Drivers Of Globalisation

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 Learning objectives

• What are the key concepts in international trade

and investment?
• Why do firms internationalize?
• What are the dimensions of globalisation?
• How does globalisation affect a firm’s strategy?
• How does globalisation affect the dispersal of its
value creating activities?

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 The nature of international business

• All value-adding activities can be performed in

international locations:
• including sourcing, manufacturing, and marketing
• International trade can involve products, services,
capital, technology, know-how, and labor.
• Firms internationalize through various entry
strategies, such as exporting and foreign direct
investment.
• These points represent the key focus of this subject

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Key concepts in international business

• International business: Performance of

trade and investment activities by firms across
national borders.
• Globalization of markets: Ongoing economic
integration and growing interdependency of
countries worldwide.
• International trade: Exchange of products
and services across national borders, typically
through exporting and importing.

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 Key concepts (cont.)

• Exporting:
• Sale of products or services from a base in the home
country or a third country to customers located abroad.
• Boeing and Airbus export billions of dollars in commercial
aircraft products every year.
• Importing or Global Sourcing:
• Procurement of products or services from suppliers
located abroad for consumption in the home country or
a third country.
• Toyota imports many parts from China when it manufactures
cars in Japan.

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 Key concepts (cont.)

International investment: Transfer

of assets to another country or the
acquisition of assets in that country.
Also known as “foreign direct
Investment” (FDI). We will focus on
this type of investment.
International portfolio
investment: Passive owner-
ship of foreign securities, such as
stocks and bonds, in order to generate
financial returns.

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The “flows” of international business

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Service industries that are rapidly internationalizing

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 Leading countries in International
Services Trade, by Total Annual Value

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 Leading countries in International
Services Trade, Total Value as a % of GDP

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 International and
domestic business: How they differ

1. International business:
• is conducted across national borders;
• uses distinctive business methods;
• is in contact with countries that differ in terms of
culture, language, political system, legal
system, economic situation, infrastructure,
and other factors.
2. When they venture abroad, firms encounter four
major types of risk.

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The four risks of international business

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The four risks of international business

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The four risks of international business

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 The Four Risks of International
The four risks of international business
Business

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 Cross-Cultural Risk

• Cultural differences: Risks arise from differences

in language, lifestyle, attitudes, customs, and
religion, where a cultural miscommunication
jeopardizes a culturally valued mindset or behavior.
• Negotiation patterns: Negotiations are required in
many types of business transactions; e.g.,
Mexicans are friendly and
emphasize social relations,
whereas Americans are
assertive and get down to
business quickly.
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 Cross-Cultural Risk (cont.)

• Decision-making styles: Managers constantly

make decisions about the operations and future
direction of the firm. For example, Japanese take
considerable time to make important decisions,
whereas Canadians tend to be decisive and “shoot
from the hip.”
• Ethical practices: Standards of right and wrong
vary considerably around the world. For example,
bribery is relatively acceptable in some countries in
Africa, but is generally unacceptable in Sweden.

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 Country Risk (Political Risk)
• Government intervention, protectionism, and barriers to
trade and investment
• Bureaucracy, red tape, administrative delays, corruption
• Lack of legal safeguards for intellectual property rights
• Legislation unfavorable
Examples
to foreign firms - The U.S. imposes high tariffs on imports of
sugar and other agricultural products.
• Economic failures - Doing business in Russia often requires
and mismanagement paying bribes to government officials.
- Venezuela’s government has interfered
• Social and political much with the operations of foreign firms.
unrest and instability - Argentina has suffered high inflation and
other economic turmoil.

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 Currency Risk (Financial Risk)

• Currency exposure: General risk of unfavorable

exchange rate fluctuations.
• Asset valuation: Risk that exchange rate fluctuations will
adversely affect the value of the firm’s assets and liabilities.
• Foreign taxation: Income, sales, and other taxes vary
widely worldwide, with
implications for company Examples
performance and profitability. – The Indian rupee has fluctuated a
• lot since 1990.
Inflation: High inflation,
– The U.S. has relatively high
common in many countries,
corporate income taxes.
complicates business
– Brazil and Russia have
planning and the pricing
experienced very high inflation.
of inputs and finished goods.

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 Commercial Risk

• Weak partner
• Operational problems
• Timing of entry
• Competitive intensity
• Poor execution of
strategy
General commercial risks such as these lead to
sub-optimal formulation and implementation of the
firm’s international value-chain activities.

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 Who participates in International Business?

• Multinational enterprise (MNE): A large company with

substantial resources that performs various business
activities through a network of subsidiaries and affiliates
located in multiple countries; e.g., Caterpillar, Samsung,
Unilever, Vodafone, Disney.
• Small and medium-sized enterprise (SME): Typically
a company with 500 or fewer employees. Over 90% of
all firms in most countries are SMEs. SMEs increasingly
engage in international business.
• Born global firm: A young, entrepreneurial SME that
undertakes substantial international business at or near
the time of its founding.
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 Why do firms participate in IB?

• To seek opportunities for growth through

market diversification
• E.g., Harley-Davidson, Sony, Whirlpool.
• To earn higher margins and profits
• Often, foreign markets are more profitable.
• To gain new ideas about products, services,
and business methods
• E.g., GM refined its knowledge about making small,
fuel-efficient cars in Europe.

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 Why do firms participate in IB? (cont.)

• To better serve key customers that have

relocated abroad
• E.g., when Toyota launched its operations in Britain,
many of its suppliers followed suit.

• To be closer to supply sources, benefit from

global sourcing advantages, or gain
flexibility in the sourcing of products
• E.g., Dell sources parts and components from the
best suppliers worldwide.

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 Why do firms participate in IB? (cont.)

• To gain access to lower-cost or better-value

factors of production
• E.g., Sony does much of its manufacturing in China.

• To develop economies of scale in sourcing,

production, marketing, and R&D
• E.g., Boeing lowers its overall costs by sourcing,
manufacturing, and selling aircraft worldwide.

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 Why do firms participate in IB? (cont.)

• To confront international competitors more

effectively or to thwart the growth of
competition in the home market
• Chinese appliance maker Haier established operations in
the United States, partly to gain competitive knowledge
about Whirlpool, its chief US rival.

• To invest in a potentially rewarding relationship

with a foreign partner
• French computer firm Groupe Bull partnered with Toshiba
in Japan to gain insights for developing information
technology.
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 Phases of Globalisation

• Phase 1: 1830 to late 1800s

Aided by railroads and ocean transport; the rise of
manufacturing and trading companies
• Phase 2: 1900 to 1930
Fueled by electricity and steel; early MNEs
• Phase 3: 1948 to 1970s
GATT, post-war era; reduction of trade barriers
worldwide; rise of global capital markets
• Phase 4: 1980 to present
Fueled by Internet and other technologies; rapid
liberalisation in emerging markets

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 Drivers and
dimensions of market globalisation

1. Drivers of Market Globalisation

• Worldwide reduction of barriers to trade and investment
• Market liberalisation and adoption of free markets
• Industrialisation, economic development, and modernisation
• Integration of world financial markets
• Advances in technology

2. Dimensions of Market Globalisation

• Integration and interdependence of national economies
• Rise of regional economic integration blocs
• Growth of global investment and financial flows
• Convergence of buyer lifestyles and preferences
• Globalisation of production activities
• Globalisation of services

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 Drivers, dimensions, and
consequences of market globalisation

1. Drivers of Market Globalisation

2. Dimensions of Market Globalisation

3a. Societal Consequences of Market Globalisation

• Contagion: Rapid spread of financial or monetary crises from one country to another
• Loss of national sovereignty
• Offshoring and the flight of jobs
• Effect on the poor
• Effect on the natural environment
• Effect on national culture

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 Dimensions of market globalisation

• Integration and interdependence of national

economies: Results from firms’ collective
international activities. Governments contribute
by lowering trade and investment barriers.
• Rise of regional economic integration blocs:
Free trade areas are formed by two or more
countries to reduce or eliminate barriers to trade
and investment, such as the EU, NAFTA, and
MERCOSUR.

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 Dimensions of market globalisation

• Integration Growth of global investment

and financial flows:
Associated with rapid growth in foreign direct
investment (FDI), currency trading, and
global capital markets.
• Convergence of buyer lifestyles and
preferences: Facilitated by global media, which
emphasise lifestyles found in the U.S., Europe, or
elsewhere; firms market standardised products.

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 Dimensions of market globalisation
• Globalisation of production: To cut costs, firms
manufacture in low labor-cost locations, such as
Mexico and Eastern Europe. Firms also source
services from abroad.
• Globalisation of services: Banking, hospitality,
retailing, and other service industries are rapidly
internationalising. Firms outsource business
processes and other services in the value chain to
vendors overseas. And, in a new trend, many people
go abroad to take advantage of low-cost services.

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 Dimensions of market globalisation
• Worldwide reduction of barriers to trade and
investment: Over time, national governments have
greatly reduced trade and investment barriers. The
trend is partly facilitated by the World Trade
Organisation (WTO), an organisation of some 153
member nations.
• Market liberalisation and adoption of free
markets: The launch of free market reforms in
China and the former Soviet Union marked the
opening of roughly one-third of the world to freer
trade.
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 Dimensions of market globalisation

• Industrialisation, economic development,

and modernisation: These trends
transformed many developing economies
from producers of low-value goods to higher-
value goods, such as electronics and
computers.
– Simultaneously, rising living standards have
made such countries more attractive as target
markets for sales and investment.

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 Dimensions of market globalisation

• Integration of world financial markets: Enables

firms to raise capital, borrow funds, and engage in
foreign currency transactions wherever they
go. Banks now provide a range of services that
facilitate global transactions.
• Advances in technology: Reduces the cost of
doing business internationally by allowing firms to
interact cheaply with suppliers, distributors, and
customers worldwide. Facilitates the
internationalisation of companies, including
countless small firms
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 Information and
Communications Technology (ICT)

• Profound advances have occurred in

computers, digital technologies, telephony,
and the Internet.
• MNEs leverage ICTs to optimise their
performance, managing operations around
the world.
• ICTs opened the global marketplace to firms

that historically lacked the resources to

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 Manufacturing and
transportation technologies
• Revolutionary developments permit manufacturing
that is low scale and low cost, via computer-aided
design of products (CAD), robotics, and IT-managed
production lines.
• In transportation, key advances include fuel-efficient
jumbo jets, giant ocean-going freighters, and
containerised shipping. The cost of international
transportation has declined substantially, spurring
rapid growth in global trade.
• Collectively, technological advances have greatly
reduced the costs of doing business internationally.
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 Company internationalisation
and the value chain

• The most significant implication of market globalisation for

companies is that a purely domestic focus is no longer viable
in most cases.
• Market globalisation compels firms to internationalise their
value chain and access the benefits of international business.
• Value chain: The sequence of value-adding activities
performed by the firm in the process of developing,
producing, and marketing a product or a service.
• Globalisation allows the firm to internationalise its value
chain, leading to various advantages.

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Being global – globalisation and globality

• In the video link James Hemerling, a senior

consultant from the Boston Consulting Group,
explains the rise of new global challengers -
companies good at competing for resources, talent,
customers and capital in rapidly developing
economies.

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Internationalisation of the firm’s value chain

• The truly international firm configures its

sourcing, manufacturing, marketing, and
other value-adding activities on a global scale.
• Rationale:
• Cost savings
• Increase efficiency, productivity, and flexibility of value
chain activities
• Access to customers, inputs, labor, or technology
• Benefit from foreign partner capabilities
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Internationalisation of the firm’s value chain

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Internationalisation of the firm’s value chain

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Internationalisation of the firm’s value chain

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Internationalisation of the firm’s value chain

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Internationalisation of the firm’s value chain

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Internationalisation of the firm’s value chain

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