Chapter 2

International Business: The New Realities, 3rd Edition

by
Cavusgil, Knight and Riesenberger
 Overview on the Globalization of Markets

• Globalization and technological advances have

altered the international business landscape more
than any other trends.

• In this class, globalization refers to the

interconnectedness of national economies and
the growing interdependence of buyers, producers,
suppliers, and governments, around the world.

• Globalization allows firms to view the world as

one large marketplace for goods, services, capital,
labor, and knowledge.
International Business: The New Realities 2-2
 Phases of Globalization

• Phase 1: 1830 to late 1800s

Aided by railroads and ocean transport; The
rise of manufacturing and trading companies
• Phase 2: 1900 to 1930
Fueled by electricity and steel; early MNEs
• Phase 3: 1948 to 1970s
GATT, post-war era; reduction of trade barriers
worldwide; rise of global capital markets
• Phase 4: 1980 to present
Fueled by Internet and other technologies;
rapid liberalization in emerging markets.
International Business: The New Realities 2-3
 The Death of Distance

In this Fastest transport

period. . . was via. . . At a speed of. . .
1500 to • Human-powered 10 miles per hour
1840s ships and horse-
drawn carriages

1850 to • Steamships 36 miles per hour

1900 • Steam locomotive 65 miles per hour
trains

Early • Motor vehicles 75 miles per hour

1900s • Propeller 300–400 miles per hour
to today airplanes 500–700 miles per hour
• Jet aircraft

International Business: The New Realities 2-4

 The Drivers of Market Globalization

1. Drivers of Market Globalization

• Worldwide reduction of barriers to trade
and
investment
• Market liberalization and adoption of free
markets
• Industrialization, economic development,
and
modernization
• Integration of world financial markets
• Advances in technology
 The Drivers and
Dimensions of Market Globalization

1. Drivers of Market Globalization

• Worldwide reduction of barriers to trade and investment
• Worldwide reduction of barriers to trade and investment
• Industrialization, economic development, and
modernization
• Integration of world financial markets
• Advances in technology

2. Dimensions of Market Globalization

• Integration and interdependence of national
economies
• Rise of regional economic integration blocs
• Growth of global investment and financial flows
• Convergence of buyer lifestyles and preferences
• Globalization of production activities
 The Drivers, Dimensions, and
Consequences of Market Globalization
1. Drivers of Market Globalization
• Worldwide reduction of barriers to trade and investment
• Worldwide reduction of barriers to trade and
investment
• Industrialization, economic development, and
modernization
• Integration of world financial markets
• Advances in technology

2. Dimensions of Market Globalization

• Integration and interdependence of national
economies
• Rise of regional economic integration blocs
• Growth of global investment and financial flows
• Convergence of buyer lifestyles and preferences
• Globalization of production activities
• Globalization of services

3a. Societal Consequences of Market

Globalization
• Contagion: Rapid spread of financial or monetary crises from
one country to another
• Loss of national sovereignty
• Offshoring and the flight of jobs
• Effect on the poor
• Effect on the natural environment
 The Drivers, Dimensions, and
Consequences of Market Globalization
1. Drivers of Market Globalization
• Worldwide reduction of barriers to trade and investment
• Transition to market-based economies and adoption of free
trade in China, former Soviet Union countries, and elsewhere
• Industrialization, economic development, and modernization
• Integration of world financial markets
• Advances in technology

2. Dimensions of Market Globalization

• Integration and interdependence of national economies
• Rise of regional economic integration blocs
• Growth of global investment and financial flows
• Convergence of buyer lifestyles and preferences
• Globalization of production activities
• Globalization of services

3a. Societal 3b. Firm-level Consequences of Market

Consequences of Market Globalization: Internationalization of the
Globalization Firm’s Value Chain
• Contagion: Rapid spread of
financial or monetary crises • Countless new business opportunities for
internationalizing firms
from one country to another • New risks and intense rivalry from foreign competitors
• Loss of national
sovereignty
• More demanding buyers who source from
• Offshoring and the flight of suppliers worldwide
jobs • Greater emphasis on proactive
• Effect on the poor
 Dimensions of Market Globalization

• Integration and interdependence of national

economies. Results from firms’ collective
international activities. Governments contribute by
lowering trade and investment barriers.

• Rise of regional economic integration blocs.

Free trade areas are formed by two or more
countries to reduce or eliminate
barriers to trade and investment,
such as the EU, NAFTA, and
MERCOSUR.

International Business: The New Realities 2-9

 Dimensions of Market Globalization (cont’d)

• Growth of global investment

and financial flows.
Associated with rapid growth
in foreign direct investment
(FDI), currency trading, and
global capital markets.

• Convergence of buyer
lifestyles and preferences. Facilitated by global
media, which emphasize lifestyles found in the U.S.,
Europe, or elsewhere. Firms market standardized
products.
International Business: The New Realities 2-10
 Dimensions of Market Globalization (cont’d)

• Globalization of production. To cut costs, firms

manufacture in low labor-cost locations such as
Mexico and Eastern Europe. Firms also source
services from abroad.

• Globalization of services. Banking, hospitality,

retailing, and other service industries are rapidly
internationalizing. Firms outsource business
processes and other services in the value chain to
vendors overseas. And, in a new trend, many people
go abroad to take advantage of low-cost services.

International Business: The New Realities 2-11

 Drivers of Market Globalization

• Worldwide reduction of barriers to trade and

investment. Over time, national governments
have greatly reduced trade and investment barriers.
The trend is partly facilitated by the World Trade
Organization (WTO), an organization of some
150 member nations.
• Market liberalization and adoption of free
markets. The launch of free market reforms in
China and the former Soviet Union marked the
opening of roughly 1/3 of the world to freer trade.

International Business: The New Realities 2-12

 Drivers of Market Globalization (cont’d)

• Industrialization, economic development, and

modernization. These trends transformed many
developing economies from producers of low-value
to higher-value goods, such as electronics and
computers.
Simultaneously, rising
living standards have
made such countries
more attractive as
target markets for
sales and investment.
International Business: The New Realities 2-13
Gross National Income
in U.S. Dollars
SOURCE: World Bank (2008) World Bank Development Indicator database. Numbers
are based on the Atlas Methodology of the World Bank, a three-year average of the
official exchange rate, adjusted for inflation.
 Drivers of Market Globalization (cont’d)

• Integration of world financial markets. Enables

firms to raise capital, borrow funds, and engage in
foreign currency transactions wherever they
go. Banks now provide a
range of services that
facilitate global transactions.

• Advances in technology. Reduces the cost of doing

business internationally, by allowing firms to interact
cheaply with suppliers, distributors, and customers
worldwide. Facilitates the internationalization of
companies, including countless small firms.
International Business: The New Realities 2-16
 Information and
Communications Technology (ICT)

• Profound advances have occurred in computers,

digital technologies, telephony, and the Internet.

• MNEs leverage ICTs to optimize their performance,

managing operations around the world.

• ICTs opened the global

marketplace to firms
that historically lacked
the resources to
internationalize.
International Business: The New Realities 2-17
Declining Cost of Global Communication
and Growing Number of Internet Users
ICTs Role in Globalization
 Manufacturing and
Transportation Technologies

• Revolutionary developments permit manufacturing

that is low-scale and low cost, via computer-aided-
design of products (CAD), robotics, and IT-managed
production lines.

• In transportation, key advances include fuel-efficient

jumbo jets, giant ocean-going freighters, and
containerized shipping. The cost of international
transportation has declined substantially, spurring
rapid growth in global trade.

• Collectively, technological advances have greatly

International Business: The New Realities 2-20
reduced the costs of doing business internationally.
Societal Consequences of Market Globalization

• Contagion: Rapid Spread of Monetary or

Financial Crises. Beginning in late 2008, the world
economy experienced a severe financial crisis and
global recession, the worst in decades. The crisis
emerged when pricing bubbles occurred in housing
and commodities markets worldwide. As bubbles in
real estate markets burst, home values crashed and
many homeowners could not repay their debts.
Meanwhile, thousands of mortgages had been
securitized, and their values plunged or became
uncertain.
International Business: The New Realities 2-21
Societal Consequences of Market Globalization (cont’d)

• Loss of National Sovereignty. MNE activities can

interfere with governments’ ability to control of their
own economies and social-political systems. Some
firms are bigger than the economies of many nations
(e.g., Wal-Mart, Shell).

International Business: The New Realities 2-22

Societal Consequences of Globalization (cont’d)

• Loss of National Sovereignty. MNE activities can

interfere with governments’ ability to control of their
own economies and social-political systems. Some
firms are bigger than the economies of many nations
(e.g., Wal-Mart, Shell).
However, some argue that global competition in the
context of global free trade makes MNEs less
powerful (e.g., the US auto industry declined as
foreign rivals from Japan and Europe entered the US
market. Some day, Wal-Mart may be overtaken by a
giant Chinese retailer).
International Business: The New Realities 2-23
 Societal Consequences of Globalization (cont’d)

• Offshoring and the Flight of Jobs. Jobs are lost as

firms shift production of goods and services abroad, in
order to cut costs and obtain other advantages. Firms
benefit, communities and industries are disrupted.

• Effect on the Poor. In poor countries, while

globalization usually creates jobs and raises wages,
it also tends to disrupt local job markets. MNEs may
pay low wages, and many Example
Many people in India are
exploit workers or employ child
losing jobs as the hand-
labor. Globalization’s benefits woven textiles industry
are not evenly distributed. is being gradually
automated. 2-24
 Example: Nike’s Foreign Factories

• Nike has 100s of factories in Asia, Latin America,

and elsewhere
• Nike has been criticized for paying low wages and
operating sweatshop conditions.
• Labor exploitation and sweatshop conditions are
genuine concerns in many developing economies.

International Business: The New Realities 2-25

 Example: Nike’s Foreign Factories

• Nike has 100s of factories in Asia, Latin America,

and elsewhere
• Nike has been criticized for paying low wages and
operating sweatshop conditions.
• Labor exploitation and sweatshop conditions are
genuine concerns in many developing economies.
• However, consideration must be given to the other
choices available to people in those countries.

• Nike and numerous other MNEs are making efforts

to improve working conditions in their foreign plants.2-26
International Business: The New Realities
Growth of World GDP,
Average Annual Percent Change,
2000–2009
SOURCE: International Monetary Fund, World Economic
Outlook Database
Societal Consequences of Globalization (cont’d)

• Effect on the Natural

Environment. Globalization
harms the environment by
promoting industrialization
and other activities that
generate pollution, habitat
destruction, and other
environmental harm.
E.g., as China and India
industrialize, air and
water pollution have
become major hazards.
2-28
Societal Consequences of Globalization (cont’d)

• Effect on the Natural Environment. Globalization

harms the environment by promoting industrialization
and other activities that generate pollution, habitat
destruction, and other environmental harm. E.g., as
China and India industrialize, air and water pollution
have become major environmental hazards.
• However, as nations develop their economies, they
tend to pass laws that protect the environment. E.g.,
this happened in Japan from the 1960s to the 1980s.
In Mexico, the government is gradually adopting
policies to protect the air, water, etc.
International Business: The New Realities 2-29
Societal Consequences of Globalization (cont’d)

• Effect on National Culture. Globalization opens the

door to foreign firms, global brands, unfamiliar
products, and new values. Increasingly, consumers
buy similar products, modeled according to Western
countries, especially the US. In this way, traditional
norms, values, and behaviors may homogenize over
time. National identity may be lost to ‘global’ culture.

International Business: The New Realities 2-30

 Global Financial Crisis of 2008-2010

• Contagion. The rapid spread of a financial or

monetary crisis from one country to another, as
seen during the global financial crisis of 2008-10.
• The financial crisis originated with ‘pricing bubbles’
in housing and commodities markets.
• Thousands of mortgages had been ‘securitized’ --
sold as investments on stock markets worldwide. As
they lost value, stock markets declined substantially.
• World economies experienced recession -- negative
growth.
International Business: The New Realities 2-31
Percent Change in Annual GDP
Growth
 Global Financial Crisis (cont’d)

• China and other emerging markets continued to

grow, albeit at a slower rate.
• Crisis began in the US and, like a contagion, spread
worldwide. Contagion spreads relatively easily today
because of globalization.

• An important cause of the crisis was inadequate

regulation of mortgage markets and banking sectors
in the US and elsewhere, which highlights the
importance of a strong legal and regulatory
framework for national economic well being.
International Business: The New Realities 2-33
 Global Financial Crisis (cont’d)

• Worldwide, many people fell into severe poverty,

partly because developing economies depend on
exports to, and direct investments from, the
advanced economies, which were in recession.
• Central bankers and finance ministers struggled to
keep up with rapidly evolving events.
• Governments pumped huge sums of money into
national economies, to stimulate economic activity.
• Regulation of economic activity is increasing as
governments address the crisis.
International Business: The New Realities 2-34
 Globalization, Economic
Freedom, and National Prosperity

• Economic freedom is the extent of government

interference in business, strictness of the nation’s
regulatory environment, and the ease with which
economic activity can be carried out.
• National prosperity is strongly associated with…
-- participation in international trade and investment;
-- the nation’s level of economic freedom.
• Thus, nations should emphasize economic freedom,
and participating in international trade and
investment.
International Business: The New Realities 2-35
Relationship Between Globalization and Growth
in Per Capita GDP (in the ten years thru 2002)
 Company Internationalization
and the Value Chain

• The most significant implication of market globalization

for companies is that a purely domestic focus is no
longer viable in most cases.
• Market globalization compels firms to internationalize
their value chain, and access the benefits of
international business.
• Value chain: The sequence of value-adding activities
performed by the firm in the process of developing,
producing, and marketing a product or a service.
• Globalization allows the firm to internationalize its value
chain, leading to various advantages.
International Business: The New Realities 2-38
Internationalization of
the Firm’s Value Chain
 Internationalization of the Firm’s Value Chain

• The truly international firm configures its

sourcing, manufacturing, marketing, and
other value-adding activities on a global scale.

• Rationale:
o cost savings
o increase efficiency, productivity, and flexibility of
value chain activities
o access customers, inputs, labor, or technology
o benefit from foreign partner capabilities.
International Business: The New Realities 2-40