session 1ii buse608

8/13/2019 Session 1ii BUSE608

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DR SAJJAD HAIDER

Introduction to BUSE608

Introduction to International Business

BUSE 608

International Business

KAAU, 2011-12


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DR SAJJAD HAIDER

Learning Outcomes

Understand the process of globalisation of production andmarkets and of the key factors underpinning this trend

Analyse the changing demographics of the global economy

Identify and assess the main characteristics of developingcountries as potential markets and production/service basesfor Multinational Companies (MNCs)

Evaluate the globalisation debate


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What is Globalisation?

Globalisation refers to the shift towards a more integrated

and interdependent world economy, Hill p4. There are two

significant facets to this process:

The globalisation of markets

The globalisation of production


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DR SAJJAD HAIDER

Globalisation

In this interdependent global economy an American might drive to work in a car designed in

Germany, assembled in Mexico from components sourced in

Japan which were made from Korean steel and Malaysianrubber

she may have filled the car with petrol at a UK owned

service station, the petrol having been sourced from an African

oil well operated by a French company

she may stop on the way to have a coffee at a US owned

coffee outlet, the coffee having been sourced from Brazil

and on the homeward journey, she may buy groceries from

a French owned supermarket


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The Implications for Business

Globalisation has increased the opportunities for

firms to expand revenues by selling around the world

and reduce costs by producing in nations where key

inputs are cheap

since the collapse of communism at the end of the

1980s many nations have swung towards the free

market end of the economic spectrum.


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The Implications for Business

Regulatory and administrative barriers to doingbusiness in foreign nations have come down, with many

former socialist countries privatising state-owned

enterprises, deregulating markets, increasing

competition, and welcoming investment by foreignbusinesses

this has allowed businesses both large and small,

from both advanced and developing nations to expand

internationally.Adapted from Hill, p5



The Globalisation of Markets

This refers to the merging of historically distinct, and

separate national markets, into one huge global marketplace

Falling barriers to trade and investment have made it easierto market products and services on an international basis

It is also perceived that the tastes and preferences of

consumers in different nations are converging into a global

norm, thereby helping to create a single global market




The forerunners of global markets have been those for

industrial goods and materials that serve universal needs

such as:

Commodities (e.g. aluminium, oil and wheat)

Industrial products (e.g. microprocessors, D/RAMs, and

commercial jet aircraft)

Services (e.g. markets in financial assets)




Consumer markets are also moving towards globalisation

Consumer products such as Coca-Cola soft drinks, SonyPlayStation video games, McDonaldsburgers and

Starbucks coffee are frequently held up as prototypicalexamples of this trendHill, p6

However, as has/will be discussed in tutorials 1&4 and inlecture 4, there is a debate as to the extent to which all

national markets are giving way to the global market



The Globalisation of Production

This refers to the sourcing of goods and services from

locations around the globe to take advantage of national

differences in the cost and quality of factors of production

(such as labour, energy, land and capital)

By so doing, companies hope to lower their overall cost

structure and/or improve the quality of their product or

service, thereby improving their competitive position




A pertinent example of an MNC which takes advantage ofthese trends is the Boeing company

Boeings commercial jet airliner, the 777, sources

components from over 500 companies spread across theworld. For example 8 Japanese suppliers make certain parts;suppliers in Singapore provide others; and Italian suppliersprovide yet more (in their case, wing flaps)

Boeing also outsources some production to overseascountries to enhance the prospect of winning orders fromairlines based in those countries




It is not, however, only MNCs which are benefiting from theglobalisation of production

Hill (5thed.) p7 cites the example of Swan Optical, a

relatively small US based manufacturer and distributor ofeyewear. Swan manufacturers its eyewear in low-costfactories in Hong Kong and China, while its design facilitiesare run from joint venture operations in Japan, France andItaly

The company has, therefore, dispersed its manufacturingand design processes to different locations around theworld to take advantage of favourable skill bases and coststructures




Swans investment in production facilities in Hong Kong and

Chins has helped the company to lower its cost structure,

while its links with design houses in Japan, France and Italy

have helped it to produce designer eyewear for which it can

charge a premium price

By dispersing its manufacturing and design activities, Swan

has thus established a competitive advantage for itself in theglobal market for eyewear



The Key Drivers of Change

Two macro-economic factors have been the key drivers of

change in the trend toward greater globalisation:

Declining trade and investment barriers

Technological advances in communications, IT and

transportation


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Lowering of Barriers

After WWII the advanced industrial nations made a commitment

to reduce (and ultimately to remove) barriers to the free flow

amongst nations of goods, services and capital

This goal was enshrined in the establishment of GATT, and of its

successor the WTO

Under their auspices average tariff rates, for example in Germany

and the UK, fell from 25% to 4% between 1950 and 2000: see Hill

glossary p714 for definition of tariffs


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Lowering of Barriers

GATT and the WTO have also promoted the reduction ofbarriers to FDI and, since the 1990s, many developingcountries have opened their markets to inward FDI

The lowering of trade and investment barriers enablescompanies to take a global perspective in terms of potentialmarkets

and allows firms to base production and design at the

optimal locations - as in the Swan Optical example


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ICT Advances

Since the end of WWII there have been major advances incommunication, information processing and transportationtechnologies

Hill cites the development of the micro-processor facilitating the growth of high-power/low-cost computing as perhaps the single most important innovation(p14)

The micro-processor has also facilitated the advances in

telecoms technology such as satellite and wireless telecomand the Internet


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ICT Advances

Not only has the Internet revolutionised communications, ithas allowed businesses to expand their global presence at alower cost than ever before

Hill has also featured an example of a business which has ineffect been created by the Internet (6th. Edn. p14)

Bridgewater Pottery is a company which, traditionally, soldpremium pottery through exclusive distribution channels inthe UK. Since establishing an Internet presence in 1997,

however, the company has become a truly internationalbusiness, selling on a global basis


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ICT Advances

In transportation the key post-war developments have been

in long-haul commercial jet aircraft, and the introduction of

containerisation in shipping

As in telecoms businesses have benefited from increased

efficiency and lower costs e.g. between 1955 and 1999

average air transport costs per ton/kilometre fell by over 80%


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ICT Advances

Technological innovations have facilitated the globalisation

of markets through low-cost transportation making it

more economical to ship products around the world while

low-cost global communications networks such as the

Internet have created electronic global marketplaces

Falling information processing, communications and

transportation costs have advanced the globalisation of

production by making it possible for internationalbusinesses to create and then manage a globally dispersed

production and design system


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A Globalisation Example

The Telecoms industry provides a clear example of theprocess of globalisation and of its impact on businesses andconsumers

A generation ago, telecoms markets around the world

shared these characteristics: A dominant, monopolistic telecoms provider usually state

owned and/or regulated

Regulations prohibiting foreign firms from entering domestic

markets Because of the lack of competition premium pricing,

particularly on long-distance and international calls


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Over the last 2 decades, however, the industry has beenrevolutionised as a result of the application of the keydrivers of change in the globalisation process

Those former state-owned telecoms providers have beenprivatised and, in many cases, broken up into smallercompeting units

International competition has also been facilitated by the

deregulation of markets as part of the process of loweringbarriers to trade and investment


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New wireless technologies, fibre-optic cabling andbroadband have further facilitated the emergence of newcompetitors

These factors have resulted in a highly competitive globalindustry with rapid technological upgrading of products andservices

In stark contrast to the situation some 20 years ago

consumers across the globe are provided with greatlyenhanced choice, improved product and service quality andsignificantly lower prices


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Trends Affecting International Business There have been two key politico-economic trends which

have contributed to the growth of international trade andinvestment:

Democracy replacing totalitarian political systems

Free and open markets replacing centrally planned andregulated economies


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Trends Affecting International Business These trends have been evident in:

Eastern Europe with the dissolution of the Soviet Bloc

Asia with the spread of political democracy and the decline ofCommunist influence

Latin America with market capitalism replacing controlledeconomy dictatorshipsand, to a lesser extent

Africa with market economies being introduced in place ofsocialist systems


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Developing Countries

Hill categorises the countries for which these trends havebeen significant as states in transition(p66). A furtherterm which might be used to describe such states isdeveloping countries

A distinction can be made between developed anddeveloping countries using the United Nations HumanDevelopment Index (HDI). This index measures a nationslevel of economic and social development along three

dimensions: life expectancy; educational standards; incomerelative to purchasing power parity


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Thus a developing country may be defined as: countries

which have moved appreciably away from agrarian to

industrialised economies, have significantly urbanised,where literacy is prevalent and where there has been a

considerable reduction in poverty below subsistence levels


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Developing Countries Developing countries can be further divided into: Newly

Industrialised Economies (NIEs) and Less Developed

Countries (LDCs)

Examples of NIEs would include:

China, India, Singapore and South Korea in Asia

Mexico and Brazil in South America

Poland and Hungary in Europe South Africa and Egypt in Africa


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Examples of LDCs would include:

The Philippines and Laos in Asia

Bolivia and Guatemala in South America

Albania and Latvia in Europe

Zimbabwe and Burkina Faso in Africa


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Companies from the developed world considering

developing countries as potential markets and/or as

production bases should be aware of the significant

differences between NIEs and LDCs

NIEs will be (relatively) politically stable, will have

(relatively) free market systems, will have contract and

property protection laws approaching westernstandards,

and will be forming mass consumer markets


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By contrast, LDCs are more likely to be politically unstable

and/or corrupt, with markets that are highly regulated, witha lack of contract and property protection laws, and withlimited purchasing power in consumer markets

Hill contends that the key issues on which international

businesses might judge to which category (NIE or LDC) aparticular country belongs are as follows: politicalstability/instability; economic prudence/mismanagement;existence/non-existence of a legal system to safeguardcontract and property rights

These issues will be further explored in Week 3 in the lectureon Political and Economic Risk


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The Globalisation Debate

The proponents of globalisation believe that the process

makes the world more prosperous with increased

international trade and cross-border investment will result in

power prices for goods and services

and that globalisation stimulates economic growth, raises

the income of consumers and helps to create jobs in those

countries which choose to operate in a free and open

trading system


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The telecoms example puts the positive case succinctly but,if this were universally applicable, why is it that there existsa powerful anti-globalisation lobby?

Those opposed to globalisation contend that falling barriersto trade and investment cause unemployment in developedcountries as firms move manufacturing to low labour costlocations


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They further contend that the globalisation of production

allows powerful MNCs to exploit developing countries byemploying child labour, paying subsistence wages andmaking employees work in sweatshopconditions

On the environment, the anti-globalisation view is that it

forces developing countries to ignore the need to imposerigorous environmental protection standards

Finally, the critics of globalisation point to the shift ineconomic power away from national governments towards

non-elected supranational organisations such as the WTOwhich reduces the sovereignty of individual countries, againparticularly in the developing world


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Conclusion

There has been a distinct trend, particularly over the past

25 years, towards the globalisation of markets and

production driven by:

Declining barriers to trade and investment

Technological advances (and cost reductions) in

information technology, communications and

transportation (ICT)


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Conclusion

Contributing to the growth in international trade andinvestment, there have been two significant politico-economic trends:

The spread of democracy The transition from restricted to free and open markets

These trends have a complementary effect in promotingeconomic growth in what had been, hitherto, the poorer

parts of the world


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Conclusion

Such developing countries now have potential as newmarkets and/or production bases for MNCs

They should, however, be assessed as to whether they are

NIEs or LDCs, with risk levels being considerably higher inthe latter category

The developing country issue is highly relevant to theglobalisation debateas a central point of contention is a

judgement on the impact of globalisation on the developingworld

session 1ii buse608

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