Ana y Álvaro

CHAPTER 1: OVERVIEW OF INTERNATIONAL BUSINESS AND

GLOBALIZATION
Learning objectives:

1. Define globalization and international business and explain how they affect each other

2. Grasp why companies engage in international business and why its growth has accelerated

3. Discuss globalization’s future and the major criticisms of it

4. Illustrate the different ways a company can accomplish its global objectives

5. Recognize the need to apply social science disciplines to understand how international

and domestic business differ.

 Globalization:
o Set of interdependent relationships among people from different parts of a
world that happens to be divided into nations
o Elimination of barriers to international movements of goods, services, capital,
technology, and people that influence the integration of world economies
o Connections between suppliers and markets in distant places activities of
international business:
 all commercial transactions, including sales, investments, and
transportation, that take place between two or more countries
 Private companies undertake such transactions for profit;
governments either for profit or for other reasons
o Enables us to get more variety, better quality, or lower prices
 Factors in international Business Operations: The conduct of a company’s
international operations depends on two factors: its objectives and the means by
which it intends to achieve them. Likewise, its operations are affected by, two sets of
factors: physical/social and competitive.
  International companies have more diverse and complex operating environments
than purely domestic ones.
 Companies’ international operations and their governmental regulations affect
overall national conditions—economic growth, employment, consumer prices,
national security—as well as the success of individual industries and firms.

 The forces driving globalization

 Measuring globalization problematic, especially for historical comparisons

o A country’s interdependence must be measured indirectly
o When national boundaries shift domestic business transactions can become
international ones (and vice versa)
o Current situation:
 Economic interdependence has been increasing, at least since the
mid-twentieth century (currently, about 25 percent of world
production is sold outside its country of origin)
 Restrictions on imports have generally been decreasing
 Output from foreign-owned investments as a percentage of world
production has increased
 Since World War II, world trade grows more rapidly > world
production
 In recessionary periods (such as that which began in 2008) global
trade and investment < than global economy
 Still most of the world’s goods and services are sold in the countries
where they’re produced
 The principal source of capital in most countries is domestic rather
than international.
 The info above concerns only economic aspects. However
globalization is also related with factors such as: people-to-
people contacts through travel and communications,
technological interchanges,government-to-government
relationships, acceptance of attributes from foreign cultures
such as words from other languages..  Common factors of
globalization from the studies:
o Size of countries: Smaller countries  more
globalized than larger ones ( mainly because smaller
land masses and populations  lower variety of
production)
o Income of the countries’ populations: Countries with
higher-income populations  more globalized than
those with lower-income populations (their citizens
can better afford foreign products, travel, and
communications with people they have met abroad.)
o Variance among globalization aspects: a country may
rank as highly globalized on one dimension, but low on
another
  Factors increasing globalization
7 Factors ( interrelated) that have increased globalization during recent years:

1. Increase in and application of technology

 Why?
o More than half the scientists who have ever lived are alive today
 Population growth
 Rising productivity: we produce more, we are able to buy more
o Need for complementary products (e.g smartphones and accessories)
o Technical innovation need for cooperation between countries
o Sell both domestically and internationally advantage from economies of scale
o Advances in communication & transportation

2. Liberalization of cross-border trade and resource movements

Over time most governments have reduced such restrictions across its borders,
primarily for three reasons:
1. Their citizens want a greater variety of goods and services at lower prices.
2. Competition spurs domestic producers to become more efficient.
3. They hope to induce other countries to lower their barriers in turn.

3. Development of services that support international business

 Companies and governments  variety of services that facilitate global commerce

 Bank credit agreements (clearing arrangements that convert one
 currency into another and insurance that covers such risks as nonpayment and
damage enroute)

4. Growth of consumer pressures

Consumers are more proficient today at scouring the globe for better deals

5. Increase in global competition

 The present and potential pressures of increased foreign competition persuade
companies to buy or sell abroad
 Born-global companies: start out with a global focus because
o of their founders’ international experience
o advances in communications  where global markets and supplies are
 Clustering or agglomeration
o areas with numerous competitors and suppliers many companies locate
there
o easy access to suppliers
o see how competitors behave
6. Changes in political situations and government policies
o business between Communist countries and the rest of the world was minimal
o Today, only a few countries do business almost entirely within a political bloc
o Nevertheless, governments still prefer international business with certain
countries and even deny such business with others for political reasons
 o Goverments  services to increase internationalization of domestic
companies:
o collecting information about foreign markets
o furnishing contacts with potential buyers
o offering insurance against nonpayment in the home-country currency
7. Expansion of cross-national cooperation
 Governments have come to realize that their own interests can be addressed through
international cooperation agreements to address these needs:
1. To gain reciprocal advantages
2. To attack problems jointly that one country acting alone cannot solve
o the resources needed to solve a problem may be too great for one country
to manage
o no single country is willing to pay for a project that will also benefit
another country
o to fight against diseases, natural disasters, environmental change..
o To coordinate economic policies Group of Twenty or G20 countries
o 19 of the world’s most important countries plus representation
from the European Union
o These countries account for over 80 percent of the world’s
production and trade as well as about two-thirds of the world’s
population
3. To deal with areas of concern that lie outside the territory of any nation (more
info about cooperation in Chapter 7)
o Three global areas belong to no single country: the noncoastal areas of the
oceans, outer space, and Antarctica
o Ocean: contains food and mineral resources and constitute the surface
over which much international commerce passes regulation needed
o Space: Commercial satellites, for example, pass over countries that receive
no direct benefit from them but argue that they should.
o Antarctica: minerals

 The costs of globalization

3 issues:

1. Threats to National Sovereignty

 Some observers worry that the proliferation of international agreements, particularly
those that undermine local restrictions on how goods are produced and sold, will
diminish a nation’s sovereignty
 The Question of Local Objectives and Policies
o some critics argue that individual countries’ priorities are undermined by
opening borders to trade
o by opening borders to trade, may be that the strict country must either forgo
its labor and environmental priorities to be competitive or face the downside
of fewer jobs and economic output.
 The Question of Small Economies’ Overdependence
o critics say that small economies depend so much on larger ones for supplies
and sales that they are vulnerable to foreign mandates.
 o These countries are also concerned that large international corporations are
powerful enough to dictate their operating terms (say, by threatening to
relocate), exploit legal loopholes to avoid political oversight and taxes, and
counter the small economies’ best interests by favoring their home countries’
political and economic interests.
 The Question of Cultural Homogeneity
o countries have difficulty maintaining the traditional ways of life that unify and
differentiate their cultures
2. Environmental Stress
 Globalization economic groth consumption of more nonrenewable natural
resources and increased environmental damage + pollution from transportation
(carbon footprint, which refers to the total set of greenhouse gases emitted)
 Arguments for globalization: Global cooperationfosters standards for combating
environmental problems,while global competition encourages companies to seek
resource-saving and eco-friendly technologies.

3. Growing income inequality and personal stress

 We generally don’t find our economic status satisfactory unless we’re doing better and
keeping up with others
 Income inequality:
o has been growing both among and within a number of countries
o Critics claim that globalization has affected this disparity by helping to develop
a global superstar system, creating access to a greater supply of low-cost
labor, and developing competition that leads to winners and losers.
 Personal Stress:
o growth in globalization goes hand in hand not only with increased insecurity
about job and social status but also with costly social unrest

 Factors that motivate companies for internationalization

There are 3 factors:

• Expanding sales
• Acquiring resources
• Reducing risk

1. Expanding Sales

A company’s sales depend on the desire and ability of consumers to buy its goods or services.
Obviously, there are more potential consumers in the world than found in any single country.
So increased sales are a major motive for expanding into international markets.

2. Acquiring resources
Producers and distributors seek out products, services, resources, and components from foreign
countries—sometimes because domestic supplies are inadequate. They are also looking for
anything that will create a competitive advantage.

3. Reducing Risk

Operating in countries with different business cycles can minimize swings in sales and profits.

 Modes of operations in international business

Exporting and importing are the most popular modes of international business. Merchandise
exports are tangible products (goods) that are sent out of a country; merchandise imports are
goods brought into a country. We can call them “visible exports and imports”.

1. Services exports and imports

For non-merchandise exports and imports, we use the terms service exports and service imports
and are referred to as invisibles. We refer 3 types of services:

• Tourism and transportation

• Service performance
• Asset use

 Tourism and transportation

The economies of some countries depend heavily on revenue from these sectors.

 Service performance

Some services, including banking, insurance, rental, engineering, and management services, net
companies’ earnings in the form of fees: payments for the performance of those services. On
international level, engineering services are called turnkey operations.

 Asset use

When one company allows another to use its assets such as trademarks, patents, copyrights, or
expertise—under contracts known as licensing agreements, they receive earnings called
royalties. Franchising is a mode of business in which one party (the franchisor) allows another
(the franchisee) to use a trademark as an essential asset of the franchisee’s business.

2. Investments

- Foreign direct investment

In foreign direct investment (FDI), sometimes referred to simply as direct investment, the
investor takes a controlling interest in a foreign company. Ex: Joint venture.

- Portfolio investement
A portfolio investment is a noncontrolling financial interest in another entity. It usually takes
one of two forms: stock in a company or loans to a company (or country) in the form of bonds,
bills, or notes purchased by the investor.

 Types of international organizations

International company is any company that operates in more than one country.
A multinational enterprise (MNE) usually refers to any company with foreign direct investments
(it has to have a minimum of foreign investment).

Collaborative arrangements: Companies work together—in joint ventures, licensing

agreements, management contracts, minority ownership, and long-term contractual
arrangements. If the relationship is critical, these companies form a strategy alliance.

Why international business differs from domestic business

We can outline 3 factors:

 Physical factors (such as a country’s geography or demography)

 Social factors (such as its politics, law, culture, and economy)
 Competitive factors (such as the number and strength of a company’s suppliers, customers,
and rival firms)

1. Physical factors

The physical and social factors we show above can affect how companies produce and market
products, employ personnel, and even maintain accounts.

- Geographic influences
Geographic barriers such as mountains, deserts, jungles can often affect communications
and distribution channels and make business riskier in some areas.

- Political policies
A nation’s political policies influence how international business takes place within its borders.
On the other hand, political disputes—particularly military confrontations—can disrupt trade
and investment.

- Legal policies
Domestic and international laws play a big role in determining how a company can operate
abroad. Domestic law includes both home- and host-country regulations on such matters as
taxation, employment, and foreign-exchange transactions. International law—in the form of
legal agreements between countries—determines how earnings are taxed by all jurisdictions.
2. Behavioral factors
The related disciplines of anthropology, psychology, and sociology can help managers better
understand different values, attitudes, and beliefs. In turn, such understanding can help
managers make operational decisions abroad.

3. Economic forces
Economics explains why countries exchange goods and services, why capital and people travel
among countries in the course of business, and why one country’s currency has a certain value
compared to another’s. Economics also helps explain why some countries can produce goods or
services for less.

 The competitive environment

Every globally active company operates within a competitive environment. Different
competitive factors:

1. Competitive strategy for products

Products compete by means of cost or differentiation Strategies. For example: developing a
favorable brand image or developing unique characteristics.

2. Company resources and expertise

Other competitive factors are a company’s size and resources compared to those of its
competitors. In large markets, companies have to invest much more to secure national
distribution than in small markets. Conversely, national market share and brand recognition
have a bearing on operating in a given country. A company with a long-standing dominant
national market position uses operating tactics that are quite different from those employed by
a newcomer.

3. Competitors faced in each market

Normally, success in a market often depends on whether the competition is also international
or local.

 Three ways of looking at globalization

 Further globalization is inevitable.

 International business will grow primarily along regional rather than global lines.
 Forces working against further globalization and international business will slow down the
growth of both.

1. Globalization is inevitable
2 main ideas: The premise that advances in human connectivity are so pervasive that consumers
everywhere will know about and demand the best products for the best prices regardless of
their origins. Besides that, because MNEs have built so many international production and
distribution networks, they’ll pressure their governments to place fewer restrictions on
international movements of goods and means to produce them.

2. More regional that global growth

The idea that growth will be largely regional rather than global is based on studies showing that
almost all of the companies we think of as “global” conduct most of their business in home and
neighboring countries. Most world trade is regional, and many treaties to remove trade barriers
are regional. Transport costs favor regional over global business.

3. Globalization and international business will be slow

The third view argues that the pace of globalization will slow, or may already have begun
collapsing. There are creating movements anti-globalizations which promote actions against
global practices. Antiglobalists pressure governments to promote nationalism by raising trade
barriers and rejecting international organizations and treaties.

 Case: Transportation and Logistics: The Case for Dubai Ports

World

The global transportation and logistics industry is one of the most important factors that
contributes to the expansion of trade and logistics. Several factors have led to the growth in the
transportation and logistics industry: the separation of raw materials, labor and production,
decline in tariffs, import restrictions, and exchange rate controls are some of the main factors
that led to this growth. These factors have resulted in an increased demand for transporting raw
materials, unfinished goods, and finished goods in the global economy.

 The Transportation and Logistics Industry

Ports play an important role in the transportation and logistics industry. They provide quality
services, advanced technologies, and skilled labor that lead to increased productivity. Logistics
has in the past focused on reducing barriers to trade, and on governmental procedures
implemented regarding getting clearance for goods at customs.

 Developing Logistics Clusters

Logistics clusters are geographically concentrated sets of logistics-related activities. They

are known to have high transportation services, low transportation costs, and an efficient flow
of goods.
They also bring value by generating other business activities and bring in new jobs.

 Doing Business in Different Countries

Local or domestic policies may affect the logistics operations in various markets. Some of these
policies may raise costs, reduce efficiency, give preferential treatment for local or public owned
corporations, and put limitations on investment in certain activities.
 About Dubai´s ports world

Dubai Ports World was founded in 2005. Excellence and innovation are two value the company
embodies in its commitment to customers, profitable global growth, and responsible corporate
and personal behavior. The majority of its business comes from emerging markets in South
America and Africa.

Caracteristics

- Overseas invironment

Operating in various markets offers opportunities as well as challenges. The opportunities

include access to new markets, access to natural resources, and innovative technology. The
industry remains dynamic and profitable where emerging markets experience a significant
growth in business.

- Finding the right skills

The logistics industry is primarily a people’s business. Around 25 percent of the costs of logistics
are labor costs. Thus, it becomes essential to attract, train, and motivate qualified people at all
levels.

- Risk issues
Supply-chain risk can be caused by various disruptions: environmental risk such as natural
disasters; geopolitical risk such as threat of attacks and terrorism… Risk can be controlled by
conducting scenario analyses, collaborating with the different players by sharing information,
identifying vulnerabilities and synchronizing back-up plans.

- Technology in business

Dubai Ports World has been keen to use advanced information technology tools to facilitate its
business. It has been using mobile technology to make life easier for customers by saving time
and money. They also use mobile technology for their employees.

- Environmental considerations

The presence of logistics companies may result in air pollution. This increases the health azards
around those clusters. There are “green innovations” in logistics operations and processes that
are ultimately minimizing the negative effects of logistics operations on the environment.

- The future

The future of Dubai Ports World looks promising. It continues to sustain its growth by
penetrating new markets while offering a unique customer experience. Dubai Ports World is a
global leader in logistics and transportation.