INTERNATIONAL BUSINESS

 With examples discuss four (4) drivers for globalization.

 Countries differ in terms of political, economic, and legal systems; using
Ghana and any country of your choice; interrogate these differences.
 Culture of a country has implications for it, discuss any 4 implications.
 Discuss the concepts of absolute and comparative advantage as theories
of international business.
 Explain 3 implications of regional integration on International Business.
The concept of Globalisation
According to the Peterson Institute for International Economics (2018),
globalization is the word used to describe the growing interdependence of the
world’s economies, cultures and populations, brought about by cross-border
trade in goods and services, technology, and flows of investment, people, and
information.
According to Hill and Hult (2016), globalization refers to the shift toward a
more integrated and interdependent world economy.
It is a term used to describe the increasing connectedness and
interdependence of the cultures and economies of the world.

Drivers for Globalisation

Declining trade barriers
Prior to the Second World War, it was difficult for many of the world’s nation-
states to engage in International trade which meant these nation states were
discouraged from exporting goods or services to consumers in another
country. This was because of the existence of formidable barriers between the
nations that hindered international trade.
These barriers to international trade were introduced in the form of high tariffs
on imports of manufactured goods with the aim of protecting domestic
industries from foreign competition. This eventually led to the ‘Great
Depression’. In an attempt to correct this historical problem, the advanced
industrial nations of the West committed themselves after World War II to
progressively reducing barriers to the free flow of goods and services among
nations. Today, globalisation has gained ascendancy because of a change in
orientation towards the free flow of goods and services as it has proved to be
beneficial to nation-states.

Declining restrictions to foreign direct investment

In addition to reducing trade barriers, many countries, by means of legal
procedures are removing restrictions to foreign direct investment. Foreign
direct investment (FDI) occurs when a firm invests resources in business
activities outside its home country. (Hill and Hult, 2016) In a report by the
United Nations, about 90% of the 2,700 changes made worldwide between
1992 and 2009 in the laws governing foreign direct investment created a more
favourable environment for foreign direct investment. Consequently, the
removal of such restrictions continue to increase the globalization of markets
and the globalization of production.
Today, many firms view the world, rather than a single country, as their
market. One of the significant effects of the lowering of investment barriers is
that, it also allows firms to base production at the suitable locations such that,
their production will be comparatively more efficient, cost effective and more
profitable. For example, a firm might design a product in one country, produce
component parts in two other countries, assemble the product in yet another
country, and then export the finished product around the world.

Major advances in communication and information processing technology

Since the end of World War II, the world has seen major advances in
communication and information processing technology and these changes
have been major forces driving the world towards globalisation. Two of the
most significant discoveries that have fuelled the move towards globalisation is
the development of the microprocessor and emergence of the Internet.
The invention of the microprocessor contributed to the rapid growth in
computing which has greatly increased the amount of information that can be
processed by individuals and firms. The development of the microprocessor
has also enhanced many recent advances in telecommunications technology.
Global communications in recent years have been revolutionized by
developments in satellite, optical fibre, wireless technologies and the Internet.
Today, these major advancements have made the world more connected and
interdependent as information flows rapidly and with ease between nations.

Major advances in transportation technology

In addition to developments in communications technology, there has been
many major innovations in transportation technology. These developments
spanning across the different modes of transportation, have reduced the time
needed to get from one location to another, closing the geographical gap
between nations. Some of these innovations include the development of
commercial jet aircraft, super freighters and containerization, which simplifies
transhipment from one mode of transport to another.
These advances have been major players in driving the world towards
globalisation.

Differences in political, economic and legal systems between Ghana and

Saudi Arabia
Economic Systems
Ghana has a mixed economic system whilst Saudi Arabia has a command
system. The mixed economic system combines both capitalism and socialism
and allows for economic freedom in the use of capital. Saudi Arabia has a
command economy system in which a centralised government (King) controls
the means of production, in this case the Saudi King and his advisors make
quite a lot of the country’s economic decisions especially those related to oil.
An investor who want to enter into that market would have to have directly
deal with the king or his advisors.
With mixed economy system as practised in Ghana, free market which is based
on demand and supply co-exist with government interventions and therefore
allows for businesses including international business as opposed to command
economy system that is controlled by a centralised government.
Legal Systems
Ghana practises civil and common law under the English law and Saudi Arabia’s
legal system is based on Islamic law (shar-iah) for both criminal and civil case
meaning their judgment must conform to that law.
Businesses entering into foreign markets with Sharia law such as Saudi Arabia
would need to be aware of guidelines provided under the Law for businesses
such as banking and therefore create some form of limitation. For example,
Islamic banks cannot pay or charge interest. Just as alcoholic beverage cannot
be produced or imported into the country. Ghana’s by virtue of its legal system
makes the country more open as comparatively it is not as restrictive in terms
of type of businesses that can operate in the country.

Political system
Saudi Arabia practices a Monarch system. Practicing a monarch system is one
of the most stable forms of governance because it reduces the level of political
divide. In this system, businesses that want to operate in the country must be
informed that the king has the final say on all matters and this can have
implications on businesses. Ghana on the other hand practices a democratic
system where an elected political parties stays in power for four years until the
next election is held. In this political system, investors must be mindful of this
transition and how it can affect business operations.
In terms of stability of the government, Mornachy based government have
been known to be more stable and therefore provides a more conducive
environment for international businesses as governmental policies are likely
not to change. Democratic government though fairly known to be stable may
experience some form of instability especially in developing world due to the
change in government. Stability is very attractive to international business
therefore governments with more stability are more attractive to businesses.

The concept of absolute and comparative advantage

Absolute advantage is the ability of an entity to produce a product or service
at a lower absolute cost per unit using a smaller number of inputs or a more
efficient process than another entity producing the same good or service.
(Investopedia Team, 2021)
The concept of absolute advantage is the ability of a party to produce goods or
services more efficiently than its competitors. It refers to the ability to produce
certain goods or services at a lower cost. An example is the ease with which
Saudi Arabia can reach its oil supplies, greatly reduces the cost of extraction.

Comparative advantage refers to the ability to produce goods and services at a

lower opportunity cost, not necessarily at a greater volume or quality.
Comparative advantage refers to a country’s ability to produce specific goods
or services at a lower opportunity cost than its trading partners. For example,
Ghana has a comparative advantage of producing cocoa.

The implication of Culture on International Business

Differences in culture across and within countries can significantly affect
international business strategies and operations of companies. This means that
business success in a variety of countries requires cross-cultural literacy.
Cross-cultural literacy refers to having an understanding of how cultural
differences across and within nations can affect the way business is practiced.
Various indicators of culture have different implications on business. Some of
these are summarised below.
Religion
An aspect of culture that can have significant impact on business operations
and relationships in the working environment is religion.
For example, businesses that intend to expand into Islamic nations need to be
informed that the people are likely to be receptive to international businesses
as long as those businesses behave in a manner that is consistent with Islamic
ethics, customs and business practices. Businesses that are perceived as
making an unjust profit through the exploitation of others, by deception, or by
breaking contractual obligations are unlikely to be welcomed in an Islamic
country. Islamic nations disallow the payment or receipt of interest, which is
considered usury. Because Islamic banks cannot pay or charge interest, they
must find a different way of making money. When an Islamic bank lends
money to a business, rather than charging that business interest on the loan, it
takes a share in the profits that are derived from the investment. Similarly,
when a business or individual deposits money at an Islamic bank in a savings
account, the depositor receives a share in the profit from the bank’s
investment.

Language
Language is one of the defining characteristics of a culture and it is one obvious
way in which countries differ. Mastering the language of a foreign country
with which you want to do business is an added value in any cross-cultural
relationship.
Most people prefer to converse in their own language, and being able to speak
the local language can build rapport and goodwill, which may be very
important for a business deal. International businesses that do not understand
the local language can make major blunders through improper translation.
In Ghana, when Citydia supermarket entered the market they had most of the
imported product from their home country labeled in their local language
which could not be understood by Ghanaians. This made it difficult for the
business to survive in the market as compared to Shoprite and others.
In addition to verbal forms of communication, failure to understand the non-
verbal cues of another culture can lead to a communication failure. For
example, making a circle with the thumb and the forefinger is a friendly
gesture in the United States, but it is a vulgar sexual invitation in Greece and
Turkey.
Social class consciousness
The culture of a people with regards to class consciousness can affects the
operation of business organizations in that culture. Class consciousness refers
to a condition by which people tend to perceive themselves in terms of their
class background, and this shapes their relationships with members of other
classes. In American society, the high degree of social mobility and the
extreme emphasis on individualism limit the impact of class background on
business operations. Also in Japan, where most of the population perceives
itself to be middle class. These have great implications on relationships within
the working environment. In a country such as Ghana, the relative lack of class
mobility and the differences between classes have resulted in the emergence
of class consciousness. Ultimately, in the working environment, this creates an
obvious gap between upper middle-class managers and the low class
employees.

Values, attitudes and norms

Values and norms of groups of people influence the attitudes and perceptions
of people. This can have great implications on businesses seeking to operate in
international regions. For example, an alcoholic beverage company cannot
operate in an Islamic country like Saudi Arabia because their culture prohibits
the consumption of alcohol.
Some countries also have different values and attitudes regarding age. Asian
and Arab societies respect for age is stronger than in United States. For
example, Japan corporative culture of age and hierarchical position of the
person in a company are directly proportional. Because of this, many times
when American companies send young executives to negotiate with senior
executives in countries like China and Japan, the results have been frustrating.

What is Regional Economic Integration

Regional integration is the process by which two or more nation-states agree
to co-operate and work closely together to achieve peace, stability and
wealth.
According to Will Kenton (2022), Economic integration is an arrangement
among nations that typically includes the reduction or elimination of trade
barriers and the coordination of monetary and fiscal policies.
Regional integration, is an agreement among nations to reduce or eliminate
trade barriers and agree on fiscal policies.

The impact of regional integration on International business

1. Regional integration can create more opportunities for countries to
trade with one another by removing the barriers to trade and
investment. A reduction or removal of tariffs may result in cheaper
prices for consumers in the bloc countries. The disadvantage here is that
it may create more competition for local businesses and sometimes
these can lead to the collapse of such businesses.

2. It can lead to employment shifts and reductions. Economic integration

can cause companies to move their production operations to areas
within the economic union that have cheaper labour prices. Conversely,
employees may move to areas with better wages and employment
opportunities.
3. The flip side to trade creation is trade diversion. Member countries may
trade more with each other than with non-member nations. This may
mean increased trade with a less efficient or more expensive producer
because it is in a member country. In this sense, weaker companies can
be protected inadvertently with the bloc agreement acting as a trade
barrier. In essence, regional agreements have formed new trade barriers
with countries outside of the trading bloc.