Chapter 1: Globalization And International Business

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Globalization;

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set of interdependent relationships among people from different parts of a world that happens to be divided into nations

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How does international business fit in?

Back 2

Globalization enables us to get more variety, better quality, or lower prices.

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International business consist of all commercial transactions between 2+ countries:

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- The goal of private business is to make profits
- Government business may or may not be motivated by profit

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Why is studying international business important?

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1. Most companies either are international or compete with international companies
2. Modes of operations may differ from those used domestically
3. The best way of conducting business may differ by country
4. An understanding helps you make better career decisions
5. An understanding helps you decide what governmental policies to support

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The Forces Driving Globalization
- The foreign policy globalization index ranks countries across 4 dimensions:

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1. Economic- international trade and investment
2. Technological- internet connectivity
3. Personal contact- international travel and
tourism, international telephone traffic, and
personal transfers of funds abroad
4. Political- participation in international
organizations and government monetary
transfers

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Factors that have contributed to the growth of globalization:

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1. Increase in and application of technology;

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the increased demand due to rising productivity means that people produce and can buy more by working the same number of hours.

More people are alive, and can develop new products. With time, new product development accelerates.

Improved communications and transportation not only speed up interactions, they also enhance a manager’s ability to oversee foreign operations. Thanks to the Internet, even small companies can reach global customers and suppliers.

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2. Liberalization of cross-border trade and resource movements;

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to protect its own industries, every country restricts the movement across its borders of goods, services and resources (workers, capital, tools) needed to produce them. These restrictions puts limits on I.B. activities and contribute to a climate of uncertainty. Over time, these restrictions have reduced:


1. Citizens want greater variety of goods and services at lower prices.
2. Competition spurs domestic producers to become more efficient.
3. They hope to induce other countries to lower their barriers in turn.

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3. Development of services that support international business

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EX: today, because of bank credit agreements, most producers can be paid relatively easily for goods and services sold abroad.

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4. Growing consumer pressures;

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consumers know more today about products and services available in other countries, and can afford to buy products that were once considered luxuries. Companies now spend more money on R&D.

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5. Increased global competition

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the present and potential pressures of increased foreign competition can persuade companies to buy or sell abroad.

EX: a firm might introduce products into markets where competitors are already gaining sales, or seek supplies where competitors are getting cheaper or more attractive products or the means to produce them. Nowadays, companies merge in order to gain operating efficiencies.

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6. Changing political situations;

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a major reason for growth in international business is the end of the schism between Communist countries and the rest of the world. Also, governments are now willing to support programs, such as improving airport facilities, which have fostered speed and cost efficiencies for delivering goods internationally.

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7. Expanded cross-national cooperation

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governments have realized that their own interests can be addressed through international cooperation by means of treaties, agreements, and consultation. 3 reasons:


1. To gain reciprocal advantages: companies don’t want to be at a disadvantage when operating internationally, so they petition their governments to act on their behalf- governments join them for a variety of commercial activities.
2. To attack problems jointly that one country acting alone cannot solve: sometimes, the resources needed to solve the problem may be too great for one country to manage or one’s country’s policies may affect those of others.
3. To deal with areas of concern that lie outside the territory of any nation

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The Costs of Globalization

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Threats to National Sovereignty

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1. The question of local objectives and policies: countries seek to fulfill their citizens’ economic, politic, and social objectives by setting rules reflecting national priorities. However, some critics argue that opening borders to trade undermines individual countries’ priorities.

2. The question of small economies’ overdependence; critics claim that small economies depend so much on larger ones for supplies and sales that they are vulnerable to foreign demands.

3. The question of cultural homogeneity; critics charge that globalization homogenizes products, companies, work methods, social structures, and even language, thus undermining the cultural foundation of sovereignty. As international differences diminish, countries find it harder to maintain the traditional ways of life that unify and differentiate their cultures.

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Economic Growth and Environmental Stress

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The argument for global growth and global cooperation:

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• Global cooperation;
• Global competition;

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Global cooperation;

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fosters superior and uniform standards for combating environmental problems

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Global competition;

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encourages companies to seek resource-saving and eco-friendly technologies.

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Growing Income Inequality and Personal Stress

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Income inequality;

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has been growing within a number of countries. Critics claim that globalization has affected this disparity by helping to develop a global superstar system, creating access to a greater supply of low-cost labor, and developing competition that leads to winners and losers

- Some argue that profits have gone to the top executives rather than to the rank and file.
- The speed with which technology and competition expand globally affects the number of winners and losers along with the relative positions of individuals, companies, and countries.
- The challenge is to maximize the gains from globalization while simultaneously minimizing the costs borne by the losers.

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Personal stress:

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the growth in globalization goes hand in hand with increase insecurity about job and social status and with costly social unrest.

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Why do companies engage in international business?

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1. Expanding sales
2. Acquiring Resources
3. Reducing risk

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1. Expanding sales:

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a company’s sales depend on the desire and ability of consumers to buy its goods or services. Higher sales ordinarily create value, but only if the costs of making the additional sales don’t increase disproportionately.

- Additional sales from abroad may enable a company to reduce its per-unit costs by covering its fixed costs- say, up-front research sots. Because of lower unit costs, it can boost sales even more.

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2. Acquiring resources:

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producers and distributors seek out products, services, resources, and components from foreign countries- sometimes because domestic supplies are inadequate. They’re also looking for something that will create competitive advantage (ex; acquiring a resource that cuts costs).

- Sometimes you can gain competitive advantage by improving product quality or differentiating their products from those of competitors.

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3. Reducing risk; operating in countries with different business cycles can minimize swings in sales and profits.

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The key is the fact that sales decrease or grow more slowly in a country that’s in a recession and increase or grow more rapidly in one that’s expanding economically.

- Companies often go international for defensive reasons; they want to counter competitors’ advantages in foreign markets that might hurt them elsewhere.

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Modes of Operations in International business

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1. Merchandise Exports and Imports;

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exporting and importing are the most popular modes of international business, especially among smaller companies.

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Merchandise exports;

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tangible products- goods that are sent out of a country

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Merchandise imports;

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goods brought into a country

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2. Service exports and imports:

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these apply only to merchandise.

- For non-merchandise international earnings, we use the terms service exports and service imports.
- The provider and receiver of payment makes a service export; the recipient and payer makes a service import.
- Service and imports take many forms:
o Tourism and transportation
o Service performance
o Asset use

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3. Investments;

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dividends and interest paid on foreign investments are also considered service exports and important because they represent the use of assets (capital)

a. The investments re treated as different forms of service exports and imports.

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Direct investment;

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In FDI, the investor takes a controlling interest in a foreign company. When 2+ companies share ownership of an FDI, the operation is a joint venture.

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Portfolio investment;

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noncontrolling financial interest in another entity.
Takes 2 forms:

- Stock in a company
- Loans to a company in the form of bonds, bills, or notes purchased by the investor

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Types of International Organization

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- Companies that work together- in joint ventures, licensing agreements, management contracts, minority ownership, and long-term contractual arrangements- all known as collaborative arrangements

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Multinational enterprise:

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refers to any company with FDI.

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Why International Business Differs from Domestic Business?

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Conditions in a company’s external environment that may affects its international operations:
1. Physical factors
2. Social factors
3. Competitive factors

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Physical and Social Factors

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1. Geographic influences
2. Political policies
3. Legal policies
4. Behavioral factors
5. Economic forces

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1. Geographic influences;

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managers who are knowledgeable about geography are in a position to determine the location, quantity, quality, and availability of the world’s resources, as well as ways to exploit them.

a. Geographic barriers- mountains, deserts, jungles- often affect communications and distribution channels
b. Chance of natural disasters and adverse climatic conditions can make business riskier
c. Population distribution and the impact of human activity on the environment may exert strong future influences on international business

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2. Political policies;

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a nation’s political policies influence how international business takes place within its border

a. Political disputes can disrupt trade and investment

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3. Legal policies;

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domestic and international laws play a big role in determining how a company can operate oversea

a. Domestic law includes home and host country regulations on matters of taxation, employment, and foreign exchange transactions
b. International law determines how earnings are taxed by all jurisdictions
c. The way laws are enforced affect a firm’s foreign operations

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4. Behavioral factors;

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the related disciplines of anthropology, psychology, and sociology can help managers better understand different values, attitudes, and beliefs

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5. Economic forces;

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explains why countries exchange goods and services, why capital and people travel among countries in the course of business, and why one country’s currency has a certain value compared to another’s

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The Competitive Environment

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1. Competitive strategy for products;

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products compete by means of cost or differentiation strategy’s by:

a. Developing a favorable brand image, through advertising or from long-term consumer with the brand, or
b. Developing unique characteristics, through R&D ex
- Using either approach, the firm may mass-market or sell to a niche market

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2. Company resources and experience;

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size and resources compared to others can be an advantage.

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3. Competitors faced in each market;

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success in a market often depends on whether the competition is international or local.