Globalization

Set of interdependent relationships among people from different parts of a world that happens to
be divided into nations.
How does international business fit in?
Globalization enables us to get more variety, better quality, or lower prices.
Why is studying international business important?
1. Most companies either are international or compete with international companies
2. Modes of operations may differ from those used domestically
3. The best way of conducting business may differ by country
4. An understanding helps you make better career decisions
5. An understanding helps you decide what governmental policies to support
There are many reasons. One of the most important is because global events affect companies of all sizes
and in all industries. In fact, managers today need to consider where in the world to obtain the inputs they
need of the required quality and at the best possible price and also where they can best sell the product or
service that theyve put together from those inputs. In many cases, managers may find that they can be
more competitive by engaging in global business transactions. Its also important to recognize that the best
way of doing business abroad may not be the same as the best way at home. When a company operates
internationally, it engage in modes of business such as exporting and importing that differ from those in
which it engages domestically. In addition, physical, social, and competitive conditions differ among
countries and affect the optimum ways to conduct business. So we often find that companies operating
internationally have more diverse and complex operating environments than those that conduct business
only at home. Even if you arent working at an international company its important to understand
international business complexities because overall national conditions things like profits, employment
security and wages, consumer prices, and national security are all affected by the international operations
of companies and by government regulations of those operations.
The Forces Driving Globalization/Measuring Globalization
The foreign policy globalization index ranks countries across 4 dimensions:
1. Economic- international trade and investment
2. Technological- internet connectivity
3. Personal contact- international travel and tourism, international telephone traffic, and personal
transfers of funds abroad
4. Political- participation in international organizations and government monetary transfers
Factors that have contributed to the growth of globalization

Increase in and application of technology: In recent years, weve seen tremendous

advances in technology. The pace of new product development is faster than ever, and
many companies are finding that 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 Faster and cheaper technology in the digital global
economy of the Internet era has broken the national barrier of time and space, thus,
integration of national markets has been facilitated with ease.
 o The increased demand due to rising productivity means that people produce and can
buy more by working the same number of hours.
o More people are alive, and can develop new products. With time, new product
development accelerates.
o Improved communications and transportation not only speed up interactions, they also
enhance a managers ability to oversee foreign operations. Thanks to the internet, even
small companies can reach global customers and suppliers.
Refers to one of the crucial factors of globalization. Since 1990s, enhancement in
telecommunications and Information Technology (IT) has marked remarkable improvements in
access of information and increase in economic activities. This advancement in technologies has
led to the growth of various sectors of economies throughout the world. Apart from this, the
advancement in technology and improved communication network has facilitated the exchange of
goods and services, resources, and ideas, irrespective of geographical location. In this way,
advanced technologies have led to economic globalization.
Liberalization of cross-border trade and resource movements: 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. Strong wave of liberalization induced by the
World Trade Organization (WTO) as well as unilateral negotiations and decisions
undertaken by the countries world over:
o Citizens want greater variety of goods and services at lower prices.
o Competition spurs domestic producers to become more efficient.
o They hope to induce other countries to lower their barriers in turn.
Refer to one of the critical forces of globalization. Every- country restricts the movement of goods
and services across its border. It imposes tariffs and quotas on the goods and services imported
in its country. In addition, the random changes in the regulations create a chaos in global business
environment. Such practices impose limits on international business activities. However, gradual
relief in the cross-border trade restrictions by most governments induces free trade, which, in turn,
increases the growth rate of an economy.

Development of services that support international business: The development of

new services that facilitate international business transactions have also increased
further driving globalization, EX: today, because of bank credit agreements, most
producers can be paid relatively easily for goods and services sold abroad.
Growing consumer pressures: In addition, todays consumers are more informed
about foreign products and services and are better able to afford more luxury items.
Moreover, more consumers can comparison shop to find better deals worldwide.
Companies look for growing markets where consumer pressures are highest such as
China; consumers know more today about products and services available in other
countries, and can afford to buy products that were once considered luxuries.
Companies now spend more money on R&D.

Acts as a main driver to facilitate globalization. Over the years, with increase in the level of
income and standard of living, the demand of consumers for various products has also increased.
Apart from this, nowadays, consumers are well aware about products and services available in
other countries, which impel many organizations to work in association with foreign players for
catering to the needs of the domestic market.

Increased global competition: 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 suppliersa
situation known as clusteringwhich helps them to become quickly aware of foreign
opportunities;
o The present and potential pressures of increased foreign competition can persuade
companies to buy or sell abroad.
Example: A firm might introduce products into markets where competitors are
already gaining sales, or seek supplies where competitors are getting cheaper
or more attractive products or the means to produce them. Nowadays,
companies merge in order to gain operating efficiencies.

Constitutes an important driver for bringing about globalization. An organization generally

strives hard to grain competitive edge in the market. The frequent increase in competition in the
domestic market compels organizations to go global. Thus, various organizations enter other
countries (for selling goods and services) to expand their market share; They export goods in
foreign markets where the price of goods and services are relatively high. Many organizations
have achieved larger global market shares through mergers and acquisitions, strategic alliances,
and joint ventures. So, these are the major factors that have contributed a lot in globalization and
the growth of global economy.

Changing political situations: 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; or a major reason
for growth in international business is the end of the schism between Communist
countries and the rest of the world. Also, governments are now willing to support
programs, such as improving airport facilities, which have fostered speed and cost
efficiencies for delivering goods internationally.
Expanded cross-national cooperation: 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; governments have realized that their own
interests can be addressed through international cooperation by means of treaties,
agreements, and consultation.
3 reasons:
 1. To gain reciprocal advantages: companies dont want to be at a disadvantage when
operating internationally, so they petition their governments to act on their behalf-
governments join them for a variety of commercial activities.
2. To attack problems jointly that one country acting alone cannot solve: sometimes, the
resources needed to solve the problem may be too great for one country to manage or
ones countrys policies may affect those of others.
3. To deal with areas of concern that lie outside the territory of any nation
The Costs of Globalization
While there are many benefits to globalization, it remains controversial. Anti-globalization
protests have become common at international conferences, and the reaction to government
policies is sometimes violent. Three issues are of particular concern:

Threats 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 countrys
cultural sovereignty is threatened as products, companies, work methods, social
structures and language are homogenized as a result of globalization.
Detail
1. The question of local objectives and policies: countries seek to fulfill their citizens
economic, politic, and social objectives by setting rules reflecting national priorities.
However, some critics argue that opening borders to trade undermines individual
countries priorities.
2. The question of small economies overdependence; critics claim that small economies
depend so much on larger ones for supplies and sales that they are vulnerable to foreign
demands.
3. The question of cultural homogeneity; critics charge that globalization homogenizes
products, companies, work methods, social structures, and even language, thus
undermining the cultural foundation of sovereignty. As international differences
diminish, countries find it harder to maintain the traditional ways of life that unify and
differentiate their cultures.

Economic Growth and Environmental Stress: 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.
In fewer words.
The argument for global growth and global cooperation:
Global cooperation: fosters superior and uniform standards for combating environmental
problems
Global competition: encourages companies to seek resource-saving and eco-friendly
technologies.
 Growing Income Inequality 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:

i. Income inequality: has been growing within a number of countries. Critics

claim that globalization has affected this disparity by helping to develop a
global superstar system, creating access to a greater supply of low-cost labor,
and developing competition that leads to winners and losers.
1. Some argue that profits have gone to the top executives rather than to the rank
and file.
2. The speed with which technology and competition expand globally affects the
number of winners and losers along with the relative positions of individuals,
companies, and countries.
3. The challenge is to maximize the gains from globalization while
simultaneously minimizing the costs borne by the losers.
ii. Personal stress: the growth in globalization goes hand in hand with increase
insecurity about job and social status and with costly social unrest.
Offshoring: A type of outsourcing, involves the transferring of production abroad it can be
beneficial because it reduces costs but, it also means that jobs move abroad Yet, offshoring
may also create new, better jobs at home.
Critics 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. IBMs offshoring strategy for example, allows
the company to not only save money and boost sales, but also to create new jobs.

Why do companies engage in international business?

There are three main reasons, companies engage in International Businesses.
Expanding sales
o A companys sales depend on the desire and ability of consumers to buy its goods or
services. Higher sales ordinarily create value, but only if the costs of making the additional
sales dont increase disproportionately. Additional sales from abroad may enable a
company to reduce its per-unit costs by covering its fixed costs- say, up-front research sots.
Because of lower unit costs, it can boost sales even more.
Acquiring Resources:
o producers and distributors seek out products, services, resources, and components from
foreign countries- sometimes because domestic supplies are inadequate. Theyre also
looking for something that will create competitive advantage (ex; acquiring a resource that
cuts costs). Sometimes you can gain competitive advantage by improving product quality
or differentiating their products from those of competitors.
Reducing risk:
o The key is the fact that sales decrease or grow more slowly in a country thats in a recession
and increase or grow more rapidly in one thats expanding economically. Companies often
go international for defensive reasons; they want to counter competitors advantages in
foreign markets that might hurt them elsewhere.
Modes of Operations in International business:

Merchandise Exports and Imports: Exporting and Importing are the most popular modes
of international business, especially among smaller companies; They represent major
sources of international revenues and expenditures for countries. .
o Merchandise exports: Tangible products- goods that are sent out of a country
o Merchandise imports: Goods brought into a country
Service exports and imports: For non-merchandise international earnings, we use the
terms service exports and service imports.
o The provider and receiver of payment makes a service export
o The recipient and payer makes a service import.
o Service and imports take many forms:
Tourism and transportation
Service performance: turnkey operations and management contracts
Asset use: licensing and franchising

Brief Explanation

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 theyre
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
dividends and interest paid on foreign investments are also considered service exports and important
because they represent the use of assets (capital)

Investments: 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 its referred to as a joint venture. A non-
controlling interest is called portfolio investment.
o Foreign Direct Investment (FDI): investor takes a controlling interest in a foreign
company
joint venture (discussed)
o Portfolio Investment: a non-controlling financial interest in another entity;
noncontrolling financial interest in another entity.
o Takes 2 forms:
Stock in a company
Loans to a company in the form of bonds, bills, or notes purchased by the
investor
International companies and terms to describe them:
Many of the terms in international business are confusing because of writers, they use them to
define different things; although international company is any company operating internationally,
there are many terms that differentiate their types of operations. There are numerous ways
companies may work together in international operations such as Companies that work together-
in joint ventures, licensing agreements, management contracts, minority ownership, and long-term
contractual arrangements- all known as collaborative arrangements. In addition, another term.
strategic alliance, can sometime mean the same thing, but more narrowlyto indicate an
agreement that is of critical importance to the cooperative viability.
The multinational enterprise (any company with a FDI) is a company that takes a global approach
to foreign markets and production. It is willing to consider market and production locations
anywhere in the world the True MNE usually uses most of the modes discussed so far; 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. In foreign markets, companies often have to adapt their typical methods
of doing business: foreign conditions may dictate a particular method and operating modes may
be different from those used domestically, thus, it should be Kept 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.

Why International Business Differs from Domestic Business?

Conditions in a companys external environment that may affects its international operations:
Physical and Social factor (Operating Environment): We can organize physical and
social factors into five groups i.e.
a. Geographic influences: The first is geographic influences or how natural
conditions influence the choice of production locations managers who are
knowledgeable about geography can determine the location, quantity, quality, and
availability of the worlds resources, as well as ways to exploit them.
i. Geographic barriers- mountains, deserts, jungles- often affect
communications and distribution channels
ii. Chance of natural disasters and adverse climatic conditions can make
business riskier
iii. Population distribution and the impact of human activity on the
environment may exert strong future influences on international business
b. Political policies: second group is political policies which impacts how, and even
if, business takes place within a country; a nations political policies influence how
international business takes place within its border
i. Political disputes can disrupt trade and investment
c. Legal policies: Related to this are legal policies. Firms must follow the laws in
each country. domestic and international laws play a big role in determining how
a company can operate oversea.
i. Domestic law includes home and host country regulations on matters of
taxation, employment, and foreign exchange transactions
ii. International law determines how earnings are taxed by all jurisdictions
iii. The way laws are enforced affect a firms foreign operations
 d. Behavioral factors: The fourth group, behavioral factors, may also force a
company to alter its operations to better fit with local cultural norms and values;
the related disciplines of anthropology, psychology, and sociology can help
managers better understand different values, attitudes, and beliefs.
e. Economic forces: Finally, economic forces affect costs, currency values, market
size, and so on; it explains why countries exchange goods and services, why capital
and people travel among countries during business, and why one countrys
currency has a certain value compared to anothers.
Competitive factors: Managers also need to understand how the competitive environment
will affect their operations. A companys 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 companys international strategy.

a) Competitive strategy for products: products compete by means of cost or

differentiation strategys by:
Developing a favorable brand image, through advertising or from long-
term consumer with the brand, or
Developing unique characteristics, through R&D ex
Using either approach, the firm may mass-market or sell to a niche market
b) Company resources and experience: size and resources compared to others can
be an advantage.
c) Competitors faced in each market: success in a market often depends on whether
the competition is international or local.
Future of Globalization

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, theyll 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. Its
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 anti-globalization 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.
Global Governance
Politics/Peace- United Nations
Trade- World Trade Organization (WTO)
Money/Finance- International Monetary Fund (IMF)
Development- World Bank
Overall- G8 Nations (USA, Canada, UK, France, Germany, Italy, Japan, and Russia)
Other international organizations and bodies