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CHAPTER 1: GLOBALIZATION
“Listening to changing customer demands and monitoring your
environment allow you and the firm to identify potential growth
opportunities.”
Introduction
The world economy today
• Fewer self-contained national economies with high barriers
to cross-border trade and investment
• A more integrated global economic system with lower
barriers to trade and investment
• Over $5 trillion in foreign exchange transactions daily
Over $19 trillion of goods and $5 trillion of services being
sold across national borders
• The establishment of international institutions
Today’s world reflects globalization
• Declining barriers to cross-border trade and investment
• Advances in transportation and telecommunications
• Material culture similar all over the world
• National economies merging into integrated global
economic system
*For businesses, this globalization process has produced many
opportunities. Firms can expand their revenues by selling around the
world and/or reduce their costs by producing in nations where key
inputs, including labor, are cheap. The global expansion of enterprises
has been facilitated by generally favorable political and economic
trends. As globalization unfolds, it is transforming industries and
creating anxiety among those who believed their jobs were protected
from foreign competition.
What Is Globalization?
Globalization refers to the trend towards a more integrated and
interdependent world economy
• Two key facets of globalization
o The globalization of markets
o The globalization of production
The Globalization of Markets
• The merging of historically distinct and separate national
markets into one huge global marketplace
• In many markets today, the tastes and preferences of
consumers in different nations are converging upon some
global norm
o Coca Cola, McDonald’s, IKEA, Starbucks,
Apple
*A company does not have to be the size of these multinational giants
to facilitate, and benefit from, the globalization of markets.
The Globalization of Production
• Sourcing of goods and services from locations around the
globe to take advantage of national differences in the cost
and quality of factors of production (labor energy, land, and
capital)
• Lower overall cost structure
• Improve the quality or functionality of the product to
compete more effectively
• Boeing only undertakes engineering design, marketing and
sales, final assembly – everything else is outsourced globally
o Currently rethinking this strategy
o
Did you know why your iPhone was assembled in China?
It’s not what you might think.
• Early outsourcing was primarily for manufacturing
• Today, modern communications technology allows
companies to outsource services
• Impediments to globalization
o Formal and informal trade barriers
o Barriers to foreign direct investment
o Transportation costs
o Economic and political risk
o Managerial challenge
The Emergence of Global Institutions
Global institutions
• Manage, regulate, and police the global market place
• Promote the establishment of multinational treaties to
govern the global business system
World Trade Organization (WTO)
• Polices world trading system and ensures nations adhere to
the rules established in WTO treaties
• Succeeded the General Agreement on Tariffs and Trade
(GATT)
• 162 nations accounted for 98% of world trade (2016)
International Monetary Fund (IMF)
• Promotes order in the international monetary system
• Lender of last resort
The World Bank
• Promotes economic development using low-interest loans
The United Nations (UN)
• Maintains international peace and security
• Develops friendly relations among nations
• 193 member countries
• Promotes respect for human rights
• Is a center for harmonizing the actions of nations
The Group of 20 (G20)
• Finance ministers and central bank governors of 19 largest
world economies
• Represents 90% of global BDP
• A forum for a coordinated policy response to the financial
crisis of 2008-2009
Drivers of Globalization
Two factors driving the move toward greater globalization
• Decline in barriers to free flow of goods, services, and
capital
• Technological change
Declining Trade and Investment Barriers
• International trade: when a firm exports goods or services
to consumers in another country
• Foreign direct investment: when a firm invests resources in
business activities outside its home country
• During 1920s and 1930s, many nations put up barriers to
international trade to protect domestic industries
• After WWII, advanced Western countries reduced barriers
o GATT, Uruguay Round, and WTO
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• About half the world-- the centrally planned economies of
the communist world-- was off limits to Western
international business
• Today, much of this has changed
The Changing World Output and World Trade Picture
• Early 1960s:
o U.S. - dominant industrial power accounting for
about 38.3% of world manufacturing output
• By 2014:

• We produce more goods and services than ever before but a

greater proportion being traded across national borders
• Consumers more knowledgeable which drives demand
• Volume of world trade growing faster than GDP
o More companies dispersing parts production
o Economies are becoming even more
intertwined
o World has become significantly wealthier

The
Role
of o U.S. accounted for only 22.4%
o Germany, France, and the U.K. had a similar
decline
o Rapid economic growth now in countries like
China, India, Russia, and Brazil
o Further relative decline by the U.S. is likely

Technological Change The Changing Foreign Direct Investment Picture

• Since World War II, there have been major advances in • The share of world output generated by developing countries
communication, information processing, and transportation has been steadily increasing since the 1960s
• Microprocessors and Telecommunications • The stock of foreign direct investment (total cumulative
o Moore’s Law value of foreign investments) generated by rich industrial
• The Internet countries is declining
o Currently, 3.3 billion users (46% of global • Cross-border flows of foreign direct investment are rising
population) • The largest recipient of FDI is China, followed by Brazil,
• Transportation Technology Mexico, and India
o Containerization
*Containerization has revolutionized the transportation business,
significantly lowering the costs of shipping goods over long distances.
Because the international shipping industry is responsible for carrying
about 90 percent of the volume of world trade in goods, this has been
an extremely important development.
• Implications for the Globalization of Production
o Lower transportation costs
o Geographically dispersed production system more
economical
o Allow firms to better respond to customer demand.
Improved Transportation has Shrunk the Globe
Commercial jet travel has reduced the time needed to get from one
location to another, effectively shrinking the globe
• Implications for the Globalization of Markets
o Low cost communication networks help create
electronic global marketplace
o Low cost transportation makes it economical to
ship products around the world
o A reduction in cultural distance
o A convergence of consumer tastes and preferences
The Changing Demographics of the Global Economy
In the 1960s:
• U.S. dominated the world economy, world trade, and world
FDI
• U.S. MNEs dominated the international business scene

The Changing Nature of the Multinational Enterprise
• Non-U.S. Multinationals
• A multinational enterprise (MNE) is any business that has
productive activities in two or more countries
• Since the 1960s: There has been a rise in non-U.S.
multinationals and there has been a rise in mini-
multinationals
• By 2012, largest nonfinancial multinationals were found in
U.S., Britain, France, Germany and Japan
• The Rise of Mini-Multinationals
o More small and medium-sized businesses involved
in international trade and investment
o Internet lowers barriers that small and medium
firms face in building international sales
The Changing World Order
• The collapse of communism in Eastern Europe
o Greater export and investment opportunities, but
political unrest is increasing risk
• Economic development in China
o Huge opportunities despite continued government
control, but also new competition from Chinese
firms
• Free market reforms and democracy in Latin America
o New markets and new sources of materials and
production, but economic and political risk
remains high
The Global Economy of the 21st Century
• A more integrated global economy
o New opportunities for firms
o But, political and economic disruptions can throw
plans into disarray
The Globalization Debate
Is the shift toward a more integrated and interdependent global
economy a good thing?
• Many experts believe that globalization is promoting greater
prosperity in the global economy, more jobs, and lower
prices for goods and services
• Others feel that globalization is not beneficial
Antiglobalization Protests
• Began with WTO protest in December 1999 in Seattle
o Protest turned violent
• Protestors fear globalization has detrimental effects on
living standards, wages, and the environment
o Theory and evidence suggests these fears are
exaggerated
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Globalization, Jobs, and Income
• Falling trade barriers destroy manufacturing jobs in wealthy
economies (U.S. and western Europe)
• Service activities increasingly outsourced to nations with
lower labor costs
• Supporters say benefits outweigh the costs
• Outsourcing allows company to reduce its cost structure and
as a result, can reduce prices
• OECD studies show that while gap between poorest and
richest segments of society has widened, in most countries,
real income levels have increased for all, including poorest
segment
• Many advanced economies report shortage of highly-skilled
workers and an excess of unskilled workers
Globalization, Labor Policies, and the Environment
• Lack of regulations in less developed countries
• Adhering to environmental regulations increases costs of
manufacturing
• Supporters argue that tougher regulations lead to economic
progress
• Studies show a hump-shaped relationship between income
levels and pollution levels
Globalization and National Sovereignty
• Critics worry economic power is shifting away from national
governments and toward supranational organizations such
as the WTO, the European Union (EU), and the UN
• Supporters argue that the power of these organizations is
limited to what nation-states collectively agree to grant
o The organizations must be able to persuade
members states to follow certain actions
o Without the support of members, the organizations
have no power
Globalization and the World’s Poor
• Critics argue the gap between rich and poor has gotten
wider and the benefits of globalization have not been shared
equally
o Many of the world’s poorest nations are under
totalitarian regimes, suffer from endemic
corruption, have few property rights, are involved
in war, and are burdened by high debt
o United Nations adopted Millennium Goals
▪ Eight economic and human development
goals for the world

Managing in the Global Marketplace
• International business is any firm that engaged in
international trade or investment
• Managing international business differs from managing
purely domestic business
• International business must vary its practices country by
country
• International business issues greater in complexity
• Need to understand rules governing international trade and
investment
International business different for four reasons
• Countries are different
• Range of problems is wider and problems more complex
• Must find ways to work within governmental limits
• Transactions involve converting money into different
currencies
Chapter 2: National Differences in Political,
Economic, and Legal Systems
Introduction
International business more complicated than domestic
• Countries vary in economic development
• Cultural, education, and skill levels vary
• The political, economic, and legal systems are known as the
political economy
• Societal culture affects the political economy and the
political economy shapes societal culture
Political Systems
• Political system: the system of government in a nation
• Political systems can be assessed in terms of the degree to
which they:
o Emphasize collectivism as opposed to
individualism
o Are democratic or totalitarian
Collectivism and Individualism
• Collectivism: a system that stresses the primacy of collective
goals over individual goals
o Can be traced to the Greek philosopher Plato
o Today, socialists support collectivism
• When collectivism is emphasized, the needs of the society as
whole are generally viewed as being more important than
individual freedoms
What About People’s Future Rights?
Individualism versus collectivism is a century-old debate topic and an
inherently interesting issue. For example, does an individual’s life
belong to him or her or to the community, society, or country in
which he or she resides? Most people have a direct and immediate
answer, but there is no consensus on which answer depending on which
country you reside in or which personal “compass” you subscribe to.
Everyone has tendencies toward being both individualistic and
collectivistic but prefers one way more than the other. So, which of
these ideas— individualism or collectivism—do you think is
correct, and which cultural belief do you prefer and why?
• Socialism
o Modern socialists trace their roots to Karl Marx
o Advocated state ownership of the basic means of
production, distribution, and exchange
o The state then manages the enterprises for the
benefit of society as a whole
• In the early 20th century, socialism split into communists and
social democrats:
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o Communists - socialism could only be achieved
though revolution and totalitarian dictatorship
o Social democrats worked to achieve the same
goals by democratic means
• Many state-owned enterprises failed to succeed, and many
nations implemented privatization programs
• Individualism: suggests individuals should have freedom
over their economic and political pursuits
o Can be traced to Aristotle who argued that
individual diversity and private ownership are
desirable
• Individualism stresses:
o Individual freedom and self-expression
o Letting people pursue their own self-interests to
achieve the best overall good for society
o Democratic systems and free markets
Democracy and Totalitarianism
• Democracy: political system in which government is by the
people, exercised either directly or through elected
representatives
o Most common form today is representative
democracy- elected representatives vote on behalf
of constituents
• Totalitarianism: form of government in which one person or
political party exercises absolute control over all spheres of
human life, and opposing political parties are prohibited
• In most totalitarian regimes:
o There is widespread political repression
o There are no free and fair elections
o Media is censored
o Basic civil liberties are denied
o Challenges to the regime are prohibited
• Four major forms of totalitarianism today:
o Communist totalitarianism: advocates achieving
socialism through totalitarian dictatorship
o Theocratic totalitarianism: political power is
monopolized by a party, group, or individual that
governs according to religious principles
o Tribal totalitarianism: a political party that
represents the interests of a particular tribe
monopolizes power
o Right wing totalitarianism: individual economic
freedom is allowed but individual political
freedom is restricted in the belief that it could lead
to communism
Pseudo-Democracies
• Many nations lie between pure democracy and complete
totalitarianism
o Authoritarian elements capture much of the
machinery of state and use this in an attempt to
deny basic political and civil liberties
o Russia under Vladimir Putin
Economic Systems
• Political ideology and economic systems are connected
• There are three types of economic systems: the market
economy, the command economy, and the mixed economy
o A market-based economic system is likely in
countries where individual goals are given
primacy over collective goals
o State-owned enterprises and restricted markets
are common in countries where collective goals
are dominant

Market Economy
• In a pure market economy the goods and services that a
country produces, and the quantity in which they are
produced is determined by supply and demand
o Supply must not be restricted by monopolies
o The role of government is to encourage free and
fair competition between private producers
Command Economy
• In a pure command economy the goods and services that a
country produces, the quantity in which they are produced,
and the price at which they are sold are all planned by the
government
o All businesses are state-owned, and have little
incentive to control costs and be efficient
o Because there is no private ownership, there is
little incentive to better serve consumer needs
o Dynamism and innovation are absent
North Korea’s Command Economy
• Kim Jong-un, the leader of the Democratic People's
Republic of Korea, inspecting a factory. North Korea
functions as a centralized, single party, and tightly
controlled dictatorial command economy.
Mixed Economy
• A mixed economy includes some elements of a market
economy and some elements of a command economy
o Governments take over troubled firms considered
vital to national interests
• The number of mixed economies in the world today is falling
Legal Systems
• The legal system of a country refers to the rules, or laws, that
regulate behavior, along with the processes by which the
laws of a country are enforced and through which redress for
grievances is obtained
• A country’s legal system is important because laws:
o Regulate business practice
o Define the manner in which business transactions
are to be executed
o Set down the rights and obligations of those
involved in business transactions
Different Legal Systems
• Common law: based on tradition, precedent, and custom
o Found in most of Great Britain’s former colonies,
including the United States
• Civil law: based on detailed set of laws organized into codes
o Found in more than 80 countries, including
Germany, France, Japan, and Russia
• Theocratic law: based on religious teachings
o Islamic law is the most widely practiced
*Tradition refers to a country’s legal history, precedent to cases that
have come before the courts in the past, and custom to the ways in
which laws are applied in specific situations.
Differences in Contract Law
• They approach contract law (the body of law that governs
contract enforcement) differently
o A contract specifies the conditions under which an
exchange is to occur and details the rights and
obligations of the parties involved
• In a common law state, contracts are very detailed with all
contingencies spelled out
• In a civil law state, contracts are shorter and much less
specific
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• The United Nations Convention on Contracts for the
International Sales of Goods (CISG) establishes a uniform
set of rules governing certain aspects of the making and
performance of everyday commercial contracts between
sellers and buyers who have their places of business in
different nations
o Countries that adopt CISG signal to other nations
that they will treat the Convention’s rules as part
of their law
Property Rights and Corruption
• Property rights: the legal rights over the use to which a
resource is put and over the use made of any income that may
be derived from that resource
• Private action: theft, piracy, blackmail, and the like by
private individuals or groups
• Public action: public officials extort income or resources
from property holders
o Excessive taxation, requiring expensive licenses or
permits from property holders, or taking assets
into state ownership without compensating the
owners
*There are systematic differences in the extent of corruption. In some
countries, the rule of law minimizes corruption. Corruption is seen and
treated as illegal, and when discovered, violators are punished by the
full force of the law. In other countries, the rule of law is weak and
corruption by bureaucrats and politicians is rife. Corruption is so
endemic in some countries that politicians and bureaucrats regard it
as a perk of office and openly flout laws against corruption.
• Corruption is present in all countries to some degree,
however when a country has a high level of corruption:
o Foreign direct investment falls
o International trade falls
o Economic growth falls
The Foreign Corrupt Practices Act limits corruption in the U.S
• It is illegal to bribe a foreign government official in order to
obtain or maintain business over which the foreign official
has authority
• All publicly traded companies must keep detailed records so
that it is clear whether a violation of the act has occurred
• Facilitating or expediting payments to secure the
performance of routine government actions are permitted
Did you know that it's illegal for Americans to bribe public officials
to gain business in a foreign country, even if bribery is
commonplace in that nation?
The Protection of Intellectual Property
• Intellectual property: property that is the product of
intellectual activity

o Patents: give the inventor exclusive rights to the
manufacture, use, or sale of that invention
o Copyrights: exclusive legal rights of authors,
composers, playwrights, artists, and publishers to
publish and dispose of their work as they see fit
o Trademarks: designs and names, often officially
registered, by which merchants or manufacturers
designate and differentiate their products
• The protection of intellectual property rights differs greatly
from country to country
• 185 nations are members of the World Intellectual Property
Organization
o Paris Convention for the Protection of Industrial
Property: agreement signed by 170+ countries to
protect intellectual property rights
▪ Enforcement is lax in many nations
especially in China and Thailand
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Focus on Managerial Implications
THE MACRO ENVIRONMENT INFLUENCES MARKET
ATTRACTIVENESS
• The political, economic, and legal systems of a country raise
important ethical issues that have implications for the
practice of international business
• The political, economic, and legal environments of a country
clearly influence the attractiveness of that country as a
market and/or investment site
• A democratic country with a market-based economy,
protection of property rights, and limited corruption is a
more attractive place to do business.

How Important are Intellectual Property Rights?

Burundi is a landlocked country in the Great Lake region of Eastern
Africa. Neighboring countries include Rwanda, Tanzania, and the
Democratic Republic of the Congo. Burundi is hilly and mountainous,
with access to Lake Tanganyika. The government system is a republic,
with the chief of state and head of government being the president.
Burundi has a traditional economic system in which the allocation of
available resources is made on the basis of primitive methods, and
many citizens engage in subsistence agriculture. At the same time,
Burundi was last of the 131 countries ranked in the 2013 International
Property Rights Index (IPRI). The IPRI is conducted by a partnership
of 74 international organizations. The IPRI takes into account legal
and political environment, physical property rights, and intellectual
property rights. How much should companies focus on intellectual
property rights in deciding where to (1) produce their products and
(2) sell their products? Does it differ if you produce or sell in the
country?

Response to violations of intellectual property

• Lobbying governments for better laws and enforcement of
those laws
o Trade Related Aspects of Intellectual Property
Rights (TRIPS) - requires WTO members to grant
and enforce patents lasting at least 20 years and
copyrights lasting 50 years
• Filing lawsuits
• Avoiding countries with poor intellectual property laws

Product Safety and Product Liability

• Product safety laws set certain safety standards to which a
product must adhere
• Product liability involves holding a firm and its officers
responsible when a product causes injury, death, or damage
o Liability laws are usually least extensive in less
developed countries
• Firms must decide whether to adhere to the standards of the
home country or the standards of the host country