-border transfer of resources to carry out business activities outside home country

Modes of International Business

International Trade
Merchandise exports and imports
Tangible items (e.g., cars, televisions, etc.) Service exports and imports Tourism and transportation Performance of services Use of intangible assets
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Modes of International Business

Foreign Investments
Direct investment : Key features Control and ownership Access to foreign markets

Access to foreign resources

Higher foreign sales than exporting (often) Portfolio investment: Key features Non-control of foreign operations Financial benefit
8

International Vs. Domestic Business

International business is mostly the outgrowth of domestic business (eg. Japanese car makers)

International business is more riskier than domestic business (because countries are different)
Differences in environmental dynamics
Diversity between countries with respect to economic growth, inflation, interest rates, cultures, social customs, business practices, laws, political systems, technology, etc.

Operational nature become more complex

Receipts and payments in multiple currencies, different accounting methods, consumers, employees, regulators, and the competitors

International versus Domestic Business

Differences in environment of their operations Economic Environment:
Differences in tariff structures and trade promotion schemes Differences in currencies (exchange rate), inflation, interest rates, accounting practices, etc. GDP growth and purchasing power (Economic stability)

Socio-Cultural Environment:
Cultures, social customs, business practices, etc.
Social and cultural norms and values differ between countries

International Vs. Domestic Business

Political and Legal Environment
Political stability and government policies affects international business Changes in trade policies, fiscal policies and other policies are taken in view of the political priorities of the govt.

Foreign exchange regulations and foreign investment policies

Well-developed sound legal system may provide unbiased and fair treatment in international business Uniformity in interpretation of laws and clarity of legal procedures

International Vs. Domestic Business

Competition
More severe competition in international market than in domestic market because of various similar products from different countries

Infrastructure
Financial, institutional and physical infrastructure
More important is physical infrastructure in the form of roads, telecommunication, ports, etc.

Technology
Opportunity for knowing and getting highly cost-effective technologies, especially for developing countries

Why do Firms Expand Internationally?

Why do Firms Expand Internationally?

Market Motives:
To expand their sales Seize market opportunities in foreign countries through trade or investment

Economic Motives:
For higher returns (profitability) through higher revenues and/or lower costs by obtaining cheap resources

Achieving economies of scale

Spreading R&D cost
Ref: SL, pp11-12

Why do Firms Expand Internationally?

Strategic Motives: To capitalize on their distinctive resources or capabilities already developed at home
Technological leadership, brand image, customer loyalty, and competitive position

To take first mover advantage

Vertical integration involving different countries To follow the major customers abroad (proximity to customers)
Japanese tire maker Bridgestone entering US market
Ref: SL, pp11-12

What is Globalization?
Globalization is the closer integration of the countries and peoples of the world, brought about by the enormous reduction in the costs of transportation and communication and the breaking down of artificial barriers to the flow of goods and services, capital, knowledge, and (to a lesser extent) people across the borders

Westernization, Americanization, Walmartization, McDonaldization, Disneyfication, Coca-Colanization, etc.

Ref: Joshi, p-7

What is Globalization?
Globalization refers to the shift toward a more integrated and interdependent world economy Globalization of markets (Economies of scale): National markets are giving way to global markets (examples)

Globalization of production: To take advantage of national differences in the cost and quality of factors of production (examples) Emergence of Global Institutions like WTO, IMF, World Bank, United Nations

What is Globalization?
Globalization may be defined as the process of integration and convergence of economic, financial, cultural, and political systems across the world Economic Globalization: The internationalization of production and markets for goods and services, integration of financial systems, corporations and industries, technology, and competition Financial Globalization: Liberalization of capital movements and spurt in cross-border capital flows

What is Globalization?
Cultural Globalization: The convergence of cultures across the world, which is evident by its impact on people and their lives Political Globalization: The convergence of political systems and processes around the world (the decline of communist systems and the rise of democratic systems)

Drivers of Globalization
Macro Factors:
(a) Declining Trade and Investment Barriers
Liberalization and privatization, changing world order, etc.

(b) Technological Change

Microprocessors and telecommunications The Internet and World Wide Web (services trade)

Transportation technology (containerization)

Drivers of Globalization
Reasons for Recent International Business Growth Expansion of technology:
Transportation is quicker Communications enable control from afar Internet: drastic decline in the transaction cost of transferring ideas and information Transportation and communications costs are more conducive for international operations

Liberalization of cross-border movements

Lower governmental barriers to the movement of goods, services, and resources enable companies to take better advantage of international opportunities

Drivers of Globalization
Development of supporting institutional arrangements
Institutional arrangements

Are made by business and government

Ease flow of goods Reduce risk

Increase in global competition

More companies operate internationally because New products quickly become global Companies can produce in different countries Domestic companies competitors, suppliers, and customers become international
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Globalization: Historical Perspective

Initial years of human history, people remained confined to their communities, villages, or local regions

Hardly any formal barriers such as tariffs or non-tariff restrictions for the movement of goods or visa requirements for people
Pre-World War I period (1870-1914): rapid integration of economies in terms of trade flows and people movement Two World Wars (1914-1945): brought various restrictions on the movements of goods and services After 1945: there was a drive to increased integration (World Bnak, GATT, IMF, etc.)
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How to Measure Globalization?

Components of Globalization Index:- (A.T.Kearney) Economic Integration: trade, FDI, portfolio capital flows, income flows (profits, wages, etc.) Personal Contact: Travel & tourism, telephone traffic

Technology: No. of internet users, technology collaborations

Political Engagement: memberships in international organizations, foreign embassies, participation in UN missions

Who Benefits from Globalization?

Globalization is a complex phenomenon. It has winners and losers at various levels Developed countries are high on globalization while developing countries are not (Why?) Widening gap between the rich and the poor Globalization can be a threat to the sovereignty of nations

It exposes national economies to uncertainties of global economy

The Globalization Debate

Job losses at home (1999 Seattle anti-globalization protests and protests against outsourcing) It comes at the expense of the environment Human right violations (e.g., sweatshops) Cultural imperialism of global media and MNCs It enhances the monopoly power of large MNCs

The Globalization Debate

To a consumer, globalization means more choices at better quality and lower prices

For job seekers, more employment opportunities

For business, wider market for their products and services (economies of scale)

For producers, expanded availability of resources and technology and knowledge transfer
For the economy, economic development and growing prosperity Reduce global divide by advancing to a homogeneous civilization and a uniform business system

Success of Globalization-Conditions
Globalization could be more advantageous to participating nations if global infrastructure is better developed

Global infrastructure includes

Institutional framework (multilateral agreements in trade, investment, and service)
Market efficiency (capital market and foreign exchange market)

Consequences of Globalization
In the long run, globalization generally leads to:

higher living standards

more efficient resource usage greater access to technology, products, and services In particular, liberalization of markets appears to enhance income levels

Consequences of Globalization
Countless new business opportunities for internationalizing firms New risks and intense rivalry from foreign competitors

More demanding buyers who source from suppliers worldwide

Greater emphasis on proactive internationalization

Internationalization of firms value chain

Movers

Restraining factors

The Drivers and Consequences of Market Globalization - Summary

Online Resources
1. Global Fortune 500 companies in 2010. http://money.cnn.com/magazines/fortune/global500/2010/f ull_list/ China duties to hit US chicken imports: http://www.bbc.co.uk/news/business-11415036 US Congress approves China sanctions bill: http://www.bbc.co.uk/news/business-11407254 Car Industry: Around the World - interesting articles: http://www.bbc.co.uk/news/business/global_car_industry/ Best Global brands: http://images.businessweek.com/ss/06/07/top_brands/sour ce/1.htm 2. 3. 4. 5.

References
1. Chapters 1, International Business by Charles W. Hill and Arun K. Jain, Tata McGraw Hill publication. 2. Chapter 2, International Business by Oded Shenkar and Yadong Luo, Wiley publication. 3. Chapter 1, International Business by Rakesh Mohan Joshi, Oxford Publications