T.J. Joseph

Globalization &

International

Business

Contents• Introduction to International Business

• Debate on Globalization

• Political Economy of International Business

• Cultural Environment of IB

• Ethical Issues in IB

• International Trade Theory and Applications

• Instruments of Trade Policy

• International Economic Integration and Institutions

• Balance of Payments and Foreign Exchange Market

• Foreign Direct Investment and MNEs

Distribution of Marks

Component Marks

Group Project 10

Case Analysis and Presentations 10

Class participation 05

Attendance 05

Mid-Term Examination 20

End-term Examination 50

TOTAL 100

What is International Business?

Resources: Raw materials, capital, and people

Goods: Semi-finished or finished

Services: Accounting, legal, banking, insurance, healthcare, education, tourism, consultancy, etc..

Knowledge and skills: Technology, innovations, various skills, IPRs, brand names, etc.

Information flows: Databases and networks

Business activities that involves the transfer of resources, goods, services, knowledge, skills, or information across national boundaries/borders

Participants in International BusinessParties involved in International Business

• Individuals (individual investors, tourists, employees, students, etc.)

• Companies (private or public)

• Government (central bank, government institutions, etc.)

• International institutions (World Bank, IMF, WTO, etc.)

Among these companies are the dominant players

in International Business

How International Business?

• International Business Transactions: Activities crossing national boundaries

• Mainly manifested in two ways:

International trade refers to exports and imports of goods and services across the borders of a country

Bilateral trade, multilateral trade, pluri-lateral trade

International investments implies cross-border transfer of resources to carry out business activities outside home country

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Modes of International Business

International Trade

Merchandise exports and imports

– Tangible items (e.g., cars, televisions, etc.)

Service exports and imports

– Tourism and transportation

– Performance of services

– Use of intangible assets

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Foreign Investments

Direct investment : Key features

–Control and ownership

–Access to foreign markets

–Access to foreign resources

–Higher foreign sales than exporting (often)

Portfolio investment: Key features

–Non-control of foreign operations

– Financial benefit

Modes of International Business

International Vs. Domestic Business• International business is mostly the outgrowth of

domestic business (eg. Japanese car makers)

• International business is more riskier than domestic business (because countries are different)

Differences in environmental dynamics

– Diversity between countries with respect to economic growth, inflation, interest rates, cultures, social customs, business practices, laws, political systems, technology, etc.

Operational nature become more complex

– Receipts and payments in multiple currencies, different accounting methods, consumers, employees, regulators, and the competitors

International versus Domestic BusinessDifferences in environment of their operations

• Economic Environment:

– Differences in tariff structures and trade promotion schemes

– Differences in currencies (exchange rate), inflation, interest rates, accounting practices, etc.

– GDP growth and purchasing power (Economic stability)

• Socio-Cultural Environment:

– Cultures, social customs, business practices, etc.

– Social and cultural norms and values differ between countries

International Vs. Domestic Business• Political and Legal Environment

– Political stability and government policies affects international business

– Changes in trade policies, fiscal policies and other policies are taken in view of the political priorities of the govt.

– Foreign exchange regulations and foreign investment policies

– Well-developed sound legal system may provide unbiased and fair treatment in international business

– Uniformity in interpretation of laws and clarity of legal procedures

International Vs. Domestic Business• Competition

– More severe competition in international market than in domestic market because of various similar products from different countries

• Infrastructure

– Financial, institutional and physical infrastructure

– More important is physical infrastructure in the form of roads, telecommunication, ports, etc.

• Technology

– Opportunity for knowing and getting highly cost-effective technologies, especially for developing countries

Why do Firms Expand Internationally?

Why do Firms Expand Internationally?

Market Motives:

• To expand their sales

• Seize market opportunities in foreign countries through trade or investment

Economic Motives:

• For higher returns (profitability) through higher revenues and/or lower costs by obtaining cheap resources

• Achieving economies of scale

• Spreading R&D cost

Ref: SL, pp11-12

Why do Firms Expand Internationally?Strategic Motives:

• To capitalize on their distinctive resources or capabilities already developed at home

– Technological leadership, brand image, customer loyalty, and competitive position

• To take first mover advantage

• Vertical integration involving different countries

• To follow the major customer’s abroad (proximity to customers)

– Japanese tire maker Bridgestone entering US market

Ref: SL, pp11-12

What is Globalization?

“Globalization is the closer integration of the

countries and peoples of the world, brought about

by the enormous reduction in the costs of

transportation and communication and the

breaking down of artificial barriers to the flow of

goods and services, capital, knowledge, and (to a

lesser extent) people across the borders”

Ref: Joshi, p-7

Westernization, Americanization, Walmartization, McDonaldization, Disneyfication, Coca-Colanization, etc.

What is Globalization?

Globalization of markets (Economies of scale): National markets are giving way to global markets (examples)

Globalization of production: To take advantage of national differences in the cost and quality of factors of production (examples)

Emergence of Global Institutions like WTO, IMF, World Bank, United Nations

Globalization refers to the shift toward a more

integrated and interdependent world economy

What is Globalization?

Economic Globalization: The internationalization of production and markets for goods and services, integration of financial systems, corporations and industries, technology, and competition

Financial Globalization: Liberalization of capital movements and spurt in cross-border capital flows

Globalization may be defined as the process of

integration and convergence of economic, financial,

cultural, and political systems across the world

What is Globalization?

Cultural Globalization: The convergence of cultures across the world, which is evident by its impact on people and their lives

Political Globalization: The convergence of political systems and processes around the world (the decline of communist systems and the rise of democratic systems)

Drivers of Globalization

Macro Factors:

(a) Declining Trade and Investment Barriers

Liberalization and privatization, changing world order, etc.

(b) Technological Change

Microprocessors and telecommunications

The Internet and World Wide Web (services trade)

Transportation technology (containerization)

Drivers of Globalization Reasons for Recent International Business Growth

Expansion of technology:• Transportation is quicker

• Communications enable control from afar

• Internet: drastic decline in the transaction cost of transferring ideas and information

• Transportation and communications costs are more conducive for international operations

Liberalization of cross-border movements• Lower governmental barriers to the movement of goods,

services, and resources enable companies to take better advantage of international opportunities

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Development of supporting institutional arrangements

• Institutional arrangements

– Are made by business and government

– Ease flow of goods

– Reduce risk

Increase in 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

Drivers of Globalization

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Initial years of human history, people remained confined to their communities, villages, or local regions

Hardly any formal barriers such as tariffs or non-tariff restrictions for the movement of goods or visa requirements for people

Pre-World War I period (1870-1914): rapid integration of economies in terms of trade flows and people movement

Two World Wars (1914-1945): brought various restrictions on the movements of goods and services

After 1945: there was a drive to increased integration (World Bnak, GATT, IMF, etc.)

Globalization: Historical Perspective

How to Measure Globalization?

Components of Globalization Index:- (A.T.Kearney)

• Economic Integration: trade, FDI, portfolio capital flows, income flows (profits, wages, etc.)

• Personal Contact: Travel & tourism, telephone traffic

• Technology: No. of internet users, technology collaborations

• Political Engagement: memberships in international organizations, foreign embassies, participation in UN missions

Who Benefits from Globalization?

• Developed countries are high on globalization while developing countries are not (Why?)

• Widening gap between the rich and the poor

• Globalization can be a threat to the sovereignty of nations

• It exposes national economies to uncertainties of global economy

Globalization is a complex phenomenon. It has winners and losers at various levels

The Globalization Debate

• Job losses at home (1999 Seattle anti-globalization protests and protests against outsourcing)

• It comes at the expense of the environment

• Human right violations (e.g., sweatshops)

• Cultural imperialism of global media and MNCs

• It enhances the monopoly power of large MNCs

The Globalization DebateTo a consumer, globalization means more choices at better

quality and lower prices

For job seekers, more employment opportunities

For business, wider market for their products and services (economies of scale)

For producers, expanded availability of resources and technology and knowledge transfer

For the economy, economic development and growing prosperity

Reduce global divide by advancing to a homogeneous civilization and a uniform business system

Success of Globalization-Conditions

• Globalization could be more advantageous to participating nations if global infrastructure is better developed

• Global infrastructure includes

Institutional framework (multilateral agreements in trade, investment, and service)

Market efficiency (capital market and foreign exchange market)

• In the long run, globalization generally leads to:

– higher living standards

– more efficient resource usage

– greater access to technology, products, and services

In particular, liberalization of markets appears to enhance income levels

Consequences of Globalization

• Countless new business opportunities for internationalizing firms

• New risks and intense rivalry from foreign competitors

• More demanding buyers who source from suppliers worldwide

• Greater emphasis on proactive internationalization

• Internationalization of firm’s value chain

Consequences of Globalization

Restraining factors

Movers

The Drivers and Consequences of Market Globalization - Summary

Online Resources1. Global Fortune 500 companies in 2010.

http://money.cnn.com/magazines/fortune/global500/2010/f

ull_list/

2. China duties to hit US chicken imports:

http://www.bbc.co.uk/news/business-11415036

3. US Congress approves China sanctions bill:

http://www.bbc.co.uk/news/business-11407254

4. Car Industry: Around the World - interesting articles:

http://www.bbc.co.uk/news/business/global_car_industry/

5. Best Global brands:

http://images.businessweek.com/ss/06/07/top_brands/sour

ce/1.htm

References

1. Chapters 1, ‘International Business’ by

Charles W. Hill and Arun K. Jain, Tata McGraw

Hill publication.

2. Chapter 2, ‘International Business’ by Oded

Shenkar and Yadong Luo, Wiley publication.

3. Chapter 1, ‘International Business’ by Rakesh

Mohan Joshi, Oxford Publications