international business

Driving Forces A number of forces are driving the trend towards increasing globalization. First, reductions in barriers to trade have allowed goods to more easily pass between international borders. Second, reductions in barriers to foreign investment have allowed foreign investors to benefit from growing markets outside of their own. Third, advances in communication and transportation technologies have greatly improved the speed at which international parties can communicate and move goods across borders. Finally, the rise in prominence of multinational corporations has greatly impacted the pace of globalization.

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Reduction in Barriers to Trade

Barriers to trade can affect the ease with which a country can import and export goods. Barriers to trade include the following:

Cooperative trading agreements have significantly reduced these barriers. In North America, the most notable example is NAFTA which is a cooperative agreement between the United States, Canada, and Mexico that ensures the smooth passage of goods between these countries. An example of similar reduction in certain European countries can be observed in the European Free Trade Association (EFTA).

Tariffs or taxes on imported goods

Quotas or the restriction of the import of something to a specific quantity

Embargoes or the prohibition of commerce and trade with a certain nation

Sanctions or economic actions of one nation, or group of nations, against another group as part of a trade dispute

Reduction in Barriers to Foreign Investment

Foreign investment includes the direct financial investments of foreign entities into the host economy. This is a type of inbound foreign investment. Foreign investment also includes the outbound investment of host country capital into foreign economies. Example of inbound foreign direct investment includes the 2016 acquisition of BG Group by Royal Dutch/Shell of the Netherlands. The Energy Information Administration reported the following:

In 2016, global FDI flows decreased by 7% to USD 1.625 billion in comparison to 2015, above levels recorded between 2009 and 2014 and comparable to 2008. However, they remained below their pre-crisis peak, representing 2.2% of global GDP compared to 3.6% in 2007. The United Kingdom recorded the highest level of FDI inflows since 2005 (USD 254 billion), largely due to Anheuser-Busch InBev acquiring SABMiller in the last quarter of the year. The United States continued to receive large inflows in 2016 with financial and corporate restructuring still playing a role, although reduced compared to 2014 and 2015. These gains were offset by decreases in FDI flows to Hong-Kong (China), Ireland and Switzerland, down from record levels in 2015, and declines in FDI flows to China for the third consecutive year.21

Foreign direct investment is an attractive option for firms looking to diversify their investment portfolios and creating opportunities for firms looking to enter emerging markets. Risks to foreign investment vary. One risk can occur when a foreign government limits the ability of foreign investors to expatriate funds in order to mitigate economic uncertainties. Emerging market economies can also be highly volatile. The recognition of the impact of such barriers led countries to form the independent Organization for Economic Co-operation and Development (OECD). OECD provides a cooperative venue for establishing guidelines and

cooperation in free-trade markets.22 Participation in such organizations instills confidence in investors looking to make foreign investments and reduces an important barrier to foreign investment. Additionally, legislative bodies are now highly sensitive to the criticality of international trade and have enacted legislation designed to expedite and stimulate foreign investment.

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Advances in Communication Technology

Communication technologies are used by the global business professional in the processing and transfer of messages and information. The technologies are used in various applications:

Innovation in networking technologies has significantly reduced the barriers of communication between distant operating locations. Local area networks are now used within most retail operations to network point-of-sale registers to inventory systems. Wide area networks are commonly implemented across operating locations so that each location can access real-time inventory information from other locations. Finally, the Internet has allowed companies to commercialize access to their product offerings in the form of electronic commerce systems. E-commerce has exploded into a multi-billion-dollar industry since its widespread adoption in the late 1990s.

Television and radio broadcasting

Multimedia applications

Internet

Graphic design

Digital and analogue audiovisual communication

Networked communication

Advertising

Journalism

Mass media

Instructional design

Driving Forces

Reductions in barriers to trade

Reductions in barriers to foreign investments

Advances in communications and transportation technologies

Multinational corporation

Advances in Transportation Technology

Transportation technologies now include a full range of ocean, rail, automotive, and aerial options. Ocean vessels evolved from slow, labor-intensive ships into modern diesel-driven vessels that can survive even the harshest climates with minimal crews. Most countries also use extensive rail networks to move heavier items within a continent. Diesel-powered trucks traveling through elaborate highway systems are used to deliver freight to even more specific destinations. Each of these transportation options have benefited heavily with the introduction of the

ISO standard cargo container.23 The International Organization for Standardization (ISO) is the world’s leading developer of International Standards. ISO standards specify the requirements for state-of-the-art products, services, processes, materials and systems, and for good conformity assessment, managerial and organizational practice. ISO standards are designed to be implemented

worldwide.24 Standard ISO cargo containers, also known as isotainers, can be loaded and sealed intact onto container ships, railroad cars, planes, and trucks.

Alternatively, commercial aircraft can be used to move more sensitive freight quickly over long distances. Finally, integrated communications networks are used to link ocean, rail, automotive, and air transportation together and allow real-time freight movement optimization. Despite record high energy costs, the options for moving freight are more efficient than ever.

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Multinational Corporations

The final driving force for globalization is the multinational corporation (MNC). Any corporation or enterprise that manages production establishments or delivers services in at least two countries may be considered a MNC. Multinational corporations are often divided into three broad groups based on production, operations management, and functionality:

Very large MNCs have budgets that exceed those of many nations. Thus, the largest MNCs operate with a considerable amount of purchasing power. Forbes Inc. has compiled a list of the top 2000 multinational firms, as determined by their sales, profits, assets, and market value. The table below lists the top twenty-five

companies of Forbes’ 2000 Rank for 2016.25

This finding is significant because there can be a notable difference in the way a nation conducts business versus the way a large corporation conducts business. A nation typically is most interested in serving its citizens without bias or qualification. A corporation, on the other hand, has the primary goal of maximizing the wealth of its shareholders. As multinational corporations continue to grow at a rate that out paces many countries’ entire economies, careful consideration must be given to the role of each in the global economic environment.

1. Vertical integration extends a firm’s competitive scope within the same industry by performing production activities normally provided by a supplier or distributor. The integration can be backward into sources of its inputs or supplies or forward into distribution of its outputs toward the end-users.

2. Horizontal integration occurs when a firm expands its business by creating or acquiring activities dealing with similar products that are substitutes for the business’ products. This can also include acquiring other competitors that offer similar products.

3. Diversified integration occurs when a firm expands its business into different products that are not similar to current lines.

Having discussed the driving forces of globalization, we now turn our attention to the impact of globalization in terms of political, economic, social, and cultural aspects of doing business across borders.

Rank Company Country Sales Profits A

1 ICBC China $151.4 B $42 B $3,

2 China Construction Bank China $134.2 B $35 B $3

3 Berkshire Hathaway United States $222.9 B $24.1 B $

4 JPMorgan Chase United States $102.5 B $24.2 B $

5 Wells Fargo United States $97.6 B $21.9 B $1,

6 Agricultural Bank of China China $115.7 B $27.8 B $

7 Bank of America United States $92.2 B $16.6 B $2

Rank Company Country Sales Profits A

8 Bank of China China $113.1 B $24.9 B $2

9 Apple United States $217.5 B $45.2 B

10 Toyota Motor Japan $249.9 B $17.1 B $

11 AT&T United States $163.8 B $13 B $

12 Citigroup United States $84 B $14.7 B $1

13 ExxonMobil United States $197.5 B $7.8 B $

14 General Electric United States $119.7 B $10 B $

15 Samsung Electronics South Korea $174 B $19.3 B

16 Ping An Insurance Group China $106.6 B $9.5 B

17 Wal-Mart Stores United States $485.3 B $13.6 B $

18 Verizon Communications United States $126 B $13.1 B $

19 Microsoft United States $85.3 B $16.8 B $

20 Royal Dutch Shell Netherlands $234.8 B $4.7 B

21 Allianz Germany $115.7 B $7.6 B $

22 China Mobile Hong Kong $106.8 B $16.4 B $

23 BNP Paribas France $74.7 B $8.4 B $2

24 Alphabet United States $89.9 B $19.5 B $

25 China Petroleum & Chemical China $255.7 B $7 B $