Chapter 01

Overview of International Business

and Globalization

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Lesson Outline
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• International Business

• Globalization

• Emergence of Global Institutions

• Drivers or Factors of Globalization

• Costs of Globalization

• Why Companies Engage in International Business

• Modes of Operations in International Business

• External Environmental Factors Affecting IB

 International Business
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• Any firm that engages in international trade or investment

• All commercial transactions, including sales, investments, and

transportation, that take place between two or more countries.

• Private companies undertake such transactions for profit;

• Governments may undertake them either for profit or for other reasons.

https://www.youtube.com/watch?v=wLNp3kgBuuQ
Globalization
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• A process of interaction and integration among the people,

companies, and governments of different nations which is
driven by international trade and investment and aided by
information technology.

• The widening set of interdependent relationships among

people from different parts of a world that happens to be
divided into nations.
Globalization
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• The worldwide movement toward economic, financial, trade,

and communications integration.

• Globalization implies the opening of local and nationalistic

perspectives to a broader outlook of an interconnected and
interdependent world with free transfer of capital, goods,
and services across national frontiers.
 Globalization
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• The shift toward a more integrated and interdependent world

economy

• The world is moving away from self-contained national

economies toward an interdependent, integrated global
economic system

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 Globalization of Markets
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• Historically distinct and separate national markets are merging

and creating the “global market”
o Falling trade barriers make it easier to sell globally
o Consumers’ tastes and preferences are converging on some
global norm
o Firms promote the trend by offering the same basic
products worldwide

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 Globalization of Markets
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o Significant differences in many relevant dimensions

o Greater Uniformity is Replacing Diversity

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 Globalization of Production
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• Sourcing of goods and services from locations around the

globe to capitalize on national differences in the cost and
quality of factors of production like land, labor, energy, and
capital
o Companies can lower their overall cost structure
o Improve the quality or functionality of their product
offering

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 Emergence of Global Institutions
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• Global institutions
o Manage, regulate, and police the global marketplace
o Promote the establishment of multinational treaties to
govern the global business system

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 Emergence of Global Institutions
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• General Agreement on Tariffs and Trade (GATT)

o Signed on 30 October 1947 by 23 nations
o Eight rounds of negotiations among member states worked
to lower barriers to the free flow of goods and services

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 Emergence of Global Institutions
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• World Trade Organization (WTO)

o Founded in January 1, 1995
o 164 member countries
o Primarily responsible for policing the world trading system
and making sure nation-states adhere to the rules laid down
in trade treaties signed by WTO member states
o Responsible for facilitating the establishment of additional
multinational agreements between WTO member states
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 Emergence of Global Institutions
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• World Bank (WB)

o Promote economic development
o Focused on making low-interest loans to governments in poor na­
tions that wish to undertake significant infrastructure investments

• International Monetary Fund (IMF)

o Maintain order in the international monetary system
o Lender of last resort to troubled nations
o Adopting specific economic policies

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 Emergence of Global Institutions
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• United Nations (UN)

o Established October 24, 1945
o Four purposes:

 To maintain international peace and security,

 To develop friendly relations among nations,
 To cooperate in solving international problems and in
promoting respect for human rights, and
 To be a center for harmonizing the actions of nations.
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 Emergence of Global Institutions
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• G20
o Founded in September 26, 1999
o 19 individual countries plus the European Union
o Purpose is to bring together systemically important
industrialized and developing economies to discuss key
issues in the global economy

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 Drivers or Factors of Globalization (Daniels)
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• Increase in and application of technology (internet, transport)

• Liberalization of cross-border trade and resource movements

(tariff , global institutions, get lower restriction from another
country also)

• Development of services that support international business

(bank credit arrangement, insurance)

• Growth of consumer pressures (aware, newer, differentiated)

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 Drivers or Factors of Globalization
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• Increase in global competition (competitive world, copy successful

attempts )

• Changes in political situations and government policies (mayanmar

military rule, iran neuclear weapon ,making capabilities, airport,
seaport)

• Expansion of Cross-National Cooperation (reciprocal advantages,

problems jointly solved, areas of concern that lie outside the territory of
any nation (antractica, dispute btwn Bangladesh and Myanmar in the
Bay of Bengal )
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 Costs of Globalization / The Globalization Debate
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• Supporters of Globalization believe that increased trade and

cross-border investment mean
o Lower prices for goods and services
o Greater economic growth
o Higher consumer income, and more jobs

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 Costs of Globalization(Daniels) / The
Globalization Debate
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• Critics worry that globalization will cause

o Threats to national sovereignty

 Small economies’ overdependence

 Cultural homogeneity
 Local objective & policies
o Environmental degradation
o Growing income inequality & personal stress
o Offshoring
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 Why Companies Engage in International
Business (Daniels)
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• Expanding sales
o Increases the potential market and profits

• Acquiring resources
o Lower costs
o New or better products
o Additional operating knowledge

• Reducing risk
o Smoothing sales and profits (recession vs boom country)
o Preventing competitors from gaining advantages (proctor & gamble in
japan)
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 Modes of Operations in International Business
(Daniels)
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• Merchandise exports and imports

• Service exports and imports

• Investments

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 Modes of Operations in International Business
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• Merchandise exports
o Goods that are sent out of a country

• Merchandise imports
o Goods that are brought into a country

• Sometimes referred to as visible exports and imports

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 Modes of Operations in International Business
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• Service exports
o Provider and receiver of payment

• Service imports
o Recipient and payer of payment

• Examples
o Tourism and transportation
o Service performance

 Turnkey operations and Management contracts (japan metro railway nd Disney mgt
team in france)
o Asset use

 Licensing and Franchising (good vs service)

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 Modes of Operations in International Business
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• Investments
o Foreign Direct Investment (FDI)

 Investor takes a controlling interest in a foreign

company
o Portfolio Investment

 A non-controlling financial interest in another entity

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 Types of International Organizations
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• Collaborative arrangements
o Joint ventures
o Licensing arrangements
o Management contracts
o Minority ownership
o Long-term contractual arrangements

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 Types of International Organizations
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• Multinational enterprises (MNEs)

o Take a global approach to markets and production or
have operations in more than one country

• Sometimes they are referred to as

o Multinational corporations (mncs)
o Multinational companies (mncs)
o Transnational companies (TNCs)

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 External Environmental Factors Affecting IBz
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• The external environment affects a company’s international

operations

• Managers must understand social science disciplines and how

they affect functional business fields

• Consider
o Physical factors
o Social factors
o Competitive factors
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 Physical and Social Factors
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• Geographic influences
o Natural conditions influence production locations (calamity, mountains,jungle-geographic
barriers)

• Political policies (political stability, Pakistan /Indonesia)

o Determines where and how business occurs

• Legal policies (domestic-taxation, employment;international dispute-int.law_

o Influence how a company operates

• Behavioral factors (value,belief,casino, bars)

o May require changes in operations

• Economic forces
o Explain differences in costs, currency values, market size
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 The Competitive Environment
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• Competitive strategy for products

o Cost strategy
o Differentiation strategy

• Company resources and experience

o Market leaders have more resources for international operations

• Competitors faced in each market

o Local or international

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 The Competitive Environment
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• So, a company’s competitive strategy influences how and

where it can best operate

• Its competitive situation may differ from country to country

in terms of its relative strength and which competitors it
faces

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 Factors in International Business Operations
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How Does The Global Marketplace Affect
Managers?
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• Managing an international business differs from managing a

domestic business because
o Countries are different
o Greater complexity of managing an international business
o Understanding the rules governing the international trading
and investment system
o ­Converting money into different currencies
Looking to the Future
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• Three major perspectives on the future of international

business and globalization
o Further globalization is inevitable
o International business will grow primarily along regional
rather than global lines
o Forces working against further globalization and
international business will slow down both trends
 34

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