GLOBALIZATION & INTERNATIONAL BUSINESS
Objectives
§ Globalization
§ International Business
§ Reasons for Engaging in Int. Business
§ Modes of International Business
§ Differences in Domestic & International Business
Globalization
Martin and Sunley (1997) identified Globalization as a
“notion of economic activity that enables a free flow of capital, trade and information not constrained by national boundaries”.
Globalization is a shift towards more integrated and interdependent world economy.
Globalization
Due to this interdependence the world is becoming a
‘Global Village’.
The concept ‘global village’ was first introduced by Marshall McLuhan (1962), one of the first thinkers of globalization.
Now firms could operate across countries in order to get access to the cheaper factors of production as well as to achieve the economies of scale (EOS).
Economies of Scale
§ Economies of scale arise when the cost per unit falls as output increases. Economies of scale are the main advantage of increasing the scale of production and becoming ‘big’.
Why are economies of scale important?
– Firstly, because a large business can pass on lower costs to customers through lower prices and increase its share of a market. This poses a threat to smaller businesses that can be “undercut” by the competition
Economies of Scale
– Secondly, a business could choose to maintain its current price for its product and accept higher profit margins.
– For example, a furniture-maker which could produce 1,000 cabinets at £250 each and sells for £350. Now they have expanded and be able to produce 2,000 cabinets at £200 each. The total production cost will have risen to £400,000 from £250,000, but the cost per unit has fallen from £250 to £200. Assuming the business sells the cabinets for £350 each, the profit margin per cabinet rises from £100 to £150.
Globalization
• Currently about 25% of world production is sold outside its country of origin as opposed to 7% in 1950 (Sullivan,2007).
• Globalization combines two things
Ø Globalization of markets
Ø Globalization of productions
Globalization
Globalization
• However, there are differences in:
Ø Consumers’ tastes and preferences. E.g. McDonalds and beef patty in India
Ø Distribution channels. E.g. Japanese distribution system
Ø Culturally embedded value systems, business systems and legal regulations. E.g. Guanxi.
Globalization
•Globalization of Production:
Globalization of production refers to the sourcing of goods and services from different locations around the globe. This helps to
Ø Gain cost advantage by producing in locations where cost of production is low. And/or
Ø Gain quality factors of production and thus differentiate products.
• e.g. Boeing787
Forces Behind Globalization
ò Declining trade and investment barrier
ò Increase in and expansion of technology
ò Development of services/ global institution that support International Business
ò Growing consumer pressures
ò Increased global competition
ò Changing political situations
ò Expanded cross national cooperation
Forces Behind Globalization
• Liberalization of cross- boarder trade and resource movements:
Lower governmental barriers to the movement of goods, services, and resources enable companies to take better advantage of international opportunities
ò Consumer demand for more variety of products at a lower price
ò Higher competition-> efficient domestic producer
ò Motivate other countries to lower their barriers as well
Forces Behind Globalization
• Increase in and expansion of technology:
Technological change has made globalization a tangible reality.
Ø Microprocessor and Telecommunications:
The single most important innovation has been the development of microprocessor which enabled the explosive growth of
Ø high power, low cost computing
Ø recent advances in telecommunication technology, satellite, optical fiber, wireless technology, world wide web and internet.
Ø telecommunication cost between London and New York has reduced from $244.65 to $0.36 during 1930 to 1996.
Forces Behind Globalization
Ø Internet and World Wide Web:
In 1990, fewer than 1 million users were connected to the Internet. By the year 2006, the figure had risen to 747 million.
• Development in Internet increased the scope of e-business.
• Small export oriented firms can easily communicate with the buyers.
• E.g. Amazon, EBay
Ø Transportation Technology:
Forces Behind Globalization
• All these recent advancements have lead to globalization of production and market.
• Implication for globalization of production:
Ø As transportation costs associated with the globalization of production declined, companies can now select geographically separate locations which are more economical.
Ø These developments make it possible for a firm to create and then manage a globally dispersed production system.
Forces Behind Globalization
Example:
Dell uses the Internet to coordinate and control a globally dispersed production system to such an extent that it holds only three days worth of inventory at its assembly location.
ØReal time look
ØTransport
ØCustomer service: India
Forces Behind Globalization
• Implication for the globalization of markets:
Ø Low-cost transportation made it more economical to ship products around the world, thereby helping to create global markets.
Ø Low-cost global communications network such as WWW are helping to create electronic global market places.
Ø Low cost of transportation has increased movement of people between countries which reduced the cultural distance among people and created convergence of taste and preferences.
Ø Global communication network and global media like, CNN, MTV, HBO etc. also contributed for the convergence.
Forces Behind Globalization
• Development of services that support International Business:
òMultinational Global & Financial institutions: WTO,IMF, World Bank
òInternational Postal services
• Growing consumer pressures:
òBargaining power of buyers are increasing
Forces Behind Globalization
• Increased Global Competition
More companies operate internationally because
– New products quickly become global
– Companies can produce in different countries
– Domestic companies’ competitors, suppliers, and customers become international
Due to the tight interlinks between key world markets and economic interdependence there is an intensification of global competition.
Forces Behind Globalization
• Changing political situations:
òIncrease in International Trade
òGeneral trend of lowering trade barriers and regulations
òSimilar technical standards: International Accounting Norm and Standards
Forces Behind Globalization
• Expanded cross national cooperation:
ò To gain reciprocal advantage:
ØBangladesh agrees to let India use their seaport.
ØReduction of import Tax: European Union
• To attack problem jointly:
Ø High Interest Rate
Ø Global problems – green house effect
• To deal with areas of concern that lie outside the territory of all countries: Non-coastal areas.
Benefits of Globalization
• Researchers argue that benefits of Globalization outweighs the cost of it. Supporters of globalization argue that during 1987-1994 the income gap actually reduced by 5.5%.
Ø Globalization improves the living standard.
Ø Globalization encourages countries to specialize in products which they can produce most efficiently. This improves the world output and overall economic condition of the world.
Ø Due to globalization some world’s poorer nations are now observing economic growth like, South Korea, Thailand and Malaysia.
Benefits of Globalization
Ø The supporters of free trade argue that tougher environmental regulations and stricter labor standards go hand in hand with economic progress. So free trade enables developing countries to increase their economic growth and become richer which in turn strengthen the regulations.
Ø International free trade agreements protect countries from exploitation. E.g. NAFTA protects Mexico from being exploited by the US firms.
Ø Supporters say that WTO and such other organizations generate collective decision which reflects the opinion of all the member states.
Criticisms of Globalization
• Countries lose sovereignty
ò Economic sector: importing products
ò Firms producing goods on those countries where there are relax set of standards
ò Homogenization of culture
• The resultant growth hurts the environment
ò Exploitation of non-renewable natural resources
• Job Losses
ò Shifting jobs to low wage rate countries
ò Offshoring
Criticisms of Globalization
Offshoring:
It is a process where an organization shifts their production in foreign countries.
Offshoring is the logical choice when a firm simply does not have certain expertise and is not willing to invest time and energy to develop it.
Globalisation or Regionalization?
However the degree of globalization should not be exaggerated. It is found that majority of economic activities are still regional rather than global. For example: European Union.
Globalisation or Regionalization?
International Business
• These connections between suppliers and markets would not happen without international business.
ò International Business: International business is all commercial/business transactions that involves two or more countries.
• It is found that now international business comprises a large and growing portion of the world’s total business.
Why Study International Business?
ò Increased number of Int. Businesses.
ò Increased Global Competition
ò No. of Choices Available for Customers
ò Differences in Culture
ò Difference in External Environment
ò Different Modes of Operation
ò Government Rules & Regulations
Reasons
To take advantage of International Opportunities, like:
§ Increased Market Size
§ Minimize Risk
§ Return on Investment
§ To Acquire Resources
§ Economies of Scale and Leaning
§ Advantage in Location
International Opportunities
• Increased Market Size:
ò No of target customers are increased thus results in increasing sales and higher profits.
• Return on Investment
• Minimize Risk:
ò Take advantage of business cycle differences among countries.
ò Defensive reason: competitors are entering
International Opportunities
• Advantage in Location
òSome countries are more technologically developed than others
• Economies of Scale and Learning
òCost of production becomes low as more units are produced
òLearn from others
Opportunities and Outcomes of International Business
Types of Businesses
Types of Businesses
§ The pattern of international competition differs from industry to industry.
§ Multi-domestic industries
§ Competition in one country does not affect competition in other countries.
§ Global industries
§ A firm’s competitive position in one country is significantly affected by its position in other countries
Modes of Entry
• Merchandise Export Import:
the most simple form of engaging in International Business.
-Tangible items (e.g., cars, televisions, etc)
• Service Export Import:
ØTourism and Transportation
ØPerformance of service: Turnkey operation
ØUse of assets: Franchising; exe: KFC
Modes of Entry
• Investment:
ØDirect Investment: FDI, Joint Venture.
Key features are
– Control : controlling interest
– Access to foreign markets
– Access to foreign resources
– Higher foreign sales than exporting (often)
– Partial ownership (sometimes)
Modes of Entry
• Investment:
Ø Portfolio Investment: Stocks, Bonds
Key features are
• It is used for diversification purposes
• Non- controlling interest of foreign operations
Domestic Vs. International Businesses
When operating abroad companies have to adjust their methods of executing international operation based on the target country’s external environment.
•Physical & Societal Factors:
ò Political Policies: relationship with host country Govt.
ò Legal Policies: Taxation, foreign exchange transaction
ò Behavioral/Cultural Factors:
ò Economic Factors: Market size, Currency value
ò Geographical Influence
Domestic Vs. International Businesses
• Competitive Environment:
ØA company’s competitive strategy influences how and where it can best operate.
Øcompany’s competitive situation may differ in terms of its relative strength and in terms of which competitors it faces.