international business

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The Globalization Movement Some believe that globalization amounts to the selling of America to the world. While the United States is the largest worldwide exporter of culture; realistically,

these exports are bringing a kind of market masala† to world. “Despite the embrace of ployethnic imagery, market-driven globalization does not want diversity; quite the opposite. Its enemies are national habits, local brands, and distinctive regional

tastes.”4 Thus, the term glocalization has been coined to explain the phenomenon that the globalization of a product or service is more likely to succeed when that product or service is adapted specifically to each locality or culture to which it is marketed. More specifically, the term describes the tempering effects of local conditions on global pressures.

Prime Characteristics and Outcomes of Globalization The prime characteristics and outcomes of globalization can be described as follows:

Globalization creates interdependencies among nations. As nations rely increasingly on global trade, they become more dependent upon the functioning of a global economy. A nation with a strong international trade presence has a much higher dependency profile than that of a nation with limited (or little to no) participation in the global marketplace. Consequently, critics argue that interdependency reduces a nation’s strength and dilutes its ability to be self- sufficient. Proponents on the other hand argue that self-sufficiency is not the best measure of a nation’s strengths and weaknesses, and interdependency may foster a more contributive and harmonious society.

Globalization requires transparency. In the well-integrated global economy, a consumer might be oblivious to the origin of the product he or she is consuming. This oblivion is especially true when the origin is immaterial to the purchasing decision, as in the case of commodities. Transparency is less effective for products with brand recognition or differentiation. For example, consider the U.S. consumer who prefers to purchase a Japanese-manufactured automobile for its perceived superiority in reliability, or a German-engineered automobile for its distinctive design. Whether transparent or not, the impact of globalization affords this consumer the option of deciding between locally produced goods or foreign imports. In another example, a consumer product such as a digital camera might contain components manufactured in Taiwan, assembled in Thailand, marketed by a French firm, and ultimately distributed in Canada. Globalization is demarcated by the way it transparently integrates all of these separate activities to form a single, seemingly inconsequential purchasing decision for the local consumer.

Globalization necessitates that business people understand the ideal goal of

having a seamless international marketplace. Financial professionals must be aware of the monetary impact of globalization, including its effect on macroeconomic and microeconomic models, accounting regulations and

Globalization and its impact on international commerce is one of the most discussed topics in the world of business today. Likewise, the decisions and actions made by business professionals impact the future directions and perspectives of globalization. At the same time, no one doubts that globalization has led to the growth of world trade and output. The following sections of this chapter cover these growth patterns, both worldwide and in the USA.

differences in legislation, and foreign exchange considerations. The economic environment is worldwide. Marketing professionals must be aware of the broad competitive landscape, including the negotiation protocols peculiar to each nation in which business is conducted. They must favorably negotiate pricing models to capture each local market because the product territory is worldwide. As a result, the consumer should benefit from the increased number of product alternatives made available in this global marketplace. Overall, the competitive environment is more cutthroat (a term used here to describe those situations in which firms tend to compete with each other in unpleasant and unfair ways), but becomes more integrated than ever.

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Globalization involves the blending and merging of various cultures; however, it is not the same as assimilation. Assimilation, the progression where a minority culture eventually assumes and resembles the characteristics of the prevailing culture, has historically resulted in situations where immigrants were

isolated from their home cultures.5 Globalization is an integrative model that is contrary to the results of isolation produced by arcane

immigration models. Integration of cultures is more desirable than assimilation, as the integration allows the better elements of that culture to remain intact. Assimilation requires the rejection of the old culture with total acceptance of the new.

Characteristics of Globalization

Interdependencies among nations

Transparency

Desire for seamless international marketplace

Blending and merging of cultures

Growth of World Trade and Output (1992–Present) The World Trade Organization (WTO) was established in 1995 to help foster international trade and resolve disputes. Many question the necessity of the WTO, but it was originally created in order to provide uniform standards and rules of

engagement to a growing international trade market.6 International trade growth was also fueled in the 1990s by government legislation that created a more favorable trading environment. The North American Free Trade Agreement (NAFTA) was enacted in order to facilitate the importation and exportation of goods and services among the signatory nations (United States, Canada, and Mexico) by reducing trade tariffs and restrictions. NAFTA was originally projected to create two hundred thousand jobs per year in the U.S. alone. The results show

that in actuality the job mix has simply changed.7 Mexico emerged as a viable location for manufacturing facilities due to its low wage costs and close proximity. Canada is also a viable location for production facilities and service industries, due to its highly skilled labor force and close cultural similarities. Today this manufacturing emergence is increasingly shifting to Asia—especially China, Taiwan, Thailand, and Malaysia.

Gross Domestic Product (GDP) is the official measure of total output of goods and services in a nation’s economy. The rank of the top 5 countries by GDP as of 2016 in trillions of dollars (Nominal) are:

The annual GDP growth rate in the United States from 1948 to 2016 has been 3.20 percent. There has been positive annual growth above 2 percent every year from 1992 to 2007 with the exception of 2001 at 0.9 percent and 2002 at 1.8 percent; GDP then suffered a decrease of -.3 percent in 2008 and -2.8 percent in 2009. In

1. United States ($18.5)

2. China ($11.3)

3. Japan ($4.7)

4. Germany ($3.4)

5. United Kingdom ($2.4)

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the last ten years, the average rate has been below 2 percent and since the second quarter of 2000 has never reached the 5 percent level. The highest growth rates

occurred in 1997 (4.5 percent) and 1999 (4.8 percent).8 It has increased an average of 2.23 percent from 2013 through 2015 and increased 1.58 percent in 2016. A major driver for this growth was the demand for technology-based products and services. The U.S. is home to some of the world’s leading hardware and software manufacturers. For example, Apple®—the world’s largest technology

company—is headquartered in the state of California.9 The increase in demand for technology-based products and services has created a job market for highly- skilled workers who demand higher salaries, which results in increased consumer purchasing power. These increases have all attributed to the growth rates witnessed in the United States over the past decade.

The GDP of nations outside of the U.S. has also risen steadily. China, the most populous country in the world, has emerged as a cost-leading manufacturer of products ranging from consumer goods to industrial equipment. China’s GDP annual growth rate for 2016 was 6.73 percent and is currently projected at 6.2 percent for 2017. Elsewhere, Vietnam—a country fraught with devastation and crippling sanctions after the Vietnam War—has emerged as a major exporter of furniture. Thailand has emerged as a leading manufacturer of semiconductors. According to the International Monetary Fund, Vietnam had GDP growth of 5.9 percent for 2014 and 6.6 and 6.1 percent for 2015 and 2016 respectively. Thailand had GDP growth of .088 percent for 2014, 2.82 percent for 2015, and 3.23 for 2016.

Middle Eastern nations have also experienced GDP growth. In oil-producing nations such as Saudi Arabia (GDP 3.639 percent 2014, 3.353 percent 2015, and 1.19 percent for 2016) and Kuwait (GDP 0.029 percent 2014, and 0.901 and 2.400 percent projected for 2015 and 2016 respectively), an increase in global energy demand has been a financial windfall. India’s growth has also topped expectations. India (GDP 7.244 percent 2014, 7.336 percent 2015, and 7.62 percent for 2016) is particularly attractive as a U.S. trade partner because of its highly educated,

English-speaking workforce. Services that can be easily contracted to third parties, known as outsourcing, make up a large portion of foreign direct investment in

India.10

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Brief Summary of Current U.S. International Trade Competitive Situation The United States is a major consumer and producer in the international marketplace. As reported by the U.S. government CIA World Fact Book, the 2016 estimated GDP purchasing power parity of the China ($21.14 trillion) ranked first in comparison to other economies, with the European Union ($19.97 trillion) coming in at a close second. The United States ranked third with a GDP

purchasing power parity of 18.56 trillion.11 The top five export partners of the United States consist of:

United States’ imports primarily come from the following countries:

Canada and Mexico consistently rank as two of the leading suppliers to the United States making up over 25 percent of total trade to the United States. NAFTA was a major contributor to continental trade growth between the United States, Mexico,

and Canada because it eased quotas, tariffs, and customs procedures.12

1. Canada

2. Mexico

3. China

4. Japan

5. United Kingdom

1. China

2. Canada

3. Mexico

4. Japan

5. Germany

Why Global Business and International Trade is Important to the U.S. First, the international market allows for domestic vendors to optimize production through the use of foreign vendors under potentially more favorable economic conditions. Production is efficient when any increase or decrease in output would cause a disproportionate increase in the cost of production and when there is no alternative that would lead to a more profitable production of a given product. In international trade, these alternatives include outsourcing production to foreign firms. Nations with lower wage costs can often produce more efficiently. Therefore, United States firms rely heavily on operations in lower wage cost nations for tasks such as manufacturing, which can be easily reassigned. Through outsourcing, the domestic firm is able to focus its resources on areas in which it maintains a distinct competitive advantage, such as service offerings or research and development. As reported in a survey of financial executives, 73 percent of the respondents consider

outsourcing to be an important component of their long-term growth strategies.13

Overall, outsourcing usually results in lower consumer prices, which would rise considerably if domestic firms were forced to procure similar items locally.

Second, the international market removes the boundaries of local market territories, thereby increasing the potential market audience. In other words, territorial boundaries that define potential markets are removed. This redefines a global business market as representing the entire world. When a domestic firm considers expanding its market globally, there is potential to develop a much larger revenue base. Additionally, firms that are losing domestic business can recapture and often expand sales by strategically pursuing customers overseas. This global view can be particularly useful to a firm that competes through product differentiation. For example, the United States’ international trade involvement can

be seen in its export of coal.14 The U.S. holds one of the largest coal reserves in the world. Many nations rely on U.S. exports of coal to service their own national infrastructure needs. U.S. firms could not recognize most of this revenue in the absence of an international trade market.

Third, foreign direct investment allows domestic firms to receive capital financing from foreign entities. It also provides financing to international markets as part of a diversified investment vehicle. The funds from foreign direct investment make up a sizable amount of capital expenditure. Japanese-based Honda Motor Company and Toyota Motors have built automobile manufacturing facilities in the Midwest and Southern United States; this has infused billions of dollars of capital into the U.S. economy. Other examples include foreign firms that maintain corporate operations in different global locations. For example, Schlumberger—a company with 2016 earnings revenue of 21.81 billion USD—is incorporated in the Netherlands Antilles, traded on the New York Stock Exchange, and maintains its headquarters in

Houston, Texas.15 A portion of its income is still subject to taxation within the United States. The healthy international business environment enables the U.S. to attract foreign firms, add jobs, tax revenue, and technology to its economy. Just as the U.S. receives foreign capital, it also invests heavily in other nations. Without a positive international trade environment, foreign investment of any type would not be possible.

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Reasons International Trade is Important to the United States

Globalization has created a thriving market for international trade and can be classified as a narrower focus on this trade activity. In addition, global business can be examined in an individual or collective context and can be compared and contrasted with domestic business.

Maximizing production and efficiency

Increasing market audience

Receiving foreign direct investment

Global Business

In a broad context, global business can be considered as business without boundaries. As a collective term global business includes all domestic businesses with transactions in the international market. Additionally, global business includes all transnational or multinational corporations (MNCs). These are enterprises that manage production establishments or deliver services in at least two nations. Global business can also be examined as it relates to individual business entities.

An international transaction occurs when a firm in one nation exchanges products, services, resources, or capital with a firm located in another nation. The frequency of international transactions can help determine whether an individual business also qualifies as a global business.

A business with frequent international transactions is a global business (i.e. one that engages in cross border commerce). In congruence with globalization principles, the entire world is one large market. The astute global business professional discerns between domestic and international customers. Firms pursuing international commerce consider differences between domestic and international standards, languages, cultural preferences, and government regulations. A well-known saying in global business circles is, “think globally; act locally.” What then are some of the major differences and similarities between domestic and international business?

Differences and Similarities with Domestic Business A global business has considerable operational differences from that of a strictly domestic business. First, a global business must consider the broader geographical scope in which it operates. Second, it must understand that each market contains different cultural influences that will affect the product marketing mix. Third, it must take into account market factors (e.g. foreign exchange rates), which can materially alter operating conditions. Finally, the management of a global business requires carefully selected and trained leadership, salesmanship, and support staff with management skills for the international environment.

The scope of a domestic business is specific. A domestic business’ scope is generally confined to a local marketing territory. The territory can be made up of a single city, county, state, or multi-state area. In a global business, this scope is expanded to include other countries over a far greater geographical area. A global business must carefully consider the nations in which it can compete, giving special attention to each nation’s unique blend of challenges, competitive landscape, and environmental factors. To illustrate, a winter clothing manufacturer concludes that consumers located in tropical regions have little interest in their winter clothing line. To be profitable, the firm either has to exclude this region from its target audience or find another product that will be suitable to the tropical region.

The second difference between global and domestic business management is

observed in a nation’s culture. Culture is defined as the set of shared attitudes, values, goals, and practices that characterize a particular category. In this business context, the category is the particular region or nation that is foreign to the domestic firm that is closely correlated to consumer spending patterns. A domestic business operates in the “comfort of its own backyard,” whereas a global enterprise operates within foreign cultures that may be entirely different from the well-known domestic market. Even the most subtle differences require thorough evaluation before an appropriate product marketing mix can be determined. A study of the correlation between advertising effectiveness and ritual behavior concludes that “the notion of advertising as simply transferring ritual meaning to a product

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through straightforward association . . . does not adequately describe the complex

interaction between the two institutions.”16 For example, an alcoholic beverage manufacturer could face great difficulty in trying to market its product in a country where a strongly influential religious community discourages the consumption of alcohol.

The third difference between global and domestic business is that management

takes into consideration market factors. Market factors are the demographic, sociological, and economic forces that vary from one region to another. One area of particular concern is the exchange of foreign currencies. Countries have their own unique currency systems complete with different denominations. In order to translate the domestic country’s currency into the foreign country’s currency, an intermediary—typically a foreign exchange market—is often required. This foreign exchange market adds overhead to the cost of buying and selling in almost all foreign markets. To make matters worse, some governments impose artificially inflated or fixed currency exchange rates. For European nations, the introduction of the Euro has significantly reduced the burdens previously associated with foreign currency exchange in this region.

Global Business Differences

The fourth difference between global and domestic business management is the

need for global business leaders to be equipped with special management skills. The global business manager must have a wide perspective of foreign affairs. General world market knowledge in addition to knowledge specific to each target country is necessary in order to make decisions about which markets would best complement the firm’s competitive strategy. Customs, which can vary greatly from one country to another, is another difficulty often faced by the global business manager. For example, the use of government bribery is a routine part of business operations in a number of nations, but the U.S. considers this practice illegal. The

Scope

Cultural influences

Market factors

Management skills

global business manager must be equipped to respond to such challenges in ways that best perpetuates the firm’s interests and maintains the integrity of the individual. One of the greatest challenges of working in this environment is doing so without sacrificing corporate or personal integrity.

The old adage says that, “those who fail to learn from history are doomed to repeat it.” This saying is especially true for those engaged in cross border business. Armed with a good understanding of the impact of globalization on business, as well as knowledge of similarities and differences between global and domestic business, we now turn our attention to a brief discussion of the historical developments in cross border business.