International Business

Competing in the Global Marketplace

Dr Nur Kamarul Hafiz

Chapter 1

Globalization
 What Is Globalization?

• The world is toward an interdependent, integrated global economic

system
• Globalization refers to the shift toward a more integrated and
interdependent world economy, including two facets:
• Globalization of markets
• Globalization of production

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 Globalization of Markets
• Globalization of markets refers to the merging of
historically distinct and separate national markets into
one huge global marketplace.
• Instead, there is the “global market”
• falling trade barriers make it easier to sell globally
• consumers’ tastes and preferences are converging
• firms promote the trend by offering the same basic
products worldwide

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 Globalization of Production
• 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, labor, and capital.
• Companies can
• lower their overall cost structure
• improve the quality or functionality of their product offering

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 Global Institutions
• Institutions are needed to
• help manage, regulate, and police the global marketplace
• promote the establishment of multinational treaties to govern the global
business system

• Examples include
• General Agreement on Tariffs and Trade (GATT)
• World Trade Organization (WTO)
• International Monetary Fund (IMF)
• World Bank
• United Nations (UN)

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 Global Institutions

• The World Trade Organization (WTO) (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
• As of 2009, 153 member nations collectively accounted for 97% of world
trade
• The International Monetary Fund (IMF) (1944)
maintains order in the international monetary
system

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 Global Institutions

• The World Bank (1944) promotes economic

development, focusing on making low-interest
loans governments in poor nations
• 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

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 Drivers of Globalization
Two macro factors underlie the trend toward
greater globalization:
•Declining trade and investment barriers
• since 1950, average tariffs have fallen significantly
and are now at about 4%
• countries have opened their markets to FDI
•Technological change
• microprocessors and telecommunications
• the Internet and World Wide Web
• transportation technology

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 Average Tariff Rates on
Manufactured Products as Percent of Value

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 Implications for Business
• Lower barriers to trade & investment mean firms can
• view the world as their market
• base production in the optimal location for that activity
• Technological change means
• lower transportation costs - help create global markets
• lower information and communication costs
• low-cost global communications networks - help create
an electronic global marketplace
• global communication networks and global media -
create a worldwide culture, and a global market for
consumer products

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 The Changing Demographics
of the Global Economy
• There has been a drastic change in the
demographics of the world economy in the last 30
years
• Four trends are important:
1. Changing World Output and World Trade Picture
2. Changing Foreign Direct Investment (FDI) Picture
3. Changing Nature of the Multinational Enterprise
(MNE)
4. Changing World Order

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 Changing World Output
& World Trade Picture
• In 1960, the US accounted for over 40% of world
economic activity; by 2008, it accounted for just over
20% of world economic activity
• A similar trend occurred in other developed countries
• The share of world output accounted for by
developing nations is rising and is expected to
account for more than 60% of world economic
activity by 2020
• From 1963 to 2008, China’s share of world GDP
increased to 11.2%

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The Changing Demographics
of World GDP & Trade

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 Has FDI Changed Over Time?
• In the 1960s, U.S. firms accounted for about two-
thirds of worldwide FDI flows; today, the US
accounts for less than one-fifth of worldwide FDI
flows
• Other developed countries have followed a similar
pattern
• In contrast, the share of FDI accounted for by
developing countries has risen
• Developing countries, especially China, have also
become popular destinations for FDI

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 Multinational Enterprise (MNE)

• A MNE is any business that has productive

activities in two or more countries
• Since the 1960s, two notable trends in the
demographics of the MNE:
1. The rise of non-U.S. multinationals – a relative decline in the dominance of
U.S. firms in the global marketplace
2. The growth of mini-multinationals – international business (IB) is
conducted not just by large firms but also by medium-size and small
enterprises

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 MNE

• MNE or MNC
• TNC(translational corporation)managed and owned
by Two different countries.
• Global company: integrates its operations that are
located from different countries. (owned and
managed by two different countries)
• Multidomestic company: allow each of its foreign
company to act fairly independntly.packaging and
producing products according to country(coca cola)

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 The Changing World Order

• Soviet union,Yugoslavia
• Many former Communist nations in Europe and Asia
are now committed to democratic politics and free
market economies
• so, there are new opportunities for IB
• China and Latin America are also moving toward
greater free market reforms
• between 1983 and 2008, FDI in China increased from
less than $2 billion to $90 billion annually
• but, China also has many new strong companies that
could threaten Western firms

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 Global Economy of 21st Century

• 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 Southeast Asia in
the late 1990s
• the recent financial crisis that started in the U.S. in 2008,
and moved around the world

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 The Globalization Debate
• 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

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 Globalization, 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

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 Globalization, Labor Policies
and the Environment

• Critics argue that firms avoid costly efforts to

adhere 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

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 Globalization and National
Sovereignty
• Is today’s interdependent 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

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 Globalization & the World’s Poor
• Is the gap between rich nations and poor nations is
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

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 Managing in the Global Marketplace
• Managing IB differs from managing a domestic
business because
• countries are different
• the range of problems confronted in IB 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

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