Competing in a Global Market

Globalization is the worldwide trend of the economies of the world becoming borderless and
interlinked —companies are no longer limited by their domestic boundaries and may conduct any
business activity anywhere in the world.

Nature of international business:

 A company engages in international business when it conducts any business functions
beyond its domestic borders.

 What kinds of business activities might make a company international?

 In this course, we refer to any company engaging in international business as a

multinational company or MNC. This is a broad definition, which includes all types of
companies, large and small, that engage in international business.

 Most often, when you see references to MNCs in the popular business press, the reference
is to multinational corporations.

Globalization: A Dynamic Context for International Business

 Globalization is not a simple uniform evolutionary process. Not all economies of the world benefit
equally or participate equally.

In the recent past, financial crises, terrorism, wars, SARS, increased border security, and a worldwide
economic stagnation have limited, or in some cases even reversed, some of the aspects of globalization.

 The financial crisis of 2008 demonstrated just how interconnected the global economy has become
in the last few decades.

 When failures and bad debt in the home mortgage industry forced some US banks and other
financial institutions out of business, the US stock market declined quickly and precipitously.

 Almost immediately, financial institutions around the world followed the US market.

 Before discussing the key globalization trends that affect international business, it is useful to look at
some commonly used classifications of the world’s countries.

 The classifications roughly indicate a country’s gross domestic product (GDP) and the growth in
GDP.
 The classifications are not exact but they simplify discussions of world trade and investments.

Types of Economies in the Global Marketplace: The Arrived,

the Coming, and the Struggling
 According to a country’s gross domestic product (GDP) and the growth in GDP, we can classify the
countries as;
 Developed economies
 Developing economies
 Transition economies
 Least developed countries (LDCs)

 Developed economies have mature economies with substantial per capita GDPs and international
trade and investments.

 The developing economies, such as Hong Kong, Singapore, South Korea, and Taiwan, have
economies that have grown extensively over the past two decades yet have sometimes struggled
recently, especially during the setbacks of the Asian crisis in the late 1990s.

 Other developing economies to watch are what the UN calls the transition economies of the Czech
Republic, Hungary, Poland, and Russia, and the developing economies of Indonesia, Malaysia, the
Philippines, Vietnam, and Thailand.

 Transition economies are countries that have changed from government-controlled, mostly
communist economic systems to market or capitalistic systems.

 The former systems relied on state-owned organizations and centralized government control to run
the economy. In the transition to free market and capitalistic systems, many government-owned
companies were converted to private ownership. The market and not the government then
determined the success of companies.

Several of these transition economies, such as Hungary, Poland, Slovakia, and the Czech Republic,
developed market economies that allowed them to join the European Union. Furthermore, many
multinationals are deciding to locate in transition economies.
Globalization Drivers
 Several key trends drive the globalization of the world economy and, in turn, force businesses to
consider international operations to survive and prosper.

 Some of the most important trends include

 falling borders, growing cross-border trade and investment,

 the rise of global products and global customers,

 the growing use of the Internet and sophisticated information technology (IT),

 the role of LCCs in the world market, and

 the rise of global standards of quality and production.

Lowering the Barriers of National Borders:

Making Trade and Cross-border Investment Easier

 In the mid-1900s, worldwide tariffs averaged 45 percent. By the early 2000s, tariffs on industrial
products fell to 3.8 percent.

 Tariffs are taxes most often charged to goods imported into a country. They have the effect of
raising the price of an imported good.
  Tariffs tend to make foreign goods more expensive and less competitive with local goods. Trade
is reduced because companies cannot compete with domestic producers.

Locate and Sell Anywhere to Anybody:

It’s No Longer Only For Manufacturing but Services as Well

 Not only do MNCs trade across borders with exports and imports, but they also build global
networks that connect different worldwide locations for R&D, supply, support services like call
centers, production, and sales.

 Setting up and owning your own operations in another country is known as foreign direct
investment (FDI). That is, FDI occurs when a MNC from one country owns an organizational unit
located in another country.

 Multinationals often build their own units in foreign countries but they also use cross-border
mergers and acquisitions.

 The most recent statistics show the EU, led by the UK and France, at the top of the list of inward
FDI: that is, FDI from other countries going into the EU. The US is second, followed by China.

 Although the developed countries still lead the world in inward FDI, the share of FDI for developing
nations has increased steadily to nearly 40 percent of worldwide inward FDI. However, many LDCs
had minimal FDI. Africa as a whole, for example, received less than 3 percent of inward FDI.

 Outward FDI follows a similar pattern with the EU leading the US, making nearly half the world’s
investments outside of their own countries. The US is second with less than 20 percent of worldwide
FDI, and Japan is a distant third.

The Rise of Low-Cost Countries:

An Increasingly Important Driver of Globalization
 Low-cost countries have two roles as drivers of globalization.

1. First, they fuel trade and investments by MNCs looking for low-cost platforms to
manufacture goods or secure services such as information technology and call centers.

2. Second, some low-cost countries are becoming what the Boston Consulting Group calls
rapidly developing economies (RDEs).

Rapidly developing economies are LCCs such as China, India, Mexico, and Brazil that not only provide a
low-cost production site but also have an expanding market for multinational sales.
International outsourcing is when a company in one country contracts with a company in another
country to perform some business function.

Off shoring is when a company in one country moves a business function such as manufacturing to
another country, usually to take advantage of lower costs.

 Outsourcing and off shoring are not without potential harm to the givers and receivers.

 Most often we hear about the people who lose jobs in one country when their work is transferred to
another country.

 However, that is not the only potential ethical issue. The ethical and institutional systems may differ
in host countries in ways that might allow potentially ethically questionable behaviors by MNCs.

 Off shoring and outsourcing are not limited to the large MNCs. Small businesses are also getting into
the act.

Information Technology and the Internet:

A Necessary Tool for Globally Dispersed Companies

 The explosive growth in the capabilities of information technology and the Internet increases
the MNC’s ability to reach customers in a global economy and to manage operations throughout
the world.

 Since any website can be accessed by anyone with access to a computer, the Internet makes it
easy for companies to go global.

 That is, with a global online population exceeding 600 million, individuals can shop anywhere
and companies can sell anywhere.

 Electronic communication (e-mail, the World Wide Web, etc.) allows MNCs to communicate
with company locations throughout the world.

 Information technology expands the global reach of an organization. MNCs can now monitor
worldwide operations to an extent never before possible. Text and graphic information can flow
to any part of the world nearly instantaneously. Headquarters, research and development,
manufacturing, or sales can be located anywhere there is a computer.

 Because employees, suppliers, and customers are geographically dispersed, organizations are
becoming virtual — linked by networks of computers. Information technology makes it all
happen.