Chapter 1: Globalization

WHAT IS GLOBALIZATION?

Globalization refers to the shift towards a more integrated and

interdependent world economy.

• The Globalization of Markets

• The Globalization of Production

1-1
 Chapter 1: Globalization

THE EMERGENCE OF GLOBAL INSTITUTIONS

Global institutions:

• help manage, regulate, and police the global market place

• promote the establishment of multinational treaties to govern

the global business system

1-2
 Chapter 1: Globalization

DRIVERS OF GLOBALIZATION

Two macro factors underlie the trend toward greater

globalization:

• Declining Trade and Investment Barriers

• The Role of Technological Change

1-3
 Chapter 1: Globalization

THE CHANGING DEMOGRAPHICS OF THE GLOBAL

ECONOMY

In the 1960s:

• The U.S. dominated the world economy and the world trade
picture
• U.S. multinationals dominated the international business scene
• About half the world – the centrally planned economies of the
communist world – was off limits to Western international
business

1-4
 Chapter 1: Globalization

• The Changing World Output and World Trade Picture

• The Changing Foreign Direct Investment Picture

• The Changing Nature of the Multinational Enterprise

• The Changing World Order

• The Global Economy of the 21st Century

1-5
 Chapter 1: Globalization

MANAGING IN THE GLOBAL MARKETPLACE

Managing an international business (any firm that engages in

international trade or investment) is different from managing a
domestic business because:

• Countries differ
• Managers face a greater and more complex range of problems
• International companies must work within the limits imposed
by governmental intervention and the global trading system
• International transactions require converting funds and being
susceptible to exchange rate changes

1-6
 Chapter 2: National Differences
in Political Economy
POLITICAL SYSTEMS

• A political system is the system of government in a nation

Political systems can be assessed according to:

• the degree to which they emphasize collectivism as opposed to

individualism
• the degree to which they are democratic or totalitarian

1-7
 Chapter 2: National Differences
in Political Economy

ECONOMIC SYSTEMS

• A free market system is likely in countries where individual

goals are given primacy over collective goals

• State-owned enterprises and restricted markets are common in

countries where collective goals are dominant

1-8
 Chapter 2: National Differences
in Political Economy

LEGAL SYSTEMS

The legal system of a country is the rules, or laws, that regulate

behavior, along with the processes by which the laws of a
country are enforced and through which redress for grievances is
obtained.

1-9
 Chapter 2: National Differences
in Political Economy

• Different Legal Systems

• Differences in Contract Law

• Property Rights and Corruption

• The Protection of Intellectual Property

• Product Safety and Product Liability

1 - 10
 Chapter 2: National Differences
in Political Economy

THE DETERMINANTS OF ECONOMIC DEVELOPMENT

Differing political, economic, and legal systems can have a

profound impact on the level of a country's economic
development, and hence on the attractiveness of a country as a
possible market and/or production location for a firm.

1 - 11
 Chapter 2: National Differences
in Political Economy

STATES IN TRANSITION

• Since the late 1980s, a wave of democratic revolutions has

swept the world, and many of the previous totalitarian regimes
collapsed

• There has been a move away from centrally planned and mixed
economies towards free markets

1 - 12
 Chapter 2: National Differences
in Political Economy
STATES IN TRANSITION

• The Spread of Democracy

• The New World Order and Global Terrorism
• The Spread of Market-Based Systems
• The Nature of Economic Transformation
• Deregulation
• Privatization
• Legal Systems
• Implications of Changing Political Economy

1 - 13
 Chapter 2: National Differences
in Political Economy

IMPLICATIONS FOR MANAGERS

• Political, economic, and legal systems of a country raise

important ethical issues that have implications for the practice of
international business

• The political, economic, and legal environment of a country

clearly influences the attractiveness of that country as a market
and/or investment site

1 - 14
 Chapter 3: Differences
in Culture
INTRODUCTION

Operating a successful international business requires cross-

cultural literacy (an understanding of how cultural differences
across and within nations can affect the way in which business is
practiced).

A relationship may exist between culture and the costs of doing

business in a country or region.

1 - 15
 Chapter 3: Differences
in Culture
WHAT IS CULTURE?

The fundamental building blocks of culture are values (abstract

ideas about what a group believes to be good, right, and
desirable) and norms (the social rules and guidelines that
prescribe appropriate behavior in particular situations).

Society refers to a group of people who share a common set of

values and norms.

1 - 16
 Chapter 3: Differences
in Culture
SOCIAL STRUCTURE

A society's social structure is its basic social organization.

Two dimensions to consider:

• the degree to which the basic unit of social organization is the
individual, as opposed to the group

• the degree to which a society is stratified into classes or castes

1 - 17
 Chapter 3: Differences
in Culture

RELIGIOUS AND ETHICAL SYSTEMS

Religion can be defined as a system of shared beliefs and rituals

that are concerned with the realm of the sacred.

Ethical systems refer to a set of moral principles, or values, that

are used to guide and shape behavior.

1 - 18
 Chapter 3: Differences
in Culture
EDUCATION

Formal education is the medium through which individuals learn

many of the language, conceptual, and mathematical skills that
are indispensable in a modern society.

The knowledge base, training, and educational opportunities

available to a country's citizens can also give it a competitive
advantage in the market and make it a more or less attractive
place for expanding business.

1 - 19
 Chapter 3: Differences
in Culture

Hofstede’s four dimensions of culture:

• Power Distance
• Individualism Versus Collectivism
• Uncertainty Avoidance
• Masculinity Versus Femininity

1 - 20
 Chapter 3: Differences
in Culture
CULTURAL CHANGE

Culture evolves over time, although changes in value systems can

be slow and painful for a society. Social turmoil is an inevitable
outcome of cultural change.

As countries become economically stronger, cultural change is

particularly common.

1 - 21
 Chapter 4: Ethics in
International Business
INTRODUCTION

Ethics refers to accepted principles of right or wrong that govern

the conduct of a person, the members of a profession, or the
actions of an organization.
Business ethics are the accepted principles of right or wrong
governing the conduct of business people.
Ethical strategy is a strategy, or course of action, that does not
violate these accepted principles.

1 - 22
 Chapter 4: Ethics in
International Business

ETHICAL ISSUES IN INTERNATIONAL BUSINESS

The most common ethical issues in business involve employment

practices, human rights, environmental regulations, corruption,
and the moral obligation of multinational companies.

1 - 23
 Chapter 4: Ethics in
International Business

ETHICAL DILEMMAS

Ethical dilemmas are situations in which none of the available

alternatives seems ethically acceptable.

1 - 24
 Chapter 4: Ethics in
International Business

THE ROOTS OF UNETHICAL BEHAVIOR

What are the roots of unethical behavior?

• Personal Ethics
• Decision Making Processes
• Organizational Culture
• Unrealistic Performance Expectations
• Leadership

1 - 25
 Chapter 5: International
Trade Theory

AN OVERVIEW OF TRADE THEORY

Free trade refers to a situation where a government does not

attempt to influence through quotas or duties what its citizens can
buy from another country or what they can produce and sell to
another country.

1 - 26
 Chapter 5: International
Trade Theory

MERCANTILISM

Mercantilism, which emerged in England in the mid-16th

century, asserted that it is in a country’s best interest to maintain
a trade surplus-- to export more than it imports.

1 - 27
 Chapter 5: International
Trade Theory

ABSOLUTE ADVANTAGE

In 1776, Adam Smith attacked the mercantilist assumption that

trade is a zero-sum game and argued that countries differ in their
ability to produce goods efficiently, and that a country has an
absolute advantage in the production of a product when it is
more efficient than any other country in producing it.

1 - 28
 Chapter 5: International
Trade Theory
COMPARATIVE ADVANTAGE

In 1817, David Ricardo argued that it makes sense for a country

to specialize in the production of those goods that it produces
most efficiently and to buy the goods that it produces less
efficiently from other countries, even if this means buying goods
from other countries that it could produce more efficiently itself.

1 - 29
 Chapter 5: International
Trade Theory
HECKSCHER-OHLIN THEORY

Hecksher and Ohlin argued that that countries will export goods
that make intensive use of those factors that are locally abundant,
while importing goods that make intensive use of factors that are
locally scarce.

1 - 30
 Chapter 5: International
Trade Theory
THE PRODUCT LIFE CYCLE THEORY

In the mid-1960s, Raymond Vernon proposed the product life-

cycle theory that suggested that as products mature both the
location of sales and the optimal production location will change
affecting the flow and direction of trade.

1 - 31
 Chapter 5: International
Trade Theory

NEW TRADE THEORY

New trade theory suggests that because of economies of scale

(unit cost reductions associated with a large scale of output) and
increasing returns to specialization, in some industries there are
likely to be only a few profitable firms

1 - 32
 Chapter 5: International
Trade Theory

NATIONAL COMPETITIVE ADVANTAGE: PORTER’S

DIAMOND

Porter’s 1990 study tried to explain why a nation achieves

international success in a particular industry and identified
attributes that promote or impede the creation of competitive
advantage.

1 - 33
 Chapter 5: International
Trade Theory

• Factor Endowments

• Demand Conditions

• Related and Supporting Industries

• Firm Strategy, Structure, Rivalry

1 - 34
 Chapter 5: International
Trade Theory
FOCUS ON MANAGERIAL IMPLICATIONS

There are at least three main implications for international

businesses:

• Location

• First-Mover Advantages

• Government Policy

1 - 35
 Chapter 6: The Political Economy
of International Trade

INTRODUCTION

Free trade refers to a situation where a government does not

attempt to restrict what its citizens can buy from another country
or what they can sell to another country.

While many nations are nominally committed to free trade, they

tend to intervene in international trade to protect the interests of
politically important groups.

1 - 36
 Chapter 6: The Political Economy
of International Trade

IINSTRUMENTS OF TRADE POLICY

There are seven main instruments of trade policy:

• Tariffs
• Subsidies
• Import Quotas
• Voluntary Export Restraints
• Local Content Requirements
• Administrative Polices
• Antidumping Policies

1 - 37
 Chapter 6: The Political Economy
of International Trade

THE CASE FOR GOVERNMENT INTERVENTION

There are two types of arguments for government intervention:

political and economic.

• Political arguments are concerned with protecting the interests

of certain groups within a nation (normally producers), often at
the expense of other groups (normally consumers)
• Economic arguments are typically concerned with boosting the
overall wealth of a nation (to the benefit of all, both producers
and consumers)

1 - 38
 Chapter 6: The Political Economy
of International Trade

• 1947-1979: GATT, Trade Liberalization, and Economic

Growth
• The World Trade Organization (WTO), Experience to Date

1 - 39
 Chapter 7: Foreign Direct
Investment
INTRODUCTION

Foreign direct investment (FDI) occurs when a firm invests

directly in new facilities to produce and/or market in a foreign
country.

Once a firm undertakes FDI it becomes a multinational

enterprise.

1 - 40
 Chapter 7: Foreign Direct
Investment
FDI takes on two main forms:

• A greenfield investment (the establishment of a wholly new

operation in a foreign country)

• Acquisition or merging with an existing firm in the foreign

country

FDI is not foreign portfolio investment (investment by

individuals, firms, or public bodies in foreign financial
instruments).

1 - 41
 Chapter 7: Foreign Direct
Investment
FOREIGN DIRECT INVESTMENT IN THE WORLD
ECONOMY

• The flow of FDI refers to the amount of FDI undertaken over a

given time period
• The stock of FDI refers to the total accumulated value of
foreign-owned assets at a given time
• Outflows of FDI are the flows of FDI out of a country
• Inflows of FDI are the flows of FDI into a country

1 - 42
 Chapter 7: Foreign Direct
Investment

POLITICAL IDEOLOGY AND FOREIGN DIRECT

INVESTMENT

• Ideology toward FDI ranges from a radical stance that is hostile

to all FDI to the non-interventionist principle of free market
economies

• Between these two extremes is an approach that might be called

pragmatic nationalism

1 - 43
 Chapter 7: Foreign Direct
Investment

BENEFITS AND COSTS OF FDI

FDI affects countries in different ways.

• Host Country Benefits

• Host Country Costs

•
• Home Country Benefits

• Home Country Costs

1 - 44
 Chapter 8: Regional
Economic Integration
INTRODUCTION

Regional economic integration refers to agreements between

countries in a geographic region to reduce tariff and nontariff
barriers to the free flow of goods, services, and factors of
production between each other.

While regional trade agreements are designed to promote free

trade, there is some concern that the world is moving toward a
situation in which a number of regional trade blocks compete
against each other.

1 - 45
 Chapter 8: Regional
Economic Integration

LEVELS OF ECONOMIC INTEGRATION

There are five levels of economic integration:

• Free trade area

• Customs union
• Common market
• Economic union
• Political union

1 - 46
 Chapter 8: Regional
Economic Integration

THE CASE FOR REGIONAL INTEGRATION

The case for regional integration is both economic and political.

• The Economic Case for Integration

• The Political Case for Integration
• Impediments to Integration

1 - 47
 Chapter 8: Regional
Economic Integration
THE CASE AGAINST REGIONAL INTEGRATION

• Regional economic integration only makes sense when the

amount of trade it creates exceeds the amount it diverts
• Trade creation occurs when low cost producers within the free
trade area replace high cost domestic producers
• Trade diversion occurs when higher cost suppliers within the
free trade area replace lower cost external suppliers

1 - 48
 Chapter 8: Regional
Economic Integration

REGIONAL ECONOMIC INTEGRATION IN EUROPE

There are two trade blocks in Europe: the European Union (EU)
and the European Free Trade Association. Of the two, the EU is
by far the more significant, not just in terms of membership, but
also in terms of economic and political influence in the world
economy.

1 - 49
 Chapter 8: Regional
Economic Integration

REGIONAL ECONOMIC INTEGRATION IN THE

AMERICAS

Regional economic integration is on the rise in the Americas. The

North American Free Trade Agreement (NAFTA) is the most
significant attempt.

Other efforts include the Andean group and MERCOSUR.

In addition, there are plans to establish a hemisphere-wide Free

Trade Area of the Americas (FTAA).

1 - 50