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Introduction to International Trade and Globalization

Introduction to International Trade and Globalization

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© Copy Right: Rai University
11.154 1
INTERNATIONALBUSINESS MANAGEMENT
UNIT IINTERNATIONAL BUSINESS AND GLOBALECONOMY
Learning Outcomes:
To make you understand as a student of internationalbusiness management what is the subject all about.
To know the concepts involved in international business andglobalization.
To understand how does globalization effects the workingof the economy of a country.
Objective of the lesson:
After studying this lesson, you should understand:
The meaning of international trade and globalization.
Why is it important to study international business?
What are the basic criteria’s involved in internationalbusiness?
Introduction
A fundamental shift is occurring in the world economy. We aremoving rapidly away from a world in which national economieswere relatively self-contained entities, iso-lated from each otherby barriers to cross-border trade and investment; by distance,time zones, and language; and by national differences ingovernment regulation, cul-ture, and business systems. And weare moving toward a world in which barriers to cross-bordertrade and investment are tumbling; perceived distance isshrinking due to advances in transportation and telecommuni-cations technology; material culture is starting to look similarthe world over; and national economies are merging into an in-terdependent global economic system. The process by whichthis is occurring is com-monly referred to as globalization.In this interdependent global economy, an American mightdrive to work in a car designed in Germany that was assembledin Mexico by DaimlerChrysler from compo-nents made in theUnited States and Japan that were fabricated from Korean steeland Malaysian rubber. She may have filled the car with gasolineat a service station owned by a British multinational companythat changed its name from British Petroleum to BP to hide itsnational origins. The gasoline could have been made from oilpumped out of a well off the coast of Africa by a French oilcompany that transported it to the United States in a shipowned by a Greek shipping line. While driving to work, theAmerican might talk to her stockbroker on a Nokia cell phonethat was designed in Finland and assembled in Texas using chipsets produced in Taiwan that were designed by Indian engineersworking at a firm in San Diego, California, called Qualcomm.She could tell the stockbroker to purchase shares in DeutscheTelekom, a German telecommunications firm transformedfrom a former state-owned monopoly into a global companyby an energetic Israeli CEO. She may turn on the car radio,which was made in Malaysia by a Japanese firm, to- hear apopular hip-hop song composed by a Swede and sung by agroup of Danes in English who signed a record contract with aFrench music company to promote their record in America. Thedriver might pull into a drive-through coffee stall run by aKorean immigrant and order “single-tall-non-fat latte” andchocolate-covered biscotti. The coffee beans come from Braziland the chocolate from Peru, while the biscotti was made locallyusing an old Italian recipe. After the song ends, a news an-nouncer might inform the American listener thatanti-globalization protests at a meeting of heads of state inGenoa, Italy, have turned vio-lent. One protester has beenkilled. The announcer then turns to the next item, a story abouthow an economic slowdown in America has sent Japan’s Nikkeistock market index to 16-year lows.This is the world we live in. It is a world where the volume of goods, services, and investment crossing national borders hasexpanded faster than world output every year for the past twodecades. It is a world where more than $1.2 billion in foreignexchange transactions are made every day. It is a world in whichinternational institutions such as the World Trade Organizationand gatherings of leaders from the world’s most, pow-erfuleconomies have called for even lower barriers to cross-bordertrade and invest-ment. It is a world where the symbols of material and popular culture are increasingly global: from Coca-Cola and McDonald’s to Sony PlayStations, Nokia cell phones,MTV shows, and Disney films. It is a world in which productsare made from inputs that come from all over the world. It is aworld in which an economic crisis in Asia can cause a recessionin the United States, and a slowdown in the United States re-allydid help drive Japan’s Nikkei index in 2001 to lows not seensince 1985. It is also a world in which a vigorous and vocalminority is protesting against globalization, which they blamefor a list of ills, from unemployment in developed nations toenvi-ronmental degradation and the Americanization of popular culture. And yes, these protests really have turnedviolent.For businesses, this is in many ways the best of times. Global-ization has increased the opportunities for a firm to expand itsrevenues by selling around the world and re-duce its costs byproducing in nations where key inputs are cheap. Since thecollapse of communism at the end of the 1980s, the pendulumof public policy in nation after nation has swung toward thefree market end of the economic spectrum. Regulatory andadministrative barriers to doing business in foreign nationshave come down, while those nations have often transformedtheir economies, privatizing state-owned enterprises,deregulating markets, increasing competition, and welcominginvestment by foreign businesses. This has allowed businessesboth large and small, from both ad-vanced nations anddeveloped nations, to expand internationally.The globa1.retailing industry, profiled in the opening case, issomething of a late mover in this development. Some indus-tries, such as commercial jet aircraft, automo-biles, petroleum,
LESSON 1INTRODUCTION TO INTERNATIONALTRADE AND GLOBALIZATION
 
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© Copy Right: Rai University
INTERNATIONALBUSINESS MANAGEMENT
semi-conductor chips, and computers, have been global fordecades. Retailing has been primarily local in orientation, but ina testament to the scope and I pace of globalization, this too isnow changing. Falling barriers to cross-border invest-ment havemade this possible. Rapid economic growth in developingnations and mar-ket saturation at home- has made globaliza-tion a strategic imperative for established retailers seeking togrow their business. Many, such as Wal-Mart and Tesco, feel thatthey must move aggressively now lest they lose the initiative toearly movers like Car-refour. They see their strategic advantage interms of building a global brand, realizing economies of scale,and leveraging skills across national borders. In this, they are nodifferent from companies in other industries that have alreadygone global.At the same time, going global is not without problems. Thistoo was evident in the opening case. The grand strategic visionof retailers such as Wal-Mart and Carrefour has often run upagainst the hard reality that for all the superficial similarities inma-terial and popular culture and in business systems, doingbusiness in foreign nation still has unique challenges. Becauseof different tastes and preferences, what sells in Britain may notsell in Thailand, operating systems that give a retailer a competi-tive advantage in America may be difficult to implement inMexico, and a brand that means something in Kansas maymean little in Indonesia.The tension evident in the opening case between the economicopportunities associated with going global and the uniquechallenge associated with doing business across borders is animportant one in international business. To begin with,however, we need to take a closer look at the process of globalization. We need to understand what is driving thisprocess, appreciate how it is changing the face of internationalbusinesses, and better comprehend why globalization hasbecome a flash point for debate, demonstration, and conflictover the future direction of our civilization.
What is globalization?
Globalization refers to the shift toward a more integrated andinterdependent. World economy. Globalization has two maincomponents; the globaliza-tion of markets and the globaliza-tion of production.
The Globalization of Markets
The globalization of markets refers to the merging of histori-cally distinct and national markets into one huge globalmarketplace. Falling barriers to cross-border trade have made iteasier to sell internationally. It has been argued for some timethat the tastes and preferences of consumers in differentnations are beginning to converge on some global norm,thereby helping to create a global market.
 
Consumer productsuch as Citicorp credit cards, Coca-Cola soft drinks, SonyPlayStation, and McDonald’s hamburgers are frequently held,up as prototypical examples of this trend. Firms such asCiticorp, Coca-Cola, McDonald’s, and Sony are more than justbenefactors of this trend; they are also facilitators of it. Byoffering a standardized product worldwide they help to create aglobal market.A company does not have to be the size of these multinationalgiants to facilitate, and benefit from, the globalization of markets. In the United States, more than 200,000 smallbusinesses with fewer than 100 employees registered foreignsales in 2000. Typical of these is Hytech, a New York-basedmanufacturer of solar panels that generates 40,percent of its $3million in annual sales from exports to five countries, or B&SAircraft Alloys, another New York company whose exportsaccount for 40 percent of its $8 million annual revenues.Despite the global prevalence of Citicorp credit cards andMcDonald’s hamburgers it is important not to push too far theview that national markets are giving way to the global marketvery significant differences still exist between national marketsalong many relevant dimensions, including consumer taste andpreferences, distribution channels, culturally embedded valuesystems, and the like. These differences frequently require thatmarketing strategies, product features; and operating practices becustomized to best match conditions in a country. For example, automobile companies will promote different carmodels depending on a range of factors such as local fuel costs,income levels, traffic congestion, and cultural values. Similarly, aswe saw in the opening case, global retailers may still need to varytheir product mix from country to country depending on localtastes and preferences.The most global markets currently are not markets for con-sumer products-where national differences in tastes andpreferences are still often important enough to act as a brake onglobalization-but markets for industrial goods and materialsthat serve a universal need the world over. These include themarkets for commodities such as alu-minum, oil, and wheat;the markets for industrial products such as microprocessors,DRAMs (computer memory chips), and commercial jet aircraft;the markets for com-puter software; and the markets forfinancial, assets from U.S. Treasury bills to eu-robonds andfutures on the Nikkei index or the Mexican peso.In many global markets, the same firms frequently confronteach other as competi-tors in nation after nation. Coca-Co la’srivalry with Pepsi is a global one, as are the ri-valries betweenFord and Toyota, Boeing and Airbus, Caterpillar and Komatsu,and Nintendo and Sega. If one firm moves into a nation that isnot currently served by its rivals, those rivals are sure to followto prevent their Competitor from gaining an ad-vantage. Theopening case revealed that retailers such as Wal-Mart, Carrefour,and Tesco are starting to engage in a global rivalry. As firmsfollow each other around the world, they bring with them manyof the assets that served them well in other national markets-including their products, operating strategies, marketingstrategies, and brand names-creating some homogeneity acrossmarkets. Thus, greater uniformity replaces diversity. Due to suchdevelopments, in an increasing number of industries it is nolonger meaningful to talk about “the German market,” “theAmerican market,” “the Brazilian market,” or “the Japanesemarket”; for many firms there is only the global market.
The Globalization of Production
The globalization of production refers to the sourcing of goods and services from loca-tions around the globe to takeadvantage of national differences in the cost and qual-ity of 
 
© Copy Right: Rai University
11.154 3
INTERNATIONALBUSINESS MANAGEMENT
factors of production (such as labor, energy, land, and capital).By doing this, companies hope to lower their overall coststructure and/or improve the quality or functionality of theirproduct offering, thereby allowing them to compete more effec-tively. Consider the Boeing Company’s latest commercial jetairliner, the 777. The 777 contains 132,500 major componentparts that are produced around the world by 545 suppliers.Eight Japanese suppliers make parts for the fuselage, doors,and wings; a sup-plier in Singapore makes the doors for thenose landing gear; three suppliers in Italy manufacture wingflaps; and so on. Part of Boeing’s rationale for outsourcing somuch production to foreign suppliers is that these suppliers arethe best in the world at performing their particular activity. Aglobal web of suppliers yields a better final product, whichenhances the chances of Boeing winning a greater share of totalorders for aircraft than its global rival, Airbus Industrie. Boeingalso outsourcers some production to foreign Countries toincrease the chance that it will win significant orders from air-liners based in that country.The global dispersal of productive activities is not limited togiants such as Boeing. Many much smaller firms are also gettinginto the act. Consider Swan Optical, a U.S. -based manufacturerand distributor of eyewear. With annual sales revenues of $20mil-lion to $30 million, Swan, is hardly a giant, yet Swanmanufactures its eyewear in low-cost factories in Hong Kongand China that it jointly owns with a Hong Kong- basedpartner. Swan also has a minority stake in eyewear designhouses in Japan, France, and Italy. The company has dispersedits manufacturing and design processes to different locationsaround the world to take advantage of favorable skill bases andcost structures. Foreign investments in Hong Kong and thenChina have helped swan lower its cost structure, while invest-ments in Japan, France, and Italy have helped it producedesigner eyewear for which it can charge a premium price. Bydispersing its manufacturing and design activities, Swanestablished a competitive advantage for it-self in the globalmarketplace for eyewear, just as Boeing has tried to do bydispersing some of its activities to other countries.Robert Reich, the former secretary of labor in the Clintonadministration, has ar-gued that as a consequence of the trendexemplified by Boeing and Swan Optical, in many industries itis becoming irrelevant to talk about American products,Japanese products, German products, or Korean products.Increasingly, according to Reich, outsourcing of productiveactivities to different suppliers results in the creation productsthat are global in nature; that is, “global products.” But as withthe globalization of markets, one must be careful not to pushthe globalization of production too far substantial impedi-ments still make it difficult firms to achieve the optimaldispersion of their productive activities to locations around theglobe. These impediments include formal and informal barriersto trade tween countries, barriers to foreign direct investment,transportation costs, and issues associated with economic andpolitical risk.Nevertheless, we are traveling down the road toward a futurecharacterized by increased globalization of markets andproduction. Modern firms are important actors in this drama,by their very actions fostering increased globalization. Thesefirms, however, are merely responding in an efficient manner tochanging conditions in their erating environment-as well theyshould. In the next section, we look at the main drivers of globalization.
Drivers of Globalization
Two macro factors seem to underlie the trend toward greaterglobalization. The first is the decline in barriers to the free flowof goods, services, and capital that has oc-curred since the endof World War II. The second factor is technological change, par-ticularly the dramatic developments in recent years incommunication, information processing, and transportationtechnologies.
Declining Trade and Investment Barriers
During the 1920s and 30s, many of the nation-states of theworld erected formidable barriers to international trade andforeign direct investment. International trade oc-curs when afirm exports goods or services to consumers in another country.Foreign direct investment occurs when a firm invests resourcesin business activities outside its home country. Many of thebarriers to international trade took the form of high tar-iffs onimports of manufactured goods. The typical aim of such tariffswas to protect domestic industries from foreign competition.One consequence, however, was “beg-gar thy neighbor”retaliatory trade policies with countries progressively raisingtrade barriers against each other. Ultimately, this depressedworld demand and contributed to the Great Depression of the1930s.Having learned from this experience, the advanced industrialnations of the West committed themselves after World War IIto removing barriers to the free flow of goods, services, andcapital between nations. This goal was enshrined in the treatyknown as the General Agreement on Tariffs and Trade (GATT).Under the umbrella of GATT, eight rounds of negotiationsamong member states, which now number more than 140,have worked to lower barriers to the free flow of goods andservices. The most recent round of negotiations, known as theUruguay Round, was completed in December 1993. TheUruguay Round further reduced trade barriers; extended GATTto cover services as well as manufactured goods; providedenhanced protection for patents, trademarks, and copyrights;and established the World Trade Organization (WTO) to policethe international trading system. Table 1.1 summarizes theimpact of GATT agreements on average tariff rates formanufactured goods. As can be seen; average tariff rates havefallen significantly since 1950 and now stand at 3.9 percent.Discussions aimed at launching a new round of cuts in barriersto cross-border trade and investment were scheduled to beginin LATE 2001. If and when the round begins, the likely focuswill be services and agricultural products, where tariffs stillremain high. The average agricultural tariff rates are still around40 percent, and rich nations spend some $300 billion a year insubsidies to support their farm sectors.

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