2-1

Globalization
Trade and investment barriers are disappearing.
Perceived distances are shrinking due to
advances in transportation and
telecommunications.
Material culture is beginning to look similar.
National economies merging into an
interdependent global economic system.

Sources:
Hill, Daniels, Radebaugh and Sullivan,
McGraw-Hill/Irwin
Shenker & Luo, Nag
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 2-2

Globalisation

• No Comprehensive Definition Available

• Current conjecture through liberalisation and rapid
technological progress is new
• Neo-Liberalism in 1980s and 1990s. Tendency of
prescribing same policies throughout
• However, global challenges are not solved.
• Global Consensus about balanced development
•W. Bank: Poverty eradication Strategy
• WTO: Doha Development Agenda
• UN: MDGs, WSSD, Monterrey Consensus
• UNCTAD: Mutual reciprocity among
developed and developing countries
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Globalisation: Some Issues
Growth, Openness and Poverty
-          Poverty level has come down but not equally. In some
cases, it has increased. Growth and openness has a positive
impact on poverty reduction in general.
-          More globalised countries have experienced higher
growth and also witnessed declining poverty
-          In general inequality across the world shows a decline
but within countries it is rising.
-          Poor management of globalisation could lead to further
marginalisation and impoverishment

-         

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 Volume of world trade and production, 1950-
2-4

2002

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World GDP in 2000-2018 2-5

GDP in Trl $

GDP Growth Rate (%)

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Globalisation: Some Issues
 Trade Liberalisation
-       World Trade growth is more than world GDP growth.
 -    Globalising developing countries have shifted to
manufactured goods exports from primary product exports
-    The relationship between trade liberalization and
growth is debatable
       The impact of trade liberalization and poverty alleviation
is indirect. Empirical evidence of trade and reduction in wage
inequality is mixed.
-        Unemployment may rise due to trade liberalization in
the short run, especially in the import competing sector.
DDA issues not being pursued properly resulted into
Cancun Failure

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WTO Prediction for 2020 and 2021
•World merchandise trade is set to plummet by between 13 and 32% in 2020 due to the
COVID-19 pandemic.

•A 2021 recovery in trade is expected, but dependent on the duration of the outbreak
and the effectiveness of the policy responses.

•Nearly all regions will suffer double-digit declines in trade volumes in 2020, with
exports from North America and Asia hit hardest.

•Trade will likely fall steeper in sectors with complex value chains, particularly
electronics and automotive products.

•Services trade may be most directly affected by COVID-19 through transport and
travel restrictions.

•Merchandise trade volume already fell by 0.1% in 2019, weighed down by trade
tensions and slowing economic growth. The dollar value of world merchandise exports
in 2019 fell by 3% to US$ 18.89 trillion.

•McGraw-Hill/Irwin
The value of commercial services exports rose
© 2003 The 2% to US$
McGraw-Hill 6.03 trillion
Companies, in 2019
Inc., All Rights .
Reserved.
 2-17
Globalisation: Some Issues
Transport and ICT

•  Transport and Communication cost is coming down

but digital divide is increasing.
• Reduction in transportation cost and accessibility of
modern communication technology has a positive
impact on trade and growth.
• It has also increased the efficiency with which goods,
services, capital, ideas and people move around the
world.

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 2-18

Relative Transportation and Communication Cost

Source: Response to the Challenges of Globalisation; Commission

of the European Communities (2002)

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 2-19
Globalisation: Some Issues
Issues in Finance
Financial crisis leads to depreciation of currency and
wide scale unemployment
Handling financial crisis is difficult as it is contagious,
driven by market mechanism and there are presence of
moral hazards and financial scams
Poorer countries receive very less FDI. They remain
underdeveloped and can not attract further FDI. The
situation needs attention as ODA has also slowed
down.
Many developing countries are hesitating to globalise
their economies due to insufficient domestic resources,
lack of efficient financial system and institutions and
low level of investment
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 2-20

Globalization: Pros& Cons

Pros Cons
Increased revenue Different nations =
opportunity through global different problems.
sales. Similarities between
Reduced costs by nations may be superficial.
producing in ‘low cost’ Global planning may be
countries. easy, but global execution
is not.

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 2-21

What is “Globalization”?

Markets

“The shift toward a

more integrated and
interdependent world
economy.”
Production

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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.

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 2-23

The Role of Technological Change

Microprocessors and
Telecommunications
The Internet and World
Wide Web

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1500-1840 The Shrinking Globe

Best average speed of 1850-1930

horse-drawn coaches and
sailing ships, 10mph.

Steam locomotives average 65mph.

Steamships average 36mph.
1950s

Propeller aircraft
300-400 mph. 1960s

Figure 1.2 Jet passenger aircraft

500-700mph.

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The Changing World Order

The fall of Communism in Eastern Europe and the
former Soviet Union.
Czechoslovakia has divided itself into two states.
Yugoslavia has divided into 5 (often warring) successor
states.
Pro-democracy movement (suppressed) in China.
Latin America has seen both democracy and free
market reforms.

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Globalization and National Sovereignty
Supranational organizations are limited to
powers granted by member countries and
serve the collective interests of its
members.
Power is derived from the organization’s
EU WTO ability to sway members to action.

UN

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Globalization and the World’s Poor

Critics argue that globalization has not helped poor.
1870: per capita income of 17 richest nations was
2.4x that of all other countries.
1990: it was 4.5x larger.
Other factors may have influenced the gap.
Totalitarian governments.
Economic policies that destroyed wealth creation.
Little protection of property rights.
Expanding populations.
War.

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 2-28

Managing in the Global Marketplace

An International Business is any firm that engages in

international trade or investment.

Managing an international business is different

than managing a domestic business:
1. Countries are different.
2. Problems are more complex.
3. Must work within government
regulations.
4. Currency conversion presents
unique problems.

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 2-29

Trade Dynamics

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 2-30

Trade Dynamics

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 2-31

Trade Dynamics

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Trade Dynamics

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More on Trade Liberalisation
Pattern of declining tariffs

Globalization of markets and production

has been facilitated by
• Reduction in trade barriers
• Removal of restrictions to
foreign direct investment

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 2-35
More on Trade Liberalisation

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Declining barriers to trade

Globalization of markets and production has been

facilitated by
Reduction in trade barriers
Removal of restrictions to foreign direct
investment

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 2-37

Percentage share of total FDI stock

Decline of
US
hegemony
and slow rise
of
Developing
Countries

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 2-38

McGraw-Hill/Irwin
World Investment Report
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 2-39

McGraw-Hill/Irwin
World Investment Report
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 2-40

The role of technological change

Microprocessors and telecommunications

The internet and world wide web

Transportation technology

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Changing demographics of the world economy

World output and trade
Changing foreign direct investment
Changing nature of multinationals
Mini multinationals
Non US multinationals

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 2-42

My world with
Rafiki,
-Biswajit Nag

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Globalization debate-Pro

Lower prices for goods and services

Economic growth stimulation
Increase in consumer income
Creates jobs
Countries specialize in production of goods and
services that are produced most efficiently

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 2-44

Environmental performance and income

Fig 1.6

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 2-45

Globalization debate-Con

Destroys manufacturing jobs in wealthy,

advanced countries
Wage rates of unskilled workers in advanced
countries declines
Companies move to countries with fewer labor
and environment regulations
Loss of sovereignty

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 2-46

Globalization and International

Business
Globalization does not mean the advance of a
homogeneous civilization and uniform business
system.
Growing interaction makes people more aware of
the differences among them.

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 2-47

What is International Business

The business activities that involve the transfer
of resources, goods, services knowledge, skills or
information across national boundaries.
May involve
Individuals
Companies
Government bodies
International institutions

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What is International Business

International transactions
Economic transactions that cross borders
International trade
Occurs when companies import or export across
borders
International investment
Occurs when a companies invests its resources
across national boundaries
International firm
Those engaged in international business

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What is International Business

Multinational Enterprise (MNE)
A firm that has directly invested abroad
Has at least one working affiliate in a foreign
country

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 2-50

International versus Domestic

Business
International business is the outgrowth of
domestic business.
Most major corporations started their operations
in the domestic market.
International entrepreneurs
Individuals or companies that invest and operate in
another country without a home base

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International versus Domestic

Business
Significantly different due to differences in:
Environmental Dynamics
Currency, inflation, interest rates, accounting
practices, cultures, social customs, laws, political
stability
Operational Nature
Communication, coordination, motivation, differences
in organizational principles and management
philosophies

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 2-52

Why Do Firms Expand

Internationally?
Firms expand internationally for various motives:
Market motives
Economic motives
Strategic motives
Motives vary from one business activity to
another.

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 2-53

Why Do Firms Expand

Internationally?
Market Motives:
Offensive motive – seize market opportunities in
foreign countries through trade or investment.
Defensive motive – to protect and hold a firm’s
market power or position in the face of threats
from domestic rivalry or changes in government
policy.

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Why Do Firms Expand

Internationally?
Strategic Motives
Capitalize on distinctive resources or capabilities
already developed at home
Be the first mover in a target foreign market
Benefit from vertical integration involving
different countries
Follow the company’s major customers abroad

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Why Do Firms Expand

Internationally?
Economic Motives
Increase return through higher revenues and/or
lower costs.
Enables the company to benefit from the
differences in:
Costs of labors
Natural resources
Capital
Differences in regulatory treatment

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 2-56

Modes of International Business

Importing and exporting

Tourism and transportation
Licensing and franchising
Turnkey operations
Management contracts
Direct and portfolio investment

1-7
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Levels/Terms of International Companies

Multinational Enterprise (MNE): global approach to markets
and production
Multinational Corporation (MNC)
Transnational Company (TNC)
Globally integrated company: integrated operations located
in different countries
Multidomestic company: multinational companies that allow
local responsiveness

1-8
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National Operations for International

Companies
Multidomestic strategy: countries operate
autonomously
Global strategy: integrate various country
operations into an international headquarters
control
Transnational strategy: integrate various country
operations while dispersing the location of control

1-9
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 2-59

Operations and Influences

1-10
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Influences on International Business

External Influences Operations
Physical/Societal factors Objectives
Political policies and Strategy
legal practices Means
Cultural factors
Economic factors
Geographical
influences
Competitive environment

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Influences on International Business

1-12
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