GLOBALIZATION

&
INTERNATIONAL
BUSINESS

Lecture-1
 Objectives

• Globalization
• Types of globalization
• Forces behind globalization
• Global institutions
• Globalization is good/bad
• Managers perspective
 Globalization

Martin and Sunley (1997) identified Globalization as a

“notion of economic activity that enables a free flow of

capital, trade and information not constrained by
national boundaries”.

Globalization is a shift towards more integrated and

interdependent world economy.
 Globalization

Due to this interdependence the world is becoming a

‘Global Village’.

The concept ‘global village’ was first introduced by Marshall

McLuhan (1962), one of the first thinkers of globalization.

Now firms could operate across countries in order to get

access to the cheaper factors of production as well as to
achieve the economies of scale (EOS).
 Economies of Scale
• Economies of scale arise when the cost per unit
falls as output increases. Economies of scale are
the main advantage of increasing the scale of
production and becoming ‘big’.

Why are economies of scale important?

- Firstly, because a large business can pass on lower
costs to customers through lower prices and
increase its share of a market. This poses a threat to
smaller businesses that can be “undercut” by the
competition
 Economies of Scale
- Secondly, a business could choose to maintain its
current price for its product and accept higher
profit margins.
- For example, a furniture-maker which could
produce 1,000 cabinets at £250 each and sells for
£350. Now they have expanded and be able to
produce 2,000 cabinets at £200 each. The total
production cost will have risen to £400,000 from
£250,000, but the cost per unit has fallen from
£250 to £200. Assuming the business sells the
cabinets for £350 each, the profit margin per
cabinet rises from £100 to £150.
 Examples:
IKEA the worlds leading retailer in home furnishing has over 2500
suppliers and usually they are located in low cost nations.
Kia Sorento- the Korean car company sources it CD player from
Japanese firm Matsushita. The company makes the optical pickup
units in china, sends the to Thailand to add electronics component,
transport the semi finished product to Mexico for final assembly and
trucks completed CD player to a US port. Finallly they are shipped
in Korea installed in KIA vehicle the marketed around the world.
It shows that by dispersing different activities around the world to
where they can be performed more efficiently, and then coordinating
the whole production process, companies can deliver products to
their customers at much lower prices than would otherwise be
possible.
 Globalization

Globalization combines two things

Globalization of markets

Globalization of productions
 Globalization of Markets

The globalization of market refers to the merging of historically

distinct and separate national markets into one huge
marketplace.

The reasons for globalization of markets are:

 Falling barriers to cross-border trade have made it easier
to sell internationally.
 Tastes and preferences of consumers in different nations
are beginning to converge on some global norms, thereby
helping to create a global market.
E.g. Coca-cola, McDonalds and Nokia
 Globalization of Markets
• However, there are differences in:
 Consumers’ tastes and preferences. E.g.
McDonalds and beef patty in India
 Distribution channels. E.g. Japanese
distribution system
 Culturally embedded value systems, business
systems and legal regulations. E.g. Guanxi.
Globalization of Production

Globalization of production refers to the sourcing of

goods and services from different locations around
the globe. This helps to

Gain cost advantage by producing in locations

where cost of production is low. And/or
Gain quality factors of production and thus
differentiate products.
Why Do We Need
Global Institutions
• General Agreement on Tariffs and Trade (GATT)
• World Trade Organization (WTO)
• International Monetary Fund (IMF)
• World Bank ; United Nations (UN); G20
 Global institutions : purposes
• manage, regulate, and police the global marketplace
• promote the establishment of multinational treaties to
govern the global business system
 World Trade Organization

The World Trade Organization (like its predecessor

GATT)
polices the world trading system makes sure that
nation-states adhere to the rules laid down in trade
treaties
promotes lower barriers to trade and investment
164 members since 2016
Head office: Geneva, Switzerland
• The International Monetary Fund (1944)
• maintains order in the international monetary
system
• lender of last resort for countries in crisis
• Argentina, Indonesia, Mexico, Russia, South
Korea, Thailand, Turkey, Ireland, and Greece
• The World Bank (1944)
• promotes economic development via low interest
loans for infrastructure projects
 UN & G20

• The United Nations (1945)

• maintains international peace and security
• develops friendly relations among nations
• cooperates in solving international problems and
in promoting respect for human rights
• is a center for harmonizing the actions of nations
• The G20
• forum through which major nations tried to
launch a coordinated policy response to the
2008-2009 global financial crisis
Forces Behind Globalization
 Increase in and expansion of technology
 Declining trade and investment barrier
 Development of services/ global institution that
support International Business
 Growing consumer pressures
 Increased global competition
 Changing political situations
 Forces Behind Globalization
• Increase in and expansion of technology:
Technological change has made globalization a tangible
reality.
 Microprocessor and Telecommunications:
 high power, low cost computing
 recent advances in telecommunication technology,
satellite, optical fiber, wireless technology, world
wide web and internet.
Forces Behind Globalization

Internet and World Wide Web:

• Development in Internet increased the
scope of e-business.
• Small export oriented firms can easily
communicate with the buyers.
• E.g. Amazon, EBay
Transportation Technology:
 Forces Behind Globalization
• Liberalization of cross- boarder trade and resource
movements:
Lower governmental barriers to the movement of goods,
services, and resources enable companies to take better
advantage of international opportunities
 Consumer demand for more variety of products at a
lower price
 Higher competition-> efficient domestic producer
 Motivate other countries to lower their barriers as well
 Forces Behind Globalization
• Development of services that support International
Business:
 Multinational Global & Financial institutions:
WTO,IMF, World Bank
 International Postal services

• Growing consumer pressures:

 Bargaining power of buyers are increasing
 Forces Behind Globalization
• Increased Global Competition
More companies operate internationally because
– New products quickly become global
– Companies can produce in different countries
– Domestic companies’ competitors, suppliers, and
customers become international

Due to the tight interlinks between key world markets and

economic interdependence there is an intensification of global
competition.
 Forces Behind Globalization
• Changing political situations:
 Increase in International Trade
 General trend of lowering trade barriers and regulations
 Similar technical standards: International Accounting
Norm and Standards
• Expanded cross national cooperation:
 To gain reciprocal advantage:
 Bangladesh agrees to let India use their seaport.
 Reduction of import Tax: European Union
 What Does Globalization
Mean For Firms?
 Lower barriers to trade and investment mean firms can
• view the world, rather than a single country, as their market and base
production in the optimal location for that activity
 But, firms may also find their home markets under attack by foreign firms
 Technological change means
 lower transportation costs
• help create global markets and allow firms to disperse production to
economical, geographically separate locations
 low cost information processing and communication
• firms can create and manage globally dispersed production
 low cost global communications networks
• help create an electronic global marketplace
 global communication networks and global media
• create a worldwide culture and a global consumer product market
How Will The Global Economy Of The
21st Century Look?
• The world is moving toward a more global economic
system…
• But globalization is not inevitable
• there are signs of a retreat from liberal economic ideology in
Russia
• Globalization brings risks
• the financial crisis that swept through South East Asia in the
late 1990s
• the recent financial crisis that started in the U.S. in 2008-
2009, and moved around the world
 Is An Interdependent Global
Economy A Good Thing?
• Supporters believe that increased trade and cross-
border investment mean
• lower prices for goods and services
• greater economic growth
• higher consumer income, and more jobs
• Critics worry that globalization will cause
• job losses
• environmental degradation
• the cultural imperialism of global media and MNEs
• Anti-globalization protesters now regularly show
up at most major meetings of global institutions
How Does Globalization Affect Jobs
And Income?
• Critics argue that falling barriers to trade are
destroying manufacturing jobs in advanced
countries
• Supporters contend that the benefits of this trend
outweigh the costs
• countries will specialize in what they do most
efficiently and trade for other goods—and all
countries will benefit
 How Does Globalization Affect Labor
Policies And The Environment?

• Critics argue that firms avoid the cost of adhering

to labor and environmental regulations by moving
production to countries where such regulations do
not exist, or are not enforced
• Supporters claim that tougher environmental and
labor standards are associated with economic
progress
• as countries get richer from free trade, they implement
tougher environmental and labor regulations
How Does Globalization Affect
National Sovereignty?
• Is today’s global economy shifting economic power
away from national governments toward supranational
organizations like the WTO, the EU, and the UN?
• Critics argue that unelected bureaucrats have the power
to impose policies on the democratically elected
governments of nation-states
• Supporters claim that the power of these organizations
is limited to what nation-states agree to grant
• the power of the organizations lies in their ability to
get countries to agree to follow certain actions
 How Is Globalization
Affecting The World’s Poor?
• Is the gap between rich nations and poor nations
getting wider?
• Critics believe that if globalization was beneficial
there should not be a divergence between rich and
poor nations
• Supporters claim that the best way for the poor
nations to improve their situation is to
• reduce barriers to trade and investment
• implement economic policies based on free market
economies
• receive debt forgiveness for debts incurred under
totalitarian regimes
How Does The Global Marketplace Affect
Managers?
• Managing an international business differs from
managing a domestic business because
• countries are different
• the range of problems confronted in an international
business is wider and the problems more complex than those
in a domestic business
• firms have to find ways to work within the limits imposed
by government intervention in the international trade and
investment system
• international transactions involve converting money into
different currencies