Chapter 1

Globalization and
International
Business
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Objectives

To define globalization and international

business and show how they affect each other
To understand why companies engage in
international business and why international
business growth has accelerated
To discuss globalizations future and the major
criticisms of globalization
To become familiar with different ways in which
a company can accomplish its global objectives
To apply social science disciplines to
understanding the differences between
international and domestic business

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Introduction
Globalization is the ongoing process that
deepens and broadens the relationships
and interdependence among countries
International business is a mechanism to
bring about globalization

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Introduction

International business consists of all

commercial transactionsincluding sales,
investments, and transportationthat take
place between two or more countries

increasingly foreign countries are a source of

both production and sales for domestic
companies

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Introduction

It is important to study international

business because

Most companies are either international or

compete with international companies
Modes of operations may differ from those used
domestically
The best way of conducting business may differ
by country
An understanding helps you make better career
decisions
An understanding helps you decide what
government policies to support

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Introduction
Factors in International Business Operations

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Forces Driving Globalization

1.
2.
3.
4.
5.
6.
7.

Increase in and application of technology

Liberalization of cross-border trade and
resource movements
Development of services that support
international business
Growing consumer pressures
Increased global competition
Changing political situations
Expanded cross-national cooperation

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Measuring Globalization
Globalization can be difficult to measure
The A.T. Kearney/Foreign Policy
Globalization Index ranks countries by

Economic dimensions
Technological dimensions
Personal contact
Political dimensions
recently ranked Singapore and Hong Kong
as most globalized

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Costs of Globalization

Threats to national sovereignty

Economic growth and environmental

stress

lose freedom to act locally

growth consumes nonrenewable natural

resources and increases environmental
damage

Growing income inequality and personal

stress

promotes global superstars at the expense of

others

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Why Companies Engage in IB

To expand sales

To acquire resources

pursuing international sales increases the

potential market and potential profits
may give companies lower costs, new and
better products, and additional operating
knowledge

To diversify or reduce risks

international operations may reduce operating

risk by smoothing sales and profits, preventing
competitors from gaining advantage

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Why Companies Engage in IB

These three reasons

sales expansion
resource acquisition
risk minimization

guide all decisions about whether, where,

and how to engage in international
business

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Modes of Operations in IB

Merchandise exports

Merchandise imports

goods that are sent out of a country

goods that are brought into a country

Sometimes referred to as visible exports

and imports

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Modes of Operations in IB

Service exports
provider and receiver of payment
Service imports
recipient and payer of payment
Examples
Tourism and transportation
Service performance
turnkey operations and management
contracts
Asset use
licensing and franchising

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Modes of Operations in IB

Investments

Foreign Direct Investment (FDI)

investor takes a controlling interest in a
foreign company
joint venture
Portfolio Investment
a non-controlling financial interest in
another entity

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Types of International
Organizations

Collaborative arrangements

Joint ventures
Licensing arrangements
Management contracts
Minority ownership
Long-term contractual arrangements

Strategic alliance

companies that work together, but the

agreement is critical to at least one partner
an agreement that does not involve joint
ownership

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Types of International
Organizations

Multinational enterprises (MNEs)

take a global approach to markets and

production or have operations in more than
one country

Sometimes they are referred to as

multinational corporations (MNCs)

multinational companies (MNCs)
transnational companies (TNCs)

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Why IB is Different
The external environment affects a
companys international operations
Managers must understand social science
disciplines and how they affect functional
business fields
Consider

physical factors
social factors
competitive factors

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Physical and Social Factors

Geographic influences

Political policies

influence how a company operates

Behavioral factors

determines where and how business occurs

Legal policies

natural conditions influence production locations

may require changes in operations

Economic forces

explain differences in costs, currency values, market

size

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The Competitive Environment

Competitive strategy for products

Company resources and experience

Cost strategy
Differentiation strategy
market leaders have more resources for
international operations

Competitors faced in each market

local or international

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The Competitive Environment

So, a companys competitive strategy
influences how and where it can best
operate
Its competitive situation may differ from
country to country in terms of its relative
strength and which competitors it faces

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Looking to the Future

Three major perspectives on the future of

international business and globalization

Further globalization is inevitable

International business will grow primarily along
regional rather than global lines
Forces working against further globalization
and international business will slow down both
trends

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