International Business

By Charles W.L. Hill

McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 1

Globalization
 Learning Outcomes
 L01: Understand what is meant by the term
globalization.
 L02: Recognize the main drivers of globalization.
 L03: Describe the changing nature of the global
economy.
 LO4: Explain the main arguments in the debate
over the impact of globalization.
 L05: Understand how the process of globalization
is creating opportunities and challenges for business
managers

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 What Is Globalization?
1. [Link]
2. [Link]

 Globalization - the shift toward a more integrated and

interdependent world economy
 The world is moving away from self-contained national
economies toward an interdependent, integrated global
economic system:
 For instance: this interdependent global economy means, You
(BD) drive to work in a car designed in Germany that was
assembled in Mexico by components made in Japan that were
fabricated from Korean steel and Malaysian rubber.
 Hence, this globalization process has produced many
opportunities. Firms can expand their revenues by
selling around the world and reduce their costs by
producing in nations where key inputs, including labor,
are cheap (RMG!! BD). 1-4
 Components of Globalization?
1. The globalization of markets:
 merging of distinct and separate national
markets into one huge global marketplace.

2. The globalization of production:

 the sourcing of goods & services from locations
around the globe to take advantage of national
differences in the cost & quality of factors of
production.

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 Components of Globalization?
1. The globalization of markets:
 merging of distinct and separate national markets
into one huge global marketplace.
 sometime the tastes & preferences of consumers
in different nations converge on some global
norm helping to create a global market:
EX:: Starbucks with café culture, Coca-Cola – cola
culture, apple -smart tech, BAT, Philip morris - smoking
 by offering same basic product worldwide, they helped
to create a global market.
 Falling trade barriers make it easier to sell globally
Best part: YOU do not have to be an MNC/ giant!!
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 1. Globalization of Markets?
 Difficulties arise from the globalization of markets
 Significant differences still exist among national
markets: in terms of….
 consumer tastes & preferences !! Works both way
 distribution channels (agro SC – EU vs BD)
 cultural value systems & business systems !!
 legal regulations (north korea Vs USA)
 To cope with these differences  Country-
specific marketing strategies needed to best
match conditions in a particular country.

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 1. Globalization of Markets?
 The most global markets are not consumer
markets due to national differences in tastes &
preferences acting as break for globalization.
 The most global markets are for industrial goods
and materials that serve a universal need: Ex:
aluminum, oil, and wheat; for industrial products
such as semiconductors, commercial jet aircraft etc
 If a firm moves into a nation not currently served by
its rivals, many of those rivals are sure to follow to
prevent their competitor from gaining an advantage.

1-8
2. Globalization of Production?
 Firms source goods & services from locations
around the globe to capitalize on national
differences in the cost and quality of factors of
production like land (US), Labor (BD, China), Energy
(EU, China), and capital (US, EU)

 MNCs can
 lower their overall cost structure (RMG !! BD)
 improve the quality or functionality of their product
offering (RMG !! Vietnam)
 These allows them to compete more effectively !!

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2. Globalization of Production?

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2. Globalization of Production?
 Outsourcing of productive activities to different
suppliers results in the creation of products that
are global in nature
 Still companies must be careful not to push the
globalization of production too far.
 Impediments to the globalization of production
include:
 Formal and informal barriers to trade
 Barriers to FDI
 Transportation costs (Hub setup G-star SLVietnam)
 Issues associated with economic risk
 Issues associated with political risk
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 Why Do We Need
Global Institutions?
 Global institutions
 manage, regulate, and police the global
marketplace
 promote the establishment of multinational
treaties to govern the global business system

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 Global Institutions includes
 General Agreement on Tariffs and Trade
(GATT)
 World Trade Organization (WTO)
 International Monetary Fund (IMF)
 World Bank
 United Nations (UN)
 G20

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 What Is Driving
Globalization?
 Two macro factors underlie the trend toward
greater globalization: A) decline in barriers B)
technological changes.
[Link] barriers to the free flow of goods,
services, and capital
 average tariffs are now at just 2.6% (U.S. tariff rates for
2021 was 1.47%)
 more favorable environment for FDI (occurs when a firm
invests resources in business activities outside its home country)
 global stock of FDI was $15.5 trillion in 2009
 facilitates global production..

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 What Is Driving
Globalization?
2. Technological change
microprocessors and telecommunications
the Internet and World Wide Web
transportation technology

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World tariff situation?

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 How Has World Output And
World Trade Changed?
 In 1960, the U.S. accounted for over 40%
of world economic activity, but by 2009,
the U.S. accounted for just 24%
a similar trend occurred in other developed
countries
 In contrast, the share of world output
accounted for by developing nations is
rising
expected to account for more than 60% of world
economic activity by 2020

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How Has World Output And
World Trade Changed?
The Changing Demographics of World GDP and Trade

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 How Has Foreign Direct
Investment Changed?
 In the 1960s, U.S. firms accounted for
about two-thirds of worldwide FDI flows
Today, the United States accounts for less than
one-fifth of worldwide FDI flows
Other developed countries have followed a similar
pattern
 In contrast, the share of FDI accounted for
by developing countries has risen
Developing countries, especially China, have also
become popular destinations for FDI

1-19
 Role of Technology
 Lowering of trade barriers made
globalization theoretically possible
technology has made it a reality
 Since the end of World War II the world
has seen advances in
 Communication
 Information processing
 Transportation technology
 explosive emergence of the Internet

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 Role of Technology:
Microprocessors & Telecommunications
 The single most important innovation maybe development
of microprocessor:
 enabled the explosive growth of high-power, low-cost computing,
vastly increasing the amount of information that can be
processed by individuals and firms.
 Telco technologies rely on the microprocessor to encode,
transmit, and decode the vast amount of information.
 The cost of microprocessors continues to fall, while their power
increases.
 Internet (WWW):
 makes it much easier for buyers and sellers to find each other,
 allows businesses, both small and large, to expand their global presence at a
lower cost

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 Role of Technology:
Transportation Technology
 Containerization: simplified transshipment from one
mode of transport to another.
 It revolutionized the transportation business, significantly
lowering the costs of shipping goods over long distances.
 Before containerization, moving goods from one mode of
transport to another was very labor intensive.
 result of the efficiency gains from containerization
transportation costs have plummeted, making it much
more economical to ship goods around the globe, thereby
helping to drive the globalization of markets and
production.

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 What Is A
Multinational Enterprise?
 Multinational enterprise (MNE) - any
business that has productive activities in
two or more countries
 In last 50 years, two notable trends:
the the rise of non-U.S. multinationals
the growth of mini-multinationals. (ex. VibeMac)
rise of the internet is lowering the barriers that
small firms

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National share of the largest 2,000
multinational corporations

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 The Changing World Order
 Many former Communist nations in Europe and
Asia are now committed to democratic politics and
free market economies
 creates new opportunities for international businesses
 but there are signs of growing unrest and totalitarian
tendencies in some countries (Ukraine & Russia, Middle
east)
 China and Latin America are also moving toward
greater free market reforms
 If China’s GDP per capita grows by an average of 6–7%,
by 2030 they could boast an average GDP per capita of
about $23,000
 China may evolve from a third-world business giant
into an industrial superpower

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 The Globalization Debate
 Pro Factors  Con Factors
 Lower prices for goods  Destroys manufacturing
and services jobs in wealthy,
 Economic growth advanced countries
stimulation  Wage rates of unskilled
 Increase in consumer workers in advanced
countries declines
income
 Companies move to
 Creates jobs
countries with fewer
 Countries specialize in labor and environment
production of goods and regulations
services that are  Environmental
produced most efficiently
Degradation

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 Is An Interdependent Global
Economy A Good Thing?
 Supporters believe that increased trade and cross-
border investment mean
 lower prices for goods and services
 greater economic growth
 higher consumer income, and more jobs

 Critics worry that globalization will cause

 job losses
 environmental degradation
 the cultural imperialism of global media and MNEs

 Anti-globalization protesters now regularly show up

at most major meetings of global institutions

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 How Does The Global
Marketplace Affect Managers?
 Managing an international business differs from managing a
domestic business because
 countries are different (cultures, political systems, economic systems,
economic development)
 the problems confronted in an international business is wider
& more complex than domestic business (ex. must decide where
in the world to site production activities to minimize costs and maximize
value added)
 managers must find ways to work within the limits imposed by
government intervention in the international trade and
investment system and develop strategies & policies to deal
with such interventions.
 international transactions involve converting money into
different currencies
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