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Enu globalisation 280712
1. Go Global !
Global Economic Environment :
Understanding Globalisation and the
Global Economy
By
Stephen Ong
Edinburgh Napier University Business School
chong@mail.tarc.edu.my
Visiting Professor, College of Management, Shenzhen
University
29 July 2012
2. Learning Objectives
To define globalization and international
business and show how they affect each
other
To discuss globalization’s future and the
major criticisms of globalization
To understand why companies engage in
international business and why
international business growth has
accelerated
To become familiar with different ways in
which a company can accomplish its
global objectives
3. Agenda
1. The Global Economy
2. Understanding Globalisation
3. Global institutions
4. Global drivers
5. The Globalisation Debate
6. Companies & Globalisation
4. Introduction
Globalization is the ongoing
process that deepens and broadens
the relationships and
interdependence among countries
International Business (IB) is a
mechanism to bring about
globalization
5. Introduction
International business
consists of all commercial
transactions—including sales,
investments, and transportation
—that take place between two
or more countries
– increasingly foreign countries are
a source of both production and
sales for domestic companies
24. 1.16 Forces Driving Globalization
1. Increase in and application of technology
2. Liberalization of cross-border trade and resource movements
3. Development of services that support international business
4. Growing consumer pressures
5. Increased global competition
6. Changing political situations
7. Expanded cross-national cooperation
25. 2. What is Globalization?
The shift towards a more integrated
an interdependent world economy
Two components:
– globalization of markets
– globalization of production
26. 2.1 Globalization of Markets
The merging of distinctly separate
national markets into a global
marketplace
– Consumer tastes and preferences are converging into a
global norm
– Firms that offer standardized products worldwide help create
a global market
27. 2.2 Globalization of
Consumer Markets?
Significant differences still exist between
national markets on many relevant
dimensions:
Consumer tastes, preferences and values
Distribution channels and legal regulations
Business systems
These differences require that product
features, marketing and operating
strategies be customized (localized) to
best match the conditions in a country
28. 2.3 Globalization of Markets?
Countries are significantly different
Range of problems are wider and
more complex
Government intervention in trade
and investment creates problems
International investment is impacted
by different currencies
29. 2.4 Globalization of Production
The sourcing of goods and services from
locations around the world
Takes advantage of differences in cost or
quality of the factors of production
Labor
Land
Energy
Capital
30. 2.5 Impediments to Global
Production
Formal and informal trade barriers
Restrictions on foreign direct
investment
Transportation costs
Economic and political risk
31. 2.5 Globalization of Services
Historically, this has been primarily
confined to manufacturing enterprises
Increasingly, firms are taking
advantage of modern communications
technology and the Internet to
outsource service activities to low-
cost producers in other nations
Trade in services currently accounts
for 20% of all international trade
32. 3. Emergence of Global
Institutions
Globalization creates the need for
institutions to help manage, regulate and
police the global marketplace
– GATT
– WTO
– IMF
– World Bank
– United Nations
33. 3.1 General Agreement on
Tariffs & Trade
GATT was established to:
– police the world trading system
– remove barriers to the free flow of trade, services and capital
between nations
Uruguay round created the World Trade
Organization
34. 3.2 World Trade
Organization
150 member nations (97% of world
trade)
assumed prior GATT agreements and
extended GATT to include services and
intellectual property
promotes lower trade and investment
barriers
35. 3.3 IMF and World Bank
International Monetary Fund (IMF) and
the World Bank were created in 1944 by
44 nations that met at Bretton Woods,
New Hampshire
IMF was created to maintain order in the
international monetary system
World Bank was created to promote
economic development through low-
interest loans
36. 3.4 United Nations
Established in 1945 by 51 nations
– committed to preserving peace through
international cooperation and collective
security
Membership is now at 191 countries
Four main purposes
1. Maintain international peace and security
2. Develop friendly relations among nations
3. Cooperate in solving international problems and in
promoting respect for human rights
4. Serve as a center for harmonizing the actions of
nations
37. 4. Global Drivers
Two macro factors underlie the trend
towards greater globalization
1. Decline in trade and investment barriers
2. Technological change
38. 4.1 Global Drivers of Globalization –
Decline in Trade and Investment
Barriers
39. 4.1.1 World Exports
Percentage Share of World Exports,
Selected Nations, 2007
0 2 4 6 8 10 12
Germany 9.20
United States 8.59
China 8.02
Japan 5.38
France 4.06
Netherlands 3.83
United Kingdom 3.71
Italy 3.40
Source: World Trade Organization
42. 4.1.2 Foreign Direct
Investment
Firms investing in resources in business
activities outside its home country
43. 4.1.3 Fewer FDI Restrictions
Nations recognize the increasing
importance of FDI
Between 1992 and 2005
– 2,226 changes worldwide in laws governing FDI
– 94% created a more favorable investment climate
As of 2005
– 2,495 bilateral FDI treaties involved 160 nations
– twelvefold increase from 181 treaties in 1980
44. 4.1.4 Decline in Trade
and Investment Barriers
Resulting in:
volume of world trade has grown faster than the world economy
flow of FDI has grown faster than the growth in world trade and
world output
47. 4.1.7 Decline in Trade
and Investment Barriers
Globalization of markets and production
and the integration of the world economy
has resulted in the increasing:
– attacks by foreign competitors in domestic markets
– overall intensity of competition
48. 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
52. 4.2.1 Global Drivers of Globalization -
Technological Change
1. Microprocessors and Telecommunications
- lower the real costs in information processing and
communication and facilitate global dispersion
1. Transportation Technology
- lower costs & transit times due to containerization
2. Internet and World Wide Web
- information backbone of the global economy
1. Production, Packaging and distribution processes
- Machines have increased speed, reliability, energy
efficiency, product shelf life
53. 4.2.2 Implications of
Technological Change
Lower costs of transportation and
information processing has facilitated
the dispersion of production to
geographically separate locations and
the growth in international trade in
services
Technological innovations have
facilitated the globalization of markets
54. 4.2.3 Global Drivers of
Globalization
A Word of Caution
One must not overemphasize these trends!
Communication and transportation
technologies are creating a “global
village”
But significant national differences
remain in culture, consumer preferences
and business practices
55. 4.3 Changing Demographics
of the Global Economy
As late as the 1960’s
US dominated the world economy and trade
US dominated the global foreign direct
investment
Large, US multinationals dominated the scene
Half the globe was Communist World and off
limits
56. 4.3.1 Changing Demographics
of the Global Economy
US is a smaller player in the global economy as a
– producer and exporter
– source of and recipient of FDI
A similar trend occurred in other developed
countries
The share of world output accounted for by
developing nations is rising and is expected to
exceed more than 60% of world economic
activity by 2020
60. 4.7 Changing Demographics
of the Global Economy
Changing nature of multinationals
– Mini-multinationals grow in
importance
– Non-US multinationals play
greater role
61. 4.8 Changing Demographics
of the Global Economy
Collapse of the USSR and
Communist nations
Emergence of “BRIC’s”
– Brazil
– Russia
– India
– China
62. 4.9 Global Economy of the 21st
Century?
Recently, we have seen the :
– changing demographics of the global economy
– removal of trade and investment barriers
Resulting in national economies integrating into a
more interdependent, global economy
However, it is hazardous to use current trends to
predict the future
The world may be moving towards a more global
economic system, but globalization in not
inevitable
63. 5. The
Globalization Debate
Is the shift toward a more integrated
and interdependent global economy a
good thing?
64. 5.1 Globalization Debate:
The Pro’s
Improves the efficiency of production
Lowers the prices for goods and services
Stimulates economic growth and job creation
Raises consumer income and prosperity levels
Rising income levels lead to demands for
greater environmental protection (Grossman &
Kruger)
66. 5.2 Globalization Debate:
The Con’s
Limits national sovereignty
Facilitates cultural imperialism
Destroys manufacturing jobs in wealthy
countries
Lowers wage rates of unskilled workers in
wealthy, advanced countries
Shifts manufacturing to countries with fewer
labor and environmental regulations
67. Costs of Globalization
• Threats to national sovereignty
– lose freedom to “act locally”
• Economic growth and environmental
stress
– growth consumes nonrenewable natural
resources and increases environmental
damage
• Growing income inequality and
personal stress
– promotes global superstars at the
expense of others
68. Costs of Globalization
Offshoring involves the transferring of
production abroad
– it can be beneficial because it reduces
costs
– but, it also means that jobs move abroad
Yet, offshoring may also create new,
better jobs at home
69. 5.3 Globalization and the World’s Poor
Critics argue that globalization has not helped
poor
– 1870: per capita income of 17 richest nations was 2.4x that of all
other countries
– 1990: it was 4.5x larger
Other factors may have influenced the gap
– Totalitarian governments
– Economic policies that destroyed wealth
creation
– Corruption
– little protection of property rights
– Expanding populations
– Civil unrest and war
70. 5.4 Pressures for Localization
Non-Tariff Barriers
Cultural Differences
Consumer Preferences
Differences in Infrastructure
Dynamic Distribution Channels
71. 5.5 Forces Against Globalization
Nationalism and Regional Separatism
Cultural Identity and Economic Sovereignty
Limited Natural Resources
Human and Labor Rights
IMF Reformers and Debt Relief
Environmental NGO’s and Anti-Globalization
72. 5.6 Recent WTO Major Setbacks
“ Battle in Seattle”
Doha Trade Round
Collapse
73. 5.7 Management Challenges
in the Global
Marketplace
Nations have profound and enduring
differences in:
– cultures,
– political systems,
– economic systems,
– legal systems and
– levels of economic development
Requiring firms to vary practices across
nations
74. 5.8 Management Challenges
in the Global
Marketplace
Range of problems confronted in an
international business is wider and the
problems more complex than those in a
domestic business
Firms have to find ways to work within the
limits imposed by government intervention in
the international trade and investment system
International business transactions involve
converting money into different currencies
75. 6. Companies & Globalisation
To expand sales
– pursuing international sales increases the
potential market and potential profits
To acquire resources
– 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
76. Why Companies Engage in
International Business (IB)
These three reasons
– sales expansion
– resource acquisition
– risk minimization
guide all decisions about
whether, where, and how to
engage in international
business
77. Modes of Operations in IB
Merchandise exports
– goods that are sent out of a
country
Merchandise imports
– goods that are brought into a
country
Sometimes referred to as
visible exports and imports
78. 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
79. 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
80. 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
81. 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)
82. Types of International Organizations
In foreign markets,
companies may have to
adapt their typical methods
of doing business
– foreign conditions may dictate
a particular method
– operating modes may be
different from those used
domestically
83. Why IB is Different
The external environment affects a company’s
international operations
Managers must understand social science
disciplines and how they affect functional business
fields
Consider
– physical factors
– social factors
– competitive factors
84. Physical and Social Factors
Geographic influences
– natural conditions influence production locations
Political policies
– determines where and how business occurs
Legal policies
– influence how a company operates
Behavioral factors
– may require changes in operations
Economic forces
– explain differences in costs, currency values,
market size
85. The Competitive Environment
Competitive strategy for products
– Cost strategy
– Differentiation strategy
– Focus strategy
Company resources and experience
– market leaders have more resources for
international operations
Competitors faced in each market
– local or international
86. The Competitive Environment
So, a company’s 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
87. 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
88. Casestudy : The Global Pharmaceutical
industry
1. Read and prepare the
Casestudy on The Global
Pharmaceutical Industry
(Johnson, Whittington &
Scholes (2011)) for
discussion and presentation
next week.
2. Identify and evaluate the
challenges facing global
pharmaceutical firms the
External Environment and
Industry analysis – PESTEL
and Five Forces.
89. Conclusion
► “Apowerful force drives the world
toward a converging commonality,
and that force is technology. The
result is a new commercial reality
– the emergence of global markets
for standardized consumer
products on a previously
unimagined scale of magnitude.”
Theodore Levitt
90. Next Week : Discussion Paper
Sachs, Jeffrey (1998),
‘International economics:
unlocking the mysteries of
globalization’, Foreign Affairs,
Nov- Dec.
91. Core Reading
Juleff, L, Chalmers, A.. and Harte, P. (2008) Business Economics in a Global
Environment, Napier University Edinburgh
Krugman, P. R., Obstfeld, M. and Melitz, M.J. (2012) International
Economics Theory and Policy. 9th Edition. Pearson
Daniels, J.D., Radebaugh, L.H. and Sullivan, D.P. (2012) International
Business: Environments and Operations. 14th edition, Pearson
Todaro, M.P. & Smith, S.C. (2009). Economic Development, 10th edition,
Pearson Addison Wesley.
Thirlwall, A.P. (2006), Growth & Development. 8th edition, Palgrave Macmillan.
Hill, C.,(2009) International Business: Competing In the Global Market Place. 7th
edition, McGraw-Hill.
Porter, Michael E. (2004)“Competitive Strategy – Techniques for Analyzing
Industries and Competitors” Free Press
Samuelson, P.A. and Nordhaus, W. D. (2010)“Economics” Irwin/McGraw-
Hill, 19th Edition
Nolan, P. (2009) Crossroads – the End of Wild Capitalism & the Future of
Humanity. London : Marshall Cavendish
Stiglitz, J., (2002) Globalization and its discontents, Penguin.
The Learning Objectives for Chapter 1 are 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 globalization’s 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
What is globalization? Globalization refers to the widening set of interdependent relationships among people from different parts of a world that is divided into nations. The term also refers to the integration of world economies through the reduction of barriers to the movement of trade, capital, technology, and people. Throughout history, human contacts over ever-wider geographic areas have expanded the variety of available resources, products, services, and markets. Today, so many different components, ingredients, and specialized business activities go into products that we ’ re often challenged to say exactly where they were made. For example Apple’s iPhones are shipped from China and seem to be Chinese, yet less than four percent of their value is actually performed in China!
What is international business? International business consists of all commercial transactions that take place between two or more countries. International business activities allow us to get more variety, better quality, and/or lower prices. International business activities may be performed by private companies motivated by profit, or by governments that undertake them either for profit or for political reasons.
This Figure shows the complex relationships among conditions and operations that a firm may face when its conducts some of its business internationally. We’ll be referring back to this Figure throughout the chapter.
You may wonder what has been driving globalization. The answer is many different factors. One factor is technology. In recent years, we’ve seen tremendous advances in technology. The pace of new product development is faster than ever, and many companies are finding that in order to keep up, they need to team up with companies in other countries to gain financial resources or specialized capabilities. Firms are also finding that to justify their investments in new product development, they need to expand their sales to other markets. Another factor driving globalization is the liberalization of cross-border trade. Today, most governments have reduced restrictions on cross-border trade giving their citizens access to a greater variety of goods and services at lower prices. Increased competition from foreign companies also encourages domestic producers to become more efficient. Governments hope that by opening their countries to trade, other countries will also lower trade barriers. The development of new services that facilitate international business transactions have also increased further driving globalization. In addition, today’s consumers are more informed about foreign products and services and are better able to afford more luxury items. Moreover, more consumers are able to comparison shop to find better deals worldwide. Companies look for growing markets where consumer pressures are highest such as China. Intense global competition is also driving globalization. Today, companies continually look abroad to increase market share and reduce costs in order to better compete with other firms. Expansion abroad can take many forms: so-called born-global companies start out with a global focus because of their founders ’ international experience and because advances in communications give them a good idea of where global markets and suppliers are. Related to this, many new companies locate in areas where there are many competitors and suppliers — a situation known as clustering — which helps them to become quickly aware of foreign opportunities. Finally, changing political situations and increased cross-national cooperation have allowed international business to flourish. Countries of different political systems are more open than before to conducting international trade with each other. Governments are spending more resources on the improvement of infrastructure facilitating the transport of goods and resources. Furthermore, governments have realized the benefits of international cooperation. In particular, governments engage in international cooperation in order to gain reciprocal advantages, to attack problems jointly that one country acting alone cannot solve, and to deal with areas of concern that lie outside the territory of any nation.
How can we measure globalization? Well, it’s not easy. In general, we know that globalization has been increasing at least since the mid-1900s. Indeed, at the moment, more than 20 percent of world production is sold outside of its country of origin as compared to just seven percent in 1950. However, much of the world is still relatively isolated. One of the most comprehensive efforts to explore levels of globalization is the A.T. Kearney/Foreign Policy Index which ranks countries across four dimensions: economic, technological, personal contact, and political dimensions. Interestingly, the Index shows that a country can rank quite high on one dimension, but much lower on another. For example, the United States ranks high on the technological dimension, but much lower on the economic dimension. In contrast, Singapore and Hong Kong have ranked as the most globalized across all dimensions, while India and Iran are at the bottom of the list.
While there are many benefits to globalization, it remains controversial. Antiglobalization protests have become common at international conferences, and the reaction to government policies is sometimes violent. Three issues are of particular concern. First, the threat the globalization poses to national sovereignty. According to critics, globalization undermines the ability of a country to act in its own best interests and can make smaller economies overly dependent on larger ones. Moreover, critics contend that even a country’s cultural sovereignty is threatened as products, companies, work methods, social structures and language are homogenized as a result of globalization. A second concern is the effect of globalization on economic growth and the environment. Because globalization brings growth, more nonrenewable natural resources are consumed and damage to the environment increases. You might think of despoliation through toxic and pesticide runoffs into rivers and oceans, air pollution from factory and vehicle emissions, and deforestation that can affect weather and climate for example. However, others argue that global cooperation actually fosters superior and uniform standards for combating environmental problems, and that companies are encouraged to seek resource-saving and environmentally friendly technologies. Finally, critics are concerned about the effect of globalization on income equality and personal stress. According to critics the income inequality that is present in many countries today is a result of the global superstar system that has emerged as a consequence of globalization. Critics contend that globalization has facilitated access to a greater supply of low-skilled and low-cost labor and encouraged competition that leads to winners and losers. There is also some evidence that the growth in globalization goes hand in hand not only with increased insecurity about job and social status, but also with costly social unrest.
Critics of globalization also worry that the practice of offshoring is shifting too many jobs abroad. But keep in mind, that the practice allows companies to keep costs down, and can actually help create high value jobs at home. IBM’s offshoring strategy for example, allows the company to not only save money and boost sales, but also to create new jobs.
Why should companies engage in international business? A general answer is that going in international can help firms create value. More specifically, going global can help firms expand sales, acquire resources, and diversify or even reduce risks.
All three of these can influence decisions about whether, where, and how to go global.
The most popular modes of international business are merchandise exports and merchandise imports. They represent major sources of international revenues and expenditures for countries.
Services exports and imports are the fastest growing sector in international trade. The most important are tourism and transportation, service performance, and asset use. Many countries depend on tourism and transportation for both foreign exchange earnings and employment. Companies pay fees for services rendered in turnkey operations and management contracts. Turnkey operations are construction projects performed under contract and transferred to owners when they’re operational. Management contracts are arrangements in which one company provides personnel to perform general or specialized management functions for another. Asset use involves allowing another company to use your trademarks, patents, copyrights, or expertise in exchange for royalties. This takes place through licensing and franchising agreements.
Companies can also engage in international business by taking either a controlling or a non-controlling interest in a foreign company. When a firm takes a controlling interest the investment is known as foreign direct investment. If two or more companies share ownership of the investment it’s referred to as a joint venture. A non-controlling interest is called portfolio investment.
We use different terms to refer to the various collaborative arrangements between companies including joint ventures, licensing arrangements, management contracts, and long-term contractual arrangements. Those relationships in which the agreement is of critical importance to one or more partners or to an agreement that doesn’t involve joint ownership are called strategic alliances.
Any company with foreign direct investments is known as a multinational enterprise. Other terms used for these types of companies include multinational company, multinational corporation, or transnational corporation.
Keep in mind that companies doing international business may have to adjust their typical methods of operation depending on the conditions in foreign markets or if the operating modes are different from those used domestically.
Companies involved in international business need to explore how the external environment will affect their operations. In particular, it’s important for managers to understand the social science disciplines and how they affect all functional business fields.
We can organize physical and social factors into four groups. The first is geographic influences or how natural conditions influence the choice of production locations. The second group is political policies which impacts how, and even if, business takes place within a country. Related to this are legal policies. Firms must follow the laws in each country. The fourth group, behavioral factors, may also force a company to alter its operations to better fit with local cultural norms and values. Finally, economic forces affect costs, currency values, market size, and so on. Together, these factors influence how companies produce and market their products, how they staff their operations, and so on. Keep in mind that the factors may require a company to use a different method of operation internationally than is used domestically.
Managers also need to understand how the competitive environment will affect their operations. A company’s competitive strategy - low cost, differentiation, or focus - will influence its international strategy, as will its resources and experience. Companies with greater resources and experience will have more opportunities open to them than companies with more limited resources or experience. Finally, the competitors a firm faces in each market will dictate to some degree a company’s international strategy.
In summary, a firm’s competitive strategy influences how and where it operates. Firms might find that their competitive situation differs from market to market.
What is the future of international business and globalization? Well, there are three different perspectives on what the future might hold. Some believe that future globalization is inevitable. Those taking this perspective note that advances in transportation and communications are so pervasive that consumers everywhere will demand the best products for the best prices regardless of their origins. Moreover because MNEs have so many international production and distribution networks in place, they ’ ll pressure their governments to place fewer rather than more restrictions on the international movement of goods and the means of producing them. The largest challenge to overcome in this scenario will be figuring out how to spread the benefits of globalization equitably while minimizing the hardships placed on individuals and companies affected by increased international competition. Others however, think that in the future international business will grow more along regional rather than along global lines. This argument is based on studies that indicate that companies tend to conduct international business in neighboring countries. It’s logical that when companies first engage in international business, they expand into neighboring countries first and continue outwardly from there. This helps reduce transportation costs and companies can benefit from regional trade agreements that reduce barriers. Still others feel that the pace of both globalization and international business will slow down. Recall that a ntiglobalization sentiments have surfaced over the years, protesting against some of the negative effects of international business activity. This sentiment together with economic recession, growing political instability, and rising fuel costs among other things, threatens to slow international business growth.