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International Business

Sixteenth Edition

Chapter 1

Globalization and International Business

Learning Objectives (1 of 2)

1.1 Relate globalization and international business (IB) to each other and explain why their study is important

1.2 Grasp the forces driving globalization and IB

1.3 Discuss the major criticisms of globalization

As you begin the lecture for the first chapter, consider discussing with students what learning objectives mean—the fact these are the main topics of each chapter. Consider telling them as they read, they’ll want to focus on these main outcomes.

Learning Objectives (2 of 2)

1.4 Assess the major reasons companies seek to create value by engaging in IB 1.5 Define and illustrate the different operating modes for companies to accomplish their international objectives 1.6 Recognize why national differences in companies’ external environments affect how they may best improve their IB performance

As you begin lecture for the first chapter, consider discussing with students what learning objectives mean—the fact these are the main topics of each chapter. Consider telling them as they read, they’ll want to focus on these main outcomes.

Factors in IB Operations

Objective 1-1

Figure 1.1 Factors in IB Operations

Learning Objective 6: Recognize why national differences in companies’ external environments affect how they may best improve their IB performance.

The conduct of a company’s international operations depends on two factors: its objectives and the means by which it intends to achieve them. Likewise,

its operations affect, and are affected by, two sets of factors: physical/social and competitive, as you can see from this chart.

Globalization and IB

Objective 1-1

What is Globalization?

Why Globalization?

The connection between Globalization and IB.

Why study IB?

Learning Objective 1: Relate globalization and international business (IB) to each other and explain why their study is important.

Globalization is the widening and deepening of interdependent relationships among people from different nations. The term sometimes refers to the elimination of barriers to international movements of goods, services, capital, technology, and people that influence the integration of world economies.

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

The global connections between supplies and markets result from the activities of IB, which are all commercial transactions.

Why study IB? Simply, it makes up a large and growing portion of the world’s business. There is a good chance each and every one of you will be involved in IB in some way or another, depending on the type of companies you work for. Studying IB is important because

• Most companies are either international or compete with international companies.

• Modes of operations may differ from those used domestically.

• It helps managers to decide where to find resources and

to sell.

• The best way of conducting business may differ by country,

• An understanding helps you make better career decisions.

• An understanding helps you decide what governmental policies to support.

The Forces Driving Globalization and IB

Objective 1-2

Globalization

Has been growing.

Is less pervasive than generally thought.

Has economic and noneconomic dimensions.

Is stimulated by several factors.

Learning Objective 2: Grasp the forces driving globalization and IB.

Although hard to measure, Globalization:

• Has been growing.

• Is less pervasive (unwelcome effects are less than what was thought) than generally thought. Fifteen percent of US consumption comes from other countries—many would think this number is much higher.

• Has economic and noneconomic dimensions (such as ease of travel, people to people contacts, use of technology).

• Is stimulated by several factors.

Currently, about a quarter of world production is sold outside its country of origin, compared to about 7 percent in 1950.

Studies beyond economic factors for the driving force of globalization state:

Size of countries—Smaller countries tend to be more globalized than larger ones, mainly because their smaller land masses and populations permit a lower variety of production.

Per capita incomes—Countries with higher per capita incomes tend to be more globalized than those with lower ones because their citizens can better afford foreign products, travel, and communications.

Variance among globalization aspects—Although a country may rank as highly globalized on one dimension, it may be low on another, such as the United States being high on technological scales but low on economic ones.

Factors in increased Globalization

Objective 1-2

Factors in increased Globalization

Rise in and application of technology

Liberalization of cross-border trade and resource movements

Development of services that support IB

Growth of consumer pressures

Increase in global competition

Changes in political situations and government policies

Expansion of cross-national cooperation

Learning Objective 2: Grasp the forces driving globalization and IB

Factors in increased Globalization:

Rise in and application of technology

Many of the proverbial “modern marvels” and efficient means of production have come about fairly recently. These include new products, such as handheld mobile communications devices, as well as new applications of old products, such as Indian guar beans in oil and natural gas mining. Thus, much of what we trade today either did not exist or was unimportant in trade a decade or two ago.

Strides in communications and transportation now allow us to discover, desire, and demand goods and services from abroad.

2. Liberalization of cross-border trade and resource movements

Barriers to trade are reduced. To protect its own industries, every country restricts the entry and exit of not only goods and services but also the resources—workers, capital, tools, and so on—needed to produce them. Such restrictions, of course, set limits on IB activities and, because regulations can change at any time, contribute to uncertainty. Over time, however, most governments have reduced such restrictions, primarily for three reasons:

Their citizens want a greater variety of goods and services at lower prices.

Competition spurs domestic producers to become more efficient.

3. They hope to induce other countries to lower their barriers in turn.

3. Development of services that support IB

Companies and governments have developed services that facilitate global commerce. For example, because of bank credit agreements—clearing arrangements that convert one currency into another and insurance that covers such risks as nonpayment and damage en route—most producers can be paid relatively easily for their sales abroad.

4. Growth of consumer pressures

More consumers know more today about products and services available in other countries, can afford to buy them, and want the greater variety, better quality, and lower prices offered by access to them. However, this demand is spread unevenly because of uneven affluence, both among and within countries as well as from year to year

5. Increase in global competition

Increased competitive pressures can persuade companies to buy or sell abroad. For example, 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.

6. Changes in political situations and government policies

Governments support programs, such as improving airport and seaport facilities, to foster efficiencies for delivering goods internationally.

For nearly half a century after World War II, business between Communist countries and the rest of the world was minimal. Today, only a few countries are heavily isolated economically or do business almost entirely within a political bloc. In fact, political changes sometimes open new frontiers, such as diplomatic relations between the United States and Cuba.

7. Expansion of cross-national cooperation

Governments have come to realize that their own interests can be addressed through international cooperation by means of treaties, agreements, and consultation. The willingness to pursue such policies is due largely to these three needs:

1. To gain reciprocal advantages

2. To attack problems jointly that one country acting alone cannot solve

3. To deal with areas of concern that lie outside the territory of any nation

Activity Minute:

Break students into small groups and ask them to rank order the globalization factors based on most important (10) to least important (1), based on their perspective. If Ask the students to write the factor and their ranking on a sticky note, and post around the room in rank order. Then invite students to view other group’s opinions. Point out there are no wrong or right answers.

Criticisms of Globalization and IB

Objective 1-3

Sovereignty

Environment

Some people may lose

Increase to personal stress

Learning Objective 3: Discuss the major criticisms of globalization.

• Countries sovereignty is diminished.

Local objectives and policies may be negatively affected with pressure from globalization. In other words, countries may feel more pressure to confirm to global standards rather than stick with their own objectives and policies.

Smaller economies may have more dependence on larger countries

Cultural homogeneity—that is the change to everyone being the “same” across cultures and losing things like language.

The resultant growth hurts the environment.

Greater carbon footprint as products travel from country to country

Greater carbon footprint as a result of increased travel.

However, increased cooperation between countries to be concerned with environment may be an upside some people lose both relatively and absolutely.

Income inequality in that the disparity of incomes may grow more as globalization occurs greater insecurity increases personal stress.

Stress results from real and perceived economic social positions by individuals. Being able to see what others have/don’t have with the click of a button (TV, Internet) can cause stress.

Why engage in IB?

Objective 1-4

Sales expansion

Resource acquisition

Risk reduction

Learning Objective 4: Assess the major reasons companies seek to create value by engaging in IB.

Why do companies engage in IB:

Sales expansion: more potential customers worldwide

A company’s sales depend on consumers’ demand. Obviously, there are more potential consumers in the world than in any single country. Now, higher sales ordinarily create value, but only if the costs of making the additional sales don’t increase disproportionately.

Resource acquisition: lower costs, new or better products, additional operating knowledge.

Producers and distributors seek out products, services, resources, and components from foreign countries—sometimes because domestic supplies are inadequate (such as industrial diamonds in the United States). They’re also looking for anything that will create a competitive advantage. This may mean acquiring any resource that cuts costs.

Risk reduction: differences in business cycles, preventing competitors from gaining advantage

Selling in countries with different timing of business cycles can decrease swings in sales and profits (e.g., increasing sales stability through operations in countries that enter and recover from recessions at even slightly different times). Moreover, by obtaining supplies of products or components both domestically and internationally, companies may be able to soften the impact of price swings or shortages in any one country.

IB Operating Modes

Objective 1-5

Merchandise Exports and Imports

Service Exports and Imports

Investments

Learning Objective 5: Define and illustrate the different operating modes for companies to accomplish their international objectives.

Merchandise exports and imports.

Tangible products—goods—that are respectively sent out of and brought into a country.

Service exports and imports and are referred to as invisibles.

The provider and receiver of payment makes a service export; the recipient and payer makes

a service import. Services constitute the fastest growth sector in international trade and take

many forms.

For example:

• Tourism and transportation.

• Service performance—services such as banking who charges fees.

• Asset use—Royalties from licensing agreements.

Investments

Direct (FDI) In foreign direct investment (FDI), sometimes referred to simply as direct investment, the investor takes a controlling interest in a foreign company.

Portfolio Investments: a noncontrolling financial interest in another entity. It consists of shares in or loans to a company (or country) in the form of bonds, bills, or notes purchased by the investor.

Types of International Organizations

Objective 1-5

MNE

Multinational Enterprise

Collaborative Arrangements

Learning Objective 5: Define and illustrate the different operating modes for companies to accomplish their international objectives.

Multinational enterprise or MNE (sometimes called MNC or TNC) is a company with foreign direct investments.

Basically, an “international company” is any company operating in more than one country, but a variety of terms designate different ways of operating.

Collaborative arrangements denotes companies’ working together, for example:

Joint ventures.

Licensing agreements.

Management contracts, minority ownership.

Long-term contractual arrangements.

Strategic Alliance is sometimes used to mean the same as collaborative arrangement, but it usually refers either to an agreement that is of critical importance to a partner or one that does not involve joint ownership.

Factors Affecting Ability to Operate Abroad

Objective 1-6

Physical factors

Institutional factors

Competitive factors

Learning Objective 6: Recognize why national differences in companies’ external environments affect how they may best improve their IB performance.

Physical factors.

Geographic: Geographic barriers—mountains, deserts, jungles, and land-locked areas—often affect communications and distribution channels. And the chance of natural disasters and adverse climatic conditions can make business riskier in some areas than in others while affecting supplies, prices, and operating conditions in far-off countries.

Demographic: Finally, countries’ populations differ in many ways, such as density, education, age distribution, and life expectancy. These differences impact IB operations, such as market demand and workforce availability.

Institutional factors.

Institutions refer to “systems of established and prevalent social rules that structure social interactions. Language, money, law, systems of weights and measures, table manners and firms (and other organizations) are thus all institutions. Examples include:

Culture

Politics

Law

Economy

Competitive factors (such as the number and strength of suppliers, customers, and rival firms)

Products compete by means of cost or differentiation strategies, the latter usually by developing a favorable brand image, usually through advertising or from long-term consumer experience with the brand; or developing unique characteristics, such as through R&D efforts or different means of distribution

Activity Minute:

Break students into small groups and ask them which of the factors affecting the ability to operate is the most important? Does the importance of the factor depend on the country the company is located in? Why or why not? Then ask students to share their answers.