LESSON 1 INTRODUCTION TO INTERNATIONAL TRADE AND GLOBALIZATION

Learning Outcomes:

UNIT I INTERNATIONAL BUSINESS AND GLOBAL ECONOMY

• To make you understand as a student of international
business management what is the subject all about.

• To know the concepts involved in international business and
globalization.

• To understand how does globalization effects the working
of 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 international
business? Introduction A fundamental shift is occurring in the world economy. We are moving rapidly away from a world in which national economies were relatively self-contained entities, iso-lated from each other by barriers to cross-border trade and investment; by distance, time zones, and language; and by national differences in government regulation, cul-ture, and business systems. And we are moving toward a world in which barriers to cross-border trade and investment are tumbling; perceived distance is shrinking due to advances in transportation and telecommunications technology; material culture is starting to look similar the world over; and national economies are merging into an interdependent global economic system. The process by which this is occurring is com-monly referred to as globalization. In this interdependent global economy, an American might drive to work in a car designed in Germany that was assembled in Mexico by DaimlerChrysler from compo-nents made in the United States and Japan that were fabricated from Korean steel and Malaysian rubber. She may have filled the car with gasoline at a service station owned by a British multinational company that changed its name from British Petroleum to BP to hide its national origins. The gasoline could have been made from oil pumped out of a well off the coast of Africa by a French oil company that transported it to the United States in a ship owned by a Greek shipping line. While driving to work, the American might talk to her stockbroker on a Nokia cell phone that was designed in Finland and assembled in Texas using chip sets produced in Taiwan that were designed by Indian engineers working at a firm in San Diego, California, called Qualcomm. She could tell the stockbroker to purchase shares in Deutsche Telekom, a German telecommunications firm transformed from a former state-owned monopoly into a global company by an energetic Israeli CEO. She may turn on the car radio, which was made in Malaysia by a Japanese firm, to- hear a popular hip-hop song composed by a Swede and sung by a group of Danes in English who signed a record contract with a

French music company to promote their record in America. The driver might pull into a drive-through coffee stall run by a Korean immigrant and order “single-tall-non-fat latte” and chocolate-covered biscotti. The coffee beans come from Brazil and the chocolate from Peru, while the biscotti was made locally using an old Italian recipe. After the song ends, a news announcer might inform the American listener that anti-globalization protests at a meeting of heads of state in Genoa, Italy, have turned vio-lent. One protester has been killed. The announcer then turns to the next item, a story about how an economic slowdown in America has sent Japan’s Nikkei stock 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 has expanded faster than world output every year for the past two decades. It is a world where more than $1.2 billion in foreign exchange transactions are made every day. It is a world in which international institutions such as the World Trade Organization and gatherings of leaders from the world’s most, pow-erful economies have called for even lower barriers to cross-border trade and invest-ment. It is a world where the symbols of material and popular culture are increasingly global: from CocaCola and McDonald’s to Sony PlayStations, Nokia cell phones, MTV shows, and Disney films. It is a world in which products are made from inputs that come from all over the world. It is a world in which an economic crisis in Asia can cause a recession in the United States, and a slowdown in the United States re-ally did help drive Japan’s Nikkei index in 2001 to lows not seen since 1985. It is also a world in which a vigorous and vocal minority is protesting against globalization, which they blame for a list of ills, from unemployment in developed nations to envi-ronmental degradation and the Americanization of popular culture. And yes, these protests really have turned violent. For businesses, this is in many ways the best of times. Globalization has increased the opportunities for a firm to expand its revenues by selling around the world and re-duce its costs by producing in nations where key inputs are cheap. Since the collapse of communism at the end of the 1980s, the pendulum of public policy in nation after nation has swung toward the free market end of the economic spectrum. Regulatory and administrative barriers to doing business in foreign nations have come down, while those nations have often transformed their economies, privatizing state-owned enterprises, deregulating markets, increasing competition, and welcoming investment by foreign businesses. This has allowed businesses both large and small, from both ad-vanced nations and developed nations, to expand internationally. The globa1.retailing industry, profiled in the opening case, is something of a late mover in this development. Some industries, such as commercial jet aircraft, automo-biles, petroleum,
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INTERNATIONAL BUSINESS MANAGEMENT

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© Copy Right: Rai University

and commercial jet aircraft. Retailing has been primarily local in orientation. Falling barriers to cross-border invest-ment have made this possible. product features.” or “the Japanese market”. Thus. Falling barriers to cross-border trade have made it easier to sell internationally. greater uniformity replaces diversity. for many firms there is only the global market. another New York company whose exports account for 40 percent of its $8 million annual revenues. distribution channels.000 small businesses with fewer than 100 employees registered foreign sales in 2000. as we saw in the opening case. In this. and a brand that means something in Kansas may mean little in Indonesia. such as Wal-Mart and Tesco. The tension evident in the opening case between the economic opportunities associated with going global and the unique challenge associated with doing business across borders is an important one in international business. Similarly. Because of different tastes and preferences. appreciate how it is changing the face of international businesses. Caterpillar and Komatsu. These include the markets for commodities such as alu-minum. The most global markets currently are not markets for consumer products-where national differences in tastes and preferences are still often important enough to act as a brake on globalization-but markets for industrial goods and materials that serve a universal need the world over. and wheat. and the markets for financial. A company does not have to be the size of these multinational giants to facilitate.S. Due to such developments. the same firms frequently confront each other as competi-tors in nation after nation. What is globalization? Globalization refers to the shift toward a more integrated and interdependent. marketing strategies. Globalization has two main components. Despite the global prevalence of Citicorp credit cards and McDonald’s hamburgers it is important not to push too far the view that national markets are giving way to the global market very significant differences still exist between national markets along many relevant dimensions. To begin with. Coca-Cola. and conflict over the future direction of our civilization. income levels. have been global for decades. they are no different from companies in other industries that have already gone global. more than 200. thereby helping to create a global market. and computers. in an increasing number of industries it is no longer meaningful to talk about “the German market. World economy. and Nintendo and Sega. demonstration. operating systems that give a retailer a competitive advantage in America may be difficult to implement in Mexico. Coca-Co la’s rivalry with Pepsi is a global one. The opening case revealed that retailers such as Wal-Mart. As firms follow each other around the world. however. the markets for industrial products such as microprocessors. and Tesco are starting to engage in a global rivalry. global retailers may still need to vary their product mix from country to country depending on local tastes and preferences. Typical of these is Hytech. they are also facilitators of it. Consumer product such as Citicorp credit cards. Coca-Cola soft drinks. realizing economies of scale. and the like. as are the ri-valries between Ford and Toyota. the globaliza-tion of markets and the globalization of production. or B&S Aircraft Alloys. going global is not without problems. Firms such as Citicorp. By offering a standardized product worldwide they help to create a global market. and Sony are more than just benefactors of this trend. and brand names-creating some homogeneity across markets. These differences frequently require that marketing strategies. a New York-based manufacturer of solar panels that generates 40. and operating practices be customized to best match conditions in a country. The grand strategic vision of retailers such as Wal-Mart and Carrefour has often run up against the hard reality that for all the superficial similarities in ma-terial and popular culture and in business systems.semi-conductor chips. culturally embedded value systems. Carrefour. At the same time. feel that they must move aggressively now lest they lose the initiative to early movers like Car-refour. We need to understand what is driving this process. oil. It has been argued for some time that the tastes and preferences of consumers in different nations are beginning to converge on some global norm. and better comprehend why globalization has become a flash point for debate. and McDonald’s hamburgers are frequently held. doing business in foreign nation still has unique challenges. and cultural values. we need to take a closer look at the process of globalization. what sells in Britain may not sell in Thailand. Sony PlayStation. McDonald’s. those rivals are sure to follow to prevent their Competitor from gaining an ad-vantage. If one firm moves into a nation that is not currently served by its rivals. up as prototypical examples of this trend. the globalization of markets. but in a testament to the scope and I pace of globalization. DRAMs (computer memory chips).” “the Brazilian market. The Globalization of Markets The globalization of markets refers to the merging of historically distinct and national markets into one huge global marketplace. and leveraging skills across national borders.154 INTERNATIONAL BUSINESS MANAGEMENT 2 © Copy Right: Rai University . For ex ample. operating strategies. Many.has made globalization a strategic imperative for established retailers seeking to grow their business. This too was evident in the opening case. this too is now changing. In many global markets. The Globalization of Production The globalization of production refers to the sourcing of goods and services from loca-tions around the globe to take advantage of national differences in the cost and qual-ity of 11. Treasury bills to eu-robonds and futures on the Nikkei index or the Mexican peso.” “the American market. assets from U. automobile companies will promote different car models depending on a range of factors such as local fuel costs. Boeing and Airbus. In the United States. the markets for com-puter software. They see their strategic advantage in terms of building a global brand. including consumer taste and preferences. traffic congestion. Rapid economic growth in developing nations and mar-ket saturation at home. they bring with them many of the assets that served them well in other national marketsincluding their products. and benefit from.percent of its $3 million in annual sales from exports to five countries.

Robert Reich. These firms.based partner. in many industries it is becoming irrelevant to talk about American products. was completed in December 1993. doors. Foreign direct investment occurs when a firm invests resources in business activities outside its home country. By dispersing its manufacturing and design activities. Table 1. the 777. just as Boeing has tried to do by dispersing some of its activities to other countries. “global products. The first is the decline in barriers to the free flow of goods. Swan established a competitive advantage for it-self in the global marketplace for eyewear. The company has dispersed its manufacturing and design processes to different locations around the world to take advantage of favorable skill bases and cost structures. -based manufacturer and distributor of eyewear. companies hope to lower their overall cost structure and/or improve the quality or functionality of their product offering. Many of the barriers to international trade took the form of high tar-iffs on imports of manufactured goods. Declining Trade and Investment Barriers During the 1920s and 30s. Drivers of Globalization Two macro factors seem to underlie the trend toward greater globalization. and wings. thereby allowing them to compete more effectively. and Italy have helped it produce designer eyewear for which it can charge a premium price. was “beg-gar thy neighbor” retaliatory trade policies with countries progressively raising trade barriers against each other. In the next section. according to Reich. services. which now number more than 140. and issues associated with economic and political risk. France. The 777 contains 132. With annual sales revenues of $20 mil-lion to $30 million. Consider the Boeing Company’s latest commercial jet airliner. a sup-plier in Singapore makes the doors for the nose landing gear. information processing. Ultimately. we are traveling down the road toward a future characterized by increased globalization of markets and production. are merely responding in an efficient manner to changing conditions in their erating environment-as well they should. Many much smaller firms are also getting into the act. Swan. The typical aim of such tariffs was to protect domestic industries from foreign competition. and Italy. the advanced industrial nations of the West committed themselves after World War II to removing barriers to the free flow of goods. land. and so on. Part of Boeing’s rationale for outsourcing so much production to foreign suppliers is that these suppliers are the best in the world at performing their particular activity. Under the umbrella of GATT. As can be seen. INTERNATIONAL BUSINESS MANAGEMENT 11. barriers to foreign direct investment. yet Swan manufactures its eyewear in low-cost factories in Hong Kong and China that it jointly owns with a Hong Kong. a U. known as the Uruguay Round. we look at the main drivers of globalization. energy. and rich nations spend some $300 billion a year in subsidies to support their farm sectors. France. The global dispersal of productive activities is not limited to giants such as Boeing. many of the nation-states of the world erected formidable barriers to international trade and foreign direct investment. eight rounds of negotiations among member states. The second factor is technological change. Discussions aimed at launching a new round of cuts in barriers to cross-border trade and investment were scheduled to begin in LATE 2001. particularly the dramatic developments in recent years in communication. Having learned from this experience. Consider Swan Optical. and capital that has oc-curred since the end of World War II.500 major component parts that are produced around the world by 545 suppliers. This goal was enshrined in the treaty known as the General Agreement on Tariffs and Trade (GATT). is hardly a giant. By doing this. that is.” But as with the globalization of markets. The Uruguay Round further reduced trade barriers. outsourcing of productive activities to different suppliers results in the creation products that are global in nature. These impediments include formal and informal barriers to trade tween countries. the likely focus will be services and agricultural products. one must be careful not to push the globalization of production too far substantial impediments still make it difficult firms to achieve the optimal dispersion of their productive activities to locations around the globe. International trade oc-curs when a firm exports goods or services to consumers in another country. A global web of suppliers yields a better final product. Eight Japanese suppliers make parts for the fuselage. and copyrights. Nevertheless.154 © Copy Right: Rai University 3 . extended GATT to cover services as well as manufactured goods. the former secretary of labor in the Clinton administration.S. where tariffs still remain high. trademarks. or Korean products. have worked to lower barriers to the free flow of goods and services. The most recent round of negotiations. The average agricultural tariff rates are still around 40 percent. Airbus Industrie. Modern firms are important actors in this drama. One consequence. services. Japanese products. this depressed world demand and contributed to the Great Depression of the 1930s. however. by their very actions fostering increased globalization. Boeing also outsourcers some production to foreign Countries to increase the chance that it will win significant orders from airliners based in that country. and transportation technologies. transportation costs.9 percent. average tariff rates have fallen significantly since 1950 and now stand at 3. Foreign investments in Hong Kong and then China have helped swan lower its cost structure. while investments in Japan. Increasingly. If and when the round begins. and capital). and capital between nations. and established the World Trade Organization (WTO) to police the international trading system. which enhances the chances of Boeing winning a greater share of total orders for aircraft than its global rival. German products. provided enhanced protection for patents. however.1 summarizes the impact of GATT agreements on average tariff rates for manufactured goods. three suppliers in Italy manufacture wing flaps. has ar-gued that as a consequence of the trend exemplified by Boeing and Swan Optical. Swan also has a minority stake in eyewear design houses in Japan.factors of production (such as labor.

If history is any guide. where Japanese automobile firms have taken market share away from General Motors and Ford. where U. serv-ing the world market from that location. Such trends facilitate both the globalization of markets and the globalization of pro-duction. however. The average yearly outflow of FDI increased from about $25 billion in 1975 to a record $1. and imports all imply that firms are finding their home markets under attack from foreign competitors. and then export the finished product around the world.1 The Growth of world Trade and World Output INTERNATIONAL BUSINESS MANAGEMENT France Germany Italy Japan Holland Sweden Britain United States In addition to reducing trade barriers. huge marketplace is increasing the intensity of competition in a range of manufacturing -and service industries. the growth in world trade seems to have accelerated in recent years. First. nations are becoming increasingly dependent on each other fat important goods and services. by 2000. while world trade grew by some 82 percent and world output by 23 percent. there were 1. It is true in the United States.8 2000 3. The bot-tom line is that the growing integration of the world economy into a single. world trade expanded almost 20-fold.000 parent companies had 820. Figure 1. as their market. and Sony. Al-though a return to the restrictive trade policies of the 1920s and 30s is unlikely. along with the-economic aftermath of the September 11th terrorist attacks on the United States. far out stripping world output. the volume of world trade has grown consistently faster than the volume of world output since 1950. 95 per-cent created a more favorable environment for FDI.5 percent.9% 5.9 nation-states are becoming more intertwined. it increased by a strong 12.856 such treaties in the world involv-ing over 160 countries. As trade expands. The lowering of trade and investment bar-riers also allows firms to base production at the optimal location for that activity. including the United States.4 5. The global economic slowdown that oc-curred in 2001. As suggested by Figure 1. This is true in Japan. where the once dominant Dutch company Philips has seen its market share in the consumer electronics industry taken by Japan’s JVC. any such contraction will be modest and short lived. indicate that 2001 may be the first year in almost two decades during which the volume of world trade contracted. companies such as Kodak. The evidence also suggests that foreign direct investment is playing an increasing role in the global economy as firms ranging in size from Boeing to Swan Optical in-crease their cross-border investments. Matsushita. it is’ not clear whether the political majority in the industrialized world favors further reductions in trade barriers. The lowering of barriers to international trade enables firms to view the world. the total flow of FDI from all countries increased about fivefold. many countries have also been progressively removing restrictions to foreign direct investment (FDI).S.9 3. a firm might design a product ill one country. And it is true. Between 1991 and 2000.000 affiliates in foreign markets that the collectively produced an estimated $14 tril-lion in global sales. but it also has accelerated faster than the growth in world trade.9 3. declining trade barriers can’t be taken for granted demands for “protection” from foreign competitors are still often heard in countries around the world.9 3. assemble the product in yet another country. The Role of Technological Change The lowering of trade barriers made globalization of markets and production a theo-retical possibility. 1950 to 2000.9 4. produce component parts in two other countries. The globalization of markets and production arid the resulting growth of world trade. a 10-fold increase from the 181n-eaties that existed in 1980.9 3.9 4. between 1990 and 2000.Table 1.121 changes worldwide in the laws governing foreign direct investment.154 © Copy Right: Rai University . in Europe. rather than a single country. As a result of the strong FDI flow. by 2000 the global stock of FDI exceeded $6 trillion. the economies of the world’s 4 Having said all this. As of 2000. foreign direct investment. Second. A dramatic increase in the number of bilateral investment treaties designed to protect and promote investment.1 Average Tariff Rates on Manufactured Products as percent of Value 1913 21% 20 18 30 5 20 44 1950 18% 26 25 11 9 23 14 1990 5. which grew by six and half times. and Merrill Lynch are expanding their presence. Technological change 11. 60.9 5.1 imply two things. The flow of FDI not only accelerated over the last quarter century.3 5. 69 countries made 150 changes to regulations governing foreign di-rect investment. The lowering of trade barriers has facilitated the globalization of production. According to data from we World Trade Organization. between two countries also reflects governments desire to facilitate FDI. The data summarized in Figure 1.3 trillion in2000. at least for the time be-ing.1. If trade barriers decline no further. the last year for which full data are avail-able. Procter & Gamble. a temporary limit may have been reached in the globalization of both markets and production. In total. Thus. For example. more firms -are doing what Boeing does with the 777: dispersing parts of their overall production process to different locations around the globe to drive down production costs and increase product quality.9 5. During 2000 alone. From. nearly twice as high as the value of global exports.9 3. In 2000. of which 147 (or 98 percent) were more” favorable to foreign in-vestors.9 3. of the 1. according to the United Nations.9% 3.

58 percent of the population had Internet access at home by July 2001. global communications have been revolu-tionized by developments in satellite. which predicts that the power of microprocessor technology doubles and its cost of production falls in half every 18 months). which enabled the explosive growth of high-power. both small and large. The Internet and World Wide Web (WWW) promise to develop into the infor-mation backbone of tomorrow’s global economy. growth of the Internet and the associated World Wide Web (which utilizes the Internet to communicate between World Wide Web sites) is the latest expression of this development.65 to $3. The microprocessor also underlies many recent advances in telecommunications technology. we will see a sharp upswing in the volume of traffic on the Web. Transport is creating a global village. INTERNATIONAL BUSINESS MANAGEMENT 11. and decode the vast amount of information that flows along these electronic highways. The cost of microprocessors continues to fall. the costs of global communications are plummeting.32. Many of these transactions are not business-to-consumer transactions (e-commerce). By1998. optical fiber. information processing. In 1990. wherever they may be located and whatever their size. or about 18 percent of the world’s population. Bridgewater has conducted a significant amount of business with consumers in other countries who could not be reached through existing channels of distribution or could not be reached cost effectively. The Web allows businesses. Since establishing an Internet presence in 1997.000 times faster-than a slow telephone line with a conventional modem). In the United States. low-cost computing. Thus. One example is a small California-based start-up. 10 years ago no one would have through that a small British company based in Stafford would have been able to build a global market for its products by utilizing the Internet. The increase in total Internet usage is also slowing. In July 1993. According to Forrester Research. but the company found it difficult and labori-ous to identify new retail outlets. scale. Cardiac Science was itching to break into inter-national markets but had little idea of how to establish an international presence. a growing percentage of it came from “hits” to the company’s website. In 2001 it grew to 490 million. The Internet and World Wide Web The phenomenal recent. director general of the World Trade Organization. Bridgewater has traditionally sold premium pottery through exclusive distribution channels. By January 2001.154 © Copy Right: Rai University 5 . the company was selling to customers in 46 countries and foreign sales accounted for 85 percent of its $1.8 trillion by 2004. from virtually nothing in 1994. In 1996. The greatest current potential of the Web seems to be in the business-to-business arena. which. Viewed globally. fewer than 1 million users were connected to the Internet.2 million revenues. Over the past 30 years. Included in the expanding volume of Web-based traffic is a growing percentage of cross-border trade. Similarly. the rate of growth in Internet adoption is now slowing markedly in the United States as the market becomes more saturated. transmit. Although some of this business was developed through conventional export channels. which lowers the costs of coordinating and controlling a global organization. including the explosive emergence of the Internet and World Wide Web.8 million-host computers were connected to the Internet (host computers host the Web pages of local users). the Web is emerging as an equalizer. vastly increasing the amount of information that can be processed by individuals and firms. to $6. and now the Internet and the World Wide Web. the world has seen major advances in communication. most-observers believe that this is due to the dominance of slow connections to the Internet (telephone lines) and they believe that once high-speed connections become more widely available (such as cable modems that can transmit data 1.12billion users. It rolls back some of the constraints of location. Cardiac Science. Microprocessors and Telecommunications Perhaps the single most important innovation has been development of the microprocessor. From Buenos Aires to Boston to Beijing.2). These technologies rely on the microproces-sor to encode. forecasts suggest that the Internet may have over 1. which makes defibrillators and heart monitors. Telecommunications is creating a global audience. ordinary people are watching MTV they’re wearing Levi’s Jeans. to expand their global presence at a lower cost than ever before. and wireless technologies. and transportation technology. and time zones. By 1995 the figure had risen to 50 million. In the words of Renato Ruggiero. where In-ternet usage is most advanced. “attracts in-ternational business people like bees to honey. and could grow. while their power increases (a phenomenon known as Moore’s Law. between 1930 and 1990. according to the company’s CEO. the cost of a three-minute phone call between New York and London fell from $244. the number of host computers had increased to109 million and the number is still growing rapidly. As this happens. Since the end of World War II.has made it a tangible reality. and they’re-listening to Sony Walkmans as they commute to work. but businessto-business (or e-business) transactions. but that is exactly what Bridgewater Pottery has done. The Web makes it much easier for buyers and sellers to find each other. However. By the year 2005. with the United States accounting for 47 percent of all Web-based transactions (see Figure 1. some 1. the value of Webbased transactions hit $657 billion in 2000.

As a result of the efficiency gains -associated with containerization.3). transportation costs have plummeted. Before the advent of container-ization. reflecting in part the growing volume of international trade -and in part the switch to this mode of transportation. by reducing the time needed to get from one location to another.3 The Shrinking Globe 1500-1840 Best average speed of horse-drawn coaches and sailing ships. making it -much more economical to ship goods around the globe. has effectively shrunk the globe (see Figure 1. Containerization has revolutionized the transportation business.154 Figure 1. In terms of travel time.S. several major innovations in transportation technology have occurred since World War II. the whole process can be executed by a handful of longshoremen in a couple of days. there by helping to drive the globalization of markets and production. 10 mph. The advent of commercial jet travel. wherever they may be located and whatever their size. It could take days and several hundred longshoremen to unload a ship and reload goods onto trucks and trains. New York is now “closer” to Tokyo than it was to Philadelphia in the Colonial days. which simplifies transshipment from one mode of transport to another. With the advent of widespread containerization in the 1970s and 1980s. Steamships average 36 mph. moving goods from one mode of transport to another was very labor intensive. export and import cargo fell from $95 to $29 (in 1990 dollars). Between 1920 and 1990 the average ocean freight and port charges per ton of U. In economic terms. significantly low-ering the costs of shipping goods over long distances. the most important are probably the development of commercial jet aircraft and su-perfreighters and the introduction of containerization. Since 1980.Figure 1. Transportation Technology In addition to developments in communication technology. lengthy. The cost of shipping freight per ton-mile on railroads in the United States © Copy Right: Rai University 11. the world’s containership fleet has more than quadrupled. and costly. The Web makes it much easier for buyers and sellers to find each other. 1850-1930 Steam locomotives average 65 mph.2 Worldwide E-Commerce Growth Forecast 1950s INTERNATIONAL BUSINESS MANAGEMENT 6 Propeller aircraft 300-400 mph. 1960s Jet passenger aircraft 500-700 mph. .

When developing new products. Implications for the Globalization of Markets In addition to the globalization of production.11. Great Britain. the real costs of information processing and communication have fallen dramatically in the past two decades. low-cost jet travel has resulted in the mass movement of people between countries. Radha was a strong math student and gained entry to an Indian uni-versity to study engineering. Communication technologies have enabled Hewlett-Packard to integrate its global dispersed operations and to reduce the time needed for developing new products (for details see the Management Focus about Radha Basu. aided by modern communications and transportation technology. Later she went to work for Hewlett-Packard where she gained her first international experience as a manager in Germany. These teams must work together on collaborative efforts. The accompanying Management Focus. and Australia. HewlettPackard uses satellite communications and information processing technologies to link its worldwide operations. Germany. no matter what the nationality or gender. She manages teams of software engineers spread across 15 time zones in Cali-fornia. She exchanges scores of e-mails a day and sends si-multaneous voice-mail messages to many of the 1. but it can cause confusion too.000 people in her division. electronic mail. masking differences in style. a global manager in the information age). by a phone call from her Swiss team. She may be awakened at 6 A. and spend the next hour refining her team’s promises to the customer while eating breakfast and driving to work. and interpretations. MTV. global communication networks and global media are creating a worldwide culture. India.154 York.” very significant national differences remain in culture. This has reduced the cultural distance between countries and is bringing about some converge of consumer tastes and preferences. For example. It is now as easy to find a Mc Donald’s restaurant in Tokyo as it is in New 11. which needs approval to sign a contract to sell soft-ware to a major customer. They also communicate with each other daily via telephone. England. A firm that ignores differences between countries does so at its peril. These developments make it possible for a firm to create and then manage a globally dispersed production system. “Homer Simpson-A Global Brand. and business practices. low-cost transportation has made it more economical to ship products around the world. Between 1930 and 1990. and she commu-nicates regularly with colleagues at distant locations us-ing videoconferencing and teleconferencing. Hewlett Packard’s product development teams consist of individuals based in different coun-tries (e. ushering in the “global village. Colorado. Like all of her meetings. and fax. This enables her to oversee a globally dispersed production system.04 cents in 1985 to 2. In any society. Radha’s job spans the world.Packard and is a naturalized American citizen. The first signs of this are already apparent. this one will be held in English. dispersal of production to geographically dispersed locations became more economical. That was followed by a stint in India. to buy a Sony Walkman in Rio as it is in Berlin. Switzerland. An increased share of cargo now goes by air. computing. we must be careful not to overemphasize their importance. the language of international business. and Germany). The widespread use of English is a definite plus. the United States. Japan. such a task would have been nearly impossible. consumer preferences.S. further facilitating the globalization of production. an America manager need spend a day at most traveling to her firm’s European or Asian operations. practices.. While modern communication and transportation technologies are. She graduated with honors and won admission to the University of Southern Cali-fornia to do graduate work in computer science. corporations in-creasingly hire the best talent they can find. technological innovations have also facilitated the globalization of markets. and to buy Levi’s jeans in Paris as it is in San Francisco. we must expect the evolution of something akin to a global culture. The development of commercial jet aircraft has also helped knit together the worldwide operations of many international businesses.68 to $0. U. the media are primary conveyors of culture. Radha Basu is a good example of the emerging class of internationally mobile global managers who are equally at home in different cultures and have to manage across borders on a day-to-day basis. thereby helping to create global markets. Radha was born in Madra in southern India in 1953. collaboration between such far-flung co-workers is intense and intimate. these individuals use videoconferencing to “meet” on a weekly basis.M.” illustrates the power of the media to create global market opportunities. A worldwide communications network has become essential for many international businesses.000 air miles a year keeping projects on track. Radha says she once told some German engineers that they should do © Copy Right: Rai University 7 . Radha logs more than 100. but she is now back in the United States working for Hewlett. In addition.g. A logical result of this evolution is the emergence of global markets for consumer products. presenting Radha with a daunt-ing management challenge. Despite these trends. As a result of the technological innovations discussed above. Japan. Implications for the Globalization of Production As transportation costs associated with the globalization of production declined. At the same time. A generation ago.fell from 3. Low-cost global communications networks such as the World Wide Web are helping to create electronic global marketplaces. average air transportation revenue per passenger mile fell from $0. but thanks to advances in communications. Using jet travel. television networks such as CNN. As noted above. Impromptu conversations are the staple of her life. Case study Radha Basu-A Global Manager in the Information Age INTERNATIONAL BUSINESS MANAGEMENT In the era of globalization. and HBO are now received in many countries. as global media develop. The same words in the same language don’t necessarily mean the same things to people of different nationalities.3 cents in 2000. and air travel. Raised as a Hindu. largely as a result of efficiency gains from the widespread use of containers. she was nevertheless edu-cated by Irish nuns in a Catholic school. and Hollywood films shown the world over.

2000. The Fox Broadcasting Company production that doc-uments the life and times of homer and his irreverent clan is the most decorated and longest running animated TV show in history. the United States still remained the world’s largest exporter. and the Germans elected to take this option. and a number of newly industrialized countries such as South Korea and China have taken a larger share of world exports. By virtue of its huge population and rapid industrialization. Since the inception of the show in 1990. the United States accounted for 27 percent of world output. Malaysia. Case study Homer Simpson—A Global Brand! So what’s next for the Simpsons? Fox has been careful to manage the licensing deals so that Homer and clan don’t suffer from overexposure or aren’t used in inappropriate ways. Whatever the sources of the show’s appeal. po-sition was not an absolute decline. Thailand. The fourth was that roughly half the globe-the centrally planned economies of the Com-munist world-was off-limits to Western international businesses.” Brandweek. She discovered that to a German. it was a relative de-cline. Nor was the United States the only developed nation to see its relative standing slip. The second was U. as can be seen from Table 1. The Changing Demographics of the Global Economy Hand in hand with the trend toward globalization has been a fairly dramatic change in the demographics of the global economy over the past 30 years. France. Not only do fox and its parent News Corporation benefit from the huge syndication rights of the show. and the chair of the philosophy department at the University of Manitoba wrote an article claiming “The Simpsons” is the deep-est show on television. November 27.S. and sometimes we comment on the ab-surdity of the hem itself. much of it outside he United States. Rather. 28-29. According to Matt Groen-ing. This decline in the U.S. reflecting the faster economic growth of several other economies. for example.” Public Affairs. France. The same occurred to Germany. and with audience ratings running high in countries as diverse as Spain and Japan.5 percent to 14.” Source: D. U. their powerful growth may continue over the long run. Related to this. 2000. Now when Radha wants something done.3 percent by 2000.154 INTERNATIONAL BUSINESS MANAGEMENT If a poll were held to identify the world’s fa-vorite dysfunctional family. The first was U. since the U. the U. “ ‘The Simpsons’ is a commer-cial enterprise and we embrace the capitalistic nature of this project What we try to do with ‘The Simpsons’ is not do a label slap-that is. firms on the international business scene.pp. but they also have made a significant sum from licensing the charac-ters. Source: Adapted from G. As late as the 1960s.2. But as Table 1.S. “The Simpsons” has generated more than $1 billion in retail sales from tie-in merchandise. economy grew at a robust average annual rate of over 3 percent from 1963 to 2000 (the economies of Germany. she uses the word must. the show’s creator. four stylized facts described the demographics of the global economy. used Father’s Day in 2000 as the perfect opportunity to find the British father whose behavior most resembles that of Homer Simpson. During the 1960s. and “The Simpsons-Picking a Winner. the United States was still by far the world’s dominant industrial power. China is emerging as a potential economic colossus. the third fact was the dominance of large. For example.S. Despite the fall. 51-55. “Homer Improvement. “we would lose credibility with the fans. EI Cortes Bart Simpson dolls in Spain. 2000. all four of these qualities either have changed or are now changing rapidly. and the United Kingdom. By 2000. Kit Kat bars and potato chips in the United Kingdom.S. June 29. as will that of several other important emerging economies in Latin 11. Germany. In 1997 and 1998 the dynamic economies of the Asian Pacific region were hit by a serious financial crisis that threatened to slow their economic growth rates for several years. the Simpsons would probably win hands down. and South Korea. Clinton Cards.. Japan’s share of world output increased from 5. a British greeting card retailer. “The Global Me. we don’t just slap their drawings on the side of a product We try to make each item witty. still by far the world’s largest industrial power but down significantly in relative size since the 1960s (see Table 1. The Changing World Output and World Trade Picture In the early 1960s. the United State accounted for 40.S. the United States routinely accounted for 20 percent of world exports of manufactured goods. should means that he has the option of not doing it.” notes a Fox spokesman.2 shows. the U. dominance in export markets has waned as Japan. Taiwan.” In short. Some 60 million viewers in more than 70 countries tune in to watch the weekly antics of the Simpsons. dominance in world foreign direct investment. 8 © Copy Right: Rai University . As will be explained below.2). position as the world’s leading exporter was threatened. Other countries that markedly increased their share of world output included China. share of world exports of manufactured goods had slipped to 12. about 50 large brand and marketing partners around the world used the Simpsons to sell everything from toilet paper in Germany. and we have to make sure that doesn’t happen. “If we didn’t do this. pp.S. The competition was rolled out across all of the company’s 692 stores and sup-ported by TV advertising.” Marketing. all nations that were among the first to industrialize. there is no question that Homer and his family have be-come a powerful global brand. 22-25. ahead of Germany and Japan. particularly in Asia. In 2000. By the end of the 1980s. In 1963. pp. from 1963 to 2000. and Intel mi-croprocessors in the United States. Time magazine named “The Simpsons the 20th century’s best TV show. Fox tries to make sure that “The Simpsons” characters are used in a way that is consistent with the irreverent nature of the show itself. a word that conveys the imperative to her German colleagues. Pascal Zachary. The show seems to have universal appeal. multinational U.2 percent. Finnigan. Over the past 30 years. dominance in the world economy and world trade picture. with the audience split 50/50 between adults and children.something and was puzzled when they didn’t. and the United Kingdom also grew over this time period).3 percent of world output.S. Despite this.

which shows how the stock of foreign direct investment by the world’s six most important national sources-the United States. 11. Thus. 2000 27. The share of the total stock accounted for by U. beginning in the 1970s. The motivation for much of this foreign direct investment by non-U.3% 5. and Brazil.S. talked of limiting inward in vestment by U.2 1.7 Figure 1. the Japanese automobile company. for example. Forecasts are not always correct.g.7 4. while the economy of India will approach that of Germany. 1988-2000 (in $ billions) One consequence of these developments is illustrated in Figure 1.4 Percentage Share of Total FDI Stock. Several European governments. The World Bank. ‘Germany.2 7.5 FDI Inflows. In-donesia. British firms were second. as the barriers to the free flow of goods. Table 1.4 3. many Japanese firms invested in North America and Europe--often as a hedge against unfavorable currency movements and the possible imposition of trade barriers.S. France. has estimated that if current trends continue. with only 2 percent. 1980-2000 The Changing Foreign Direct Investment Picture Reflecting the dominance of the United States in the global economy. as op-posed to exports from Japan. France. Thus.7 4.S. non-U. economy. and a commensurate decline in the share enjoyed by rich industrialized countries such as Great Britain. although the magnitude of that shift is still not totally evident. firms increasingly began to invest across national borders. as opposed to any absolute decline in the health of the U.4 3.1 2.4 Share of World Exports. corporations. accounting for 10.S. therefore. Meanwhile.5 9. Japan.3 percent of worldwide foreign direct investment flows in the 1960s. production in the most important foreign markets.7 6. In addition. and many of tomorrow’s most capable competitors will probably also emerge from these regions.4. Toyota also undertook these investments to head off growing political pressures in the United States and Europe to restrict Japa-nese automobile exports into those markets. the shares accounted for by Japan.92 2. while Japanese firms were a distant eighth. services. India.5 percent. firms was the desire to disperse production activities to opti-mal locations and to build a direct presence in major foreign markets. South’ Korea The World Bank also estimates that today’s developing nations may account for over 60 percent of world economic activity by 2020.154 © Copy Right: Rai University 9 . but these suggest that a shift in the eco-nomic geography of the world is now under way. may account for only about 38 percent by 2020. For example. while today’s rich nations.. Toyota executives believed that an increasingly strong Japanese yen would price Japanese automobile exports out of foreign markets. and the United States. and capital fell. Toyota. most notably that of France. (The stock of foreign direct invest-ment refers to the total cumulative value of foreign investments. European and Japanese firms began to shift laborintensive manufactur-ing operations from their home markets to developing nations where labor costs were lower.. and the Netherlands-changed between 1980 and 1999.S.4 3.2 4. The dominance of U.S.S. 1963t 40. rapidly increased its investment in automobile production facilities in the United States and Great Britain during the late 1980s and early 1990s. By itself. However. other developed nations.0 NA NA Share of World Output. this is not a bad thing. made sense. For international businesses.1 4. most forecasts now predict a rapid rise in the share of world output accounted for by developing nations such as China.3 6. firms.America (e. Figure 1. Japan. The relative decline of the United States reflects the growing economic development and industrialization of the world economy. U.5 3.) Figure 1. firms accounted for 66. a further relative decline in the share of world output and world exports accounted for by the United States and other longestablished developed nations seems likely.2 The Changing Pattern of World Output and Trade Share of World Output. If we look 20 years into the future. and as other countries increased their shares of world output.0% 14. Germany.3 % 7.0 3. firms was so great that book were written about the economic threat posed to Europe by U. 2000 12. by 2020 the Chinese economy could be larger than that of the United States. firms declined substantially from about 42 percent in 1980 to 24 percent in 1999. Poland).g.3 5. Thailand. which entered the new millennium stronger than ever. which currently account for over-55 percent of world economic activity.S. INTERNATIONAL BUSINESS MANAGEMENT Country United States Japan Germany France United Kingdom Italy Canada China. the implications of this chang-ing economic geography are clear: many of tomorrow’s economic opportunities may be found in the developing nations of the world.4 also shows the stock accounted for by firms from developing economies.7 4. United Kingdom. Brazil) and Eastern Europe (e.54 8. South Korea.

and 7. By 1999.S. Procter &Gamble. When people think of international business.S. Some 22 percent of these companies came from Hong Kong. The Rise of Mini-Multinationals Another trend in international business has been the growth of medium-sized and small multinationals (mini-multinationals). a trend that reflects the increasing internationalization of busi-ness corporations. which manufactures lubricating fluids for machine tools. Figure 1. The large number of U. multinationals reflected U. employs 25 people and generates sales of $6. which came in at 100. followed by Japan with 17 percent.1 percent in1980.154 . firms accounted for 26 percent of the world’s 100 largest multinationals.5% 12 16. developing nations were taking an increasingly large percentage share of this flow. Throughout the 1990s. China retained its importance as the leading destination for foreign direct investment among developing economies. Fuji. We have already discussed several examples in this chapter-Swan optical.3. which ranked 48 in terms of foreign assets. In 1999 firms based in develop-ing nations accounted for 9. Since the 1960s. They were Hutchison Whampoa of Hong Kong. Germany. (The 1973 figures are based on the largest 260 firms. 1973 Table 1. W.3 8.3 The national Composition of The Largest Multinationals 1990 United S tates Japan United Kingdom France Germany 1997 48. The rise in the share for developing nations reflects a growing trend for firms from these countries. enterprises. firms.7 percent from Korea. Although the 1973 data summarize in the Table 1.8 percent of the largest multinationals. Or take G. China. Lubricating systems also has set up a joint venture whit a German company to serve the European market consider also Lixi. Employing just 65 people.8 7. 16. this small companies international business is conducted not just by large firms but also by medium-sized and small enterprises. it is evident that there has been growth in the number of multinationals from developed economies.5 illustrates two other important trends-the continued rapid growth in cross-border flows of foreign direct investment and the emerging importance of de-veloping nations as the destination of foreign direct investment. and Cardiac Scienceand we have noted how the rise of the Internet is lowering the barriers that small firms in building international sales. Until 1998. However.and Cemex of Mexico. $4.S. whereas the figure for the 1990s are based on the largest 100 multinationals. they tend to think of firms such as Exxon. a manufacturer of cocoa-bean roasting. Looking to the future. the ranks of the world’s largest 100 multinationals are still dominated by firms from developed economies. global business activity was dominated by large U. the largest 50 multinationals from developing economies had foreign sales of $ 103 billion out of the total sales of $453 billion and employed 483. things had shifted significantly. while the large number of British multinationals reflected that country’s industrial dominance in the early decades of the 20th century. It’s hardly a large. they illustrate the trend. Petroleos de Venezuela of Venezuela. if we look at smaller firms. However. in 1973.S. General Motors. with about $40 billion in foreign investment flowing into this economy every year since the mid-1990s.9 32. up from only 3. INTERNATIONAL BUSINESS MANAGEMENT Non-U. In the long run. The second largest source country was the United Kingdom. the flow of money into the developing world will probably reaccelerate.S. reflecting the economic opportunities in many of these nations.S.9 percent of the stock of foreign direct investment.5% 3.5 18. with 18. 48. there have been two notable trends in the demographics of the multinational enterprise: (1) the rise of non-U. Inc. Ford. multinationals corporations. U.129 people outside of there home country. Japan accounted for only 3. particularly Japanese multinationals. we can reasonable expect growth of new multinational enterprises from the world’s developing nations.mulitinationals. such as South Korea.5 percent of the world’s 260 largest multinationals were U. Sony. Washington. yet more than $2 million of the company’s sales are generated by exports to a score of countries from Japan to Israel and the United Arab Emirates. For another example. consider Lubricating System.5million in revenues comes from export to Japan.6 9. Barth.S.8 12. which ranked 84. for the first time three firms from developing economies entered the UN’s list of the 100 largest multinationals. France was third with 13 10 © Copy Right: Rai University 11. the amount of investment directed at both developed and developing nations increased dramatically. Kodak. Although it is certainly true that most international trade and investment is still conducted by large firms. At the of the 1990s..4 8.7 26% 17 8 13 12 percent. however. complex multinational. Lubricating systems. multinationals In the 1960s.8 10. 8. With U. Matsushita.S. firms accounting for about two-thirds of foreign direct investment during the 1960s.) The globalization of the world economy together with Japan’s rise to the top rank of economic powers has resulted in the global marketplace.S. to invest outside their borders. of Kent. primarily due to the lingering effects of the 1997 Asian economic crisis and the resulting slump in economic activity in the region.3 are not strictly comparable with the data for the 1990s.7 6. Bridgewater Pottery.5 million.1 2000 31.S. one would expect most multinationals to be U. According to the data summarized in the table 1. The Changing Nature of the Multinational Enterprise A multinational enterprise is any business that has productive activities in two or more countries. This trend changed between 1998 and 2000.4% 15.8 percent from China. machinery based in Ludwigsburg.6 percent from Brazil. According to United Nations data. economic dominance in the three decades after World War II. manufacturer of industrial X-ray equipment: 70 percent of Lixi. and Unilever-large. complex multinational corporations with operations that span the globe. and (2) the growth of mini-multinationals. a small U.and the world’s developing nations increased markedly. Despite this slump.5 percent of the largest multinationals at the time. it is also true that many medium-sized and small businesses are becoming increasingly involved in international trade and investment.

At the same time. roughly equivalent to that of Spain’s today. interdependent. both democracy and free market reforms also have taken hold. while Yugoslavia has dissolved into a bloody civil war among its five successor states. Their implications for international businesses may be just as profound as the collapse of communism in Eastern Europe.The Changing World Order Between 1989 and 1991 a series of remarkable democratic revolutions swept the communist world. Just how this will play out over the next 10 to 20 years is difficult to say. These changes have increased the attractiveness of Latin America. Now much of this seems to be changing. Czechoslovakia has divided itself into two states. and-increased commitment to removing barriers to cross-border trade and investment. high debt. substantial opportunities are accompanied by substantial risk. widespread deregulation. China. these countries were essentially closed to Western international businesses. If what is occurring in China continues for two more decades. Accordingly. greater globalization brings with it risks of its own. Thus. following the normative prescriptions of liberal economic ideology. governments are selling state-owned enterprises to private investors. The world may be moving toward a more global economic sys-tem. Barriers to the free flow of goods. Brazil. which is slower than the 8 percent growth rate achieved during the last decade. debt and inflation are down. This suggests that over the next few decades. the poorly managed economies of Latin America were characterized by low growth. China’s new firms are proving to be very competitors. Moreover. The Global Economy of the 21st Century The last quarter of century has seen rapid changes in the global economy. foreign investment is welcomed.2 billion people. indicating that national economies are becoming more closely integrated into a sin-gle. most Latin America countries were ruled by dictators. In country after country throughout Eastern Europe and eventually in the Soviet Union itself. Poland. The Soviet Union is now history. then by 2020 this nation of 1. more na-tions are joining the ranks of the developed world. Russia has experienced considerable economic pain as it tries to shift from a centrally planned economy to a market economy. As for Latin America. For the best part of half a century. current trends indicate that the world is moving rapidly toward an economic system that is more favor-able for the practice of international business. more quite revolutions have been occurring in China and Latin America. China suppressed its own prodemocracy movement in the bloody Tiananmen Square massacre of 1989.154 © Copy Right: Rai University 11 . The volume of cross-border trade and investment has been growing more rapidly than global output. so may be the returns. given the long history of economic mismanagement in Latin America. and their continued commitment to democracy and free market economics cannot be taken for granted. markets being opened to more competition. Reflecting this. communist governments collapsed like the shells of rotten eggs. countries such as the Czech Republic. the liberal vision of a more prosperous global econ-omy based on free market principles might not come to pass as quickly as many hope. Throughout most of Latin America. Thus. In addition to these changes. Clearly. Many of the former Communist nations of Europe and Asia seem to share a commitment to democratic politics and free market economics. Despite this. and South Africa may build powerful market-oriented economies. INTERNATIONAL BUSINESS MANAGEMENT 11. The move toward a global economy has been further strengthened by the widespread adoption of liberal economic. both as a market for export and as a site for foreign direct investment. On the one hand. Countries may pull back from the recent com-mitment to liberal economic ideology if their experiences do not match their expectations. services. China may move from Third World to industrial superpower status even more rapidly than Japan did. On the other hand. and the region’s economies are growing rapidly. but globalization is not inevitable. China represents a huge and largely untapped market. Now they present a host of export and investment opportunities. The economies of most of the former communist states are in very poor condition. of a retreat from liberal economic ideology in Russia. global economic system. with 1. policies by countries that for two generations or more were firmly opposed to them. For decades. A generation ago. The potential consequences for western international business are enormous. for example. between 1983 and 2000.to Russia and Brazil Ultimately the crisis threatened to plunge the economies of the developed world. they restricted direct investment by foreign firms. Thus the changes in China are creating both opportunities and threats for established international businesses. If this continues.273 billion people could boast an average income per capita of about $13. and they could take global market share away from western and Japanese enterprises. Disturbing sings of growing unrest and totalitarian tendencies continue to be seen in many Eastern European states. and hyperinflation-all of which discouraged investment by interna- tional businesses. There are signs. the risk involved in doing business in such countries are very high. and their firms are major players in many global industries from ship-building and steel to electronics and chemicals. there is no guarantee that these favorable trends will continue. This was starkly demonstrated in 1997 and1998 when a financial crisis in Thailand spread first to other East Asian nations and then in 1998. Now they boast large economies. but then. in country after country we are seeing state-owned businesses privatized. As in the case of Eastern Europe. it is always hazardous to take established trends and use them to predict the future. In addition. South Korea and Taiwan were viewed as second-tier developing nations. this would be a tougher world for international businesses to compete in. China continues to move progressively toward greater free market reforms. In short. If Russia’s hesitation were to become more permanent and widespread. many of whom seemed to view western international businesses as instruments of imperialist domination. the opportunities for international businesses may be enormous. annual foreign direct investment in China increased from less than $2 billion to $40 billion.000. On the other hand. and capital have been coming down. As their economies advance. If China’s gross domestic product (GDP) per capita grows by an average of 6 percent to 7 percent. having been replaced by 15 independent republics.

and the wages for unskilled workers being discounted. Supporters of globalization do concede that the wage rate enjoyed by unskilled workers in many advanced economies may have declined in recent years. cite the case of Harwood Industries. For exam-ple. an in-dex of wage rate inequality for all workers actually fell by 5. According to this view. If one agrees with this logic. where it paid workers $9 per hour. it makes little sense for the United States to produce textiles at home when they can be produced at a lower cost in Honduras or China (which. which en-ables consumers to spend more of their money on other items.6 percent annually while the earnings of the 10 percent at the bottom of the heap fell by 8 percent. Lerman has found that far from income inequality increasing. into a recession. Microsoft software. the increased income generated in China from textile exports increases income levels in that country. the fall was much greater. there is always some dislocation -lost textile jobs at Harwood Industries. If this is the case. for example—but the whole economy is bet-ter off as a result. there are ways for firms to exploit the opportuni-ties associated with globalization. In some areas. manufacturing jobs in wealthy advanced economies such as the United States and the United Kingdom. the income of the worst paid 10 percent of the population actually rose twice as fast as that of the average worker. For now it is simply worth noting that even from a purely economic perspective. growing income inequality is a result of the wages for skilled workers being bid up by the labor market. If future research supports this finding. suggesting that the high employment levels of these years have triggered a rise in the income of the lowest paid. Robert Lerman of the Urban Institute believes that the finding of inequality is based on inappropriate calculations of wage rates. textile imports).including the United States. Bartlett and J. and Income One concern frequently voiced by opponents of globalization is that falling barriers to international trade destroy. and the Environment A second source of concern is that free trade encourages firms from advanced nations to move manufacturing facilities to less developed countries that lack adequate regu-lations to protect labor and the environment from abuse by the unscrupulous. Intel-based computers. workers rose in real terms by 0. Jobs. During the last few years of the 1990s. B. but as we saw in 1997-98. In the same vein. and Mo-torola cellular telephones. unlike Honduras.L. Steele. while globalization critics argue that the decline in unskilled wage rates is due to the migration of low-wage manufacturing jobs offshore and a corresponding reduction in demand for unskilled workers. the wage rates of poorer Americans have fallen significantly over the last quarter of a century. The critics argue that falling trade barriers allow firms to move their manufacturing activities to countries where wage rates are much lower D. Reviewing the data using a differ-ent methodology. data for the Organization for Economic Cooperation and Development suggest that since 1980 the lowest 10 percent of American workers have seen a drop in their real wages (adjusted for inflation) of about 20 percent. the earnings of the best paid 10 percent of U. Globalization.S. The opportu-nities for doing business in a global economy may be significantly enhanced. such as Boeing jets.S. one might expect free trade to lead to an increase in pollution and result in firms from advanced nations exploiting the labor of less developed na-tions. Supporters of globalization reply that critics such as Bartlett and Steele miss the es-sential point about free trade—the benefits outweigh the costs. textiles from China leads to lower prices for clothes in the United States. Globalization. the argument that globalization leads to growing income inequality may lose much of its punch. where textile workers receive 48 cents per hour. Labor Policies. They maintain that the declining real wage rates of unskilled workers owes far more to a technologyinduced shift within advanced economies away from jobs where the only qualification was a willingness to turn up for. At the same time. the risks associated with global financial contagion are also greater. two journalists for the Philadelphia Inquirer who have gained notoriety for their attacks on free trade.154 . and shifted manufacturing to Honduras. Importing. which helps the Chinese to purchase more products produced in the United States. the-theory goes. clothing manufacturer that dosed its U .6 INTERNATIONAL BUSINESS MANAGEMENT 12 © Copy Right: Rai University 11. by moving their production facilities to nations that do not have such burdensome regulations or that fail to enforce the regulations they have. When a country embraces free trade.S. argue Bartlett and Steele. They point out that many ad-vanced economies report a shortage of highly skilled workers and an excess supply of unskilled workers. In this manner. while at the same time reducing the risks through appropriate hedging strategies. However. but in increasing so-ciety’s investment in education to reduce the supply of unskilled workers. Figure 1. a U. Thus. Still. supporters of globalization argue that free trade benefits all countries that adhere to a free trade regime. supporters of globalization see a more com-plex picture. while importing goods that they cannot produce as efficiently. Glob-alization critics often argue that adhering to labor and environmental regulations significantly increases the costs of manufacturing enterprises and puts them at a com-petitive disadvantage in the global marketplace vis-a-vis firms based in developing na-tions that do not have to comply with such regulations. Research also suggests that the evidence of growing income inequality may be sus-pect. a Federal Reserve study found that in the seven years preceding 1996. opera-tions. a solution to the problem of declining in-comes is to be found not in limiting free trade and globalization.5 percent between 1987 and 1994. Similar trends can be seen in many other countries.S. work every day and toward jobs that require significant education and skills. while the top 10 percent have enjoyed a real pay increase of around 10 percent. Because of moves like this. Firms deal with this cost disadvantage. globalization is not all good. They argue that free trade will result in countries specializing in the production’ of those goods and services that they can produce most efficiently. is a major source of U. This argument was used repeatedly by those who opposed the 1994 formation of the North American Free Trade Agreement (NAFTA) between Canada.

and ignore workplace safety and health issues. The WTO arbitrates trade disputes between the 140 or so states that are sig-natories to the GATT. supporters of free trade argue that factories based in Mexico are now cleaner than they would have been without the passage of NAFTA. for example. Mexico. and the United Nations. according to one prominent critic. environmentalist and consumer rights advocate Ralph Nader: Under the new system. By creating wealth and incentives for enterprises to produce technological innovations. Thus. this should lead to tougher environmental and labor laws. while pollution levels are rising in the world’s poorer countries. The bureaucrats can decide whether or not people in California can prevent the destruction of the last virgin forests or determine if carcinogenic pesticides can be banned from their foods. many economists and politicians maintain that the power of supranational organizations such as the WTO is limited to that which nation-states collectively agree to grant. They painted a picture of U. and the United States. unelected bureaucrats now impose policies on the democratically elected governments of nation-states. In general. Figure 1. The World Trade Organization (WTO) is a favorite target of those who attack the headlong rush toward a global economy. The arbitration panel can issue a ruling instructing a mem-ber state to change trade policies that violate GATT regulations. they have been falling in developed nations. would be deferred to a group of unelected bureaucrats sitting behind closed doors in Geneva (which is where the headquarters of the WTO are located). not to subvert those interests. they enact tougher environmental and labor regulations. Furthermore. most business enterprises are staffed by managers who are committed to behave in an ethical manner and would be unlikely to move production offshore just so they could pump more pollution into the atmo-sphere or exploit labor. If these bodies fail to serve the collective INTERNATIONAL BUSINESS MANAGEMENT 11. and it is productivity rather than base wage rates that often has the greatest influence on costs. As perceived by critics. thereby undermining the sovereignty of those states and limiting the nation-state’s ability to control its own destiny.S. the relationship between pollution. If the violator refuses to comply with the ruling. the free market system and free trade could make it easier for the world to cope with problems of pollution and population growth. U. While there may be a few rotten apples. if challenged by any WTO member nation. the WTO allows other states to impose appropri-ate trade sanctions on the transgressor. the crit-ics of free trade have got it backward-free trade does not lead to more pollution and labor exploitation. labor ex-ploitation.S. was passed only after side agreements had been ne-gotiated that committed Mexico to tougher enforcement of environmental protection regulations. In the United States. as countries get richer. Because free trade enables developing countries to increase their economic growth rates and become richer. At risk is the very basis of democracy and accountable decision making. The vision of greedy managers who shift production to low-wage countries to exploit their labor force may be misplaced. a well-treated labor force is productive. the concentration of carbon monoxide and sulphur dioxide pollutants in the atmosphere decreased by 60 percent between 1978 and 1997. In contrast to Nader’s rhetoric. Supporters of supranational organizations point out that the power of these bodies rests largely on their ability to persuade member states to follow a certain action. They painted a picture of U. As a result. many decisions that affect billions of people are no longer made by local or national governments but instead. They also argue that business firms are not the amoral organizations that critics sug-gest. They argue that bodies such as the United Nations and the WTO exist to serve the collective interests of member states. . all in the name of higher profits.154 © Copy Right: Rai University 13 . it leads to less.while lead concentrations decreased by 98 percent -and these reductions have occurred against a background of sustained economic ex-pansion. NAFTA. Globalization and National Sovereignty Another concern voiced by critics of globalization is that today’s increasingly interde-pendent global economy shifts economic power away from national governments and toward supranational organizations such as the World Trade Organization. for example. or whether European countries have the right to ban dangerous biotech hormones in meat . the Euro-pean Union. manufacturing firms moving to Mexico in droves so that they would be free to pollute the environment. all in the name of higher profits. employ child labor. and production costs may not be that suggested by critics. manufacturing firms moving to Mexico in droves so that they would be free to pollute the environment. and ignore workplace safety and health issues. Supporters of free trade also point out that it is possible to tie free trade agreements to the implementation of tougher environmental and labor laws in less developed countries. and the United States. In this view. .S.Environmental performance and income Mexico. Supporters of free trade and greater globalization express serious doubts about this scenario. employ child labor. In-deed. Drawn from a study undertaken for the Organization for Economic Cooperation and Development. They point out that tougher environmental regulations and stricter labor standards go hand in hand with economic progress. The WTO was founded in 1994 to po-lice the world trading system established by the General Agreement on Tariffs and Trade.6 shows there is a clear positive relationship between the income levels in a country and the environmental performance of that country as measured by various indicators. In general.

investing di-rectly in operations in other countries. maintaining close relations with a particular level of government may be very important in Mexico and irrelevant in Great Britain.154 . What does this shift toward a global economy mean for managers within an international business? As their organizations increasingly engage in cross-border trade and investment. managing U. and the prob-lems themselves more complex than those confronted by a manager in a domestic business. and so on. a manager in an international business is confronted with a range of other issues that the manager in a domestic business never confronts. workers might require different skills than managing Japanese workers. legal systems and levels of economic development. Is it best to export its product to the foreign country? Should the firm allow a local company to produce its product under license in that country? Should the firm enter into a joint venture with a local firm to produce its product in that country? Or should the firm set up a wholly owned subsidiary to serve the market in that country? As we shall see. but tlley must also adopt the appropriate policies and strategies for coping with them. A firm that adopts a wrong policy can lose large amounts of money. they often intervene to regulate cross-border trade and investment.S. both large and small. although multinational enterprises are international businesses. while a firm that adopts the right policy can increase the profitability of its international transactions. Managers in an international business must not only be sensitive to these differences.interests of member states. more firms. In this view. Then it must decide how best to coordinate and control its globally dispersed production activities (which. economic systems. Q3) How does one manage himself in the global market place. not supranational organizations Managing in the Global Marketplace An international business is any firm that engages in international trade or investment. and (4) international transactions involve converting money into different currencies.of problems confronted by a manager in an international business is wider. All a firm has to do is export or import products from other countries. They must find ways to work within the limits imposed by spe-cific governmental interventions. the differences arise from the simple fact that countries are different Countries differ in their cultures. (3) an international business must find ways to work within the limits im-posed by government intervention in the international trade and investment system. At the most fundamental level. (2) the range. real power still resides with individual nation-states. Since currency exchange rates vary in response to changingeconomic conditions. discuss in brief ? © Copy Right: Rai University 11. as we shall see later in the book. Marketing a product in Brazil may require a different approach than marketing the product in Germany. As the world shifts toward a truly integrated global economy. A firm does not have to become a multinational enterprise. is not a trivial problem). an international business must develop policies for dealing with exchange rate movements. Differences between countries require that an international business vary its practices country by country. It also must choose the appropriate mode for entering a particular foreign country. foreign direct investment. Despite all the talk about the emerging global village. it means managers need to recognize that the task of managing an international business differs from that of managing a purely domestic business in many ways. political systems. Conducting business transactions across national borders requires understanding the rules governing the international trading and investment system. In sum. to engage in international business. In addition to the prob-lems that arise from the differences between countries. A further way in which international business differs from domestic business is the greater complexity of managing an international business. the choice of entry mode is critical 14 because it has major implications for the long-term health of the firm. managing an international business is different from managing a purely do-mestic business for at least four reasons: (1) countries are different. Activity (Questions):- INTERNATIONAL BUSINESS MANAGEMENT Q1) Comment on changing demographics of the global economy? Q2) How has global economy of the 21st century effected the world trade picture. the business strategy pursued in Canada might not work in South Korea. those states will withdraw their support and the supranational organization will quickly collapse. Managers within international businesses must de-velop strategies and policies for dealing with such interventions. Nominally committed to free trade. and despite the trend toward globalization of markets and production. Cross-border transactions also require that money be converted from the firm’s home currency into a foreign currency and vice versa. are becoming international busi-ness. and jobs and income in the world? comment . An international business must decide where in the world to site its production activities to minimize costs and to maximize value added. Managers in an international business must also deal with government restrictions on international trade and investment. An international business also must decide which foreign markets to enter and which to avoid.

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