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CHAPTER 1: Perspectives on Globalisation and International Business

CHAPTER 1: PERSPECTIVES ON GLOBALISATION AND


INTERNATIONAL BUSINESS

1 STUDY GUIDE
Introducti 1 • Fayol in the early 20th century professes
on management to be a profession. A manager thus
according to Fayol is one who should plan, organise,
command, co-ordinate and control. This is the
normative approach to management.
• Since then many writers have put forth on what a
manager does and not what a manager should do ( as
postulated by Fayol). Notably Mintzberg’s ( 2009)
work on the role of a manager divides the work of a
manger into 10 roles under three categories:
Interpersonal, informational and decisional
roles. Mintzberg’s work is more descriptive rather than
normative. Mintzberg summarises the work of a
manager as brevity, fragmentation and verbal
communication best characterises the work of a
manager

Enter 2 • This new subject explores what a management is


now the all about by looking at management on a world or
global a global context. This means what works at home
context may not necessarily work abroad. The world is full of
opportunities, complexities and challenges which an
international manager should be aware of. It is an
exciting world that awaits a young and enterprising
person who would like to make international
management his long term career and companion.

Chapter 3 • Chapters 1 to 6 – you will be able to acquaint


outline yourself on how the formal and informal institutions of
the international community, regions and countries
affects the job of the manager
• Chapters 7 to 10 – you will learn how an
international managers about strategies to compete,
invest and operate in different countries and regions.
• Chapters 11 to 14 – you will be able to equip
yourself with the knowledge of organisational
structure, global sourcing, information systems and
human resources, and how they go about managing an
multinational organisation location abroad.

Content 4 • From a business perspective, you can think of


of this globalization in terms of the globalization of markets and
chapter
the globalization of production.

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The globalization of markets refers to the merging of


historically distinct and separate national markets into one
huge global marketplace. As trade barriers between
countries fall, companies like Ikea, Sony, and Coca-Cola are
able to sell their products to a global market where
consumers are more and more alike.
National markets are still very relevant, challenging
companies to develop different marketing strategies and
operating procedures.

The second facet of globalization—the globalization of


production—refers to the 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 like land, labour, and capital. Companies hope
that, by sourcing and producing their products in the
optimal location, they will be able to better compete
against their rivals. Below is a diagram showing the sourcing
for Dell Notebook computer is from various parts of the
world.

Boeing, for example, outsourced about 65 percent of its


787 aircraft manufacture to foreign companies. Boeing

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believes that this strategy allows it to use the best


suppliers in the world, an advantage that will help to win
market share over its rival Airbus Industries. Even
healthcare is globalized. For example, US and Canadian
hospitals now routinely send X-rays via the internet to be
read in India, and some insurance companies even
recommend having certain medical operations be
conducted in foreign countries.
Imagine a morning in the life of one Nageb: He wakes up
wearing his M&S pajama made in China or Mauritius. He
uses a Colgate toothpaste, a brand made from America but
produced in Malaysia but the toothbrush is Systema lion, a
Japanese Brand made in Malaysia or China. He has his
Gardenia bread made in Singapore but the brand is from
UK. He drinks his English Lipton Earl grey tea but the fine
tea leaves are from Sri Lanka. He jumps on his Japanese
Motorbike made in Japan, his Petrol is from Saudi Arabia
processed by the Dutch oil company Shell. And the story
can go on and on.

1.2 What is STUDY GUIDE


globalisati 1 • Globalisation has been described, therefore,
on? as “the concrete structuration of the world as a
whole”: that is, a growing awareness at a
global level that “the world” is a continuously
constructed environment.
Marshall (1998: 258)

• The word globalisation would mean different things


to different people. The following perhaps would
represent what is globalisation:

* accelerated speed of communication and


transportation technology – Hill calls this space
shrinking technology

* rising power of MNE and increased in inequality of


income

* increased in competition for jobs, especially for low


skilled workers

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* is a force eliminating differences between


distinctive cultures

* world is moving towards a homogenous plain


without national boundaries

How the word globalisation is received depends on


how and in what context is one referring to. As can
be seen from the aforesaid there are a plethora of
interpretation on what is globalisation.

2 • In context there has been a significant


development in international bodies to manage this
cliché of globalisation. Hence the following bodies
now are connected with the issue of globalisation

* WTO ( previously, GAAT – General Agreement on


Tariff and Trade ) – it regulates and promotes world
trade

* IMF – handles all international monetary matters


and ensures confidence and stability in the
international monetary system.

* World Bank – provides financial help to developing


countries to aid especially in the development of
infrastructure which is so vital to the building of
commerce, industry and business.

1.3 Trend STUDY GUIDE


towards 1• Globalisations has been hardly new. It has been in
globalisati existence since the time immemorial. Voyages of
on discovers of the new world like Vasco Da Gama and
Christopher Columbus are a attestation to this.
• However during the past 150 years there has been a
marked development in globalisation. Jones
( 2004 ) has identified two waves as shown in the
hereunder diagram.

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Each wave is characterised by long – term trends and


cyclical swings

• Triad Nations – globalisation was particularly


confined to the Triad nations of North America,
Western Europe and Japan.

• BRICs – then entered the emergin economies of


BRICs in the 1980s comprising, Brazil, Russia, India,
China and some have even included South Africa.
The following are the characteristics of the
emerging economies:

* recently established institutional framework that


helps in international trade and investment.

* low and or middle level incomes

* above average growth vs other similar nations.

• In the first decade of 21st century – the was a


phenomenal growth in world GDP, cross border trade
and per capita income – prior to the global economic
crisis of 2008/09

• However due to the concerted and co-ordinated


global effort of the world economies orchestrated by

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IMF from mid 2009 there was renewed confidence


albeit the recovery in the developed country has been
somewhat subdued while the rebound for the
emerging economies was much faster. As seen in the
diagram above the second wave has been less
steep from 2010-2012.

• Two key factors seem to underlie the trend


towards the
increasing globalization of markets and production: 1)
the
decline of barriers to trade and investment and
2)
technological change.

Hill suggest 4 trends for this:

1. Changes in the world output and trade

The triad market of the US, Japan, and Western


Europe
accounts for about half of the world's total
consumption
and an even higher proportion of purchases of
such
products as computers, consumer electronics,
and
machine tools. It is not surprising therefore that
most
MNEs expand a major part of their efforts in these
areas.
However, the dominance of the triad countries is being
challenged by the growth in developing countries.
The World Bank forecasts that by the year 2020,
Canada and Spain will be replaced in the top fifteen
economies by Taiwan and Thailand. By that time,
seven of the world's largest economies will be Asian
countries, compared with only three in 1992. China is
expected to surpass the US as the World's largest
economy. Developing countries will surpass the
industrial countries in world output during the late
1990s. Further, the middle class is growing rapidly in
many Asian countries, both in absolute numbers and
in percentage of the population. For example,
between 1993 and 1998, the middle class in India is
projected to increase by 110 million people and from
23.5 percent to 33 percent of India's population.
Thus, developing countries, especially those of Asia,
will command more attention by international

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companies as a location for both sales and production.


In essence, there will be a new triad made up of
North America, Europe, and East Asia.

2 Foreign Direct Investment

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1960s USA accounted for 66 % of world FDI


1980 – Share of USA, UK, Japan, Germany,
2007 France, Netherland have declined
Today FDI by developing countries are on the
rise

• 3 - Types of companies

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An international company has its base


(headquarters) in one country, and trades overseas
from that single base - this relates specialised product
e.g UOL

A multinational company/Multidomestic
Company has a home base in one country (referred to
as the home-country), but has then established
operations in a number of other countries, (referred to
as host-country). So it trades from a number of bases –
Retailers

A transnational company (TNC) is an


organisation that is consciously attempting to
be global by disassociating itself from one home
country. There may be one or more main bases but
the company does not see itself as in anyway
“belonging” to those countries. This type of company
has taken a strategic decision to become global but is
still seen as coming from one or more countries - e.g
auto - manufacturer, Consumer Electronics,
Banks

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A global company has a high need for integration


and a low need for local responsiveness. The world is
their market and thus has a geocentric orientation
towards international market. e.g. SIA, Boeing,
Commodities like oil and diamond

• Since 1960s two trends have emerged:

1) an increase in the number of non – US MNCs,


MNCs from France, UK, Germany, Britain as well as
Japan have become more important as they engage in
FDI.

2) an emerging trend in the growth of mini-


multianationals like Lenovo, Feng Deng and SAIC –
all Chinese companies aching to go abroad.

3) Small firms can also become global via through


internet and website availability.

4. The collapse of USSR has brought new and


emerging opportunities for MNCs. In addition
countries such as India, China, Mexico and the like
are the home of large MNCs

1.4 The 1• What is the façade of the global


globalis economy in the 21st century. As the
ation world moves towards a more integrated
debates system, it brings about both benefits and
criticism.

• Benefits - Bhagwati – proponent of


globalisation have the following benefits –
lower prices, more economic growth and
more employment

• Critics – would say that it will cause job


losses, damage the environment and
create cultural imperialism

By this simple introduction we can identify


four major areas of debate.

Jobs and income.


CRTICS SUPPORTERS
Firms have an attraction to Supporters of globalization
transfer low value jobs to would claim otherwise. If the

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developing countries as trade home consumers pay less


barriers have been removed. It then he/she will have
will simply be foolish to keep money to spend on other goods
low cost jobs at home when it is and services and this has the
cheaper to produce in China, effect of boosting the domestic
India, Honduras for that matter. economy.
Such transfer in production
overseas will create
unemployment at home

Labour policies and the environment.

CRITICS SUPPORTER
MNCs will have incentive Critics would argue that
to move the production as the country
to pollution haven progresses the host
countries where lax government is likely
regulations on to impose stricter
pollution and labour regulations on
laws will reduce their pollutions and protect
cost of operation and add the environment
more to their profits the e.g. of China.
the government has
waken up to the fact that
their cities are polluted
and thus have then
measures to curb
pollution and protect
their workers from
unscrupulous and
exploitionist MNCs.

Shifts in economic power

CRTICS SUPPORTER
Governments of Supporter would say that
countries will lose their this is not true as
power to manage, in policies are
other words introduced to promote
governments will lose the collective interest
their sovereignty to of member countries and
supranational will aid their
organizations such as development rather than
WTO, IMF, European retard it.
commission in the case
of the EU.

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Wealth distribution.
Critics Supporter
Globalisation enrich the Supporter would say that
pockets of countries the inequality in
which have strong income is the creation
global brands and that of domestic
the income equality governments who are
between the haves and NOT able to curb
have nots will widen population growth,
usually to the detriment corruption and poor
of developing countries economic
who are usually devoid of management. For
global brands example some
totalitarian governments
may pursue their own
self interest rather than
the interest of the
people. And also
economic growth in the
developing countries is
due to loan debt rather
than productivity growth.
These are not the faults
of globalization

1.4.1 Friedman’s View However, Friedman may not


Does Friedman (2007) believes provide the only valid argument
Distanc globalization is for defining
e Still accelerating and is flattening globalization. Although to
Matter? the world so hyperglobalists
that every nation will eventually globalization literally means
be part of the free co-operation and
the global marketplace and connection with nations all
production process. Dicken over the world,
(2007) calls this a ‘hyper Ghemawat (2001) and
globalist view’. Dicken (2007)
gross overstatement and
creates a general misconception
Friedman has a technological about the
stance on globalization extent of globalization's reach.
believing that technology has a In his influential article
significant part to play Distance Still Matters
flattening the world. The Ghemawat
dependence on the internet companies in their
and the WWW enables pursuit of the benefits from
distance to be reduced, call globalization,
centres to be created, co- consistently
ordination of outsourcing is the attractiveness of foreign

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made possible with the use of


fast data transmission,
markets .
conferences between two of that the true amount of trade
more overseas operations is and investment between
made possible with the help of countries is influenced largely
video conferencing. So the by geographical and cultural
world has become flatter with differences
inter-connected global countries 5,000 miles apart only
operations. perform 20 percent of the trade
they would otherwise do if they
Friedman argues that ten were 1,000 miles
flatteners have shaped apart, and furthermore
globalization and have caused ten times more likely to take
increased homogeneity in the place if a country was a
world. former colony of another
These include (see separate which,
article ) : Ghemawat argues
1 the fall of the Berlin Wall lowers the
representing economic cultural barriers to trade. These
liberalization, figures taken together explain a
2 the development of internet key
protocols, point in Ghemawat’s argument,
3 workflow and open source which is
software, that ‘distance still matters
4 open source software and and companies must
uploading explicitly and thoroughly
5 & 6 the increased use of account for it when they make
outsourcing and offshoring, 7 decisions about global
the development of global expansion’. Arguing against
supply chains, Friedman’s flattening argument,
8 the increased use of Ghemawat elaborates that
specialized firms to carry out global communications and
internal functions, technologies have
9 the development of search been argued to be
engines, ‘shrinking the world,
10 and latterly (recent) of running it into a small and
wireless, digital, mobile, relatively homogenous
personal, and virtual place. But when it comes to
technologies. business, that’s not only an
incorrect assumption but
Personal technology also a dangerous
relationship is The cultural difference
gaining momentum, where between countr
people not is still wide and complex, and
content with established although outsourcing and
information sharing foreign direct investment have
bodies, take matters into their recently grown between
own hands with blogs, review nations, it is
sites, and evident, as we shall see in

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establishing their own media chapter 3, that


channels. cultural differences still prove
Everyone essentially challenging. In support of
becomes in control Ghemawat’s
of their own personal statement, Dicken (2007)
networking and argues that quantitative and
spread of influence. aggregative evidence
suggests that the world
economy was ‘more open and
more integrated in the
half century prior to the First
World War,
than it is today’.
also supports this empirical
based analysis stating that
cultural differences in
religious beliefs, language,
social norms, and
behaviours
have a huge impact in the
risk involved in trading and
the likelihood of succeeding
Therefore, according to these
theorists, globalization cannot
be characterized as
flattening the world. As
puts it:
‘there are undoubtedly
globalizing forces at work,
but we do not have a fully
globalized
explains that part of the
problem with defining
globalization is
that aggregative and
quantitative analysis though
valid, are not the only story we
should take on board when
thinking about the world
economy
today. The economy today he
goes on to suggest, constitutes
a deep and complex integration
that cannot be captured in the
statistics of trade and foreign
direct investment (FDI). Instead
globalization is:
‘a supercomplex series of
multicentric, multiscalar,

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multitemporal, multiform
and multicausal processes’.

This explanation, in contrast to


Friedman’s
technological progres
more dynamic and circulatory in
design. To summarize, it would
seem that
includes
fluctuating levels of trade
and FDI, economic growth of
emerging markets,
growing Transnational
Corporations (TNCs),
outsourcing and labour
force migration, as well as
technological innovations
that have facilitated
movements.

In his article
Matters, Ghemawat
complements this view by
suggesting that companies
often overestimate the ease
with which their
business can move abroad. The
cultural, administrative, and
geographical distance
between nations presents a
fundamental challenge to
firms facing the
globalization of the world
economy today.
uses the example of
Murdoch’s
Star Television
network, which assumed that
the Asian audiences would be
enthusiastic about
English language programmes
and films.
Furthermore, Murdoch’s
underestimating of the
administrative differences
between Asia and the USA led
him into political
calamity as he claimed live on

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television that
watch what one wanted
was a threat to Asian
‘totalitarian regimes
everywhere’. This led to the
blocking of Star TV from
Chinese television, which is a
huge market for Murdoch.
Coca-Cola
also had problems in the
Peruvian market
when they attempted to replace
Inca Kola,
the national beverage, with
their own US branded Cola. The
Peruvian people held
mass demonstrations against
Coco-Cola
until their Inca Cola was
returned to the shelves. Being
sensitive to national
differences is not just a
consideration;
international business it
may well be an imperative
to survival

1.5 What 1• In order to become successful it is obvious that


does companies should work with forces for globalisation
globalisati and improve their global performance. The following
on mean are ways by which companies should work with such forces
for
companies
?
1.1 Low barriers to trade and investment
The is now an allure to locate their operations in other
countries rather than be dependent on their own domestic
market. Take the e.g. of OSIM and BreadTalk who have
expanded regionally. These create multiple markets
having interdependency between countries for goods and
services.

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1.2 Technological change


Advances in communication, information processing and
transportation have helped companies to be become
global even smaller companies. The advent of
microprocessor brought about high power, low cost
computing has accelerated the process of globalisation.
Girls can order their trendy clothes by simply clicking on
the website. The order will be transmitted in real time and
whichever supplier is nearer to the girl’s home country she
will be delivered her order within a few days of the order.
Further she will be given an order number which can
helped her tracked down her order. A call centre can be
maintained in inexpensive India or Philippines. Oh Yes! My
friends the internet has enabled small and big firms to
become global players. Also the internet and WWW has
facilitated the control and co-ordination of globally
dispersed value chain activities ( overseas operations )
making the firm a truly global company.

1.3 Transportation improvements


Over the years the logistics of transportation have
significantly improved making the transportation of goods
seamlessness. Containerisation and development of
super freighters has helped in the movement of trade.
Refreighted containers has enabled the transportation
of perishable items like diary products and meat and fish.
Hence the time taken to transport goods from one part of
the world to the next has significantly been reduced and
with the use of containers the cost too has fallen
drastically.

So there is evidence that there is a global shift in the way we do


business. But global firms need to be sensitive to the local needs of the
country in which they operation. For example Yahoo has the same
platform wherever it operates but the content is different in different
countries – In Australia the front page has Cricket while in the US it has
American Football and in Brazil it has soccer. Similarly Google when it
entered the Chinese market it has a search engine using a Chinese name
and customers for their website to suit the taste of the Chinese internet
users who spend a lot of time on the internet and read left – hand side of
the screen first. However Google as we will see in later chapters had
some moral issues in China.

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SHORT Q & A

QUESTION 1: Describe the shifts in the world economy over the last
30 years. What are the implications of these shifts for international
businesses based in Britain, North America, and Hong Kong?

ANSWER 1: Globalization has led to an ever more integrated world


economy over the past 30 years. There has been a significant shift
away from the USA and Western European countries as being
dominators of world business. While the role of these countries is
still large, developing countries and Asian countries are becoming
increasingly active and aggressive in international trade and
investment. Significant implications for British firms involve their
need to look beyond Europe and America for investment and
opportunities. Consumer spending power is growing the most
quickly in developing countries. British firms also face the
opportunity (and the threat) of attracting Asian firms interested in
Britain as a lauchpad for the European market. For North American
firms, the same holds true, although the importance of the
increasing prosperity in Latin America suggests a potentially huge
market in “their backyard.” Hong Kong, while losing its
“independence”, is perceived as the gateway to the immense
market of mainland China. While the free market freedoms Hong
Kong firms have enjoyed are now under question, the access to
China is improving along with the move towards a market economy
within China. International businesses based in all three locations
are facing new opportunities and threats.

QUESTION 2: "The study of international business is fine if you are


going to work in a large multinational enterprise, but it has no
relevance for individuals who are going to work in small firms."
Evaluate this statement.

ANSWER 2: Persons who believe in this view, and the firms that
they work for, may find that they do not achieve their full potential
(at best) and may ultimately fail because of their myopia. As
barriers to trade decrease and state of the art technological
developments take place throughout the world, new opportunities
and threats exist on a worldwide basis. The rise of the mini-
multinationals suggests there are global opportunities for even small
firms. But staying attuned to international markets isn't only
important from the perspective of seeking profitable opportunities
for small firms; it can also be critical for long-term competitive
survival. Firms from other countries may be developing products
that, if sold internationally, may wipe out small domestic
competitors. Scanning international markets for the best suppliers
is also important for small firms, for if a domestic competitor is able
to tap into a superior supplier from a foreign country, it may be able
to seriously erode a small firm's competitive position before the

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small firm understands the source of its competitor's competitive


advantage and can take appropriate counter actions.

QUESTION 3: How have changes in technology contributed towards


the globalization of markets and of production? Would the
globalization of products and markets have been possible without
these technological changes?

ANSWER 3: Technological changes have significantly contributed to


the globalization of products and markets, and accelerated the
creation of a global village. While increasing globalization of
markets has been taking place since before either Marco Polo or
Christopher Columbus traveled across the globe in search of trade,
recent technological developments have brought the world closer
together more quickly than at any time in the past. Developments
in information processing and communication have decreased the
costs of managing a global production system, and improvements in
transportation have made the shipment of goods timelier and less
costly than at any time in the past. International firms can locate
facilities wherever it is most advantageous, coordinate the activities
between facilities, and ship products to customers worldwide more
cost effectively than at any time in the past.

QUESTION 4: “Ultimately, the study of international business is no


different from the study of domestic business. Thus, there is no
point in having a separate course on international business.”
Evaluate that statement.

ANSWER 4: The truth is that if an international business attempts to


utilize the same business techniques that were effectively
domestically on the international scene, it is quite likely to fail. The
annals of corporate business are lined with examples of that
concept, from small companies struggling to make an impact to
large multinationals like Procter and Gamble, who failed in Japan
when they first introduced disposable diapers to that market.
International business is different in many of the ways mentioned
here: 1) countries differ, 2) the range of problems a manager faces
is greater and more complex, 3 the limits imposed by governmental
intervention and the global trading system complicate international
business, and 4) international transactions require converting funds
and being susceptible to exchange rate changes. A separate course
on international business can provide an understanding of these
difficulties, and how conducting international business requires
consideration of issues not typically covered in other courses.

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QUESTION 5: How might the Internet and the associated World Wide
Web affect international business activity and the globalization of
the world economy?

ANSWER 5: The ability of firms and individuals to both market their


products or services, and find out about interesting new products or
services worldwide, is greatly enhanced by the World Wide Web.
Using this as an initial point of contact, we can imagine how this
could then initiate new flows of trade and investment. Consumers
can find new products of interest that are not available in local retail
outlets, and then simply order them over the internet. Firms will
find that they have an increasingly global customer base, and that
current distribution systems may be inadequate or inappropriate.

QUESTION 5: If current trends continue, China may emerge as the


world’s largest economy by 2050. Discuss the possible implications
for such a development for the world trading system, the world
monetary system, and the business strategy of today’s European
and US-based global corporations.

ANSWER 5: The world trading system would clearly be affected by


such a development. Currently China enjoys a somewhat privileged
status within the World Trade Organization as a “developing”
country. Such a rise to eminence, however, would clearly force it to
become a full and equal member, with all the rights and
responsibilities. China would also be in a position to actively affect
the terms of trade between many countries. On the monetary front,
one would expect that China would have to have fully convertible
and trading currency, and it could become one of the “benchmark”
currencies of the world. From the perspective of Western global
firms, China would represent both a huge market, and potentially
the home base of some very capable competitors

Sample Questions

1 What is globalisation?

• Marshall’s Definition – Summary


• Shift towards a more integrated and interdependent world
economy
• 1n the 1980s, the word globalisation was a jargon, however
nowadays it is used commonly so much so that it has become
cliché.
It all depends in what context are we using the word. Etc

2 For an individual country, what are the likely advantages and


drawbacks that come with globalisation?

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3 How can an international business use globalisation trends to


its advantage? What problems can globalisation trends create for
an international business? Work with these arguments to
establish competitive advantage internationally?

Example of Toyota
Advantages to a firm Disadvantages
• Bigger market – global market • Formal and Informal rules –
adjustments ( Distant still
matters – Ghemewat )
• outsourcing – cut costs - China • Contagion effect – financial
crisis – interconnected -
• Technology enables • global company affected by
( Friedman ) – sharing of uncertainty – e.g. Tsunami in
knowledge / lower transportation Japan – production held up for
costs months

How to establish competitive advantage internationally?

Tutorial Questions

1 “ The world is flat “ ( Thomas Friendman, 2003 ). Is it?


a. Define globalisation and assess the trends towards and
against globalisation
( 10 marks )

• Define globalisation – refer to above notes


• Assess the trends towards globalisation – Friedman
• Assess the trends against it - Ghemewat

b. Assess the role of national government intervention and


multilateral organisations like the IMF and World Bank in
the globalisation process. ( 10 marks )

• National governments – engage in trade agreement –


Singapore govt has trade agreement – US, India, China, Asean, EU,
Australia, NZ, Chile, S.Korea + together with IMF + World Bank –
opening up markets – multilaterialism – flatter world ( support
Friedman ) – discuss in other chapters.

c. Use examples to illustrate your points ( 5 marks )

M.Nageb 21

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