Global Business Perspectives
The Global Business Environment
LECTURE 2
Challenges and responsibilities
Globalization and the business environment
How globalization is changing businesses and societies
Summary of contents
What is globalization?
Economic development: country differences
Internationalization by MNEs
FDI and the global economy
Globalization across key dimensions of the global environment
Challenges and responsibilities
Conclusions
What is globalization?
Movement of products, people, money, companies and information across national boundaries
Globalization of production
MNEs’ ability to locate different stages of production in a variety of locations globally
Based on the value chain, which envisages successive stages of production, each adding value to the finished product
Globalization of markets
MNEs’ ability to serve customers with their products around the world
Ability to adapt to differing needs in differing countries
Globalization processes
Perspectives on globalization
‘Hyperglobalization’ – positive view focusing on empowerment of individuals and organizations
Sceptical perspective
Inequalities among countries remain
Negative impacts on the environment
Growing power of MNEs
Economic development transforms economies and societies
Industrialization – transforming an economy from mainly agricultural production to factory production
Developed countries – those whose industrialization has reached maturity, and whose economies have become more services-based
Developing countries – those in the process of industrialization
Country differences
Country differences (cont’d)
Transition economies – economies shifting from state planning to market-based systems
Least-developed countries – the poorest and least-developed of the group of developing countries
Emerging economies – fast-growing developing economies
UN Human Development Index (HDI)
Development comprises economic and other indicators of well-being
HDI is a combination of three indicators to give a fuller picture of well-being than economic data alone:
Economic indicators
Health, including life expectancy
Education
Emerging economies
Grouping of the BRIC countries (Brazil, Russia, India and China): large in area and population
Diversity among the BRICs economically:
China as a manufacturing superpower
Brazil and Russia rely on resource wealth
Other emerging economies: Indonesia, Mexico, South Africa (all developing economies)
Why do MNEs internationalize?
Pull factors
New markets
Greater efficiency
Proximity to resources
Access to technology and skills
Proximity to customers
Push factors
Market saturation
Economic downturn
Taxation and regulatory changes
Modes of internationalization
The internationalization decision
Modes of internationalization – differing methods by which companies expand
The mode can differ between locations and between different stages of production
Exporting is often chosen as an entry mode
Foreign direct investment (FDI) involves ownership and control of foreign assets
Higher risk and longer term commitment involved
Often carried out through a joint venture, where partners set up a new entity for the purpose of market entry
Outsourced production (manufacturing by another company under licence) is often preferred to FDI
Theories of FDI
Location advantages (highlighted by Hymer) were the basis of early theories of FDI.
Product life cycle theory (Vernon) focused on the shift in manufacturing to lower cost locations.
Dunning’s eclectic paradigm, or OLI paradigm, takes in three sets of advantages:
Ownership advantages (O) – includes rights over property (such as intellectual property (IP)
Location advantages (L) – includes all dimensions of a country’s environment, e.g. low-cost labour
Internalization advantages (I) – by taking over control of other companies in the supply chain (vertical integration), the MNE relies less on markets.
Trends in FDI
FDI flows increasingly targeting developing countries for location advantages
China is the largest recipient of inward FDI, but inward flows have slowed in recent years as economic growth has slowed
Outward FDI from developing countries (emerging MNEs) have grown
Notable examples are Brazil, India and China
FDI: benefits and drawbacks
Benefits of FDI
Can promote economic development and technology transfer - Spillover effects to local firms
Foreign capital and skills can aid host countries (e.g. in the oil industry)
Drawbacks of FDI
Foreign investors tend to leave when location advantages shift.
Host countries sometimes lose out on jobs in FDI projects.
Trade deals linked to FDI tend to benefit the investing country, not the host country.
Who gains and loses from FDI?
Impacts of globalization
Economic - Inequality between countries and within countries
Political - Greater co-operation and interdependence between sovereign states, promoted by the UN
Legal - Growth in international law and international legal activity, including cross-border lawsuits
Financial - Growth in global financial flows, but risks evident in financial crisis of 2008
Cultural – Growth of the global middle class versus persistence of traditional cultural values
Technological – Technology transfer; technological innovation is now widely dispersed globally
Ecological – Pollution and environmental degradation caused by rapid industrialization
Tensions within the global environment
Integration of national economies – risks that weakness in one will spread to others
Political co-operation facilitated by the UN, but national interests often come first for governments
International law (e.g. human rights) is now enacted in most national legal systems, affecting MNEs and their operations worldwide
Developing countries have been reluctant to accept the global need for reduced emissions, but have agreed to the Paris Climate Change Accord
Tensions within the global environment (cont’d)
Disruptive effects of technological innovation; raise issues for societies and regulators
Globalization of financial markets: risks to financial systems exposed to global capital flows
Cultural and social environments remain distinctive, while globalization has impacted on consumer behaviour and lifestyles everywhere
Societies becoming more multi-cultural, often through immigration, but there exist underlying tensions
Challenges and responsibilities
Harnessing globalization to improve well-being for all in society
FDI and global supply chains: MNEs bear responsibility for social impacts
Government incentives to inward investors: issues of sustainable development
Resource-rich developing countries: how to promote inclusive economic growth
Conclusions
Globalization has seen growing interconnectedness and interdependence of countries and organization
MNEs as drivers of globalization
FDI strategies in developing countries, seeking low-cost labour
Rising wages and economic growth in developing countries that attract FDI
Disappearing manufacturing jobs in developed countries – de-industrialization