The impact of globalisation on

international business
The world is evolving, and with it trade and businesses are undergoing a huge changes.
Goods and services from any country are easily available all over the world, and while the
roots of globalisation are pretty old, this facet is quite new. Globalisation can be defined as
the easy availability of goods, connectivity amongst nations, and also access to trade rights
in any country. But as we mentioned before, globalisation has old roots.
The famous silk route that connected China with Europe is one of the best examples. Trade
and business across nations were quite prevalent and the search for new markets even led
to the discovery of new continents. But trade at that time was a difficult affair. The silks, the
spices, the precious stones all were acquired with great difficulty and at high prices.
However, after the industrial revolution, which shook the cobwebs out of the outdated
modes of production and ushered in an era of mass production of goods, the phenomenon
called globalisation was fully born. Factory production, improved distribution and the
availability of goods across markets created a further rise in demand. More and more
businesses selling essential items such as processed food, medicines, household items and
desirable items such as jewellery, fancy cars etc. were set up. Globalisation was thus born
with a new face and the birth was heavily aided by remarkable changes in distribution and
communications technology and the techniques of production.
International business is a world rife with possibilities as well as cut-throat competition. In
order to compete it is very important that the products or services of a particular business
are better than its competitors. Businesses thus are evolving too. Old methods are
frequently becoming redundant and are being continuously replaced by newer methods.
Globalisation thus has opened up the world of opportunities as well as created a host of
other factors that an organisation has to consider if it has to survive in this new world.
To remain competitive businesses often now have to source raw materials internationally as
well as outsource their labour force to foreign shores. When venturing into a new market, it
is much easier if the business forges alliances and joint ventures with local businesses. This
not only gives the business the advantage of a ready market, but saves on costs as well.
Gobalisation has thus helped businesses to create huge markets as well as provide a range
of products which has left the consumer spoilt for choice (Reddy, 1997).
The volume of world trade has increased many fold since the 1950s. The opening up of
economies as well as the creation of new opportunities has resulted in an increase in
productive potential as well as evaporating the barriers to economic investment. The world
has become a global market.
What is globalisation?
Changes in policy and immense changes, as well as new developments, in the field of
technology, have resulted in the growth spurt that has eventually led to melting down of
international boundaries and led to the global outreach of products and services. Major
policy changes have opened up the markets domestically and internationally, and now local
products are competing with international products.
If we look at the current market situation we can easily see that those countries who
adopted an open approach towards international brands, and opened up their markets to
compete with foreign products, have gained a lot from globalisation. Their economies have
received an upward thrust that has catapulted their growth story in a hitherto unimaginable
way. Even a communist giant like China has opened up some of its markets for foreign
direct investment and created strategies and policies that are friendly to foreign investment.
This has brought the Chinese economy to the forefront and has also resulted in an increase
in the per capita income of its citizens.
Another very important factor that has boosted globalisation is the stupendous growth in the
field of technology. Technological development has resulted in rapid development of many
aspects of our civilisation. The world as we know today is very different from the one which
existed fifty or even ten years ago. The kind of technological advancement that has been
achieved has not only made many important discoveries, but also led to a technology-
enabled lifestyle. Together with that, people have the use of an extensive number of
gadgets in their day to day affairs. In this scenario, it is only natural that the products and
services need to be better with each passing day, otherwise they will be immediately
replaced. Globalisation has thus made businesses walk on a razor’s edge in order to
maintain their foothold in the fiercely competitive global market (Archibugia & Iammarino,
1999).
The business world has thus learned to be aware of technological changes that can affect
their productivity and also positively or negatively impact their very survival. There is a
permanent shift in the way information is being accessed by an individual from any location
of the world and utilising it for the development of their own business. Even government
agencies are not untouched by the all-consuming urge of globalisation. Interestingly enough
one of the major forces behind globalisation are the changing political situations as we
already discussed in terms of the Chinese trade policy. Globalisation has also led to the
growth in the supporting services such as banks, transport companies etc.
One of the major advantages of globalisation is perhaps its ability to promote international
co-operation. Policies are being created and nurtured which support the development of
trade and in the long run benefit all countries, such as the creation of the World Trade
Organisation (WTO) to ensure that trade flows smoothly. Since the consumer today is as
much aware of their requirements as the means of getting it, it is the obligation of the
businesses to fulfil those consumer requirements. The competition thus is pretty tough, and
the liberalisation of policies and opening up of markets has helped gain access to a plethora
of international opportunities.
Why do we need international business?
Businesses are driven by the profit motive. Businesses have responsibilities towards their
shareholders as well as other stakeholders to obtain a proper return on investment and also
earn a profit. There are a few important aspects to this –

o Acquisition of resources
Resources would include both raw materials as well as finished goods. The acquisition of
resources that will benefit the company and also help it to do better than its competitor is an
objective for any business. Advanced technology with better components can help a
business beat their competition.
 
o Increase in market base
The products that are available in India, China or the United States, are also now easily
available in Britain as well. This is because markets have opened up and are now
completely dependent on the continuous flow of goods from one end of the world to the
other. This is good news from the point of view of business. The production of goods and
services is dependent on demand, and the larger the market the greater the demand.

o Minimising the risk factor
The sales and profit of any product undergoes the cycle of demand and supply. If a
business is limited to just one country, then the periodic shift in demand may affect its
profitability, and it could be vulnerable during a slump. To negate this, it is essential that the
risk be spread over as wide an area as possible. Thus international markets can help a
business to stay afloat as while one market may be depressed another could be booming at
any one time.
How is international business done?
There are various ways through which the world of international business operates. It is
quite important to note that all these ways have something in common, and that is the urge
for global outreach.

o Import and export of merchandise
Merchandise means tangible goods that are brought in from a foreign country or that are
sent over to a foreign country for sale.

o Import and export of services
Services are intangible or non-merchandise products. They include transportation and
tourism. For example, a British citizen travelling to India using Air India and staying in an
Indian hotel represents service export income for India and service import expenses for
Britain. Note that international business services are generally more restricted by local
regulations than tangible goods are.

o Investments
The foreign investments are of two types: FDIs or Foreign Direct Investment and Portfolio
investment. Foreign direct investment is used when the company wants to gain a controlling
interest or the sole ownership of a business. Portfolio investment is a form of non-controlling
interest.
International businesses have made the world much smaller and also had a huge impact on
the way business is conducted. This is visible in the various ways that have been adopted
to transact business all over the world. International business has thus been hugely
impacted by the phenomenon of globalisation.
Conclusion
Globalisation has brought people and businesses much closer, therefore, the impact on
international business is huge as well as remarkable. Globalisation and international
business are very interrelated. International business has both taken advantage of
globalisation and contributed to its development. The idea of globalisation is making
everything available at places hitherto considered difficult for business, as well as the
utilisation of resources that are useful, but are not easily available. Merchandise and service
industries have both greatly benefitted from international transactions and even small
traders have been able to benefit from it. This has also helped to bring in a wave of
entrepreneurship and encouraged people to start something of their own. In a real sense
globalisation ushers in an era of oneness that was not there before. Are there any
disadvantages? Not for businesses, if they can cope with the increased competition, they
gain from global markets and resources, but for the rest of us it makes the world
increasingly identical with the same international brands such as MacDonald’s, Starbucks
and Coca-Cola wherever you are in the world!

The Business of Globalization and the Globalization of Business

Constantine E. Passaris
University of New Brunswick, Canada

The new global economy of the twenty-first century has transformed the economic,
social, educational and political landscape in a profound and indelible manner. It is
composed of a trilogy of interactive forces that include globalization, trade
liberalization and the information technology and communications revolution.
Globalization has melted national borders, free trade has enhanced economic
integration and the information and communications revolution has made
geography and time irrelevant. The role and functions of entrepreneurship in the new
global economy have taken on added significance and face compounded challenges.
We live in a challenging environment of rapidly changing economic events, where the
private sector has become the most important engine of economic growth and the
public sector has shrunk in importance and influence. Entrepreneurs are defining the
new rules of engagement on the economic landscape as they come to grips with
contemporary challenges and new opportunities. In this new environment,
entrepreneurs need to articulate a pragmatic vision, exercise effective leadership and
develop a competent business strategy. They should create the synergies that will
allow them to integrate the interactive ingredients of the new economy in order to
enhance their competitive advantage. Their business strategy should embrace
flexibility, a quick response time and a proactive approach to economic opportunities.
This paper will also enumerate the entrepreneurial abilities, skills, competencies and
perspectives that are essential pre-requisites for success in the new global economy
of the twenty-first century. In short, the economic heartbeat of the new economy is
the global entrepreneur with an international mindset.
Introduction

1 The new global economy of the 21st Century has transformed the economic, social,
educational, and political landscape in a profound and indelible manner. Never before
in human history has the pace of structural change been more pervasive, rapid, and
global in its context. The new economy is composed of a trilogy of interactive forces
that include globalization, trade liberalization, and the information technology and
communications revolution. Globalization has melted national borders, free trade has
enhanced economic integration, and the information and communications revolution
has made geography and time irrelevant. Furthermore, the new economy is built on a
culture of innovation. Indeed, the signature mark of the new global economy is new
ideas, new technologies, and new initiatives.

2 Economic growth and development in the new global economy has been preceded
by a complex structural realignment of investment streams, the clustering of business
enterprises, the transformation of the production process and the adoption of a niche
marketing approach (Porter, 1998). Furthermore, it has necessitated the effective
integration of state-of-the-art technologies in the domain of information and
communications in order to enhance competitive advantage in the forum of
international trade. All of this has resulted in a fundamental restructuring of economic
society. The role of innovation as a catalyst that drives the engine of economic growth
needs to be acknowledged as a fundamental postulate of the new global economy.
Furthermore, the pivotal role of a country’s human resources and the unique economic
value of its human capital endowment, reflected in the educational attainment and
technical skills of its population, is an essential prerequisite for empowering the new
economy and facilitating the integration of labour in knowledge based industries. Life
long learning and the continuous upgrading of skills as well as the structural
reorganization of the work place have become essential parameters of a country’s
contemporary economic profile. The knowledge based economy is fuelled by
technology, human capital, and research and development which contribute to
accelerating levels of productivity and economic performance (OECD, 1996). In
short, the fuel of the new economy is technology and its currency is human capital.
The product of the new economy is knowledge and its market is the virtual
marketplace of the internet. Global opportunities require competitive tax levels,
investment in research and development, an emphasis on education and training, and
industrial clusters of excellence all geared towards world wide niche markets of the
new global economy (OECD, 1997).

3 The structural transformation of the new global economy has not been confined to
economic parameters. It is equally pervasive in the way we live, learn, work, invest,
provide for our health care, entertain ourselves, exercise our democratic
responsibilities, influence the formulation of public policy and communicate with
each other. Public services, banking, education, health care and electronic commerce
are at the forefront of the Information Revolution with the capability of accessing
information, services, and products from around the world almost instantaneously.
The rapidity of change and the magnitude of structural transformation are hallmarks
of this economic structural transformation - a pace of change that is unprecedented in
the history of mankind (Gera and Mang, 1998). The information and communications
technology of the 21st Century has made possible the contraction of time and space.
The new information and electronic capabilities are defining the new parameters and
advancing the frontiers of economic connectivity (Boston Consulting Group, 1998).

Globalization

4 Globalization is not a new concept. It has evolved and mutated over the centuries to
reflect the priorities and ambitions of different generations. The global outreach of
nations for geopolitical, economic, military, and trade benefits has transgressed the
centuries and embraced almost every country in the world. From time immemorial the
process of globalization has taken different forms and proceeded in different
directions. The voyages of Odysseus recorded by Homer in The Odyssey. The
Babylonian Empire that stretched over Mesopotamia in western Asia between the
rivers Tigris and Euphrates from 1894 BC to 1595 BC, and again from 625 BC to 539
BC when its grasp reached as far as Palestine. The conquests of Alexander the Great
(356 BC to 323 BC) who forged an empire that included parts of Europe, Africa, and
the Asian continent as far as India. In the late 3rd century BC, the Romans began their
conquest of the Balkan Peninsula in search of iron, copper, precious metals, crops,
and slaves. This marked the beginning of the Roman Empire, which lasted from 27
BC until 476 AD, and blended unity and diversity across Sicily, Spain, Macedonia,
Greece, Egypt, North Africa, Syria, parts of Asia Minor, Gaul, and Britain. The
Byzantine Empire lasted from 395 AD to 1453 AD and spanned the Middle East,
North Africa, and Spain. The British Empire from 1583 AD to 1931 AD included
such a large collection of countries around the world that it coined the familiar phrase
"the sun never sets on the British Empire".

5 This short and selective geographical survey of the history of globalization attests to
the permanence of mankind’s globalization ambitions. Through the discovery and
exploitation of new found lands, through the military conquest and annexation of
adjacent territories, and through the signing of contemporary multilateral free trade
agreements, the process of globalization has been an uninterrupted continuum in the
evolving history of mankind. The steady progression of globalization has found
expression in the geopolitical and economic ambitions of military, economic, and
political superpowers by means of wars, mercantilism, colonization, political and
economic supremacy, and more recently, through international economic liaisons and
multilateral trade agreements. In short, history bears testimony that the pursuit of
globalization was at times accomplished with the power of the sword on the
battlefield, or through a coup d’etat that sent tanks rumbling down the streets, or more
recently through the stroke of a pen on an international agreement. The contemporary
phase of globalization reveals that it has many dimensions - economic, social,
political, cultural, religious, and environmental (Black, 1998). All of these dimensions
are appropriate in a borderless, globalized world (Passaris, 2002).

6 A working definition of economic globalization is the global integration of

economies through trade and investment flows, as well as the production of goods and
services in order to enhance international competitiveness. Other capsulated
definitions include the process of accelerating international integration of markets that
result in an integrated global market without national economic borders. More
specifically, the economic profile of globalization includes the development of global
corporations and global networks; the widespread internationalization of all forms of
economic activity in production, marketing, consumption, capital, standards and
tastes; a rapid growth in intra-firm and intra-network trade of components and sub-
assemblies and finished products leading to a much higher level of specialization; the
development and wide diffusion of lean production methods and a much greater
disaggregation of production; the migration of labour-intensive, standard-technology
production (including components, sub-assemblies and finished products) to low wage
economies; the "brain drain" or migration of highly educated and skilled labour to
countries of advanced information technology; the successful integration of a
multinational and multicultural workforce in order to strategically deploy the
economic and social benefits of diversity; the re-orientation of large-scale production
in high wage economies from economies of scale to economies of scope; the
shortening of product cycles (placing a high premium on innovation, product quality
and niche marketing); the integration of outside financial and other services into the
production cycle; and the rapid growth and diffusion of service and knowledge-
intensive activities (both products and processes) particularly in advanced industrial
economies (Passaris, 2002).

7 Globalization has been driven by technological change and financial liberalization,

and sustained by an appreciation among policy makers that an open, liberal, and rules-
based international trading and financial system is essential to global economic
progress. The new economy has become truly global in scope and substance. The free
flow of capital, labour, goods and services within free trade regions, the development
of new financial instruments and institutions, and instantaneous access to information
and communication through the new digital networks, have created a fully integrated
global economic system of tremendous scope and opportunity, and achieved a higher
level of international economic inter-dependence and linkages than ever before (Gupta
and Choudhry, 1997).

Trade Liberalization

8 The second axiom of the new economy is trade liberalization. The prevailing
philosophy in favour of trade liberalization is based on the export led growth model
which espouses the economic benefits of exports to the national economy in the form
of employment creation, income generation, and as a contributor to economic growth.
Indeed, the concept of trade as an engine for growth has been an economic paradigm
that has been passed down from the trade theorems of the nineteenth century.

9 There is no denying that in the contemporary context, most countries around the
world have endorsed the principle and signed on to the potential economic rewards
from global trade liberalization. This has taken the form of a strong policy
commitment toward public declarations against protectionism and a strong expression
of intent to dismantle the walls of protectionist tariffs, quotas, and all forms of barriers
to international trade. The contemporary vision of the new global economy embraces
the promotion of a free trade environment that encourages trade across national
borders of goods and services, the transfer of intellectual property, and the
unregulated flow of capital. In this respect, the modern phase of free global trade
promotes an ambitious agenda that includes not only trade and payments, but the
whole gamut of international transactions that effectively create an open, competitive,
and stable international environment.

10 One of the most striking differences between the new economy and the one that
preceded it is found in the magnitude and rapid movement of international capital
flows. Capital account liberalization, the development of new financial instruments,
and the new digital technologies have created a fully integrated capital market of
tremendous scope and substance. Indeed, a major force driving the growth of
international trade and investment has been the liberalization of global financial
transactions as well as exchange and capital controls. Furthermore, technological and
financial innovation has triggered a demand for more appropriate international
exchange and payment systems. It has also necessitated a more acute emphasis on the
development of sound financial systems, compliance with the principles of good
governance, and the implementation of sound fiscal and monetary macroeconomic
policies. In some countries this has meant adopting a comprehensive program of
economic reforms that involved the development of domestic financial markets and
institutions, and the adoption of consistent macroeconomic policies (Barro and Sala-I-
Martin, 1995). This is in sharp contrast to historical precedent that relied heavily on
administrative controls to regulate international exchange and payments as well as
capital transactions (Archibugi and Michie, 1997).
11 The larger volume of private capital flows has generated a greater reliance on
interbank markets to co-ordinate the supply and demand of foreign exchange. The
trend toward adopting more flexible market based exchange rate arrangements has
been partly responsible for the contemporary movement towards currency
convertibility. As countries eliminated exchange restrictions for current international
transactions and liberalized capital movements, they created conditions conducive to
the development of domestic foreign exchange markets where exchange rates could
be determined more flexibly. The increase in capital flows has placed a premium on
countries following consistent monetary and exchange rate policies. In most cases, the
policy response to capital inflows has involved allowing more flexibility in exchange
rate arrangements.

12 Trade liberalization is predicated upon a favourable domestic economic climate and

enhanced international competitiveness for domestic products. In this regard, national
attentiveness to a balanced approach of government revenue and expenditures within
its fiscal policy, and the pursuit of a monetary policy that aggressively monitors
inflation levels within a predetermined acceptable corridor is perceived as the most
appropriate policy mix for promoting economic growth and enhancing free trade. In
short, the complementarity of an enlightened approach to both fiscal and monetary
policies can enhance the international competitiveness of domestic products in the
global economy.

13 Trade liberalization has been aggressively pursued in the recent past at the
multilateral and bilateral level. The cumbersome and time consuming process of
reaching agreements at the multilateral level, particularly through United Nation
institutions such as the World Trade Organization and its predecessor the General
Agreement on Tariffs and Trade (GATT), has led to the exploration of alternative
forums for international trade agreements. Countries have found it more convenient
and expedient to organize their multilateral free trade agreements within geographic
regional trading blocks. In addition to regional trading blocks such as the European
Union and the North America Free Trade Agreement there are regional common
market trading blocks such as the Common Market of South America, the Andean
Pact, the Central American Common Market, the Caribbean Common Market, the
Southern Africa Customs Union, and the Common Market for Eastern and Southern
Africa. Regional economic agreements also include the Asia-Pacific Economic Co-
operation and the Association of South East Asia Nations. Regional free trading
arrangements can contribute to economic efficiency, trade, investment, and economic
growth. They are also substantial contributors to structural reform by creating
incentives to eliminate restrictive trade practices and licensing procedures,
streamlining customs procedures and regulations and integrating financial markets.
Regional trading blocks can also promote the simplification of transfers including
payment and procedure policies related to transportation, infrastructure, labour, and
immigration, in some countries they also harmonize investment regulation incentives,
tax treatment, and standards and technical regulations.

14 The dynamics of contemporary trade flows are significantly different from the
traditional patterns of international trade. By and large, international trade in its
contemporary phase has been dominated by transnational corporations, which account
for more than two-thirds of world trade. Consequently, there has been a significant
increase in intra-forum trade, which amounts to about 40 per cent of total trade.
Furthermore, the internationalization of production has resulted in a growing vertical
specialization in world trade. As a result, there has been a marked increase in the use
of imported inputs or components in the production of goods exported from
developing countries. In this respect, if an increase in exports is the result of an
increase in imports, then the net effect of trade would largely depend upon the
structure of exports and imports, import content of exports, terms of trade, and
crowding-out effects, among other things. In short, the traditional theoretical models
of international trade require a measure of renewal in order to reflect the current
nature and dynamics of trade flows.

15 The increasingly interconnected global economy requires the active promotion of

international economic co-operation, free and fair trade opportunities for developed
and developing countries, the reform of the international financial system, maintaining
the momentum for structural economic reform and encouraging economic growth, and
the eradication of poverty in the poorest countries. All of this within the overriding
objective of sound macroeconomic conditions and strong non-inflationary growth.

Information Technology

16 The information technology revolution has profoundly altered the structural

parameters and modus operandi of most national economies. Indeed, the
transformation from the industrial age to the information age has resulted in the
restructuring of the work environment, the creation of new economic institutions and
a reconfiguration of the macroeconomic system. The role of information and
communications technology in the new economy has been pivotal. This is particularly
true of the changing structure of international production. In this context, firms are
integrating the production and marketing of goods and services across national
borders. International economic transactions that formerly were conducted between
independent entities are now being internalized within a single firm or multinational
corporation. The new technological infrastructure has empowered services to be
delinked from production and traded or performed remotely. In this contemporary
venue the market for a growing number of internationally integrated but
geographically dispersed business enterprises is global, rather than national or
regional. Indeed, the collapse of time and space through the medium of
information/communications technologies has displaced the physical market with the
virtual market of the internet for business to business and business to consumer
transactions (Cairncross, 1997).

17 The production of goods and the provision of services in the new global economy
continues to be dictated by the economics of profitability. In other words, the high
cost of the information technology infrastructure and highly skilled labour used in the
production process require a marketing niche that caters to a large global market than
a small national market. It has also necessitated the introduction of the concept of
mass customization, and sensitivity to cultural diversity. This is in addition to the
logistical benefits of integrating production globally and forming international
economic liaisons through mergers, acquisitions, hostile take-overs, alliances, and
networks in order to bring economic transactions that were previously conducted at
arms length under administrative control.

18 The new economy has precipitated a dramatic face lift in the workplace structure. It
has replaced the rigid, hierarchical, top-down structure with a more flexible,
horizontal, integrated work place model. It has also spotlighted the three essential skill
requirements of the information age. First, academic skills that provide the basic
foundation to get and keep a job, and to achieve the best results. Those include an
ability to communicate effectively, think critically, and continue to learn for life.
Second, personal management skills such as the combination of positive attitudes,
responsibility, and adaptability. Those would include time management, individual
accountability, and meeting deadlines. Third, teamwork skills which require a
personal disposition to work with other members of a diverse and varied group of
individuals. Indeed, the greatest challenge and the most unique opportunity for new
age managers is to garner the tremendous potential and remarkable creativity of a
workforce environment that brings together human diversity, as well as professional
and occupational dissimilarity in a harmonious and productive workplace structure.

19 At the very heart of the information and communications revolution is the vital
process of the commercialization of scientific discoveries and new inventions. There
is no denying that the road from invention to innovation is long and fraught with
many obstacles. It is not unusual for many inventions to be left behind because of
obstacles in securing the necessary financial capital or adapting an invention to the
economic realities of mass production. Furthermore, in the modern world the Graham
Bell’s, Thomas Edison’s and Guglielmo Marconi’s who endowed us with path-
breaking inventions practically single handed, are few and far between. Inventions
today are more likely to be the product of a team effort and a concerted research and
development initiative of some government laboratory, academic institution, or major
corporation.

20 Economists are divided into two schools of thought regarding the process of
inventions. The first school subscribes to the notion that inventions are an incremental
and marginal process. The second school of thought argues that some inventions are
the catalyst for abrupt structural change that permeates the economic landscape in a
tidal wave of production realignments and technological clustering. Regardless of
what school one subscribes to, there is no denying that the great inventions that took
place during the Industrial Revolution between 1860 and 1900 had a profound impact
on economic productivity and personal lifestyle. These inventions included electricity,
the internal combustion engine, radio, the telephone, phonograph, motion pictures, the
chemical and pharmaceutical industries, advances in entertainment, communications,
urban sanitation, and travel in the form of air and motor transportation. The
Information Revolution has resulted in a new spurt of inventions with expansive
structural changes and significant economic transformation. It should be noted that at
the start of the 21st Century we are simply at the beginning of a second significant
cluster of innovations with far-reaching economic and social impact. The list of
inventions ascribed to the new economy is still in its infancy but already includes
computers, the internet, and telecommunications devices.

21 The impact of the information revolution has not been limited to the restructuring
of the economy. The restructuring of the workplace has individualized the nature of
work and led to the disaggregation of labour. The nature of work has undergone
radical change from permanent, full-time with very few job changes, to part time,
contract work, responding to private and public sector out-sourcing, and a large
number of job changes during one’s working career. In turn, this transformation of the
work environment has diluted the concept of the welfare state, and punched holes in
the social safety net. The challenge facing public policy in the new economy is to find
a way for flexible work and flexible employment to continue to support social security
entitlements and programs.

Scale Versus Scope

22 The economic gains of the Industrial Revolution were associated primarily with
economies of scale. Economies of scale accrue when the cost of producing a unit of
output decreases as the output rate increases prior to diminishing returns setting in.
This is a result of the incremental decrease in per unit cost, as the per unit fixed cost is
distributed over a larger number of total production output. Economies of scale arise
from specialization and the division of labour that can be attained more effectively by
each business’ internal structure of the production process co-ordination, rather than
in market co-ordination. The mass production of consumer durable goods using the
assembly line method of production is a good example of gains from economies of
scale during the Industrial Revolution. More specifically, car manufacturers have been
the beneficiaries of economies of scale through the use of cost saving machinery and
highly specialized labour, along with targeting increases in production output levels.

23 The information technology revolution created an economic synergy of a different

sort that is referred to as economies of scope. Economies of scope accrue when highly
specialized labour inputs and expensive state of the art equipment is used to produce a
range of goods and services. Hence, a decrease in per unit cost as a consequence of
increasing the number of different goods produced is attained. In other words,
economies of scope are realized when highly specialized and expensive technical
inputs are shared by a variety of different outputs. Microsoft is a good example of a
business enterprise that has attained economics of scope. More specifically, Microsoft
hires and utilizes the specialized skills of computer programmers, designers and
marketing experts across a range of software products. In other words, a business
enterprise can realize cost savings by utilizing the same inputs across a varied product
range, thereby spreading the input cost and decreasing the per unit cost of production.
Economies of scope are important for knowledge based industries that have a high
break even point because of expensive inputs and cost overlays utilized in software
development, infrastuctural plans, and equipment and marketing strategies. It is
important to note that in this sector, productivity gains are not due solely to the
utilization of computers, but more specifically to the synergy of the information
technology sector that embraces computer hardware, software and communications.

Internetization

24 Internetization is a word that I have coined to capture the pervasive influence of the
internet and the world wide web on all aspects of human endeavour for our society in
the 21st Century. It is a process that is empowered by information and
communications technology in a world with a tremendous capacity for virtual
connectivity. Hardly a day goes by when our individual and collective lives are not
touched by some aspect of the information technology and communications
revolution. The electronic prefix that is appearing before an increasing number of our
daily activities such as e-commerce, e-mail, e-learning and e-government is a tangible
expression of the pervasive influence of the internet.

25 At the very heart of information technology applications for the knowledge based
sector of the economy is the widespread use of computers and robotics. A collateral
benefit of this transformation has been the extraordinary scale of research and
development in the quest for new applications to the advances in information and
communications technology, the phenomenal growth of the software industry and
related business services, the scale of investment in computerized equipment and in
the telecommunications infrastructure, as well as the rapid growth of niche markets
for satellite and peripheral industries supplying information and communications
technology products, specialized components, and services.

Schumpeterian Entrepreneur

26 In his two seminal books The Theory of Economic Development and Business
Cycles, Schumpeter (1912) articulated his path-breaking analysis on the role of the
entrepreneur in economic growth. To this day, his body of work on entrepreneurship
remains the most authoritative analysis on this subject area (Orati and Dahiya, 2001).
According to Schumpeter, innovation is what determines the value of
entrepreneurship to economic society. Schumpeter embraced the principle that
innovation precipitates a change in production function, and the entrepreneur is the
catalyst that brings it about. In this context, entrepreneurship takes on added
significance as the engine of growth and a contributor to the wealth of nations
(Schumpeter, 1939).

27 This is perhaps an opportune time to draw a distinction between management and

entrepreneurship. The manager has more limited, confined and static responsibilities
in the day to day operation of a business enterprise. The entrepreneur, on the other
hand, is more of an economic visionary (McFarling, 2000). The functions of an
entrepreneur are more dynamic and risk-taking, which embrace attempting new ways
of doing business, and trying new ideas or new production methods, introducing new
products, new processes and new structural forms of business organizations
(McDaniel, 2000). In short, managers improve a company that has already been
established, while entrepreneurs create successful corporations.

Global Entrepreneur

28 The role and functions of entrepreneurship in the new global economy of the 21st
Century have taken on added significance and face compounded challenges. Today
we live in a challenging environment of rapidly changing economic events, where the
private sector has become the most important engine of economic growth, and the
public sector has shrunk in importance and influence. In this context, the entrepreneur
has a primary role to play in promoting national well-being through the enterprise of
the private sector. Entrepreneurs are defining new rules of engagement on the
economic landscape as they come to grips with contemporary challenges and new
opportunities. New ideas, new directions, and new initiatives are the signature mark of
the 21st Century. In this new environment, entrepreneurs need to articulate a
pragmatic vision, exercise effective leadership, and develop a competent business
strategy. They should have personal qualities to integrate the interactive ingredients of
the new economy, viz. globalization, trade liberalization, and the information
technology and communications revolution, in order to enhance their competitive
advantage. Their business strategy should embrace flexibility, a quick response time
and a proactive approach to economic opportunities (Passaris, 2002).

29 The pervasive economic integration that has taken place in the new global economy
has compounded the interdependence of nations, and enhanced the linkages of
production and marketing. At the very heart of this transformation is the birth of the
global entrepreneur. In other words, the ability to adopt a global mindset in the
exercise of entrepreneurial initiatives. Indeed, in addition to a new global vision, new
competencies and new skills are necessary tools for the modern entrepreneur. Among
those new skills are the ability to cope with the tidal wave of frequent and repeated
change, more cost-effective production methods, improving the quality of products,
having a faster response time to changing market conditions, selling at lower prices,
and being more aggressively competitive. In order to strategize globally, the
contemporary entrepreneur must extend his/her mindset to incorporate
multidimensional relationships and complex social, cultural, economic and political
realities.

30 One of the most important entrepreneurial requirements is the ability to have a

global perspective. Globalization has for all practical purposes melted national
borders and made geographical location irrelevant. Entrepreneurs with a global vision
have the advantage of reaching out to embrace economic opportunities world-wide.
Conducting business in a local, regional or national milieu is significantly different
from doing business internationally. For example, it requires upscaling from a
national image in the market place to a global image. This involves endorsing the
same standards of quality throughout the world on a consistent basis, but at the same
time incorporating the flexibility to tailor packaging or the image of the product to suit
the customs and traditions of the local market.

31 Second, the new global entrepreneur must have the ability to meet the challenges
and take advantage of the opportunities associated with human diversity. This requires
the adoption of a progressive multicultural approach in terms of one’s workforce as
well as one’s product clients. The contemporary entrepreneur must develop a
knowledge and appreciation of the cultural, social, and economic differences that
influence how people perceive and interact in their environment and its relationship to
community development. It requires being constantly sensitized to the different
cultural values, attitudes and approaches to problem solving and decision-making. A
proficiency in managing diversity domestically and internationally is essential for
harnessing the multicultural profile of the workforce and ensuring optimum levels of
productivity. The cultural diversity of the workforce is an economic asset that must be
deployed to strategic business advantage. It translates into an ability to communicate
in the languages of many different countries, and familiarity with local customs,
traditions, business, and financial habits. Marketing strategies must understand the
role of languages and cultures as they attempt to introduce new products in foreign
markets. The failure to take local preferences, packaging, branding, local conditions,
and economic infrastructure into account can result in poor strategic decisions. An
imperative for effectively managing cultural diversity is cultural sensitivity. The
modern entrepreneur requires a comfort level that is conducive to utilizing the
multicultural, multiracial, multilinguistic, and multifaith character of the workforce.
This is a profound economic advantage in such areas as international trade,
identifying export markets, overseas business contacts, opening doors of economic
opportunity, establishing a presence in overseas markets, facilitating foreign direct
investment, integrating advanced technology, and assessing the business risk of
operating in a foreign market. A global perspective involves a holistic view of
workforce inclusiveness whereby all employees are treated fairly and equitably, and
are provided with equal opportunities and equal rewards. It requires the effective
integration of diverse cultures in the business network in a productive and trusting
environment. In short, this is about creating people synergy, where the outcome is
greater than the inputs, because of the strategic co-ordination of a diverse and
pluralistic workforce.

32 The third axiom of successful entrepreneurship in the new economy depends on

pushing the frontiers of innovation in a persistent and deliberate manner. Integrating
innovation has become a constant objective for economic efficiency and the
development of a successful business strategy. The maxim "if it ain’t broke don’t fix
it" should be replaced with "if it ain’t broke improve it". The modern entrepreneur
must embrace the role of a catalyst for innovative change on a continuous time frame.
In this respect, entrepreneurs must seek opportunities for achieving economies of
scale and economies of scope. Global enterprises can ascertain these economies by
extending their reach to global markets. In doing so, they extend the potential of their
domestic market and enhance the scope of their innovation initiatives through
research and development, the development of new products, improving quality, and
reducing the cost of existing products. It should be noted that developing global niche
market requires a long-term customer oriented focus. In order to compete in the
contemporary global market, products and services must be sensitive and responsive
to local market needs and customer preferences. Furthermore, in the fast paced world
of business, even the long term is getting shorter. Given the diversity of market
requirements and needs, the dispersion of manufacturing and out sourcing, the
importance of research and development leadership, and the recognition of
technological advances for product and process innovations; learning and the transfer
of knowledge are key to global success. Business organizations that are successful
must be able to co-ordinate, transfer, and use knowledge gained rapidly and
effectively.

33 New corporations with an international focus must embrace an organizational

vision that has a global reach. There must be an administrative model that facilitates
the corporate vision and has the plans to implement it effectively and consistently
throughout the entire organization. It is in this regard that product quality takes on
added significance. The culture of the modern enterprise must be to adhere to high
quality standards that are company-wide and permeate throughout the entire
enterprise, not just parts of it.

34 The modern horizontal structure of the new global corporation allows the process
of shared ideas and new information that are the catalysts for creating new
opportunities. In this global environment, corporations will require the skills to
communicate with diverse groups of people. To do so effectively requires multilingual
training and high levels of cross cultural awareness and sensitivity. Besides the
positive effects of good communication skills among colleagues and with clients,
effective communication is of particular importance to geographically dispersed and
culturally diverse organizations. Sensitive communications build trust and send a
common message that helps build a strong corporate culture and shared value
systems.

35 The modern entrepreneur must instil an element of creativity in the organizational

design as well as reflect a functional global perspective. The organizational structure
must be characterized by flexibility and multidimensionality in order to operate
effectively in a diverse global environment. In this regard, effective teamwork is an
essential requirement for business success. It goes without saying that with the
increased complexity of global operations, the ability to function effectively in work
teams - especially in culturally diverse groups - is of paramount importance. The
advent of better and cheaper global communication technology means that global
teams can operate without being in the same physical location. Global team work can
contribute to successful business planning, a stronger commitment to achieving world
wide objectives, and a closer collaboration in carrying out strategic change.

36 Inshort, international business offers more opportunity today than ever before.
However, enhanced opportunities also imply compounded challenges that are
accompanied by increased complexity, uncertainty, and risk. Indeed, being global is
more than simply geography. It means integrating and leveraging the tools for the
successful implementation of a global vision. It also means being adept at
understanding and utilizing the forces, ideologies and value systems that which shape
the way nations and cultures interact, and the way social, political and economic
policy impacts every aspect of how modern corporations and organizations operate
across the globe. It requires a holistic approach towards harnessing the synergy from
economic, human and social capital on an international playing field.

Conclusion

37 The economic profile of the new global economy has been driven by technology,
fuelled by innovation and entrepreneurial initiative, and is based on new ideas, new
perspectives and new business strategies. It has opened the door to new investment
opportunities and acted as a catalyst for employment creation. At the same time the
new economy has altered the economic landscape and realigned the linkages between
different sectors of the economy. In short, technological innovation and
entrepreneurial initiative is alive and well in the new global economy of the 21st
Century.

38 The new economy has markedly transformed the structural parameters of the
economic landscape and contracted the prism for time and space. The role of
information technology in the new economy has been pivotal. It is particularly potent
in the changing structure of international production. International economic
transactions that formerly were conducted between independent entities are now being
internalized within a single firm or multinational corporation. The new technological
infrastructure has empowered services to be delinked from production, and traded or
performed remotely. In this contemporary venue, the market for a growing number of
internationally integrated but geographically dispersed business enterprises is global,
rather than national or regional. The internationalization of production is necessitated
by the economics of profitability. In other words, the high cost of information
technology and the highly skilled labour used in the production process, require a
marketing niche that caters to a global market rather than a smaller national market.
The economic heartbeat of the new economy is the global entrepreneur.

References

Archibugi, D. Howells, J. and Michie, J. (1999). Innovation Policy in a Global

Economy. Cambridge University Press: Cambridge.

Archibugi, D. and Michie, J. (1997). Technology, Globalization and Economic

Performance. Cambridge University Press: Cambridge.

Barro, R. J. and Sala-i-Martin, X. (1995). Economic Growth. McGraw Hill: New

York.

Black, Stanley, W. (1998). Globalization Technological Change and Labor Markets.

Kluwer Academic Publishers: Boston.
Boston Consulting Group. (1998). The State of Online Retailing. Boston Consulting
Group: Boston.

Cairncross, F. (1997). The Death of Distance: How the Communications Revolution

Will Change Our Lives. Harvard Business School Press: Cambridge.

Gera, S. and Mang, K. (1998). The Knowledge-Based Economy: Shifts in Industrial

Output. Canadian Public Policy 24 (2): 149-184.

Gupta, S.D. and Choudhry, N.K. (1997). Globalization, Growth and

Sustainability. Kluwer Academic Publishers: Boston.

McDaniel, B. A. (2000). A Survey on Entrepreneurship and Innovation. Social

Science Journal. 37 (2): 277-285.

McFarling, B. (2000). Schumpeter’s Entrepreneurs and Common’s Sovereign

Authority. Journal of Economic Issues. 34 (3): 707-723.

Orati, V. and Dahiya, S. B. (2001). Economic Theory in the Light of Schumpeter’s

Scientific Heritage. Spellbound Publications: Rohtak.

Organization and Economic Co-operation and Development. (1996). Employment and

Growth in the Knowledge-Based Economy. OECD: Paris.

Organization for Economic Co-operation and Development. (1997). Industrial

Competitiveness in the Knowledge-Based Economy: the New Role of Government.
OECD: Paris.

Passaris, C. E. (2002). Schumpeter and Globalization: Innovation and

Entrepreneurship in the New Economy. Fifth Annual International Schumpeter
Lecture. Viterbo.

Porter, M.E. (1998). Clusters and the New Economics of Competition. Harvard

Business Review. 76: 77-90.

Schumpeter, J. A. (1912). The Theory of Economic Development: An Inquiry into

Profits, Capital, Credit, Interest and the Business Cycle. Harvard University Press:
Cambridge.

Schumpeter, J. A. (1939). Business Cycles: A Theoretical, Historical and Statistical

Analysis of the Capitalist Process. McGraw Hill: New York.
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Principles of Management

Module 16: Globalization and Business

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Current Trends in Global Business

LEARNING OUTCOMES

 Describe key characteristics of business globalization.

 Explain global competition.
 Explain global supply chains.
 Give examples of the global nature of innovation.

Many businesses now urge their employees to “Think globally.”

What Is Globalization?
Globalization is the process by which the exchange of goods, services, capital,
technology, and knowledge across international borders becomes increasingly
interconnected. Globalization creates new opportunities for businesses to increase
profits by expanding markets and by allowing wider access to resources. On the other
hand, globalization also opens domestic markets to new competitors, decreasing
demand for local products. Arguing the advantages or disadvantages of globalization is
a little like arguing about the weather: it’s best just to admit it’s here to stay and then
figure out how it’s going to affect you.

Important Global Trade Agreements and Organizations

After World War II (US involvement spanned from 1941–1945), many countries wanted
to expand global cooperation—politically, economically, and socially. Nations agreed to
work together to promote free trade and increase global cooperation. They also created
regional custom and trade agreements and unions to facilitate economic
interdependence.  The most important of these organizations, treaties, and trade
agreements are briefly summarized below.

The World Trade Organization

The World Trade Organization (WTO), officially formed in 1995, grew out of the General
Agreement on Tariffs and Trade (GATT). The WTO oversees the implementation and
administration of agreements between member nations. It provides a forum for
negotiations and for settling disputes among nations. It also helps developing nations
get experience and technical expertise needed to deal with large and very
comprehensive trade agreements. Although there are ongoing controversies, its
member states account for 97 percent of global trade and 98 percent of the global gross
domestic product. The WTO is a truly global organization that deals with agriculture,
labor standards, environmental issues, competition, and intellectual property rights.

The World Bank

The World Bank is an international financial institution that provides loans for capital
programs to developing countries. It is a component of the World Bank Group, which is
part of the United Nations system. The World Bank is comprised of 189 member
countries represented by a board of governors. Although headquartered in Washington,
DC, the World Bank has offices in almost every nation in the world. The organization
has two goals to achieve by 2030:
1. End extreme poverty by decreasing the percentage of the world’s population that live on
less than US $1.90 per day to no more than 3 percent.
2. Promote shared prosperity by fostering the income growth of the bottom 40 percent
in every country.

Some recent projects have been aimed at improving primary and secondary school
education systems and basic infrastructure, such as building and maintaining safe water
supplies and sanitary sewer systems in Africa and parts of Asia. Although the World
Bank has come under fire in the past for budget overruns and poor project oversight, its
role in promoting economic development has been undeniable.
The International Monetary Fund

The International Monetary Fund (IMF), headquartered in Washington, DC, is

comprised of 189 member countries. The IMF works to foster global growth and
economic stability by providing policy, advice, and financing to its members. It also
works with developing nations to help them reduce poverty and achieve macroeconomic
stability. It now plays a central role in the management of balance-of-payments
difficulties and international financial crises.

When the IMF was founded, its primary functions were to provide short-term capital to
aid the balance of payments and to oversee fixed-exchange-rate arrangements
between countries, thus helping national governments manage their exchange rates
and prioritize economic growth. This assistance was meant to prevent the spread of
international economic crises. The IMF mission changed slightly after 1971, and floating
currency exchange rates made it harder to predict the economic stability of a region.
Today the IMF plays an active role in shaping and managing economic policy around
the world.

Watch the short video that follows for an overview of how the IMF and the World Bank
are similar and how they differ.

Global Trade Policies

In addition to international organizations, countries make agreements among
themselves to reach trade advantages. There are four common types of trade
agreements (also known as trade blocs) with different levels of trade dependencies:
regional trade agreements (RTAs), custom unions, common markets, and economic
unions.
 Regional trade agreements establish reciprocal (equally binding) treaties addressing tariffs
and trade barriers with member countries. For example, the United States–Mexico–Canada
Agreement (USMCA), once ratified, will allow for tariff reductions or eliminations (free
trade). The Association of Southeast Asian Nations (ASEAN) provides for the free
exchange of trade, service, labor, and capital across ten independent member nations to
provide a balance of power to the economic powerhouses of China and Japan.
 Customs unions are arrangements in which countries agree to allow free trade on
products within the customs union. They may also agree to a common external tariff
(CET) on imports from the rest of the world. It is the CET that distinguishes a customs
union from a regional trade agreement. It is important to note that although trade is
unrestricted within the union, customs unions do not allow free movement of capital and
labor among member countries. An example is the customs union of Russia, Belarus, and
Kazakhstan, which was formed in 2010. These countries eliminated trade barriers among
themselves but have also agreed to some common policies for dealing with nonmember
countries.
 Common markets are similar to customs unions in that they eliminate internal barriers
between members and adopt common external barriers against nonmembers. The
difference is that common markets also allow free movement of resources (e.g., labor)
among member countries. An example of a common market is the Economic Community
 of West African States (ECOWAS), comprised of Benin, Burkina Faso, Cape Verde,
Gambia, Ghana, Guinea, Guinea-Bissau, Ivory Coast, Liberia, Mali, Niger, Nigeria,
Senegal, Sierra Leone, and Togo.
 Economic unions eliminate internal barriers, adopt common external barriers, and permit
free movement of resources (e.g., labor). They also adopt a common set of economic
policies. The best-known example of an economic union is the European Union (EU). EU
members all use the same currency, follow one monetary policy, and trade with one
another without paying tariffs.

Watch the video that follows for a brief look at the advantages and disadvantages of
free trade among countries.

Key Characteristics of Globalization

Debates about the characteristics and consequences of globalization generally focus on

three areas: political, economic, and cultural. Globalization produces both positive and
negative outcomes in all these areas.

Political

For thousands of years, treaties have shaped international relations and led to complex
alliances. International cooperative bodies such as the United Nations and the World
Trade Organization exist today because of the increasing need for political cooperation
at the global level. It is impossible for a country to remain isolated from events around
the world. People’s ideas and expectations are shaped by what they see happening
around them. Because of the rapid flow of information to most areas of the world,
people are very aware of events taking place around the globe virtually as they happen.
However, some nations, such as North Korea, choose to try to isolate themselves from
the rest of the world. Others try to control the flow of information within their borders. But
technology makes it very difficult to control access to information. Depending on how it
is used, technology can both reduce and increase political tensions and military
conflicts.

Labor and environmental abuses, traced to corporations taking advantage of weak

protectionist laws in some countries, are uniting people who would otherwise not find
political common ground. The fear of domestic job losses and concerns about
manufacturing safety records in developing countries are becoming popular planks in
many political campaigns.

Economic

As a result of globalization, nations with limited resources can access goods and
knowledge that help to raise their standards of living. Trade treaties, such as USMCA
and the European Union (EU), lower or abolish tariffs that restrict the flow of products
across borders. Nations with rare resources or specific skills are able to focus on their
particular business or commercial strengths and sell their goods to a global market. The
Economist magazine has reported that one billion people have been lifted out of poverty
thanks to freer trade policies.[1] On the downside, outsourcing allows businesses to
exploit people as sources of cheap labor required to work under substandard
conditions. There is also a trend toward the consolidation of businesses in many
industries, hurting locally owned businesses and damaging local economies.

Cultural

Globalization has heightened the awareness of the many, many languages, religions,
cuisines, arts, literature, and dress that constitute cultures around the world. Some
people are worried, however, that cultures around the world are merging into a “world
culture” in the process of globalization. As people emigrate to economic powerhouses in
the search for higher standards of living, many local traditions and even languages are
threatened with extinction. You will read more about this topic later in this module.

PRACTICE QUESTION

Global Competition
Global competition means the competing organizations that serve international
customers through enhanced communications, improved shipping channels and supply
chains, reduction of trade barriers, and centralized financial institutions. There are small
players, such as a local entrepreneur who advertises handmade baby carriers on her
website and ships products to other countries through Amazon or directly to the
customer. At the other extreme are the giant multinationals such as Exxon Mobil, Apple,
McDonald’s, and Google.

Why do so many businesses make the financial investments and take the high risks
involved with global business ventures? The chief reasons include the following:

 Increased profits. A wider market and customer base means the opportunity to sell more
goods and services. Some countries have lower taxes, adding to the advantages of
moving production there.
 Greater access to suppliers for materials and at lower costs. If a cold snap in southern
Florida damages the crop of oranges for a season, juice manufacturers can import fruit
from another country.
 Reduced manufacturing costs through access to cheaper labor. Even Levi’s, which still
makes its blue jeans in the United States, will pay Wipro $143 million over five years to
handle information technology, human resources, finance, and customer service.
[2]
 Motorcycle maker Harley-Davidson moved 125 jobs overseas. It is also well-known that
Apple has the iPad and iPhone assembled in China by contractor Foxconn, while parts for
the devices are made in more than 20 different countries.
 Social and environmental concerns. Many US businesspeople are committed to improving
the lives of people around the world and working with international organizations to
address environmental concerns such as air pollution, clean water, and climate change.
The World Economic Forum has developed the Global Competitiveness Report that
ranks countries on global competitiveness. It averages the different data points that
encourage competitiveness, including such things as a stable government, good
educational systems, a developed infrastructure, a strong market for goods and
services, efficient labor pools, stable financial institutions, and the ability to innovate and
use technology. The top ten most globally competitive countries in 2016 were as
follows:
1. Switzerland
2. Singapore
3. United States
4. Netherlands
5. Germany
6. Sweden
7. United Kingdom
8. Japan
9. Hong Kong
10. Finland[3]
Another ranking that measures global competitiveness is the Ease of Doing Business
Index created by the World Bank Group. This index lists the “friendliest” countries for
starting commercial ventures. The ranking considers such factors as dealing with
construction permits, getting electricity, legal procedures, getting credit, providing
investor protections, paying taxes, enforcing contracts, trading across borders,
regulatory issues, and transparency in government. [4]

Only Singapore, the United States, and the United Kingdom appear in the top ten of
both lists.

Two key reasons that these countries are so globally competitive is that businesses
operating within their borders have developed the most efficient supply chains and
continually innovate to improve operations, products, and services.

PRACTICE QUESTION

Global Supply Chains

A supply chain is the network of suppliers and contractors that provide needed materials
and services to a business. It includes all of the businesses involved with taking a
product from raw material to manufacturing to the transporting and storage of the
finished merchandise. Some supply chains include delivery to the consumer and even
account for recycling of the used product. Logistics means getting materials from one
place to another when they are needed and storing them if necessary. It is a popular
field of study in many business schools. Logisticians study the latest innovations in
shipping, warehousing, rail/road transportation, and airfreight.

A global supply chain exists behind that Amazon package on your doorstep.
For example, let’s look briefly at what it takes to produce a typical T-shirt bought off
Amazon. The cotton is grown in Texas or Mississippi with the help of agricultural
subsidies to the farmers. The raw cotton is shipped to Indonesia (for example), where it
is combed and spun into yarn. The yarn is sent to Bangladesh or another country where
it’s made into whole cloth, washed, and dyed. The cloth is then sent to Colombia (or
whichever country has the lowest labor rates) to be sewn into T-shirts. The T-shirts are
then shipped back to the United States, where they are printed and distributed to retail
stores or Amazon warehouses. Getting the goods to the consumer is the most
expensive part of the whole process. Finally, some T-shirts are recycled to East Africa.
International agreements to keep tariffs low and improved shipping methods all
contribute to making this global supply chain cost-effective. [5]

In the global economy, managing a supply chain requires dealing with trade and tariff
controls, quality regulations, and international relationships. Global supply chain
management is highly specialized and complicated. Some firms even do nothing but
manage supply chains for other companies, whereas some other companies offer the
service in addition to their core activity. For example, the following promotion appears
on the FedEx website:

FedEx Supply Chain is a third-party logistics provider that can support supply
chain requirements throughout the product lifecycle, from kitting and product
packaging through end-of-life services such as liquidation and recycling. [6]

The World Bank estimates that 13 percent of the world’s gross domestic product (GDP)
was earned from moving and storing goods around the planet in 2016.

Today’s globally integrated economy makes it necessary for businesses to look as far
as possible for both the cheapest and the best resources. The benefit of global supply
chains is that businesses can take advantage of low-cost goods and services in foreign
locations to bring down operating costs. However, when a business depends on
outsourcing, it increases the number of risk factors outside of its control. Tsunamis in
Japan shut down an auto assembly plant in Ohio when essential parts couldn’t be
shipped; severe flooding in Thailand delayed the manufacture of computers for the US
market when hard drives failed to appear. Ethical considerations can also be a factor.
Even when a firm tries to ensure that the factory owners it contracts with provide fair
wages and safe working conditions, abuses still occur, and responsibility is hard to
assess. A series of factory fires and disasters killed hundreds of workers in Bangladesh
in 2013 and led to the Disney Company canceling the production of its licensed
products in that country.[7]

Many companies have developed alternate supply chains that take over when the
primary sources are unavailable. Managers must always be aware of changes in the
economy and in politics that make one source a better choice than another. As energy
prices increase in one location and go down in another, for example, shifts can be made
to capture these savings. These kinds of efficiencies can occur when companies use
technology to innovate their supply chain management systems.\

PRACTICE QUESTION

The Global Nature of Innovation

Innovation in business is developing an idea or invention that increases efficiency,
raises productivity, or creates value for which customers will pay. An innovation applies
information, imagination, and initiative in ways that further the goals of the organization
to satisfy customer expectations. Today, virtually every business believes that
innovation is necessary for its sustainability and growth.
One of the most powerful drivers of innovation is technology. Not only is
technology scalable (able to handle increasing amounts of work) but it can also be used
to leverage and produce new innovations. Economists traditionally viewed competition
as a function of investment, labor and other costs, and the general business climate.
Today, competitiveness is based more on the ability to keep up with rapid technological
and organizational changes. In a dynamic world, many people use the catchphrase
“innovation-led economy.”

When your business competes on a global scale, it is more important than ever to adapt
and innovate to find ways to sustain a competitive advantage. Doing the same thing
forever is not a viable option because the next company is committed to finding the key
to take your market share. Blockbuster Video, for instance, failed to recognize customer
demand for the new live-streaming innovation for computers, whereas Netflix jumped on
the innovative technology and created a user-friendly interface. To succeed,
organizations must continually adapt and apply new strategies.

A final example: Nestlé is the largest food and beverage company in the world. In 2016,
it launched a crowdsourcing initiative to ease communication among the 36,000 people
involved in its supply chain. The initiative, called InGenious, asks employees to
communicate with each other about supply chain challenges, problems, and solutions.
The company has also developed more than seventy massive open online courses
(MOOCs) in multiple languages to educate its supply chain teams worldwide. Nestlé
leaders believe that there is no one system that can track all of the agricultural suppliers
in the world and how their products are distributed. They are developing “sharing
economy” technologies that rely on crowdsourcing to alert the company to potential
problems and help them develop solutions.

PRACTICE QUESTION

1. “Towards the end of poverty,” The Economist, June 1, 2013, accessed Aug. 5,
2017, https://www.economist.com/news/leaders/21578665-nearly-1-billion-people-
have-been-taken-out-extreme-poverty-20-years-world-should-aim ↵
2. McDougall, P. “Bored of the USA?: 'Made In America' Jeans Maker Levi Strauss to
Move 500 Jobs Offshore,” International Business Times, Nov. 13, 2014, accessed Aug. 5,
2017, http://www.ibtimes.com/bored-usa-made-america-jeans-maker-levi-strauss-
move-500-jobs-offshore-1723477 ↵
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