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T.J. Joseph

Globalization &International

Business

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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

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Distribution of Marks

Component MarksGroup Project 10

Case Analysis and Presentations 10

Class participation 05

Attendance 05

Mid-Term Examination 20

End-term Examination 50

TOTAL 100

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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 ofresources, goods, services, knowledge, skills, orinformation across national boundaries/borders

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Participants in International Business

Parties 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

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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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7

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

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

domestic business (eg. Japanese car makers)

International business is more riskierthan domesticbusiness (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

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International versus Domestic BusinessDifferences in environment of their operations

Economic Environment:

Differences in tariff structures and trade promotionschemes

Differences in currencies (exchange rate), inflation, interestrates, 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 betweencountries

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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 unbiasedand fair treatment in international business

Uniformity in interpretation of laws and clarity of legal

procedures

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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

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Why do Firms Expand Internationally?

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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

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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 customers abroad (proximity to

customers)

Japanese tire maker Bridgestone entering US market

Ref: SL, pp11-12

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What is Globalization?

Globalization is the closer integration of thecountries 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.

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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 moreintegrated and interdependent world economy

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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 capitalmovements and spurt in cross-border capital flows

Globalization may be defined as the process ofintegration and convergence of economic, financial,

cultural, and political systems across the world

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Cultural Globalization: The convergence of

cultures across the world, which is evident by its

impact on people and their lives

Political Globalization: The convergence ofpolitical systems and processes around the world

(the decline of communist systems and the rise of

democratic systems)

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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)

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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

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How to Measure Globalization?

Components ofGlobalization 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 internationalorganizations, foreign embassies, participation in UN

missions

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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 haswinners and losers at various levels

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The Globalization Debate

Job losses at home (1999 Seattle anti-globalizationprotests 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

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

quality and lower prices

Forjob 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 growingprosperity

Reduce global divide by advancing to a homogeneous

civilization and a uniform business system

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Success of Globalization-Conditions

Globalization could be more advantageous toparticipating nations ifglobal infrastructure is better

developed

Global infrastructure includes

Institutional framework (multilateral agreements

in trade, investment, and service)

Market efficiency(capital market and foreign

exchange market)

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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

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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 firms value chain

Consequences of Globalization

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Restraining factors

Movers

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The Drivers and Consequences of Market

Globalization - Summary

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Online Resources1. Global Fortune 500 companies in 2010.

http://money.cnn.com/magazines/fortune/global500/2010/full_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/source/1.htm

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References

1. Chapters 1, International BusinessbyCharles W. Hill and Arun K. Jain, Tata McGrawHill publication.

2. Chapter 2, International Business byOdedShenkar and Yadong Luo, Wiley publication.

3. Chapter 1, International Businessby Rakesh

Mohan Joshi, Oxford Publications

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