SIM337 March 2019 PDF

Contemporary
Developments
in Business and
Management
Kenneth Fee
The University of Sunderland
© 2013 The University of Sunderland
First published September 2013
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Contents
Introduction vii
Unit 1 The contemporary world of business and

management vii
Introduction 1
1.1 The global business environment 3
1.2 The importance of developments in the global
environment 10
Case Study 14
1.3 Organisational decision making and performance 17
Self-assessment questions 19
Feedback on self-assessment questions 19
Summary 20
Unit 2 Globalisation 21
Introduction 21
2.1 Definitions and indicators of globalisation 22
2.2 Key drivers and facilitators of globalisation 25
Case Study 27
2.3 Barriers and inhibitors of globalisation 29
2.4 Comparing the costs and benefits of globalization 31
Case Study 32
2.5 International trade and foreign direct investment 36
Case Study 36
2.6 Applying Porter’s diamond model 40
Summary 44
Copyright © 2013 University of Sunderland iii

Unit 3 The global business environment 45
Introduction 45
3.1 The business environment: national, regional and
international 46
Case Study 51
3.2 Stakeholder analysis 52
3.3 Understanding and applying the PESTLE framework 56
3.4 Risk analysis and the impact of change 58
Summary 62
Unit 4 The globalisation of markets and industries 64

Introduction 64
4.1 Market and industry globalisation 65
4.2 Market structures, competition and performance 70
Case Study 71
4.3 Market concentration and market power 73
4.4 Applying Porter’s Five Forces framework 75
Summary 79
Unit 5 Internationalisation – how, where and when 80

Introduction 80
5.1 The process of internationalisation 81
5.2 Drivers of internationalisation 83
5.3 Selecting a foreign target market 86
5.4 Internationalisation strategy and optimal locations 88
5.5 Assessing country attractiveness 89
5.6 First-mover and late-mover advantages 92
Summary 95
iv Copyright © 2013 University of Sunderland

Unit 6 The political, economic and legal environment 96
Introduction 96
6.1 Political, economic and legal environment 97
6.2 Political and economic systems 99
6.3 Legal systems and international business 103
6.4 International law and international business 106
6.5 Globalisation and legal issues 108
Case Study 108
Summary 111
Unit 7 International financial markets and institutions 112

Introduction 112
7.1 Currency, inflation, interest rates and exchange rates 113
7.2 International financial institutions 117
7.3 Contemporary developments in international finance 119
7.4 International financial markets 122
7.5 The global financial crisis 123
Case Study 123
Summary 127
Unit 8 Technological change 128

Introduction 128
8.1 Technology and innovation 129
8.2 Drivers of research, development and innovation 132
8.3 Global technology markets 135
Case Study 137
8.4 Protecting innovation 140
Summary 143
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Unit 9 Socio-cultural and environmental issues 145
Introduction 145
9.1 The social and cultural environment 146
9.2 Impact of socio-cultural differences on business 150
9.3 The ecological environment 153
Case Study 153
9.4 Globalisation and ecology 156
Summary 160
Unit 10 Future developments in business and management 161

Introduction 161
10.1 Developments in emerging economies 162
Case Study 163
10.2 Future trends in globalisation 165
10.3 Corporate social responsibility 169
Summary 175
References 176
Index 191
vi Copyright © 2013 University of Sunderland

Introduction
Welcome to the Contemporary Developments in Business and Management

learning pack! It has been designed to assist you in studying for the core module
of the BA (Hons) in Business and Management degree and covers all topics in
the official module descriptor.
This learning pack considers contemporary developments in business and

management in the twenty-first century. It covers the broad-ranging inter-
national business environment, with a strong emphasis on the phenomenon of
globalisation.
The contemporary world of business and management is changing, and at an

accelerating rate. Among the most prominent developments are: inter-
nationalisation, globalisation, the emergence of new economies, intensifying
competition, shifting demographics, climate change and other ecological
challenges, rapid innovation and technological change, the growth of the
knowledge economy, crises in financial markets, the rise of corporate social
responsibility, and much more.
This learning pack considers all of these developments, and equips you with
the tools to analyse them, addressing the political, economic, socio-cultural,
technological, legal, economic and financial, and the competitive environment
of international business. It is richly illustrated with case studies and examples
from all over the world.
How to use this pack

The learning pack will take you step by step in a series of carefully planned
units and provides you with learning activities and self-assessment questions
to help you master the subject matter. The pack should help you organise and
carry out your studies in a methodical, logical and effective way, but if you
have your own study preferences you will find it a flexible resource too.
Before you begin using this learning pack, make sure you are familiar with any
advice provided by the University of Sunderland on such things as study skills,
revision techniques or support and how to handle formal assessments.
If you are on a taught course, it will be up to your tutor to explain how to use
the pack in conjunction with a programme of face-to-face workshops and
seminars – when to read the units, when to tackle the activities and questions,
and so on.
If you are on a self-study course, or studying independently with remote tutor

support, you can use the learning pack in the following way:
■ Scan the whole pack to get a feel for the nature and content of the subject
matter.
■ Plan your overall study schedule so that you allow enough time to complete
all units well before your examinations – in other words, leaving plenty of
time for revision.
Copyright © 2013 University of Sunderland vii
■ For each unit, set aside enough time for reading the text, tackling all the
learning activities and self-assessment questions and for the suggested
further reading. Your tutor will advise on how they will plan activities
around these materials and opportunities to network with other students.
Now let’s take a look at the structure and content of the individual units.
Overview of the units

The learning pack breaks the content down into ten units, which vary from
approximately eight to ten hours’ duration each. However, we are not advising
you to study for this sort of time without a break! The units are simply a
convenient way of breaking the syllabus into manageable chunks. Most people
would try to study one unit a week, taking several breaks within each unit. You
will quickly find out what suits you best.
You will see that each unit is divided into sections. It is assumed, for the most
part, that you will study the units in the order presented. What is more
important is that you try to study each section of each unit in the order
presented. Each unit is written on the strict assumption that you will understand
the material in each section before moving to the next.
Each unit begins with a brief introduction which sets out the areas of the
syllabus being covered and explains, if necessary, how the unit fits in with the
topics that come before and after.
After the introduction there is a statement of the unit learning objectives. The
objectives are designed to help you understand exactly what you should be able
to do after you’ve studied the unit. You might find it helpful to tick them off as
you progress through the unit. You will also find them useful during revision.
There is one unit learning objective for each numbered section of the unit.
Following this, there are prior knowledge and resources sections. These will let
you know if there are any topics you need to be familiar with before tackling
each particular unit, or any special resources you might need, such as calculator,
graph paper or specific books.
Then the main part of the unit begins, with the first of the numbered main
sections. At regular intervals in each unit, we have provided you with learning
activities, which are designed to get you actively involved in the learning
process. You should always try to complete the activities before reading on.
You will learn much more effectively if you are actively involved in doing
something as you study, rather than just passively reading the text in front of
you. The feedback or answers to the activities are provided immediately
following the activity. Do not be tempted to skip the activity.
Throughout the unit key terms are highlighted in bold with the definition
appearing in the margin.
Each unit contains recommended reading which also appears in the margin and
which refers you to relevant chapters of supporting textbooks including the
core textbook. It is essential that you do this reading, since it is not possible to
put everything you need to know in a single learning pack. At level 3 of a degree
viii Copyright © 2013 University of Sunderland

wider reading is key to developing deeper subject learning through a
contemporary, contextual and critical perspective. This is important to consider
when approaching the related assessment of the module.
We provide a number of self-assessment questions at the end of each unit. These

are to help you to decide for yourself whether or not you have achieved the
learning objectives set out at the beginning of the unit. As with the activities,
you should always tackle them. The feedback or answers follow immediately
after at the end of the unit. If you still do not understand a topic having
attempted the self-assessment question, always try to re-read the relevant
passages in the textbook readings or unit, or follow the advice on further
reading given. Your allocated tutor will be available to deal with questions
arising from the material and will assist your study through the unit.
At the end of the unit is the summary. Use it to remind yourself or check off
what you have just studied, or later on during revision.
Finally, where possible, we have made reference to material on the internet since
this is easy to access. You may find that addresses change. This is annoying; but
with a bit of effort you will be able to track the material down (nothing
disappears completely from the web). And by searching you will learn even
more! Good luck and enjoy it.
Core textbooks
The essential text is:
The International Business Environment (second edition), by Leslie Hamilton
and Philip Webster, with a contribution by Dorron Otter, published by Oxford
University Press in 2012.
This book provides an overview of the international business environment,

taking as its starting point a global perspective on understanding the global
economy, globalisation, and its impact on international business organisations.
The book divides into two parts: Part One, the Global Context, sets the context
for the international business environment, with five chapters on globalisation,
the global economy, analysing global industries, the global business
environment, and assessing country attractiveness; Part Two, Global Issues,
provides more detail in seven chapters on the socio-cultural framework, the
technological framework, the political environment, the legal environment, the
financial framework, corporate social responsibility, and the ecological
environment.
The book is accompanied by an Online Resource Centre, at http://www.

oxfordtextbooks.co.uk/orc/hamilton_webster2e/, featuring multiple choice
questions, web exercises, a glossary, web links, an interactive world map, and
a library of video links.
Acknowledgements
The author and publisher are grateful to the following for their permissions to
reproduce or adapt figures in the text:
The World Trade Organisation, for the graphs on international trade, figures
1.1 and 1.2 in Unit 1, source – World Trade Report, World Trade Organization,
Copyright © 2013 University of Sunderland ix

2010, available at http://www.wto.org/english/res_e/booksp_e/anrep_e/
world_trade_report10_e.pdf
Simon & Schuster, for Porter’s Five Forces diagram, figure 1.6 in Unit 1, source
– Porter, ME (1980), Competitive Strategy: Techniques for Analysing Industries
and Competitors, The Free Press
CAOBISCO, the Association of Chocolate, Biscuit and Confectionery Industries

of the European Union, for the flow chart of the chocolate industry supply
chain, figure 3.1 in Unit 3, source – http://www.cocoafarming.org.uk/pdf/
times100_casestudy.pdf
University of California Press, for Post’s model for identifying stakeholders,

figure 3.2 in Unit 3, source – adapted from Post, J et al. (2002), ‘Managing the
Extended Enterprise: the New Stakeholder View’, California Management
Review, 1 October 2002
Professor Aubrey Mendelow, for his stakeholder mapping power/interest

matrix, figure 3.3 in Unit 3, source – Mendelow, A. (1991), ‘Stakeholder
Mapping’, Proceedings of the 2nd International Conference on Information
Systems, Cambridge, MA
The Organisation for Economic Co-operation and Development (OECD), for

the graph of R&D expenditure by country, figure 8.1 in Unit 8, source – OECD
(2011), ‘R&D Expenditure’, in OECD Science, Technology and Industry
Scoreboard, 2011, OECD Publishing, available at http://dx.doi.org/10.1787/
sti_scoreboard-2011-16-en
Booz and Company, for the table of top ten R&D spenders, figure 8.2 in Unit
8, source – Jaruzelski, B. et al, (2011), ‘Why Culture is Key’ strategy + business
magazine, at http://www.booz.com/media/uploads/BoozCo-Global-Innovation-
1000-2011-Culture-Key.pdf
The European Commission, for the graph of leading countries’ shares of the
international technology trade, figure 8.3 in Unit 8, source – Gatelli, D. &
Tarantola, S. (2007), ‘High-tech Trade Indicators 2006: EU-25 vs. USA, China
and Japan’, European Commission, at http://s3.amazonaws.com/zanran_
storage/statind.jrc.ec.europa.eu/ContentPages/16448439.pdf
Miniwatts Marketing Group, for the chart of the world’s internet users, figure
8.4 in Unit 8, source – Internet World Stats, at http://www.internetworldstats.
com/stats.htm
The United Nations (UN), for the table of world population growth, figure 9.1
in Unit 9, source – UN report, ‘The World at Six Million’ (2004), http://
www.un.org/esa/population/publications/sixbillion/sixbilpart1.pdf
Every attempt has been made to contact the relevant publisher or copyright
holder for their permission. We apologise for any inadvertent omission; please
advise us of any changes required for future editions.
x Copyright © 2013 University of Sunderland

Unit 1 The contemporary
world of business and
management
‘A strategy is something like: an

innovative new product; globalization,
taking your products around the world;
be the low-cost producer. A strategy is
something you can touch; you can
motivate people with; be number one
and number two in every business. You
can energize people around the
message.’
Jack Welch
Introduction
Jack Welch, a renowned business strategy consultant, was Chairman and
CEO of General Electric (GE) for 20 years, during which time the company’s
value grew by 4000 per cent. GE began providing electricity in New York
multinational State in 1892, and today is a multinational conglomerate with more
than 300,000 employees and a presence in 50 countries. As one of the
biggest companies in the world, it is not a typical business, but it is
emblematic of the way business has become a global phenomenon,
touching the lives of everyone, wherever they live.
conglomerate
The contemporary world of business and management is international in
scope. Many businesses have suppliers, customers, employees,
shareholders and partners in countries other than their home nation. They
may also have production facilities, offices, sales and retail outlets,
resources and assets in different countries. Their labelling, packaging,
website(s), promotional materials and other documents may be in
different languages. Their aspirations are likely to be global.
In this unit we will explore the nature and scope of business and
management across the world of today. We will introduce the subject of
this learning pack and prepare for the units to follow. We will lay the
groundwork by introducing what is new and current in business, and why
this is important. And we will focus on how these developments affect
the performance of businesses and decisions made by their managers.
Copyright © 2013 University of Sunderland 1

Contemporary Developments in Business and Management
We will look at some real examples of businesses operating around the

world, consider how they are managed, and analyse their performance
and prospects.
Unit learning objectives

After completing this unit you should be able to:
1.1 Identify the latest developments in the global business environment.
1.2 Explain why these developments are important.
1.3 Analyse the impact of these developments on organisational decision
making and performance.
Prior knowledge
This is the first unit of the learning pack Contemporary Developments in Business
and Management, and as such does not require study of any previous unit. You
should find it helpful to have an elementary knowledge of world geography and
some appreciation of current affairs. Some general knowledge of economics,
business, management or finance will also be helpful, as will any experience in
these fields. In addition, in each unit of this learning pack you will find at least
one learning activity corresponding to each learning objective, plus a list of self-
assessment questions at the end of each unit, again with one question
corresponding to each learning objective. In some of the learning activities, you
will be asked to refer to an organisation you have selected from your own
knowledge or experience. You should select this organisation as soon as possible,
and refer to it consistently in your responses to the learning activities throughout
the module.
The organisation you select should neither be too small nor too big – it should be
an enterprise that operates internationally. You should begin now by profiling the
organisation. Write down the following information:
■ The name of the organisation, bearing in mind that it may trade under more
than one name.
■ The location of the organisation – where it is registered and where it has its
headquarters.
■ What it does – you may find it useful to refer to its mission statement, or the
‘about us’ section of its website.
■ Is the organisation independent or is it owned by a larger organisation?
■ How large is it? (Possible metrics include market capitalisation, assets,
revenues, profits, employee headcount.)
■ What markets does it operate in, and who are its competitors?
Resources
The relevant reading for this unit may be found in Part One, Global Context,
and especially the chapter ‘The Global Economy’ in your core textbook (Hamilton
and Webster, 2012). Supplementary references are provided in the text.
2 Copyright © 2013 University of Sunderland

Unit 1 The contemporary world of business and management
1.1 The global business environment

It is a fundamental truth that the world is always changing, and that in business
the only constant is change. It is also true that, for current and recent generations,
we have never seen so much change, in human history, as in the past century. Far
from slowing, that change seems to be accelerating. A business in the early part
of the twentieth century would have depended for communication on hand- or
typewritten letters and memos (the telephone was in its infancy), sent by
messengers on foot, or by post carried by horse or stage coaches. The railways
and steamships of the advanced economies were opening up trade, and some
companies already covered the globe, but most businesses traded locally, in their
own country or region, or even just in their own town. Many people in countries
where the economies were only starting to develop lacked even these advantages.
Many of the business methods and resources we take for granted today have
been inventions and innovations of the last 25 to 50 years.
A number of key characteristics mark the contemporary business world as

different from what has gone before:
■ The global pattern of wealth.
■ International trade.
■ Greater movement of financial capital.
■ Rapid technological development.
■ Enhanced communications.
We shall consider each of these key characteristics in turn.
The global pattern of wealth

Swedish statistician Hans Rosling gave a presentation at Technology,
Entertainment, Design (TED) conferences in March 2007, entitled New Insights
on Poverty, which dramatically visualises the shifting patterns of global wealth
and development over nearly two centuries (see http://www.ted.com/talks/
hans_rosling_reveals_new_insights_on_poverty.html).
International relations are always changing, and perhaps never as rapidly as

during the last century. The world has moved through a series of distinct phases:
first, from one of great empires, where a few great powers dominated, in the
period up to the First World War (to 1914); second, to a period of conflict and
instability from the First to the Second World Wars, including the symbiotic
command economy rise of communism and fascism (1914 to 1945); third, to the period of the Cold
War, and the clash of ideologies and economic systems between capitalism and
the command economies of the Soviet Union, China and their allies (1945 to
about 1989); and parallel to the third period, and most recently, to the
breakdown of colonialism and the emergence of new economies in what used
to be referred to as the ‘Third World’, along with the collapse of the Soviet
Third World system and the beginning of economic reforms in China.
All countries strive for economic growth and to create wealth, with greater or
lesser success depending upon a number of factors, while some have resources
and historic legacies that mean they enjoy far greater wealth than others.
Organisations such as the United Nations, the International Monetary Fund
and the World Bank measure the gross domestic product (GDP) of all the

United Nations countries of the world, to allow comparisons, but no measure is precise; indeed
there is controversy over whether GDP is the best measure, and estimates vary.
It is broadly agreed that aggregate world GDP in 2011 was about US$70 trillion
(70,000,000,000,000), that the United States was the wealthiest single country
with a GDP of around $15 trillion, China was second wealthiest with a GDP
of around $7.3 trillion, and that the European Union (EU), the wealthiest
economic bloc in the world, had a GDP of around $17.5 trillion. Estimates
vary, but China’s GDP is forecast to overtake that of the US sometime between
International Monetary Fund 2016 and 2019 (http://www.un.org; http://www.imf.org; http://www.
worldbank.org).
GDP tells us about the absolute size of each economy, but it is a poor measure
of relative wealth, not least because the population of each country is different.
A calculation of GDP per capita adjusts for population size and results, for
example, in countries such as Australia and Sweden moving sharply up the
rankings to about the same level as the US.
World Bank
Economists use alternatives to GDP in attempts to draw a more accurate
picture. Gross value added (GVA) is one such alternative, adding subsidies to
GDP and subtracting sales taxes such as the UK’s value added tax (VAT). At a
company level, GVA may be used to calculate the gross value added by any
product or service the company currently offers. However, any measure of
gross domestic product
economic output only goes part of the way to measuring the wealth of a nation
and the living standards of its people – GDP is rather like measuring a person’s
diet and nutrition on the basis of how much they eat.
Purchasing power parity (PPP) is a technique for adjusting the calculation of

GDP to conditions in a country’s domestic market, in order to measure what
gross value added
you can buy with a unit of the country’s currency. Converting measures of a
country’s wealth from GDP to PPP per capita can yield startling results; China
and Japan have similar GDP, but measuring their comparative wealth using
purchasing power PPP per capita converts Japan to five times better off than China. An alternative
and novel measure is the ‘Big Mac Index’, to which we shall return in Unit 2.
Whatever the accuracy of these measures, the general truth they reveal is that
there are still highly developed economies such as the US, Japan and the
European Union, on the one hand, and much less developed economies such as
Pakistan, Vietnam and most of sub-Saharan Africa, on the other. It is no
coincidence that nearly all the big multinational corporations, with famous
brand names, come from the highly developed economies, while hardly any
come from the poorer countries – can you name a big global company whose
home country is Pakistan?
The global pattern of wealth can often be self-sustaining. If a company is

looking for a base in another market, it will look for where the necessary
infrastructure already exists, including premises and facilities, a local supply
chain, indigenous labour supply, political and economic stability and, perhaps
most important of all, an established base of prospective customers with
purchasing power. These conditions will tend to exist in relatively wealthy
countries and not in relatively poor countries. On the other hand, developing
economies can sometimes offer advantages, such as cheap labour – companies
from the US and the EU, as we shall see, frequently establish manufacturing

G8 operations in developing countries such as China and customer contact centres

in countries such as India.
In the next unit, you will identify the most prosperous countries, those that
make up the G8, the wider grouping of the G20, and the emerging countries
G20
characterised as BRIC, among other identifications.
International trade
A second key characteristic of the modern business world, and an important
context, is the continuing growth and sometimes pervasiveness of international
trade. Exporting and importing, once thought of as exceptional activities in an
economy, are now virtually the norm in any advanced nation. Think of an
example of any business you know and consider whether it sells to customers
in more than just its home country, whether it sources supplies from other
countries, or whether it has employees or facilities in other countries. The
BRIC
chances are that even quite a small business will answer yes to at least one of
these questions.
International trade grew rapidly in the latter half of the twentieth century, with
aggregated world exports rising from $0.5 trillion in 1950 to $12.5 trillion in
2005. This growth was more rapid than global output, rising at 3 per cent per
annum. Exports represented just 13 per cent of world output in 1970, but had
grown to 25 per cent by 2005, and the World Bank predicts they will grow to
34 per cent by 2030. See Figures 1.1 and 1.2.
140
130
120
110
100
90
80
70
60
50
40
1981 1985 1989 1993 1997 2001 2005 2009
Figure 1.1: World exports as percentage of global GDP

Source: World Trade Organization (2010)

Log scale
10,000
Average annual percentage change – 1950–2006 Manufactures
5,000 Total exports 6.0
Manufactures 7.5
Mining products 4.0
(Volume indices 1950–100)
2,500 Agricultural products 3.5
1,000 Fuels and mining products
500
Agricultural products
250
100
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Figure 1.2: International trade by product group

Source: World Trade Organization (2010)
mercantilism
Trade has extended to foreign shores almost since people started trading and
had the means to travel. Economists have asked why, and the earliest theory
held that all countries, and the enterprises within them, ought to seek to
maximise exports and minimise imports. This theory, dating back to at least the
seventeenth century, is known as mercantilism, and was once believed to be the
only way to ensure the wealth and indeed the security of each nation. Exporting
balance of trade was viewed as positive, to be pursued wherever possible, as it increased jobs and
stimulated industry in the home country, whereas importing was viewed as
negative, only to be undertaken if absolutely necessary, as it meant reduced
jobs and demand in the home country. Mercantilism advocated a positive
balance of trade (http://www.econlib. org/library/Enc/Mercantilism.html).
This theory still has its echoes, and advocates, as neo-mercantilism or economic
protectionism nationalism, and some countries in the nineteenth and twentieth centuries
pursued policies of protectionism, restricting trade with their international
rivals, either by applying high tariffs or quotas to imports, or by subsidising
their own exports – or both.
An alternative theory, originating with David Ricardo in the nineteenth century,

comparative advantage is that of comparative advantage, whereby countries aim to specialise in
production and exporting of goods that they are able to produce at lower
opportunity cost than their competitors. In other words, they specialise in goods
for which they have to forego fewer resources than their competitors in order
to produce those goods. This begins to explain why some countries specialise
labour-intensive in certain exports: developing countries in Asia, for example, export labour-
intensive goods and services that exploit their relatively low labour costs
(agriculture, textile manufacture, contact centres and so on), whereas the
developed economies of Europe and North America tend to specialise in capital-
intensive industries to exploit their capital reserves (oil, chemicals, automobiles

capital-intensive and so on) or knowledge-intensive industries to exploit their education

investments (pharmaceuticals, software design, biotechnology and so on). We
will look at the competitive advantage of nations in more detail in Unit 2.
As international trade has grown, new patterns have emerged, and any new
knowledge-intensive
enterprise is likely to find that existing competition is international, markets
exist all over the world, and innovation and disruption may come from
anywhere in the global network. Some enterprises are ‘born global’, which is
to say they are international in outlook from the outset. For example, the US
computer manufacturer Dell produced its first computer in 1985, sold units
abroad in its first year of operation, had embarked on a global expansion
programme by 1988, and now has facilities in Panama, Brazil, the UK, Ireland,
Poland, Slovakia, China, India, Malaysia and the Philippines, and customers
worldwide.
New trade theory in the 1980s held that there was advantage to be gained from
a greater degree of specialisation, economies of scale and product
differentiation. This theory regards products as increasingly similar to the point
of being commoditised, but sees scope for individual countries or enterprises to
commoditisation offer specialised versions appealing to the needs of different market segments
or different consumer tastes. For example, personal computers have become
commoditised, but Apple has differentiated on the basis of design and aesthetics
– see the case study in Unit 2.
The General Agreement on Tariffs and Trade (GATT), established in 1947 and
free trade policy modified in 1994, encourages the reduction of tariffs and other trade barriers
and the elimination of preferences, on a reciprocal and mutually advantageous
basis. GATT was originally supported by 23 countries, now 141, and free trade
(an absence of protectionism), derived from the theory of comparative
advantage, and as promoted by the World Trade Organization, is now the norm
(http://www.wto.org; Love and Lattimore, 2009).
Greater movement of financial capital

The third key characteristic of the modern business world is the ease of
movement of financial capital across borders. Where there is free trade, and
goods and services may move freely across international borders, it is logical
that finance may move in the same way. Many enterprises seek to make the
best investments, and to deploy capital where it will work best for them,
regardless of their nationality. This is one of the reasons we refer to large
enterprises that operate in many countries as multinational corporations.
We may understand financial capital movement in this way:

‘The movement of money for the purpose of investment, trade or business
production. Capital flows occur within corporations in the form of
investment capital and capital spending on operations and research &
development. On a larger scale, governments direct capital flows from tax
receipts into programs and operations, and through trade with other nations
and currencies. Individual investors direct savings and investment capital
into securities like stocks, bonds and mutual funds.’
(http://www.investopedia.com)
There was not always so much freedom of movement. Although foreign

exchange contracts may be dated back to the twelfth century, international

banking was not really established until the nineteenth century with the shift
from gold and silver coinage to paper money. Until then, enterprises were wary
of moving capital abroad, for security reasons. At the end of the Second World
War, the creation of the International Monetary Fund, the International Bank
for Reconstruction and Development (forerunner of the World Bank), and the
General Agreement on Tariffs and Trade, all helped foster a climate of greater
security for movement of capital.
Historically, national governments have sought to restrict the freedom of

individuals and enterprises to move money out of the country. At its simplest,
this takes the form of transaction taxes, ranging through to more sophisticated
measures such as exchange controls, which prevent or limit the buying and
exchange controls selling of a national currency at the market rate. Even today, we see concerns
by national governments that enterprises operating in their territories pay
corporation taxes – Starbucks, Amazon and Google earned adverse publicity in
2012 for their avoidance of UK tax – while the enterprises seek to minimise
their tax liabilities by moving assets to countries where they may pay less. See
the Apple case study in Unit 2.
In Unit 2 we will go on to look at two specific forms of financial capital

movements, foreign direct investment (FDI) and foreign indirect investment
(FII) or portfolio investment. For now, it is enough to note that financial capital
moves more freely across national borders than it has ever done, and the trend
is towards greater movement of financial capital.
Rapid technological development

Commentators on the old Soviet Union marvelled at how its dictator of three
decades, Josef Stalin, found Russia working with a wooden plough and left her
equipped with atomic piles (Deutscher 1969). This epithet serves as testimony
to the extent of technological change in the twentieth-century world.
That century saw the advent of the first automobile manufacture (circa 1900),
long-range radio (1901), the automated assembly line (1901), military
innovations including the tank, submarine and fighter planes, and chemical
weapons (1914–18), the first passenger airline (1919), television (1926),
antibiotics (1928), the jet engine (1937), the first atomic weapon used (1945),
the first nuclear power plant (1954), the first satellite launched (1957),
integrated circuits (1958), the laser (1960), the first manned space flight (1961),
the microprocessor (1968), the internet (1973), personal computers (1978),
mobile phones (1983), the world wide web (1989), the Global Positioning
System, better known by its initials, GPS (1993) and gas-powered fuel cells
(1997). The start and end of the century looked very different.
Rapid and continuing technological development is now a key characteristic

of the modern business world. It seems that, almost as quickly as new business
problems emerge, solutions to them are being discovered, invented or
improvised. Technology, in this sense, should be understood in its broadest
application as a collection of tools, equipment and machinery, plus their
modification, adaptation and deployment, and embracing ‘old’ as well as ‘new’
technology. It’s about the means to get things done.
Nevertheless, one of the hallmarks of recent rapid technological development

is the emergence of new technologies, unknown to previous generations. These

are sometimes described as emerging and converging technologies, and
identified by acronyms such as NBIC, which stands for nanotechnology,
biotechnology, information technology and cognitive science, GNR, which
stands for genetics, nanotechnology and robotics, and GRAIN, which stands
for genetics, robotics, artificial intelligence and nanotechnology. One of the
challenges for the modern manager is keeping abreast of new developments
and understanding the potential applications of new technologies. You will
explore this subject further in Unit 8.
Enhanced communications
The fifth key characteristic of the modern business world is enhanced
communications. A hundred years ago the telegraph, telephone and radio were
in an early stage of development, while television and the internet were yet to
be invented. Written communications got faster and faster, but up to the 1980s
most written business communication was handwritten or dictated, then
typewritten, then hand delivered or sent by a postal service such as the UK’s
Royal Mail. The delivery time for any communication bound beyond the same
building could be measured in days rather than hours, and mail to other
countries could take weeks.
Developing and bringing together the technologies of telephony and the

microprocessor has changed that, and in communication terms we are now in
the age of the internet. Intra-office memoranda, as they used to be called, are
now email messages, or private messages via an intranet or web-based
community, and are sent and received almost instantaneously. Communication
may be conducted between different countries, indeed different continents, by
a choice of telephone, short message service (SMS) text, email, teleconferencing,
videoconferencing or video call such as Skype, and these can take place
immediately, without any forethought or planning required.
Communication is not just faster, it is now multimedia. Multimedia messaging

service (MMS), software for still and moving image capture and animation,
and web-based technologies, such as Webinar software, permit file sharing,
audio and video contact for any number of meeting participants, ensuring not
just static but dynamic communication, interactivity, and the use of text, voice,
graphics, animation, photography, video and any other media that may be
shared.
Language used to be a barrier to international communication, but the internet

has accelerated the global trend towards adoption of English as the common
language for most business communication. This enables more people to share
the communication technologies.
In this era of enhanced communications, the challenges for business managers

Recommended reading: Brooks et are not just how to benefit from the ready availability of so much
al. (2011); Capon (2009); Guy communication, but to choose where, when, how and how frequently to
(2009); Harrison (2010); communicate, and to avoid communications overload.
Worthington and Britton (2009).

ga
nin ct 1. Select any one of the five developments in the global business
Lear
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1a environment described, and illustrate it with an example from your

y
knowledge or experience. You should choose an example of an

enterprise that can demonstrate your selected development in some
detail.
2. Can you think of any other recent development that affects the global
business environment? Make the case for it to be included alongside the
five developments described above.
eedb ac
F
1. You could have selected any one of the five developments, but
k
1a whichever selection you made, it should have described one of the

following:
■ Where their wealth lies – invested mainly in their home country or
abroad.
■ The main countries that they buy and sell goods and services
to/from.
■ What they have done to move their financial capital around the
world.
■ The key technologies for their business, and what new
technological developments have made a difference for them.
■ How the business communicates, internally and externally, and
what benefits it gains from new communication technologies.
2. You could have identified: increased government regulation of business
(as a positive or a negative), greater movement of labour (and how
immigration controls are regulating this), increased consumer choice and
the pressures that generates for enterprises to differentiate their offers,
the power of global brands and how they limit new competition. Or you
may have identified something else altogether – in certain industries or
sectors there may be another distinctive development, but does it affect
all businesses?
1.2 The importance of developments in the

global environment
The business as a transformation system
We shall now consider the application of these developments to businesses, and
its implications. We begin by considering the internal arrangement of a business
as a transformation system.
The operations of a business – any business – may be described as a trans-

formation system, which is to say a process for transforming inputs into
outputs. The inputs may include: land and natural resources; raw materials;
tools, equipment and technology; human resources; financial resources;
entrepreneurial and managerial skills. The outputs may include: goods or
products, as in a traditional manufacturing model; services, demonstrating that

this system applies to companies in the service economy; ideas and information,
demonstrating that this system applies to the knowledge economy. See Figure
1.3.
Inputs
Land Outputs
Materials and equipment Goods or products
Transformation Services
Human resources
Technology Ideas and information
Financial resources
Figure 1.3: Transforming inputs into outputs
Businesses take a combination of inputs and act on them to create outputs. For
example, they expend financial resources to acquire raw materials, and then
deploy human resources, machinery and equipment to manufacture finished
goods for market. An automobile manufacturer raises capital, builds a factory
with assembly lines, employs assembly workers, sources and buys component
parts, organises the workers to assemble them, and distributes finished
automobiles for sale. This is a greatly simplified example, but illustrates how
the system works.
One characterisation of this process is that of wealth creation. As businesses act

to transform the inputs to outputs, they are essentially creating wealth, or
adding value. Thus they are contributing to the pattern of global wealth. If they
take inputs such as labour and natural resources from one country and
transform them into outputs such as capital or consumer goods in another, then
they are shifting that wealth as they engage in international trade. The
transformation process for multinational enterprises at least is also likely to
involve movement of financial capital, and for any enterprise it is likely to
involve changing technology and enhanced communications. We can find
evidence in the transformational model for all of the key characteristics of the
contemporary global business environment.
Viewing business in this way also helps us to distinguish the internal from the
external environment, and to understand how the external environment acts on
the business. Figure 1.4 shows the business as a transformation system with
the range of external forces that bear upon it. In Figure 1.4, the original flow
diagram from Figure 1.3 depicts the internal environment, while the arrows
from the range of forces outside the flow diagram depict the external
environment.

economics technology
competition
Inputs
politics
Land
Outputs
Goods or products
Materials and equipment
Transformation
Services
Human resources
Ideas and information
Technology
Financial resources
social and cultural factors laws and regulations

Figure 1.4: The business as transformation system
It is clear that, without a strategy for understanding and dealing with these
external influences, any business will be severely constrained in its capacity to
operate internally and to fulfil its goals.
The external environment

The external environment affecting businesses is big and complex, but must be
analysed and understood if any business is to succeed, and sustain its success
in the long term. The diagram in Figure 1.5 attempts to depict the whole of the
external environment, and gives a flavour of the extent of issues involved.
Political, legal, Institutional and

administrative, regulatory social context
Technology
Skills Industry
Competitors structure
Suppliers A Customers
Location
Allies
Market
Moral, ethical, social, cultural
structure
Figure 1.5: The external environment

macro environment We may view the external environment as it impacts upon businesses in two
ways, as a macro environment and as a competitive environment.
Macro, from the ancient Greek for ‘large’, is the term for broader issues as
opposed to finer details or individual instances, as in macro’s opposite, the
competitive environment
micro environment. Some commentators also use an intermediate scale, which
they call the meso environment, to refer to the organisation of physical
infrastructure, including transport, communication and power distribution
systems, and to sector policies, especially education, research and technology.
The macro environment refers to conditions that pertain in the economy and
micro environment society as a whole, rather than any particular industry, sector or locality. The
macro environment is about all the big external issues that impact on
businesses, and may be analysed using the PESTLE analysis tool.
meso environment
The earliest versions of this macro environment analysis tool were known as
PEST, which stood for Political, Economic, Social and Technological issues.
The first recorded use of the tool seems to be that of Francis Aguilar in 1967,
although he arranged the acronym as ETPS. PEST became popular from the
1980s, when its limitations became apparent, and various extensions were
devised, in recognition of the wider range of factors, with the most commonly
used variation being PESTLE.
PESTLE stands for the six dimensions of the macro environment:

■ the Political environment
■ the Economic environment
■ the Socio-Cultural environment
■ the Technological environment
■ the Legal environment
■ the Ecological environment.
Recommended reading: Aguilar We shall look at the PESTLE framework in more detail, and begin to apply it,
(1967); Cadle et al. in Unit 3, and subsequently delve deeper in Units 6, 7, 8 and 9.
(2010); http://www. cipd.co.uk/hr-
resources/factsheets/pestle- The competitive environment may be regarded as the micro environment, or a
analysis.aspx.
more specific way of looking at the external environment, in relation to the
competitive forces that impact on a specific enterprise, or cognate group of
enterprises. It is sometimes referred to instead as the market structure.
Professor Michael E Porter of Harvard University Business School devised the
best-known model for analysing the competitive environment, known as
Porter’s Five Forces. Porter himself, in his book on competitive strategy, referred
to these forces as the micro environment. The five forces of Porter’s model are:
■ competitors
■ buyers
■ suppliers
■ substitutes
■ potential new entrants.
We shall investigate Porter’s Five Forces in more detail in Unit 4, but for now we
should recognise them as the most popular technique for analysing the competitive
environment. The way the five forces interact is depicted in Figure 1.6.

Potential
entrants
Threat of
new entrants
Industry
Bargaining competitors
power of
suppliers
Suppliers Buyers
Bargaining
power of
Rivalry among
buyers
existing firms
Threat of
substitute products
or services
Subtitles
Figure 1.6: Interaction of Porter’s Five Forces Source: Reprinted with the per-
mission of the Free Press, a division of Simon & Schuster, from Competitive
Strategy: Techniques for Analysing Industries and Competitors by Michael E
Porter. Copyright 1980 by Michael E Porter]
Recommended reading: Porter The following case study illustrates many of the developments we have
(1979); Porter (1980); Porter considered so far in the contemporary world of business and management.
(2008). Note especially the evidence of Porter’s Five Forces at work.
Case Study
Starbucks in the UK
Founded in 1971 as a single outlet in Seattle, USA, Starbucks began
growing into a global chain from 1983, inspired by Italian barista coffee
shops. In 2012 it had more than 20,000 coffee shops in more than 60
countries worldwide. Starbucks has 150,000 employees and a turnover of
$13.3 billion, and is the global market leader. In 1998, Starbucks entered
the British and European markets through its acquisition of 65 Seattle
Coffee Company stores in the UK.
Competing in the UK is different from Starbucks’ home in the US, as the
UK is traditionally more of a tea-drinking country, but buyer behaviour is
changing. In the past, British towns and cities had Lyons coffee houses on
street corners, waves of Italian immigrants opened cafes during the
twentieth century, and coffee consumption has been growing, relative to
tea consumption.

Case Study continued
Starbucks currently has the second highest number of coffee outlets in

the UK, with its main competitor, Costa Coffee (bought from its Italian
founders in 1995 by Whitbread), having 1400 to Starbucks’ 750, and
Caffè Nero next with 500 outlets. These three dominated the market in
2012, with market shares of 40 per cent for Costa, 30 per cent for
Starbucks and 15 per cent for Nero, and no other competitor having as
much as 2 per cent. But new entrants are coming, recognising the
revenues and profits to be made from the rising interest in coffee,
including AMT Coffee, Harris & Hoole (owned by Tesco) and Caffè
Ritazza.
Substitutes for coffee drinking in Starbucks outlets include home-brewed
coffee, with increasingly sophisticated machines available, tearooms and
fast food outlets offering a range of beverages and snacks, and licensed
bars where alcohol may also be served. Clues to substitution may be
discerned in Starbucks’ own experiments in diversification. It sells a range
of other beverages and snacks in their outlets, it offers coffee beans and
grounds for customers to take home, it has outlets within bookstores and
other retail contexts, it has launched a premium instant coffee, and it has
unbranded outlets in Seattle offering alcohol and entertainment such as
live music.
Starbucks has sought to differentiate itself from the competition, and one
arena for this is in its dealings with suppliers. Its website declares ‘since
we opened our first store in 1971, we’ve dedicated ourselves to earning
the trust and respect of our customers, partners (employees) and
neighbours’ and it carries the Fair Trade mark on its coffee – see the
section on stakeholder analysis in Unit 3, and especially the discussion of
Fair Trade in relation to the chocolate industry in Unit 3’s case study.
In 2012 a scandal emerged about global multinational companies
avoiding UK corporation tax. Among the household names with
favourable reputations damaged by the scandal were Google and
Amazon, but Starbucks was the first to react. Perhaps recognising its
vulnerability because of the visibility of its high-street outlets, and its
susceptibility to the ready availability of alternatives for consumers,
Starbucks took action while Google and Amazon preferred to quietly ride
out the storm of public disapproval. Starbucks met with the UK
government and volunteered to pay £10 million extra taxation for the
next two years.
(Sources: http://starbucks.co.uk/;
http://www.guardian.co.uk/business/2012/jun/22/coffee-shop-revolution-
continues;
http://www.caterersearch.com/Articles/13/01/2012/341987/Branded-
coffee-chains-continue-to-go-from-strength-to.htm;
http://www.bbc.co.uk/news/business-21219823)

ga
nin ct Return to the practical example of a business from your own knowledge or
Lear
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1b experience, which you used in the last learning activity. Bearing in mind the
y
developments in the global business environment we discussed at the start

of this unit, and that you focused on in the previous learning activity,
describe your chosen business as a transformation system, with reference to
its macro environment and competitive environment.
eedb ac
The business as a transformation system: your example should specify the
F
1b inputs and outputs of the business. For example, Starbucks takes as inputs
coffee beans, water, sugar, milk and packaging (and other things) as
materials, shop locations convenient for consumers, furniture and shop
fittings, and espresso coffee machines as equipment, trained baristas as
employees, and finance to fund all of this, and adds value by transforming
all this into speciality coffees and other beverages and snacks, and a
comfortable and refreshing customer experience.
The macro environment: you should use the PESTLE analysis tool to describe
your business’s macro environment. Starbucks took account of the political
dimension in offering to increase its UK tax contribution. Its economic
environment includes the range of competition (see below) and its
relationships with suppliers. Its socio-cultural environment is affected by
changing consumer tastes, and in some countries attitudes to coffee as a
stimulant. Its technological environment depends to some degree on the
relative inability of the consumer to replicate the quality of barista coffee
with a domestic machine. Its legal dimension includes the impact of
company law and employment law on the business. And its ecological
situation is shown in its commitment to the Fair Trade kitemark and the
other ethical commitments the company makes.
The competitive environment: you need to reference all of Porter’s Five
Forces. Starbucks competes directly with other coffee outlets such as, in the
UK, Costa Coffee and Caffè Nero, and indirectly against potential
substitutes such as coffee drunk at home, and alternatives such as tea and
other beverages. Starbucks’ competitive environment also includes the
threat of new entrants such as supermarkets which have similar capabilities
in food sourcing, storage and preparation, and customer service, the buying
power and consumer preferences of its customers, and the bargaining
power of suppliers such as coffee growers.
kitemark

1.3 Organisational decision making and

performance
We began the unit with Jack Welch’s view of what matters for business strategy in
the contemporary world. Strategy is increasingly important for big businesses,
especially those competing globally. Old and more rigid models of business
planning have been discredited along with the grand scale central economic
planning of the communist countries. Large corporations used to have five-year
plans and longer, tying themselves in to product development, production, and
sales and marketing programmes extending over many years. But this proved
inflexible as the pace of change quickened.
Welch’s predecessor for ten years as CEO of General Electric, Reginald Jones, who
actually appointed Welch in 1981, was the architect of what was, for the time, a
typical strategic planning model for the business. This created and sustained what
would now be regarded as a bureaucratic structure, with a vertical hierarchy of
management through subordinate companies and divisions all the way up to the
group board of directors. What Welch and others in other businesses changed was
to flatten the hierarchies, devolve management decision making down the line, and
strategic business unit make each strategic business unit more flexible and able to respond to changes in
the business environment.
We can see the influence of each of the five trends we identified in the con-
temporary business world in this new approach to managing organisational
performance and making management decisions.
The global pattern of wealth requires enterprises to move business operations

closer to where they are required, anywhere in the world, and be prepared to move
them again at short notice. The same pattern compels businesses to identify new
market opportunities wherever they arise and to move quickly to meet the demand.
Volkswagen has become the largest car manufacturer in Europe, largely through
marque its policy of acquiring marques and production facilities in as many European
countries as possible, responding to customer demand. In 2012, Volkswagen had
factories in 15 European countries, including Spain (SEAT), the Czech Republic
(Skoda), France (Bugatti), Italy (Lamborghini) and the UK (Bentley). Worldwide,
Volkswagen actually has production operations in 61 countries, including in North
and South America, Asia and Africa.
International trade offers so much choice of opportunity that the key business skill
is in identifying the most attractive markets, those which offer the best competitive
potential and best strategic fit for an enterprise. Many firms enter into international
trade to achieve economies of scale, but there may be other benefits, and financial
offshore banking services firms have been particularly adept at spotting these. Many offer offshore
banking facilities, protecting their individual and corporate clients from more
punitive taxation, or from financial or political instability, and offering greater
privacy.
Greater movement of financial capital means businesses are better placed to move
their assets wherever they may be required. This may mean making foreign
acquisitions, or investing in new operations in other countries, or it may mean
depositing financial capital in more tax-effective locations to minimise tax
liabilities. A number of US companies, including Pepsi, Apple and Google, have

their European headquarters in the Republic of Ireland to take advantage of its

low rates of business taxation, just 12.5 per cent in 2012.
Rapid technological development means that capabilities may increase or

improve more rapidly, and businesses need to harness those capabilities to their
marketing goals. Indeed, sometimes these capabilities may drive their marketing
direction. When a company identifies it has a distinctive capability, it acts
quickly to secure competitive advantage from this capability. In the 1980s,
Japan’s Toyota Motor Corporation (TMC) became more competitive relative
just-in-time to the US car industry by developing, among other things, its ‘just-in-time’
inventory management system, which enabled TMC to be more flexible and
responsive to changes in customer demands. This was possible because of the
Japanese culture of the keiretsu, a close collaborative relationship with a group
of suppliers for the long term (http://www.economist.com/node/14299720).
keiretsu
Enhanced communications means decisions may be communicated and acted

upon in minutes rather than days. Cisco Systems found by 2001 that the time
it took to roll out a global sales training programme covering new products
took longer than the new products’ life cycle. Cisco resolved this dilemma by
implementing online learning, which could be rolled out much faster over the
internet (http://www.cisco.com/web/learning/netacad/index.html).
There are many other challenges to management of a modern business, and

managers have to cope with issues such as innovative business funding models,
intra-corporate entrepreneurship, the interdependence of business functions,
disruption to traditional line management from matrix structures and project
management, more complex human resource issues such as flexible working,
Recommended reading:
Hodgkinson and Starbuck (2012); diversity and welfare benefits, intellectual property, and working with social
Kay (1995); the chapter ‘The media. With so many challenges, it is imperative that managers maintain focus
Competitive Environment’ in on the most significant trends for their businesses, and their strategies to deal
Brooks et al (2011).
with them.
.
ga
nin ct
Identify an example of a national market where an indigenous carbonated
Lear
ivit
1c soft drink competes effectively with the global market leader, Coca-Cola.
y
What factors influence this, and what sort of competitive responses can
Coca-Cola make?
eedb ac
F
Examples you may have identified include Pepsi Cola, which actually outsold
1c Coca-Cola in the US for a period, Britvic’s Irn Bru, which outsells Coca-Cola
in Scotland, Denmark’s Jolly Cola, Angry Birds in Finland and Inca Kola in
Peru. There are plenty of other examples, and the competitive situations
frequently change, with new products emerging as new market entrants,
and protectionism sometimes influencing buyers’ decisions. Coca-Cola’s
competitive response is frequently to establish bottling plants and engage
the supply chain in each country. In Peru, Coca-Cola took the step of
acquiring Inca Kola and now sells it into other countries in Latin America. In
the US, Coca-Cola’s competition with Pepsi is a case study in itself, to which
we shall return in Unit 4.

Self-assessment questions
1.1 Briefly describe two of the five key characteristics of the contemporary
global business environment.
1.2 Distinguish between the macro environment of an enterprise and its
competitive environment.
1.3 Give an example of a strategic decision impacting on the competitive
performance of a business.
Feedback on self-assessment questions

1.1 You could have chosen from any of the following five descriptions:
■ The global pattern of wealth describes the spread of wealth, and
inequalities in wealth creation and spending power in different parts
of the world, as measured by GDP and PPP.
■ International trade is a growing global economic phenomenon,
reflecting drives for new markets and customers, and the need for
enterprises to reduce costs.
■ Greater movement of financial capital is the increasing trend for
money and other financial assets to be more freely moved from
country to country be enterprises and governments.
■ Rapid technological development refers to the ever faster capacity of
enterprises to invent, discover and improvise means to solve business
problems, often deploying the very latest technologies to do so.
■ Enhanced communications means the speed of communications, even
at intercontinental level, utilising the internet and other new tech-
nologies.
1.2 The macro environment refers to the range of big external factors
influencing the operation of any business, regardless of nationality,
industry or sector. The competitive environment, on the other hand, could
be characterised as the micro environment, and refers to the range of
competitive forces impacting on a specific enterprise, including its
competitors, suppliers, buyers, product/service substitutes and potential
new market entrants.
1.3 You may have selected any example such as Starbucks’ decision to work
with cooperatives representing coffee bean growers in the countries where
they source these raw materials, and their adoption of the Fair Trade
mark. Starbucks calculates that the value of this mark, despite the
increased cost of buying more expensive coffee beans, lies in the
sustainability of its supply chain and in enhanced consumer loyalty to its
brand and products. Similarly, Starbucks considered it needed to make a
public voluntary contribution of extra UK tax to offset the public
relations damage caused by revelation of how its business model avoids
UK tax.

Summary
In this unit you have examined the contemporary world of business and
management, recognised that it is international in scope, and identified the five
key characteristics affecting all businesses, wherever they are in the world. You
should now recognise this as a macro environmental analysis of global business
as a whole. The five key characteristics identified are:
■ the global pattern of wealth
■ international trade
■ greater movement of financial capital
■ rapid technological development
■ enhanced communications.
You have considered the importance of these developments, within the context
of the business as a transformation system, one that transforms inputs to
outputs in the process of wealth creation, within the context of macro-
environmental analysis, using the PESTLE analysis tool, and within the context
of competitive analysis, using Porter’s Five Forces.
Applying all of this, you have looked at the operational decision making and
performance of global enterprises, drawing conclusions as to how enterprises
formulate business strategy in an ever-more complex world. In the next unit, we
shall consider the way the world as a whole is changing, and the process of
globalisation, preparing the ground for a more detailed analysis of the global
business environment in subsequent units.

Unit 21 Globalisation
‘We now live in a global village.’

Fiore and McLuhan, 1967
Introduction
It was 1962 when the Canadian social commentator Marshall McLuhan
first described the world we live in as a global village. McLuhan was
interested in mass media, and was struck by how, even then, over half a
century ago, communications technology was drawing people from all
around the world into a single community. This was nearly 30 years before
the invention of the world wide web, but already the trend we now
recognise as globalisation was under way.
In 1962 countries were more insular and people rarely gave much thought
to what went on beyond their national borders. Foreign travel was a
luxury for the rich only, with cheap flights and package holidays still to be
developed. Yet the signs of change were there. President John F Kennedy
of the United States had announced a mission to land a man on the moon
(1961). British Prime Minister Harold Wilson was to speak of the white
heat of technology (1963). And businesses were beginning to expand
overseas, quite rapidly in some cases.
In this unit we will explore what is meant by globalisation, its definitions

and indicators, and try to understand what drives and inhibits this trend.
We will weigh the advantages and disadvantages, acknowledging that
there are many who do not see globalisation as positive, and focus in on
the particular costs and benefits for business.
We will consider some notable examples of globalisation in business,

identifying and distinguishing international trade and foreign direct
investment. And we shall use Michael Porter’s diamond model to investigate
why some countries seem better able than others to develop and sustain
competitive advantage on a global scale.

2.1 Define globalisation and identify its main indicators.
2.2 Analyse the key drivers of globalisation.
2.3 Analyse the factors inhibiting globalisation.
2.4 Compare the costs and benefits of globalisation for business.
2.5 Distinguish between international trade and foreign direct
investment.
2.6 Assess a country’s competitive advantage using Porter’s diamond
model.

Contemporary
Contempary Developments
Developments
in in
Business
Business
Management
and Management
Prior knowledge
This unit follows from Unit 1, which should be studied first. Some appreciation
of general concepts in business and management would be helpful, along with
recognition of some terms in financial management, but this unit should be
accessible nonetheless.
Resources
The relevant reading for this unit may be found in the chapters ‘Globalization’
and ‘The Global Economy’ in your core textbook (Hamilton and Webster, 2012).
Supplementary references are provided in the text.
2.1 Definitions and indicators of

globalisation
The essential idea of globalisation is that the world is getting smaller. Not in a
geological sense, of course – the physical dimensions of the earth remain much
the same. But it is quicker and easier than it has ever been to travel and
communicate around the world, and to do business, which is our focus of
interest. (See, for instance, Cairncross, 1997.).
When Adam Smith wrote The Wealth of Nations, in the late eighteenth century,
he journeyed from Glasgow to Edinburgh every week, by the fastest means
possible at the time, the stage coach, and it took him one and a half days. Today
the same journey by train takes 45 minutes. Nineteenth-century emigrants from
Europe to America said goodbye to their families at the quayside, in the sure
knowledge that they were unlikely ever to see them again, able to stay in contact
at best by exchange of letters that spent many weeks in the mail. Today they can
pick up the telephone and talk to their relatives immediately, they can have
visual contact at no extra cost thanks to the internet, and intercontinental
flights are sufficiently frequent and inexpensive that they can be face-to-face
the same day, if the need arises.
Communications used to take as long as it took people to travel, carrying

letters. Then, about one hundred years ago a telegraph message could be routed
around the world in less than 20 minutes. Now telephone, email and even video
communications may be transmitted to anywhere on earth, and received more
or less instantaneously.
As recently as the early part of the twentieth century, the influenza pandemic
of 1918–20 is believed to have spread globally largely because of the
unprecedented international movement of people caused by the First World
War, leading to more deaths from flu than from the war. Prior to this, the limits
of international travel meant spread of diseases worldwide was so rare that
each instance is well known, such as the Black Death of the fourteenth century.
Global health scares today, such as the outbreak of SARS in Hong Kong in
2002, lead to international alerts, coordinated efforts by bodies such as the

World Health Organization, and borders being closed, as the speed at which
diseases might spread is properly understood. Even with these measures, SARS
infected people in 37 countries within weeks.
globalisation
Globalisation brings people all around the world closer together but, as these
examples show, this is not always a good thing – later in this unit you will weigh
the costs and benefits. However, we may feel we understand what globalisation
means, and recognise its effects. Nevertheless, pinning down a precise definition
of globalisation is not easy. There are differing and conflicting definitions, and
intense debate as to whether it is a positive or a negative phenomenon.
ga
nin ct
Is the world getting smaller? The examples given above support this idea,
Lear
ivit
2a but how does this compare with your personal experience, or that of the
y
organisation you work for? Consider whether there is anything that you, or
your organisation, do differently because of the way the world is changing,
or has changed. Do you have direct experience of the effects of
globalisation?
eedb ac
F
Recent years have seen the growth of budget airlines. You might have
k
2a found it easier to travel somewhere further afield than you would previously
have considered feasible, for a holiday or a study trip, or you might have
made contact with someone in another country who shares with you a
common interest or hobby (20 years ago this would have been unlikely).
The use of social media sites such as Facebook and Twitter has facilitated
worldwide networking. Your organisation could have suppliers or customers
in another country, even another continent, when previously their
operations were confined to just one country. Or perhaps you frequently
video-conference with colleagues from another part of the world? One
counter-argument is that costs of fuel and transportation are driving local
sourcing of manufacturing, making countries or regions more self-reliant,
and restricting globalisation – but the evidence for this is scant.
Definitions
How we define globalisation is likely to depend upon our perspective, and our
economic development main areas of interest, whether these are politics, economic development, world
health, international security, trade and business, or something else. Here is a
general definition:
‘Globalization is a process of interaction and integration among the people,
international trade
companies, and governments of different nations, a process driven by
international trade and investment and aided by information technology.
This process has effects on the environment, on culture, on political systems,
on economic development and prosperity, and on human physical well-
being in societies around the world.’
(http://www.globalization101.org)
This may be easier to understand, but has the drawback of being very broad,
in trying to address the entire scope of globalisation. We can begin to get a
better sense if we narrow our focus to the field of business and management.

The International Monetary Fund (IMF) says:

‘The term “globalization” began to be used more commonly in the 1980s,
reflecting technological advances that made it easier and quicker to
complete international transactions – both trade and financial flows. It
refers to an extension beyond national borders of the same market forces
that have operated for centuries at all levels of human economic activity –
village markets, urban industries, or financial centres.’
(http://www.imf.org/external/np/exr/ib/2008/053008.htm)
Even more simply, the Financial Times defines globalisation as ‘the integration
of economies, industries, markets, cultures and policy-making around the
world’
(http://lexicon.ft.com/Term?term=globalisation).
This helps us see that globalisation is about the process of increasing the
connectivity and interdependence of the world’s markets and businesses,
regardless of national boundaries.
Evidence of this includes the spread of well-known brands around the world.
The French used to resist the spread of McDonald’s restaurants (see case study)
as an intrusion of American culture into the distinctively French realm of
cuisine. Since 2007, France has been the largest single market for McDonald’s
outside the United States
(http://www.francetoday.com/articles/2011/05/16/how_about_a_big_mac_au_p
oivre.html).
It would once have seemed incongruous to see McDonald’s outlets in other

countries, but we can now see their logo script rendered in Japanese, Chinese,
Cyrillic and Arabic characters, while in India, they eschew beef and sell curries
under the same branding (see case study). Wherever we travel, we see the
familiar names of McDonald’s, Starbucks, Visa, Disney and Amazon.
Even quite small businesses now find it easy to trade across national borders,
and the traditional division of firms into exporters and non-exporters is
becoming blurred. The practicalities involved in exporting and importing are
often indistinguishable from trade within the home country.
Indicators
There are three main economic and financial indicators of globalisation:
migration migration, international trade and financial flows. Indicators may be under-
stood as significant measurable effects.
Migration is about flows of people, or the movement of people across national

borders. The easier it is for people to travel, the more likely it is they will do so
if there is an economic need. Migrants have always moved away from countries
financial flows
with limited opportunities towards wealthier countries, and now people readily
move to wherever work prospects are better.
Between 1950 and 2006 international trade (exporting and importing) grew
27-fold in volume terms, three times faster than world output. We can conclude
that international trade is becoming an ever more important component in
national and global economic activity, and is a clear indicator of globalisation.
foreign direct investment (FDI) Financial flows refer to the movement of financial capital (in simple terms,
money) from one country to another. These may take the form of foreign direct
investment (FDI) or foreign indirect investment (FII) and will be discussed in
foreign indirect investment (FII) more detail later in this unit. For the moment, we should note that FDI has
grown even more than international trade.
Most of the growth of the world economy in the latter half of the twentieth
century may be attributed to recovery from the damages of the Second World
War. But the more recent (last 20 years) and more rapid growth, especially in
trade and investment, indicates globalisation.
Language is another significant marker of globalisation. The number of

languages in common use is diminishing, and a small number of languages
dominate our international communication. Only ten languages have more than
100 million native speakers, and the United Nations uses just six ‘official’
languages in its meetings. English increasingly stands out as the most used
language, despite there being nearly three times as many native Mandarin
speakers, and despite English not being even the most commonly spoken native
tongue of the European languages (that’s Spanish). The difference is that
English is by far the most commonly spoken second language, and is often the
default language of the internet and of business.
ga
nin ct There are some nationalist tensions in Europe (and arguably elsewhere) with
Lear
ivit
2b calls for independence for the likes of Catalonia and Scotland. To what
y
extent does this contradict the trend towards globalisation?
eedb ac
The trend towards globalisation is not uniform. Localisation, meaning the
F
2b translation of products and services into native languages, and

accompanying cultural adaptations, is increasing, and this trend
complements globalisation. Devolving governments, recognising and
encouraging national differences, independence movements, conserving
local languages and dialects, and so forth, are all part of the overall picture.
2.2 Key drivers and facilitators of

globalisation
It may be argued that globalisation is not yet fully global, although the trend
is clear. Many of the underdeveloped economies of the world are not yet
engaged in the way we have described, and most trade and investment takes
triad place within and between three economic blocs, sometimes called the triad, led
by the G8 group identified in Unit 1. The triad comprises:
■ The European Union (EU) of 27 member states.
■ The North American Free Trade Association (NAFTA) comprising the
United States, Canada and Mexico.
■ Japan.

But the emergence of the so-called BRIC countries – Brazil, Russia, India and
China – is generating serious new competition.
The rest of the world is catching up. Other emerging nations include the so-
called CIVETS group of Colombia, Indonesia, Vietnam, Egypt, Turkey and
South Africa, or the alternative cluster of the Next Eleven (N-11) identified by
Goldman Sachs as Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria,
Pakistan, Philippines, Turkey, South Korea and Vietnam, or the G20 group
comprising the G8 and the European Union plus the developing countries of
Argentina, Australia, Brazil, China, India, Indonesia, Mexico, Saudi Arabia,
South Africa, South Korea and Turkey. Note that there are some overlaps
among these categories. All of these countries are keen to grow their economies,
expand their international trade and share the benefits of globalisation.
Theodore Levitt (1983) has identified three groups of ‘drivers’, or main causes,
of globalisation:
■ Economic – benefits of economies of scale, and availability of cheap labour.
■ Technological – communications and transportation.
■ Political/regulatory – reduced trade tariffs, free trade regions, collapse of
the communist bloc, China’s market economy reforms.
Hamilton and Webster summarise the drivers of globalisation a little differently,

as competition, reduction in regulatory barriers, improvements in technology,
saturated domestic markets, desire to cut costs, and growth of global customers.
The economic drivers begin with cost reduction, which is always a high priority
for businesses, and Levitt’s example of cheap labour available in other countries
is typical. Hamilton and Webster offer the example of the aluminium industry,
which uses a lot of electricity, and so is more concerned with energy costs than
labour costs, but either of these could drive a business to move abroad.
Saturated domestic markets is another example of an economic driver, and it
is instructive to see so many American businesses, like Starbucks and
McDonald’s, expand until they have covered every state and dependency in the
US before moving overseas. Competition is even more fundamental and may
drive companies to expand overseas even while continuing to contest market
share at home, as happened with Coca-Cola and Pepsi. Economies of scale
leave some businesses little alternative to international expansion, and the
emergence of global customers is the happy corollary of that need.
The technological drivers are relatively straightforward, amounting to

improvements in transport and communications, although these improvements
have been so dramatic that this seems like understatement. The main
technological improvements in transportation occurred during the middle part
of the twentieth century, although freight shipping costs have continued to fall,
while the real communications breakthroughs came later, with the world wide
web and the developments built upon it from the 1980s onwards.
The political/regulatory drivers may be summarised as the drive to free trade,

taken in its broadest sense. This includes the collapse of the communist model
and the encouragement of free enterprise in China. More generally, it
encompasses collaborations including free trade areas, such as the Association
of Southeast Asian Nations (ASEAN) initiatives, and common markets such as
the European Union, schemes for the reduction of tariffs and regulatory

barriers, and the international drive to normalise trading relations among all
countries. The political pressure is not all one way, but the trend is un-
mistakable.
In addition to the drivers of globalisation, we can identify a number of other

facilitators, which is to say factors that do not necessarily cause globalisation,
but ease its path. The distinction between drivers and facilitators – whether
something causes globalisation, or just helps – is sometimes blurred.
Among the market factors facilitating globalisation are: growth opportunities

in new markets; the presence of potential customers in these new markets;
development of global supply chain capabilities; converging market needs such
as globally shared consumer tastes; and increasingly globalised competition
creating pressures to compete globally.
There are also cost and supply factors facilitating globalisation, including:
material and labour costs differing from country to country; variations in access
to natural resources; and growth of entrepreneurship in developing economies.
Other factors facilitating globalisation include, as noted, increased capability to
communicate in a common language, English, plus increased availability of
Recommended reading: Neu et al communications technologies, plus institutional assistance from bodies such as
(2002). the World Bank.
We can observe these factors at play in many case studies.
Case Study
McDonald’s
McDonald’s Corporation, headquartered in Illinois in the United States, is
the world’s largest fast food hamburger restaurant chain, with more than
34,000 outlets, 1.7 million employees (directly and via franchises), and
revenues in excess of US$27 billion.
McDonald’s started in California in 1940, its first restaurant featuring the
‘Golden Arches’ design opened in Illinois in 1955, and its first outlets
outside the US were in Canada and Puerto Rico, in 1967. By 1970 there
were McDonald’s restaurants in every state in the US, and overseas
expansion started to develop, first to Costa Rica and the Virgin Islands,
then to countries such as Japan, Germany and Australia, and in 1974 the
United Kingdom. McDonald’s now has a presence in 119 countries
around the world, in every continent but Antarctica.
Such is the global spread of McDonald’s that numbers rapidly date, but at
time of writing two out of every three McDonald’s outlets were outside
the US, with eight new restaurants opening every day, 58 million
customers served every day (close to 1% of the Earth’s population), and
the milestone of 100 billion burgers sold was passed in 1993.
The story of McDonald’s growth seems to show repeated saturation of
markets, prompting the company to move on into other markets. The

same essential formula has been applied with success to all sorts of
countries, regardless of cultural differences, including the brand design
features (the Golden Arches and the Ronald McDonald clown figure), the
sit-in and drive-through outlet characteristics, and the burger-and-fries-
based menu. However, there have been significant adaptations of this
model to different locations.
Some outlets in India serve curry, but not beefburgers (lamb is usually
substituted), and there are plans to introduce completely vegetarian
McDonald’s restaurants in 2013. Outlets in Germany serve traditional
beer, although alcohol is conspicuously absent from McDonald’s in the US.
Each country has its own menu as a variation of the traditional American
menu (McLaks salmon burgers in Norway, McRice in Indonesia, Red Bean
ice-cream sundaes in Hong Kong), and the local language is always
adopted, including local scripts for signage. Every attempt is made to
meet the expectations of local customers. Nevertheless, McDonald’s has
attracted controversy many times in many countries, a recurring theme
being the perception that local or national cultures are being undermined
by McDonald’s different and distinctively American culture.
On the positive side, McDonald’s is sometimes credited with raising
customer service standards in the new markets it enters, and although
employee expectations are not prioritised in the same way as customers’,
Recommended reading: basic employee terms and conditions are offered.
Kroc (2012) ; Ritzer (2004);
http://www.mcdonalds. McDonald's has become emblematic of globalisation, to the extent of it
com/us/en/our_story.html;
sometimes being referred to as the ‘McDonaldization’ of the world. The
http://www.mcspotlight.org/ Global Policy Forum uses the expansion of McDonald’s to measure the
company/company_ degree of globalisation. And since 1986, the Economist magazine has
history.html; used the ‘Big Mac Index’, in reference to a standard McDonald’s product,
http://www.economist.com/
comparing the price of a Big Mac in various different currencies to
node/159859?story_id= informally judge those currencies' relative purchasing power.
E1_TVJRVJ.
ga
nin ct
Read the McDonald’s case study, and if possible the references, and consider
Lear
ivit
2c to what extent this case evidences the drivers and facilitators of

y
globalisation discussed.
ba
eed ck
Economic: There must be economies of scale for McDonald’s in replicating
F
2c the same design features and menu options everywhere it trades. And many
of the emerging economies it has expanded into offer plentiful low-cost
labour.
Technological: Like all global businesses, McDonald’s benefits from
improving transportation and technology links.
Political: There have been some cultural concerns but, those aside, there
have been few political and certainly no significant regulatory barriers to
their expansion.

eedb ac
You may have identified further drivers and facilitators, perhaps from your
F
k
2c own knowledge and experience. You may also want to consider whether
shared consumer tastes have aided McDonald’s globalisation, or whether
continued McDonald’s globalisation has driven shared consumer tastes.
2.3 Barriers and inhibitors of globalisation

The trend towards globalisation has not been one way, and has not been
relentless. We can identify a number of inhibiting factors and barriers to
globalisation, holding back the process.
Migration
In the first place, migration is a good example, which we have already noted as
an indicator of globalisation, and yet it is also a constraint. For despite many
people’s willingness to migrate, there are and have been pressures to resist this
movement, and regulatory measures to restrict it. Policy initiatives to encourage
or restrict immigration fluctuate, especially in the more developed countries
such as in Western Europe and North America, where labour shortages and
surpluses fluctuate. There are an estimated 43 million immigrants living in the
US, a significant number of whom (perhaps 5 million or more) may be illegal.
Even with regard to occupations where there are clear skills gaps, governments
may prefer to heed the concerns of some of their electors who fear competition
for limited job opportunities. Border and immigration controls alone may
effectively inhibit migration.
In the case of migrant workers, the interests of companies and their govern-
ments may not coincide. In 2003, more than 250 illegal immigrants to the US
were arrested at Wal-Mart retail stores in 21 states. The company was fined
millions of dollars in 2005; in 2010 a group of migrant workers attempted a
class action in the US courts, accusing Wal-Mart of various unfair labour
practices such as locking them in stores overnight; in 2012, Wal-Mart
successfully defeated the case in a Philadelphia court.
Recommended reading: In the European Union, expansion to include the relatively poor countries of
http://money.cnn.com/2003/10/23 Central and Eastern Europe has led to migration across the EU’s open borders
/news/companies/walmart_worker from countries such as Romania and Bulgaria to countries such as Germany
_arrests/.
and the United Kingdom. In times of economic hardship and high
unemployment, such migrants are often blamed for taking the jobs of native
workers.
Governments
Second, government regulations are a more general inhibitor. Companies invest
substantially in the knowledge they need to work within their home country
World Trade Organization regulatory frameworks, and may need to reinvest to understand and work with
foreign regulations; unfamiliar legislative restrictions, such as different technical
or health and safety requirements, may discourage investment abroad. The
World Trade Organization (WTO) believes ‘a country should not discriminate

between its trading partners and it should not discriminate between its own
and foreign products, services or nationals’, and yet many countries retain
tariffs on foreign imports and subsidies for domestic goods. Controls on capital
movements – both inflows and outflows – are decreasing, but many developing
economies like to retain controls. Intellectual property rights, such as patents,
trademarks and copyrights, can vary considerably from one legislative domain
to another. And public procurement policies, which often represent a significant
Recommended reading: proportion of a country’s spending, can formally or informally give preference
http://www.wto.org/.
to domestic suppliers over foreign competitors.
Distance
Third, although we have emphasised the diminishing of the barriers of distance
for travel and communications, these remain barriers. It is still true that goods,
services, finance and people all move more easily within countries than between
countries, even when allowance is made for income differences and for
distances. Within the triad, there is more trade within each of its three blocs
than between any of them – even between the US and the European Union,
there are restrictions on trade. Cultural differences still embrace national
identity, customs, language, politics, religion, social tastes, attitudes to work,
and differing perceptions of corruption (in a number of less developed
countries, some degree of bribery is an accepted norm). And many people retain
insular or parochial prejudices against outsiders or foreigners. Geographical
and cultural differences should never be underestimated.
Culture
Some products and services are more sensitive to cultural differences than
others. The global strategist Pankaj Ghemawat identified meat, cereals, tobacco
and office equipment as more sensitive, and cameras, vehicles, wood products
and electricity as less sensitive. You may wish to consider whether products or
services you consume, or that your organisation supplies, are more or less
sensitive to these barriers to globalisation.
Aspiring global brand names, designs and liveries may be susceptible to cultural
differences. For example, the colour red is a positive indicator in China, but a sign
of mourning in Japan, and animals are commonly used in logo devices despite
carrying widely varying meanings in different cultures. Some brand names don’t
work in other languages and have to be changed (examples from the car industry
Recommended reading: include the Ford Pinto – Brazilian slang for ‘tiny penis’ – and the Chevrolet/
Ghemawat (2001); Vauxhall Nova – Spanish for ‘does not go’). Other global companies such as
http://www.globalization101.org/ Unilever vary their branding to suit the needs of different cultures.
uploads/File/Culture/cultall.pdf.
There may be other barriers and inhibitors to globalisation. Can you think of
any affecting organisations you work for or know?
ga
nin ct Consider the range of inhibiting factors and barriers to globalisation. You
Lear
ivit
2d may find it helpful to draw up a long list. Which inhibiting factors and
y
barriers do you think are the most important:

(a) for your own organisation, or one that you know well?
(b) in general terms?

F eedb ac
k
In general terms, cultural differences probably run deepest, and would inhibit
2d globalisation even in circumstances where governments are entirely
welcoming of inward investors or traders from abroad, and all other barriers
are down. For the most remote countries, barriers of distance and
communication probably remain paramount. For labour-intensive industries,
measures impeding the flow of potential workers across borders are likely to
have the most impact. Natural disasters, such as the 2011 Tohoku earthquake
and tsunami in Japan, can have knock-on effects in the global supply chain.
In specific instances, legislation, regulations or policy impacting on the
particular activities of an enterprise may be the most significant inhibitors.
■ Hamilton and Webster describe the experience of Domino’s Pizza,
varying pizza toppings from country to country according to tastes, but
having to reconsider their entire business model in China, where the
concept of takeaway meals has not been accepted, causing Domino’s to
have to install dine-in facilities there instead (mini case in chapter
‘Globalization’ in Hamilton and Webster, 2012).
■ Corporate tax regimes vary significantly from one country to another and
impact on global movement by big companies; those that have been
criticised for avoiding UK tax include Starbucks, Amazon and Google.
■ Immigration controls sometimes prevent firms from accessing the labour,
especially skilled labour, they require; Indian restaurateurs in the UK have
complained about a shortage of appropriately skilled cooks.
2.4 Comparing the costs and benefits of

globalisation
It may seem self-evident that access to an expanded global range of products
and services is a good thing, and indeed it can represent a significant benefit for
consumers who have purchasing power. For the poorer peoples of the world the
benefits are not so clear. Some governments of developing countries believe
globalisation is a force benefiting capitalism in the most developed countries,
at the expense of their people and their natural resources.
Nelson Mandela has said:

‘We often talk about the globalisation of our world, referring to our world
as a global village. Too often those descriptions refer solely to the free
movement of goods and capital across the traditional barriers of national
boundaries. Not often enough do we emphasise the globalisation of
responsibility. In this world where modern information and communica-
tions technology has put all of us in easy reach of one another, we do again
share the responsibility for being the proverbial keeper of our brother or
sister. Where globalisation means, as it so often does, that the rich and
powerful now have new means to further enrich and empower themselves
at the cost of the poorer and weaker, we have a responsibility to protest in
the name of universal freedom.’
(Speech on receiving the Freedom Award from the National Civil Rights
Museum, November 2000, Nelson Mandela Centre of Memory, http://db.
nelsonmandela.org/)

Some commentators regard globalisation as just the latest version of, or latest
term for, global exploitation, by the more developed countries of the developing
colonialism ones. These commentators liken globalisation to colonialism and imperialism.
You may wish to reflect on the differences between colonialism and globalisa-
tion.
Businesses need to be aware of the societal influences on them, and the inter-
national scope of their external environment. Governments are not always
friendly to businesses, especially foreign businesses, and even more so towards
foreign businesses they perceive as exploiting them. Different political cultures
will treat multinational corporations, in particular, in sometimes unexpected
ways.
Case Study
Bolivian gas conflict
The Plurinational State of Bolivia, to give it its proper name, is a
landlocked country in South America, bordered by Brazil, Argentina,
Chile, Paraguay and Peru. It has a population of 11 million, a nominal
GDP of US$25 billion, and is one of the G20 group of developing nations.
Bolivia is a democratic republic, but one with a radical history and its own
distinctive identity. The name of the country derives from Simon Bolivar,
the nineteenth-century revolutionary who led and symbolised Latin
America’s struggle for independence from the Spanish Empire. The iconic
marxist figure Che Guevara was killed fomenting communist revolution in
Bolivia in 1967. Political tensions remain, and Bolivia has experienced
periods of instability, military dictatorship and extreme economic hardship.
It has the unusual distinction of having a unique ‘Law of the Rights of
Mother Earth’, which gives nature the same rights as humans.
Bolivia has large natural gas reserves, the second largest in South America
after Venezuela, amounting to proven reserves of 760 cubic kilometres
and an estimated total of 1400 cubic kilometres. These reserves could
meet a substantial proportion of Bolivia’s domestic energy needs, and
have a significant value as an exported commodity. In the 1990s, some
politicians began to argue that Bolivia’s share of the profits from these
exports, estimated at between $40 and $70 million per year, or 18 per
cent of the total profits, was not enough.
Popular nationalist feeling was stoked by disputes over which neighbour,
Chile or Peru, would route the gas pipelines to the Pacific Ocean, from
where the gas would be shipped to North America. In 2003 there were
protest demonstrations involving tens of thousands of people, a general
strike, and the formation of a body called the National Coordination for
the Defense of Gas.
In 2003 there was a change of government, in 2004 a referendum was
nationalisation held on nationalisation of the gas industry, and in 2005 taxes on gas
were increased from 18 to 32 per cent. This uncertainty led to many
foreign firms halting their gas investments.
There were riots in the streets of the Bolivian capital, La Paz, in July 2005,
and a new Hydrocarbons Law was implemented in 2006, taking all gas

reserves into state ownership. Among the assets seized were four
electricity generating companies, including power stations owned by the
Corani subsidiary of French multinational GDF Suez (36 per cent owned
by the French government) and the Guaracachi subsidiary of British
multinational Ruralec. Ruralec estimated the value of their Bolivian
investments at $110 million. Neither Ruralec nor GDF Suez was fully
compensated for the value of their investments, although disputes are
Recommended reading:
Donaldson (2012); ongoing.
http://uk.reuters.com/article/2010/ In the ensuing turmoil, Chile and Peru arranged to transport gas reserves
05/01/uk-bolivia-power-
nationalization-idUKTRE64012N2 from Indonesia instead, and the value of the Bolivian assets fell. The
0100501; Bolivian government continued its policy of state ‘ownership, possession
http://www.nytimes.com/2012/ and total and absolute control’, in President Evo Morales’ phrase, of
05/02/business/global/ hydrocarbons, and in 2012 nationalised Red Eléctrica de España, a
bolivia-seizes-local-assets-of- Spanish utility, with investments valued at $81 million.
spanish-utility.html?_r=0.
ga
nin ct
Read the Bolivian gas conflict case study and consider what actions the
Lear
ivit
2e foreign investor companies could have taken to avoid the losses they
y
sustained, or to mitigate the impact on them of the Bolivian government’s

policy.
eedb ac
F
With hindsight, GDF Suez and Ruralec (and perhaps others) could have
k
2e chosen not to invest in Bolivia, and taken their investments elsewhere, or at

least spread their risk. Alternatively, they could have sought assurances from
the Bolivian government; companies will often try to work closely with
indigenous governments to protect their investments. The problem is
changes of government can negate agreements and partnerships, but this
risk can be minimised by companies also consulting with opposition parties,
who may become the government in the future. Any country where the
next government cannot be predicted, perhaps because of the threat of
revolution, may be best avoided. But if the opportunities are unique to that
country, the investors may want to take the risk, backed up by insurance, if
possible.
Nationalisation
Nationalisation, especially without full compensation, is perhaps the most
drastic investment risk faced by global businesses, but there may be other
notable costs too.
Relatively inefficient enterprises may find that the removal of protectionist

legislation, and other competitive barriers, exposes them to much more intense
competition from foreign competitors, perhaps much bigger and more

experienced companies. In Europe, former national institutions such as airlines

and utilities have suffered in this way (for example, Lufthansa and France
Telecom). Such inefficient enterprises often lobby governments to retain trade
barriers, denying consumers the benefits of cheaper and better-quality products
and services.
Dependence upon foreign markets and suppliers

maquiladora
Dependence upon foreign markets and suppliers can cause problems too.
Maquiladoras is the name for around 3000 factories set up along the Mexican
border with the United States, employing at their high point 1.3 million
workers, producing goods for the North American market, via the NAFTA
agreement. Examples include not just Mexican companies, but US multi-
national corporations such as Ford, General Motors and Motorola, as well as
Recommended reading: leading companies from Japan and Europe. The maquiladoras are vital to the
http://www.corpwatch.org/article. Mexican economy, accounting for half of Mexico’s exports, but are highly
php?id=1528; exposed to the market and supply conditions in North America. When
http://geography.about.com/od/
urbaneconomicgeography/a/ recession affected the US economy in 2008, the maquiladoras shed jobs and
maquiladoras.htm. lost sales – 30 per cent of all jobs and one-third of all export sales in 2009.
Increased volatility
There is some evidence that globalisation makes the overall business
environment more volatile, bringing further costs and risks. Recent evidence,
from the late 1990s and the recession of 2008 onwards, suggests that economies
of developing countries that are more integrated with world financial systems
may become unstable when financial markets change, for example with
fluctuating exchange rates and interest rates. Enterprises prefer to operate in
environments where the macroeconomic conditions are relatively stable and
Recommended reading: Green predictable, as opposed to bearing greater risks of increased costs, reduced
(2010) ; Prasad et al (2003). revenues and curtailed profits.
Corporate reputations
corporate social responsibility
Corporate reputations may also suffer from globalisation, with corporate ethics
coming under wider scrutiny, and from a broader range of perspectives. It is
increasingly common for a company's image to depend as much on its record
on ethical, social and ecological issues as on its financial performance. Multi-
national corporations are increasingly expected to respond to the concerns
articulated by Nelson Mandela in the quotation above, and demonstrate that
they are contributing to the global good and not just the needs of their
shareholders. Consequently, many companies incur significant costs developing
Recommended reading: Sethi and promoting their stance on corporate social responsibility, to mitigate risk
(2008). and avoid potentially greater costs.
On the positive side, there are many benefits to businesses from globalisation.
New markets
The opening up of new markets is perhaps the most obvious example, with
Toyota expanding its automotive operations rapidly in the North American
market, and General Motors doing the same in Asian markets. The opening
up of China, with its huge population and consumer base, has even more
promising implications for European and American enterprises seeking to do
business there. Other former communist bloc countries in Eastern Europe

represent another sphere of opportunity. Companies whose revenues and profits

had stagnated or even gone into decline in their traditional Western markets are
increasingly finding opportunities for higher revenues and growth in newly
opened markets.
Cheaper suppliers
Access to cheaper suppliers is another key benefit, with fresh labour supplies in
emerging economies benefiting both the enterprises seeking to expand and
individuals looking for new jobs and opportunities. British financial institutions
and utilities have rushed to set up contact centres and other labour-intensive
operations in India, where the supply of skilled and graduate labour is much
cheaper than in Europe, lowering costs and making them more competitive.
Examples include BT and HSBC. The same logic applies to the whole supply
chain, sourcing supplies of final products, parts and components, and raw
materials, in order to lower costs and improve competitiveness.
Access to resources
Access to previously denied natural resources is another benefit. As oil reserves
decline, exploration and production companies increasingly look for new
sources, and countries that had previously denied access to foreign investors
are changing course. For example, Saudi Arabia, in a change of long-term
policy, has allowed Shell direct access to its energy deposits since 2011. The
benefits are reciprocal, with Saudi Arabia entering a 50–50 partnership to
operate three oil refineries with Shell in the Gulf of Mexico.
Access to global talent pool

Globalisation also helps enterprises benefit in managing and growing their
knowledge base, which is a key driver of innovation, new products and
businesses, and competitive advantage. As Jack Welch said during his time with
General Electric, ‘Globalization has changed us into a company that searches
intellectual capital the world, not just to sell or to source, but to find intellectual capital – the
world's best talents and greatest ideas.’ Thus globalisation promotes new
knowledge and learning for the world to share.
Overall, there is a complex balance sheet, with many costs and many benefits.
The debate about whether globalisation is a positive or a negative phenomenon
rages on.
ga
nin ct
Draw up your own ‘balance sheet’ of costs versus benefits of globalisation.
Lear
ivit
2f Create a table with two columns, one for costs and one for benefits, and list
y
the main costs and benefits in each. Align related costs and benefits next to
each other. Weigh the costs and benefits against one another. In marginal
notes, or at the end of the table, draw your conclusions with regard to
whether the costs outweigh the benefits, or the benefits outweigh the
costs. Overall, do you believe globalisation is a positive or a negative
phenomenon?

eedb ac
F
Your balance sheet might look like Table 2.1 below. Related costs and
2f benefits are shown alongside each other.
Table 2.1: Costs and benefits of globalisation
Costs Benefits
■ Risk of loss of assets due to ■ The corollary of these are opportunities
government intervention (for from deregulation and opening up of
example, nationalisation) new markets
■ Risk of loss of assets due to a lack of ■ Access to cheaper supplies: labour,

government intervention (for finished products, parts and
example, theft or criminal damage) components, raw materials
■ Access to natural resources previously
denied
■ Access to new sources of intellectual
capital
■ Costs arising from withdrawal of ■ This is also a benefit, if viewed from

protective trade barriers the perspective of freeing trade
■ Costs related to lobbying to retain
protective trade barriers
■ Costs arising from exposure to ■ Access to foreign markets is also a

foreign markets benefit
■ Costs arising from exposure to ■ Access to global financial resources is a

volatility of financial markets benefit
■ Costs arising from damage to ■ This cost may be balanced by the

corporate reputation benefit of a global presence
Any of the costs and benefits may be broken down into greater detail, and additional costs
and benefits may also be identified beyond this list.
Many of these costs and benefits will be hard to quantify, unless contextualised to the
specific experience of an organisation. Weighing the costs and benefits will also depend
upon the relative importance of each factor for a particular organisation or country. Whether
globalisation is positive or negative will arise from these calculations, and will be a matter for
subjective judgement.

2.5 International trade and foreign direct

investment
Apple
Apple Incorporated is a US-based multinational corporation,
headquartered in the prosperous small city of Cupertino, in the heart of
‘Silicon Valley’ in California. Apple is one of the world’s largest technology
firms, with 2012 revenues of US$156.5 billion, profits of $41.7 billion,
72,800 employees, and an iconic range of products including the iPhone,
iPod and iPad. Measured by market capitalisation, Apple is bigger than
Microsoft and Google combined, and is also the world’s third largest
mobile phone maker, after Samsung and Nokia.
The competitive strategy of Apple is based on a design ethos,
distinguishing Apple products from their competitors by their emphasis on
designs that appeal to the senses of their users, exciting a sometimes
fanatical brand loyalty. Apple’s product designs are both functional and
aesthetic, and at the same time often appear to have been deliberately
designed not to be interoperable with industry standards adhered to by
their competitors.
The growth of Apple as a business has been neither steady nor meteoric,
but marked by uneven spells of growth, decline and then growth again.
Founded in the late 1970s by Steve Jobs and his collaborators, Apple rose
to prominence in the 1980s with its Macintosh computers, but after the
resignation of Jobs in 1985, declined, and held only a small share of the
desktop computer market until Jobs’ return as CEO in 1997. In the early
2000s, Jobs led Apple back to profitability, and the innovative design of
new products, initially the Mac series (from 1998), then the iPod (2001),
iPhone (2007) and iPad (2010).
From its inception, Apple sold its products all over the world, trading
internationally wherever there was a demand for computers. Demand for
its latest products, with their huge consumer appeal, is driving more rapid
overseas sales. As at 2012, Apple had nearly 400 retail outlets, but in just
14 countries (overwhelmingly in the US), and so it planned international
expansion by extending its retail network, appointing the former head of
the UK’s Dixon electronic goods retailer to lead this expansion.
Recommended reading: Lashinsky
(2012); http://www.theawl.com/ Most of Apple’s manufacturing is outsourced to Japan, Korea and China,
2011/11/apple-and-design;
http://www.nytimes.com/2012/0/
sometimes to big name producers of specialist parts, including Toshiba
29/business/apples-tax-strategy- and Samsung. Apple tends to outsource manufacturing – of entire
aims-at-low-tax-states-and- products, not just components – because its core skills lie in design and
nations.html?pagewanted=all& marketing rather than manufacturing, but it chooses Asia not just
_r=0; http://seekingalpha.com/
article/ 318794-apple-s-foreign-
because of its specialist expertise, but because labour is much cheaper,
cash-hoard; the case study in the and because taxes are lower.
chapter ‘Analysing Global
Industries’ in Hamilton and From 1980, Apple created subsidiaries in low-tax countries including the
Webster (2012)/ British Virgin Islands, Ireland, the Netherlands and Luxembourg, primarily
maquiladoras.htm. to avoid higher corporate taxes in the US, although the Europe, Middle

East and Africa headquarters in Ireland has grown to employ 3000 staff.
This led to significant investment of financial capital overseas. Between
2007 and 2011, Apple’s cash investments shifted from a slight majority of
US over foreign deposits in 2007 to more than three times as much
invested abroad in 2011.
Most commentators agree that the death of Steve Jobs in 2011 leaves a
question mark over Apple’s future, given Jobs’ pivotal role in its success to
date. Whatever happens to the company, the implications will be as
global as its operations and foreign investments.
The case study of Apple shows that multinational corporations are large,
complex organisations that have global interests in a variety of ways for a
variety of reasons. Apple’s include closeness to their customer bases, access to
specialist expertise in the supply chain, access to cheap labour supplies, and
tax minimisation, among many reasons. International trade and overseas
investment are just part of the picture.
Countries trade for a number of reasons. Initially they trade to obtain products
that cannot be grown or made in their own countries, or to obtain the raw
materials to stimulate their own manufacturing. Later, the reasons multiply,
not least being the need to find markets for their products once they have met
the demand in their own countries.
Classical economics proceeds from the assumption that trade, including

international trade, may be pursued freely, but this is far from the case, as every
country imposes trade restrictions of some kind. An ongoing debate in economics
is about the conflict between varying degrees of protectionism as opposed to free
trade. Britain’s Corn Laws of the nineteenth century provide the classic case of
what this conflict means. During the Napoleonic Wars, Britain was unable to
import corn (wheat), which led to high prices and increased domestic production.
Landowners and farmers feared loss of revenues once the war ended, as it did at
the Battle of Waterloo in 1815, and so influenced parliament to legislate to protect
their industry. The Importation Act of 1815 marked the high point of
protectionism, imposing prohibitive duties on anyone seeking to import corn. This
caused great hardship in the towns and cities, as bread prices were kept high, which
led to rises in wages for factory workers, unemployment, famine and the Peterloo
Massacre, when soldiers dispersed a protesting crowd in Manchester. The repeal
of the Corn Laws in 1846 marked the shift from protectionism to free trade.
Today, the World Trade Organization promotes free trade, and advocates
lowering trade barriers, including customs duties (or tariffs) and measures such
as import bans or quotas. The WTO principles include:
■ non-discrimination between domestic and foreign traders
■ reciprocity in agreements
■ transparency in dealings
■ predictability and stability
■ general reduction of trade barriers
■ special assistance and trade concessions for developing countries.

However, there remain a number of reasons why governments may wish to

intervene in trade. These may include:
■ National defence, to ensure critical supplies may be maintained in time of
war.
■ Protecting fledgling industries from foreign competition.
■ Protecting jobs, if domestic firms keep them in the home country when
foreign competitors may not.
■ Guarding against over-dependence on a narrow economic base, if foreign
competitors cherry-pick the more profitable industries.
■ Political reasons, such as embargoes on hostile regimes.
■ Guarding against ‘dumping’, when imported goods are priced lower than
those of domestic competitors, perhaps due to illegal subsidies.
■ Retaliation against foreign countries’ actions, such as raising tariffs or
dumping.
■ Restricting the flow of undesirable products, such as drugs or protected
species of animals.
■ Cultural or lifestyle protectionism, when a government perceives its country
as inundated with foreign ideas, language, entertainments and so on, to the
detriment of its own culture.
International trade continues to increase. Total aggregated exports in 1970 were

13 per cent of world output, but are predicted to rise to 34 per cent by 2030.
Earlier in this unit, we distinguished between foreign direct investment (FDI)
and foreign indirect investment (FII, also known as portfolio investment). The
difference between FDI and FII is that, in the former, the investors not only
own the physical assets but also wish to exercise managerial control over them.
FDI carries international trade to its logical conclusion, not just selling goods
and services to customers in other countries, not just sourcing suppliers and
raw materials from other countries, and not just taking shares of businesses in
other countries, but actually taking ownership of those businesses. As the Apple
case study shows, an international scope of operations gives multinational
corporations greater flexibility of action, and free international movement of
their capital. FDI allows them to maximise their foreign investments.
Contemporary examples of FDI include:

■ US multinational Kraft’s acquisition of the UK’s Cadbury Schweppes, in a
hostile takeover costing £11.5 billion.
■ Tata Steel, an Indian company that has invested in the USA, just one of the
$2.3 trillion worth of FDI in the US, providing 5 million jobs across all 50
states.
■ Intel, the US-based semiconductor company, has built factories in Barbados,
China, Costa Rica, Ireland, Israel, Malaysia, the Philippines and Vietnam.
(http://www.ft.com/cms/s/0/1cb06d30-332f-11e1-a51e-
00144feabdc0.html#axzz2FK9ERydk;
Recommended reading: Nicholls http://www.moneycontrol.com/news/business/tata-steelexamplejob-
(2012); http://www. creationusa-through-fdi_580350.html;
fdiintelligence.com/.
http://faculty.chicagobooth.edu/ralph.ossa/course%20materials/
Lec%208a%208b%20%20Multinational%20firms%20and%20foreign%
20direct%20investment.pdf)

greenfield development FDI includes both new developments, either greenfield or brownfield, and
acquisitions of existing enterprises. Horizontal FDI occurs where a firm invests
in the same sort of plant it usually operates, such as a car manufacturer building
another car factory. Vertical FDI occurs where a firm invests in a supplier
brownfield development industry, such as the car manufacturer building a factory to make parts for its
cars. Multinational corporations face difficult decisions about where to invest,
and have to analyse their options, weighing different countries’ relative
attractiveness in several dimensions.
ga
nin ct
Select a recent example, from your experience or studies, of foreign direct
Lear
ivit
2g investment, and answer the following:

y
1. What was the value of the investment?

2. What were the nationalities of the investor and the host country for the
investment?
3. Was it an acquisition, greenfield or brownfield investment?
4. Was it a horizontal or vertical investment?
5. What distinguished the investment from the company’s international
trading?
6. How well do you think it fits with the investor’s global strategy?
eedb ac
F
With regard to questions1 to 4, it is not possible to give detailed feedback,

k
2g as the answers will depend entirely on the example selected. However, by

way of illustration, let us take the example of Nissan’s 2012 announced
investment of a small luxury car plant in Sunderland
(http://www.bbc.co.uk/news/business-20759537).
1. The value of that investment has been estimated at £250 million (but be
wary of reported figures, especially when these are projections as
opposed to actual figures, and think about what may not be included).
2. Nissan Motor Company Ltd is a Japanese car manufacturer, with a track
record of investment in the UK.
3. This is a brownfield investment, adding to Nissan’s existing presence.
4. This is a horizontal investment as, characteristics of the vehicle aside, this
is typical core business activity for Nissan.
5. International trade covers the exchange of goods and services across
borders, while foreign direct investment refers specifically to the
acquisition of production facilities in another country. Nissan’s
investment is clearly an example of the latter.
6. This is a matter of opinion, but a case for the strategic fit of this
investment could be made by reference to the opinion of Nissan itself,
keen to expand in Europe, and committed to the British car industry as a
base for that expansion.

2.6 Applying Porter’s diamond model

If potential investors can weigh the relative attractiveness of different countries for
investment, it follows that host countries can take action to make themselves more
attractive, in order to encourage foreign investment and boost their economies.
Many countries expend considerable effort in attracting foreign investors. One
of the aims of the Department for Business Innovation and Skills is ‘making the
UK one of the fastest and easiest countries in the world to set up a new business’,
resulting in the UK attracting more FDI than any other European country.
In the 1980s, Professor Michael E Porter of Harvard University undertook a study

to find out what made nations competitive, and what factors were critical to
achieving and sustaining competitive advantage. Porter identified four related
attributes, which he described as ‘the diamond of national advantage’. See Figure 2.1.
Firm strategy,
structure and
rivalry
Factor Demand
conditions conditions
Related and
supporting
industries
Figure 2.1: Porter’s diamond of national advantage
■ Factor conditions define the use of the factors of production, including

natural resources, human resources, knowledge, capital and infrastructure.
Porter distinguished between the basic factors, including raw materials and
the labour pool, and the created factors, such as developing higher skills
and improving the knowledge base. Porter’s idea here is that creating the
higher-value factors will increase the chances of success.
■ Demand conditions are about how well the home market works. It does
not need to be large, but buyers and sellers need to be in close contact to
ensure buyers’ demands are acted upon, for example to innovate faster, to
create advanced new products, or to encourage uptake of fashions or tastes.
■ Related and supporting industries refer to the supply chain or clusters of
cognate businesses such as competitors, as these stimulate innovation, cost-
efficiencies and -effectiveness, skills upgrades and better information. These
can help create a climate to foster growth and success.
■ Firm strategy, structure and rivalry refer to the ways enterprises are formed,
organised and managed, and the competitive conditions with their domestic
rivals. Having the right business structure and direction is important, but so
too is the pressure of rivalry to drive competitiveness.
Porter stressed the interaction of the four attributes, and that all four are
interdependent upon one another. Hence the linking lines in the diagram. For
example, smart buyers will simply buy imports if quality goods are not
available, and access to low-cost supplies may be beneficial, but if an enterprise
dominates the market, then this will not lead to greater competitiveness. For a
nation to seize a competitive advantage, it needs all of the attributes to be
working in harmony, and the lesson for governments is to take concerted action
to focus on the weakest attributes, while continuously addressing all four.
Recommended reading: the There are two other variables not shown in the basic diamond diagram. Porter
chapter ‘Assessing Country argued that a proactive role may be played by government, intervening
Attractiveness’ in Hamilton and decisively to change the balance of attributes, although changes of government,
Webster (2012); Porter (1990);
Ketels et al. (2009); or changes of policy, can also have a negative impact. The other variable is
http://www.isc.hbs.edu/pdf/ chance, whereby the conditions of the diamond may be out of control of the
20061128_Singapore_ACI_ firm or the government as a consequence of chance events such as natural
Launch.pdf; disasters, wars, or major changes in world financial markets.
http://www.cbi.org.uk/media-
centre/news-articles/2012/09/
how-the-us-china-and-india-try- One of the most interesting cases of Porter’s theory being applied is Singapore,
to-attract-external-investment/ where Porter himself acted as a consultant. In The Competitive Advantage of
fdiintelligence.com/. Nations (1990) he was pessimistic about its prospects, believing it would
continue to be a factor-driven economy, at a relatively early stage of economic
development, unable to harness all the attributes of the diamond. But by 2006,
Porter described Singapore as ‘one of the most impressive success stories of
economic growth in the 20th century’ (at the launch of the Asia Com-
petitiveness Institute).
ga
nin ct Select a country of your choice. It should be a country that you have some
Lear
ivit
2h knowledge of, or for which you may readily obtain economic information,
y
including detailed yet summarised facts and figures. Investigate the

economic performance of that country, using Porter’s diamond model:
assess its factor conditions and demand conditions; review the strategy,
structure and rivalry of its key firms, and their related and supporting
industries; and consider the other variables of government and chance. You
should choose a country for which summary economic information is readily
available, and stick to summary information, to avoid getting bogged down
in too much detail, some of which will inevitably be contradictory. You
should not try to examine all industries comprehensively, but select a small
number of significant ones and just a few leading firms in those industries.
Under the four headings of the diamond model:
1. Summarise the current status of that country, in terms of its
competitiveness in its global region and in the world as a whole.
2. Forecast its prospects for the next five to ten years, if things continue as
expected.
3. Recommend actions its government could take to improve its prospects.

eedb ac
F
k
The summary of the current status of the country should show its current
2h ranking, relative to its near neighbours and other global competitors. It
should highlight the key industries for its economy, and assess how well
they are currently competing (how do their revenues and profits compare?).
The summary should highlight strengths and weaknesses, and then
opportunities and threats should be identified to help make a reasonable
forecast. The forecast should not be an unsubstantiated prediction, but
should be supported by current evidence. The sort of actions you could
recommend for governments to take include investment in skills upgrading,
funding to support research, development and innovation, trade subsidies
or controls, incentives to boost collaboration, selective reduced taxes,
relocation support, support for trade missions, or other targeted measures.
2.1 Give a definition of globalisation and identify two of its main indicators.
2.2 Select two drivers of globalisation and explain in a few sentences why
they are drivers.
2.3 Select two barriers to globalisation and explain in a few sentences why
they inhibit the process.
2.4 Identify two business costs and two business benefits of globalisation.
2.5 Briefly describe foreign direct investment, and explain what makes it
different from international trade.
2.6 Explain in a few sentences how Porter’s diamond model may be used to
assess a country’s competitive advantage.

2.1 There are several definitions offered in this unit, and a version of any of
them is an acceptable answer. The ideal answer should emphasise the
interconnectedness and interdependence of businesses all over the world.
The two indicators should be one of the following: migration; inter-
national trade; financial flows; or any significant part of any of those
three, such as foreign direct investment.
2.2 The two drivers should be chosen from this list: economies of scale;
improved transport and communications; improvements in technology;
reduced tariffs and other trade controls; opening up or deregulation of
new markets; saturated domestic markets; increased competition; desire
to reduce costs; growth of global customers.
2.3 The two barriers should be selected from this list: constraints on
migration; government regulations; distance and limitations on com-
munications; cultural barriers.

2.4 The two costs should be drawn from this list: potential loss of assets from
nationalisation or other government intervention; potential loss of assets
from theft or criminal damage; withdrawal of protective trade barriers;
expense of lobbying to retain protective trade barriers; costs from
exposure to foreign markets; exposure to volatility of financial markets;
damage to corporate reputation. The two benefits should be drawn from
this list: opportunities from deregulation and opening up of new markets;
access to cheaper supplies of labour, finished products, parts and
components, raw materials; access to natural resources previously denied;
access to new sources of intellectual capital.
2.5 Foreign direct investment refers specifically to purchase of production
facilities in another country, whether by acquisition, greenfield or
brownfield developments. International trade is the general term for
exchange of goods or services across national boundaries.
2.6 Porter’s diamond model identifies the key attributes a country needs to
develop to achieve and sustain competitive advantage. These are factor
conditions, demand conditions, related and supporting industries, and
firm strategy, structure and rivalries, and all of them must be developed
in concert, as they are complementary.
Summary
In this unit you have explored the context of globalisation, and considered how
it impacts on you, any organisation you are involved in, and your country. You
have defined globalisation in terms of how businesses all over the world have
become more interconnected and interdependent, and recognised some of the
indicators of globalisation including migration, international trade and financial
flows. You should have reflected on how meaningful these issues are for any
organisation you are involved in.
You have identified the main drivers and facilitators of globalisation, and its
barriers and inhibiting factors, recognising that these are many and complex.
You have considered the costs and benefits for businesses, and weighed the
balance sheet of globalisation, considering whether it is a positive or a negative
phenomenon. You should now understand the scope of international trade, and
the more precise definitions of foreign indirect investment and foreign direct
investment. Finally, you have looked at Michael Porter’s diamond model as a
means of assessing a country’s competitive advantage, and tried out the model
for yourself.
Globalisation is not just here to stay, it is an ongoing process, and one in which
we are all caught up. We will go on to examine the implications of this in the
next units.

Unit 31 The global business
environment
‘I think the most important CEO task is

defining the course that the business will
take over the next five or so years. You
have to have the ability to see what the
business environment might be like a long
way out, not just over the coming months.
You need to be able to both set a broad
direction, and also to take particular
decisions along the way that make that
broad direction unfold correctly.’
Chris Corrigan, former Managing Director, Patrick Corporation
Introduction
Successful business leaders like Australia’s Chris Corrigan take special
account of the external business environment, not just in their immediate
decision making, but in their strategies and plans for the longer term. And
that external environment is increasingly global in scope. Without this
contextual perspective, their strategies would be little more than
statements of intent, or wish lists, and their businesses would tend to be
inward looking. With that perspective, they are armed to deal with the
world as they find it, and as it changes.
In Units 1 and 2 you looked at contemporary developments in business and

management, and the advent and impact of globalisation. In this unit, you
will move on to focus on the nature of the global business environment,
distinguishing its national, global-regional and international dimensions.
You will consider who influences businesses to follow the paths they take,
why they wield that influence, and what difference that makes. And you
will understand whose views are important to a business, both internally
and externally, and why. This is stakeholder analysis.
You will begin to explore a useful business analysis tool, PESTLE, that we
will return to in more detail in Units 6, 7, 8 and 9. In this unit, you will
understand what PESTLE is, and apply it to your analysis of the external
business environment.

And you will evaluate the risk of changes in the global business
environment, and how they may affect the operations of business
organisations.

3.1 Distinguish between the national, regional and international business
environment.
3.2 Discuss the roles of the key organisational stakeholders in the global
3.3 Understand and apply the PESTLE framework for external environ-
ment analysis.
3.4 Assess the potential impact of changes in the global business
environment on the organisation’s operations.
Prior knowledge
This unit complements Units 1 and 2, and it would be preferable for students to
have studied those two units first. Otherwise, some general knowledge of
economics, business, management or finance would also be helpful, as would
any practical experience in these fields.
Resources
The relevant reading for this unit may be found in the chapter ‘The Global
Business Environment’ in your core textbook (Hamilton and Webster, 2012).
Supplementary references are provided in the text.
3.1 The business environment: national,

regional and international
All businesses operate in the context of an external environment. In Unit 1 we
distinguished two ways of looking at the external environment as:
■ the competitive environment and
■ the macro environment.
We begin this unit by considering the macro environment in more detail, at

three different levels:
■ national
■ global regional, which from this point we shall refer to as simply ‘regional’,
and
■ international.
British Petroleum (BP), for example, operates within the external environment
of its home country, the UK, within the region of the European Union, and all
kabushiki-gais over the world. Canon (from the Japanese, Kiyanon kabushiki-gais) operates in
its home country of Japan, the region of Asia, and all over the world. Tata
Group, headquartered in India, operates in the region of the Indian
subcontinent of Asia, and around the world.

Unit 3 The global business environment
The national environment of an enterprise is usually simple to define, but there

are exceptions to having just one home country, such as Shell, which is an
Anglo-Dutch business, with its headquarters in the Netherlands and its
registered office in the UK. The international environment is also relatively
straightforward to define, usually meaning the entire world, although for some
enterprises there are no-go areas. This was particularly true in the era of the
Cold War, when many communist countries refused access to private enter-
isolationist prises, and remains true for isolationist countries such as North Korea.
The one in the middle, the regional environment, is a bit trickier. In the
examples we used above, we could have defined BP’s main region of operations
as ‘the West’, including North America as well as Europe, with the United States
being especially important for BP. And we could have defined Canon’s region
Pacific Rim as the Pacific Rim, rather than Asia. It is best to keep an open mind about the
regional scope of an enterprise, as global businesses may have significant
operations in more than one region at a time. And, of course, the environments
of any businesses may change over time, as they move their assets and markets
from region to region, and sometimes even move their home country, as
happens in the case of international acquisitions. There was a scandal when
Guinness acquired United Distillers in 1986, pledging to move its headquarters
to Scotland, but notoriously reneging on this commitment once the acquisition
was completed.
environmental scanning Environmental scanning is a technique whereby businesses take account of the
three levels of the external environment – and other factors – when developing
their business strategy. The technique involves the study and interpretation of
the political, economic, social, technological, legal and ecological events, issues
and trends that influence a business, an industry or a market. This can become
overcomplicated, and business strategists need to bear in mind the purpose of
environmental scanning, which is to inform business strategy. Some find it
helpful to distinguish between the task environment and the general
environment, where the former refers to the particular tasks undertaken by
enterprise, including those relating to its industry, competitors and customers,
plus techniques of production, suppliers, raw materials, market sectors and
human resources. This could be understood as a repositioning of the internal
environment. The latter category, the general environment, refers to matters
affecting any participant in any industry, and as such represents another way
of viewing the external environment.
SWOT analysis This is where SWOT analysis comes in, with businesses analysing their
Strengths, Weaknesses, Opportunities and Threats. Strengths and Weaknesses
are likely to be very specific to the individual enterprise, while Opportunities
and Threats are likely to be more common to a whole industry sector, or a
whole market, or a whole country. Globalisation creates opportunities for
enterprises to enter new markets and new countries: since India and China
opened up their economies to foreign trade and investment, beneficiaries have
included Tesco, Heineken, Disney, General Motors and Toyota. It also creates
opportunities to extend the value chain globally, as in the example of Boeing,
which now draws its aircraft supplies from over 900 suppliers in 17 countries.
However, globalisation also carries a number of threats, including financial
risks such as currency crises and inflation, political risks such as seizing of
foreign assets (see the case study on the Bolivian gas conflict in Unit 2), and

unfamiliar natural disasters that only affect certain global regions, such as
tsunamis or earthquakes, which are largely restricted to the Pacific Rim.
Environmental scanning may be said to have the following objectives:
■ Detecting political, economic, social, technological, legal and ecological
trends and events important to the organisation.
■ Defining the potential threats, opportunities or changes for the organisation
implied by those trends and events, and how they impact on the organisa-
tion’s strengths and weaknesses.
stakeholders ■ Promoting a future orientation in the thinking of all employees and stake-
holders.
■ Alerting leadership and management to trends that are converging,
diverging, speeding up, slowing down, or interacting.
Environmental scanning is the first part of a strategy development and imple-

mentation process, including monitoring, forecasting and assessing of the
external environment, which along with complementary analysis of the internal
environment contributes to strategy formulation. Those involved in environ-
mental scanning should be looking for indicators and evidence of change,
current or impending, expert forecasting opinion, signs of imminent potential
game-changing events, and indirect influences and effects. The general idea is
to take as broad a sweep as possible, while retaining meaning and focus.
(Sources: Aguilar, 1967; http://www.iveybusinessjournal.com/topics/global-
business/the-global-environment-of-business-new-paradigms-for-international-
management)
The national environment

The national environment includes issues such as the business culture, which
will tend to be common to all businesses from a particular country to a certain
extent, although there may be considerable variation from one sector, or from
one organisation, to another. Most British businesspeople will exchange
business cards carelessly, but in Japan, the receipt of a business card is treated
with ceremony, and the card is carefully studied at some length. In
collaborations between France and Germany it has been found that French
employees find German managers pedantic and laboured in their explanations,
while German employees find they receive insufficiently detailed instruction
and direction from French managers.
interventionist
Another key feature of the national environment is government regulation,
arising from societal norms (or culture). Free enterprise is always constrained
by some degree of regulation, sometimes even welcomes it, but there are notable
differences from one country to another. Some national governments are more
interventionist than others, and may act in sudden, unexpected ways to regulate
laissez faire business. Businesspeople who come from a more laissez faire business
environment sometimes complain of ‘red tape’, or excessive bureaucracy, when
they work in new countries.
Related to government regulation is the issue of the political environment. As

a general guide, more developed countries tend to be more stable; less
developed countries less stable. This may mean established enterprises in
developed countries are more willing to take risks such as trying out new

products, trying changes to existing products, or testing new markets, while

enterprises in less developed countries are more risk averse, because the political
climate they operate in is fundamentally riskier.
The range of economic factors in the national macro environment includes

wage rates, interest rates, inflation, unemployment and business cycles, among
others. In general terms, the health of the national economy plays a significant
part in the successful operation of businesses within it. Businesses from more
prosperous economies are more likely to be more prosperous.
There are also technological differences between different nations, although

the effects of globalisation mean these are less and less pronounced. The use of
chopsticks in preference to knives and forks would be one obvious difference,
and even in the arena of business there are differences. A Chinese computer
keyboard poses challenges because China has no alphabet and instead relies on
a system of connecting characters, numbering over 4000 – too many for a
computer keyboard. Therefore, Chinese input methods, which actually pre-
date the personal computer (typewriting posed the same problem), involve
phonetic readings or the use of root shapes of characters.
The regional environment

Issues in the regional environment will include culture, as there are clearly
cultural differences between continents such as Europe and Asia, although we
should be wary of confusing cultural differences with ethnic stereotypes. For
example, in the United States and other developed countries, a firm short
handshake is considered not just polite, but a sign of self-confidence, while in
Africa the opposite is true, and the most courteous handshake will last for as
long as a few minutes, but will be looser, or what Americans would regard as
‘limp’.
The nature of certain global regions means that businesses operating within
them find a higher degree of risk than usual is acceptable, because that is the
regional norm. This might apply in war-torn regions, such as much of the
Middle East and Africa. Compare this with the point about political stability
engendering greater acceptance of risks in the section on the national
environment, above – is this a contradiction? And a greater acceptance of the
likelihood of natural disasters such as earthquakes and tsunamis would be
considered a manageable risk in the Pacific Rim, but perhaps not even
something to insure against in Europe.
Many of the factors affecting each national environment affect its regional
environment to a certain extent, especially with regard to economic, socio-
cultural, technological and ecological considerations, which tend to be relatively
common across a region, but less so with regard to political and legal
considerations, which tend to be specific to each country and may vary quite a
lot across a region. For example, some Asian countries such as Japan and South
Korea are quite highly developed, while others such as Indonesia and the
Philippines are less developed, while still others such as Vietnam and Laos are
emerging from the legacy of communism.

The international environment

Whether the international environment makes a difference will depend upon
whether a business genuinely operates on a global scale. Any business that
operates across more than one region will need to take account of world politics
and the role of bodies such as the United Nations, as well as international trade
agreements and the role of bodies such as the World Trade Organization. But
despite the globalisation trends discussed in Unit 2, we are still a long way from
Recommended reading: Brooks et
al. (2011); chapters 8, 9 and 10 in global homogeneity in consumer tastes and demands, and the world retains a
Capon (2009); Guy (2009); diverse range of ethnicities, languages and cultures. Any business that aspires
Harrison (2010); Worthington and to be global needs to be prepared to vary what it does to a great extent – see,
Britton (2009). for example, the case study on McDonald’s in Unit 2, with its menu variations.
We shall now look at another case study that covers most of the world.
Case Study
The chocolate industry

The chocolate industry illustrates many of the key concepts in this unit. It
is an industry of special significance for the UK, because of the history of
the cocoa trade and slavery in the British Empire, and the pioneering
businesses of Cadbury, Rowntree’s, Fry’s and others. Today, these former
corporate giants of UK confectionery have merged and ultimately been
acquired by bigger foreign competitors, notably Nestlé and Kraft.
The world’s largest chocolate manufacturers are sometimes characterised
as ‘Big Chocolate’, after the style of the Big Oil and Big Tobacco
industries. The biggest companies are Kraft, which acquired the last major
independent UK manufacturer, Cadbury, in 2010, Nestlé of Switzerland,
Ferrero of Italy, and Mars and Hershey of the US. Prior to the Kraft
acquisition, Cadbury was the second biggest confectionery manufacturer
in the world, and the third biggest in chocolate. Big Chocolate wields
considerable influence in economies where its raw materials are an
important crop for export.
Chocolate products include sweet confectionery, cakes and biscuits, and
chocolate drinks. The principal ingredient of chocolate is cocoa, which is
grown in a tropical climate in countries such as Ivory Coast and Ghana in
Africa, Brazil and Ecuador in Latin America, and Indonesia and Malaysia in
Asia. Total world production of cocoa is estimated at 2,855,000 tonnes.
Chocolate manufacture involves harvesting the cocoa beans, fermenting
and drying them, usually in the growing countries, then transporting
them to the centres of chocolate manufacture. These are in very different
countries from those that grow the beans, and include the US, Mexico,
Switzerland, Japan, Italy, Germany and Turkey. The manufacturers clean
and roast the beans, remove their shells, and crush, blend and grind the
beans to form cocoa butter. Cocoa is separated from cocoa butter, and it
is the latter that is used to make chocolate, with the addition of sugar and
milk.
The supply chain is a little more complicated. Figure 3.1 depicts a
simplified supply chain for the chocolate industry.

Growers
(typically small cocoa farmers)
Intermediaries
Cooperatives (small dealers, middlemen and
exporters buy from small farmers)
Cocoa processors
(local, US and EU grinders)
Milk, sugar
and
Chocolate manufacturers
packaging
suppliers
Chocolatiers
Ice-cream,
baking,
drinks, etc.
Distributors/wholesalers
Retailers
(shops, supermarkets, vending, etc.)
Consumers
Figure 3.1: Chocolate industry supply chain
The global chocolate market was valued at US$83.2 billion in 2010, and is
forecast to grow to $98.3 billion in 2016. We shall revisit the chocolate
industry later in this unit.
(Sources: http://www.chocolatemonthclub.com/factory.htm;
http://www.cocoafarming.org.uk/pdf/times100_casestudy.pdf;
http://www.marketsandmarkets.com/PressReleases/global-chocolate-
market.asp; http://www.icco.org;
http://www.eurococoa.com; Cadbury, 2012; Ryan, 2012)

ga
nin ct
Lear
ivit
Refer to the organisation you selected at the outset of Unit 1. Consider its
3a
y
national, regional and international business environments, taking account

of both the macro environment and the competitive environment (market
structure).
eedb ac
For your chosen organisation you should have mentioned both the overall
F
3a external environment and the competitive forces in its industry, including its
suppliers, competitors and customers, and the potential threats posed by
substitute products and new entrants to the market. You should have
completed an environmental scan, focusing on the organisation’s external
environment. As a minimum, you should have defined the national, regional
and international scope of the organisation, and offered some analysis.
By way of illustration, earlier in the unit we identified the national, regional
and international business environments of BP and Canon, and a
comparison of them would highlight their relative sizes in terms of revenues
and market capitalisations, where in the world their customers are, their
differing business cultures arising from their different nationalities, the
differences in their supply chains, their market positions relative to their
competitors, and their future prospects.
3.2 Stakeholder analysis

The concept of stakeholding is one that has become a key issue for business
strategy in recent years. One theory is that companies should only be concerned
about their owners, those who own shares in the company – ‘shareholders’ in
the UK, ‘stockholders’ in the US. Another theory is that companies should put
the needs and interests of their customers first. Still another theory, less common
apart from among trade unionists, is that companies should put their employees
first. Stakeholder theory resolves this by asserting that there are a variety of
different interests in any organisation, and all should be taken into account.
A simple definition of a stakeholder is any person, group, organisation, member

or system who affects or can be affected by an organisation’s actions.
Stakeholders are those who, in any sense, hold a ‘stake’ in the business. The first
recorded reference to stakeholding in this way was in a 1963 internal memo-
randum at the Stanford Research Institute, which defined stakeholders as ‘those
groups without whose support the organization would cease to exist’, and the
concept came to prominence in the 1980s.
One way of identifying stakeholders is to look at the value chain for a business,
from its sources of raw materials, through other suppliers, and business
partners, to its customers and consumers, or the groups that represent them.
However, this is insufficient as it misses out at least two significant groups we
have already mentioned: shareholders and employees. A wider lens for
identifying stakeholders could encompass families of employees, local
communities, trades unions, government, industry bodies, creditors, potential

investors, prospective customers, prospective employees, education and training

providers that prepare industry entrants or offer ongoing development,
professional associations, and others.
James Post et al (2002) suggest a model for identifying stakeholders. See Figure
3.2.
governments
supply chain associates
investors,
shareholders and lenders
local joint venture

customers regulatory private
communities partners and employees corporation and users authorities organisations
and citizens alliances
resource base
regulatory authorities
private organisations
Figure 3.2: A model for identifying stakeholders

Adapted from Post et al (2002)
Stakeholder analysis is not just about identifying stakeholders, but about

evaluating the importance of their stakeholding, and determining how to
interact with stakeholders. A technique to assist this is stakeholder mapping.
The simplest way to weigh stakeholders’ interests is to categorise them into
those with low, medium and high interests. A more sophisticated approach is
to consider two dimensions, interest and power, and construct a two-by-two
matrix sorting stakeholders into four categories: those with low interest and
low power; those with low interest but high power; those with high interest
but low power; and those with high interest and high power. This leads to
conclusions as to how to deal with each category. See Figure 3.3 on the next
page.
In the chocolate industry we can identify a number of stakeholders from the

flowchart in Figure 3.1. These include the growers, cooperatives, inter-
mediaries, cocoa producers, suppliers of milk, sugar and packaging,
distributors/wholesalers, retailers and consumers. To these we must add
employees and their representatives, shareholders, chocolate industry bodies,
government and probably others.

level of interest
low high
high
keep satisfied key players
level of power
minimal effort keep informed
low
Figure 3.3: Categories of stakeholders

Source: Mendelow (1991)
A potentially important stakeholder in the chocolate industry is the Fair Trade

movement (http://www.fairtrade.org.uk/). This movement has arisen in a range
of industries, not just chocolate, in response to concerns about the rights of
stakeholders among the growers and primary producers of raw materials and
essential ingredients, in this case the growers of the cocoa beans. The Fair Trade
movement contends that the only sustainable future for the cocoa industry (and
others, such as bananas, coffee, cotton and sugar) is through growers receiving
higher prices for their crops. So far, there is little evidence of Fair Trade having
significant economic impact; Kraft’s Cadbury brand is the only one of the Big
Chocolate companies to have endorsed it, and less than one per cent of the
cocoa market is labelled Fair Trade. However, there have been greater success
rates in other industries, such as coffee where big companies such as Starbucks
have adopted the Fair Trade brand. This suggests it may have future impact on
the cocoa industry.
ga
nin ct
Refer back to the organisation you selected at the outset of Unit 1, and
Lear
ivit
3b which you used in the previous learning activity in this unit. Construct a
y
stakeholder map for the organisation, based on the model in Figure 3.3,
adding a narrative explaining why you have categorised each stakeholder
group as you have. You may find it helpful to look back at the case study on
the chocolate industry, and the list of industry stakeholders we have just
identified for the chocolate industry.

eedb ac
Table 3.1 and the following narrative provide a comparative illustration of a
F
k
3b stakeholder map for the chocolate industry.
Table 3.1: Stakeholder map
level of interest
low high
high
key players
Big Chocolate
keep satisfied manufacturers, their
Governments, smaller shareholders, customers
customers and consumers such as big retailers, the
cocoa bean growers and
the Fair Trade movement
level of power
keep informed
minimal effort employees of the chocolate
Co-operatives, industry manufacturers, suppliers of
bodies and the wider sugar, milk and packaging,
communities Big Chocolate
partners/alliances and
regulatory authorities
low
The ‘key players’ in the chocolate industry, who have both high interest and
high power, are the shareholders in the Big Chocolate companies who
produce the products, their biggest customers such as supermarket chains,
and the growers who provide the essential cocoa beans. These fall within
the resource base in Post’s classification (Figure 3.3). The growers do not
seem to have high power, but could exercise it through the Fair Trade
movement, which thus also belongs in the ‘key player’ category, holding
potential power in the future. Arguably, employees should be placed in the
same category, but their relatively low power means they belong under
‘keep informed’. Chocolatiers, who design and produce special chocolate
products, may be an exception belonging in the ‘key player’ category. Also
under ‘keep informed’ are others in the supply chain such as the milk, sugar
and packaging suppliers (as sugar is another Fair Trade commodity, a case
may be made for including those suppliers under key players), Big Chocolate
partners/alliances, and regulatory authorities. These fall into the industry
structure section in Figure 3.3. Governments, smaller customers and
chocolate consumers have power should they choose to wield it, but
normally take little interest in the operation of the industry (although the
rise of Fair Trade could change that), so they fall into the ‘keep satisfied’
category, and the social political arena in Figure 3.3. Finally, those with low
power and low interest include cooperatives, industry bodies and the wider
communities, who thus require ‘minimal effort’.

3.3 Understanding and applying the PESTLE

framework
In Unit 1 we introduced the analysis tool PESTLE, which stands for the
Political, Economic, Socio-cultural, Technological, Legal and Ecological
dimensions of analysis. It is sometimes alternatively rendered as PESTEL or
even LE PEST, but PESTLE is the handy metaphor of the mixing tool in a pestle-
and-mortar, and in our initial use we wish to include a mix of all the
dimensions. We shall apply it to analysis of the external global business
environment, and consider the specific example of the chocolate industry.
The purpose of PESTLE is to inform business strategy, to help make decisions

and to plan for the future. It enables businesses to understand better what is
going on outside their organisation, identify opportunities and threats, and
manage risk. Let’s examine each of the PESTLE dimensions in turn, noting
where there may be overlap between dimensions.
The political dimension includes crises such as wars and revolutions, the nature
and stability of ruling governments (at local, national and, in some cases such
as Europe, regional levels) and those likely to succeed them, their attitudes to
taxation and social welfare, their attitudes to foreign trade and trading blocs,
and the question of public ownership of enterprises. It will also include more
specific policies pertinent to certain industries, and this qualification is true for
all of the other dimensions of PESTLE.
The economic dimension includes all national and international economic

trends such as monetary policy, exchange rates, inflation, wage rates,
unemployment, business cycles, public spending programmes and reporting
conventions.
The socio-cultural dimension includes a range of factors such as ethnicity and

national identities, ethics and morals, income distribution, demographics
(including age, gender and migration patterns), religious beliefs and customs,
lifestyles, attitudes to work and leisure, and attitudes to education and
consumerism.
The technological dimension includes the speed of adoption of new tech-

nologies, the rate of technology transfer, the commitment to research and spend
on research by government, universities and industry, and technological
innovation.
The legal dimension includes company law, employment law, health and safety
legislation, financial regulation, and regulations controlling products such as
statutory quality standards.
The ecological dimension includes a range of factors such as climate change,

energy conservation, water quality and shortages, biodiversity and land use,
contamination and health issues from chemicals, waste management and
disposal, depletion of fisheries, deforestation and pollution.
In the chocolate industry, the political dimension includes the stability of

governments in the cocoa bean growing countries, with some like Brazil being

fairly stable, while others like Ivory Coast are not. The economic dimension
includes the conduct of international trade, not least the lobbying of the Fair
Trade movement. The socio-cultural dimension includes consumer tastes, which
vary from Swiss and Italian preferences for dark chocolate with a high
proportion of cocoa solids to British and American preferences for heavily
sweetened milk chocolate with added non-dairy fats. The technological
dimension includes the question of the lack of innovation, and why the
chocolate manufacturing process has changed so little since the 1828 invention
of the hydraulic cocoa press. The legal dimension includes the issue of whether
confectionery products containing vegetable fats (such as Cadbury’s Dairy
Milk) may be classified as true chocolate. The ecological dimension includes
questions about the sustainability of cocoa bean farming. These are just some
examples.
ga
nin ct Refer once again to the organisation you selected at the outset of Unit 1,
Lear
ivit
3c and which you used for the previous two learning activities. Conduct a
y
PESTLE analysis for the macro environment of the organisation. What

conclusions can you draw about the prospects for the organisation, what
are the main challenges it faces, and how would you expect it to change in
the coming years?
eedb ac
Compare your PESTLE analysis with the following analysis of the chocolate
F
3c industry.
A political analysis for the chocolate industry would include the question of
political stability in the cocoa-growing countries and the views of their
governments regarding compensation of growers. This may combine with
the views of governments in the manufacturing countries and large markets
in the developed economies, where ethical concerns of consumers may
support the growers’ interests.
International trade lobbying interests (Fair Trade) may add to this pressure,
and it is reasonable to conclude that manufacturers’ costs are likely to
rise as a result. An option open to manufacturers is to move production
closer to the growers. This trend has been sharper in other manufacturing
industries, with production moved to developing countries where
labour is less expensive, and it would have the added benefit for the
chocolate industry of appeasing at least the governments in the growing
countries, if not the growers themselves.
Against this are the climates of tropical countries, which are not conducive
to chocolate manufacture, but technological progress (such as air-
conditioned plants) means that what was not feasible 100 years ago is
certainly feasible today.
Markets are also shifting to the less developed countries, as chocolate
consumption in the developed countries is close to saturation level (around
90 per cent of adults in Western Europe consume chocolate products) while
growing middle classes in countries like India and China are acquiring a
taste for chocolate.

eedb ac
F
Health concerns may lead to a fall in consumption in the developed

k
3c countries, but are less likely to impact on sales in developing countries in the
short-to-medium term.
continued The balance of these considerations suggests that the chocolate industry
may move closer to its emerging markets south of the equator, relocating
production and increasing marketing operations. The only significant factor
weighing in the balance sheet against this trend is political instability in
countries such as Ivory Coast and, if this can be overcome, the trend for the
industry seems clear.
3.4 Risk analysis and the impact of change

The global business environment is increasingly complex, dynamic and
uncertain. The pace of change is rapid, and so many new economies are
emerging that competition is becoming more intense. It is therefore a key
concern for businesses to anticipate change and manage their risks, including
forecasting the risks they are likely to confront in the future.
Among the recent changes affecting all kinds of business are:

■ global macroeconomic imbalances
■ anti-globalisation
corporate social responsibility ■ corporate social responsibility
■ shortages of natural resources
■ the internet
■ the illegal economy.
Global macroeconomic imbalances

What we mean by global macroeconomic imbalances are the ways in which the
pattern of wealth in the world is shifting, and the volatility that brings, along with
the rise of global competition, whereby a firm may find new competitors emerging
from an unexpected quarter. In the middle of the twentieth century, US Steel was the
largest company in the world, of any kind, but today it is only the thirteenth biggest
steel company, by volume of steel produced, and all 12 of the larger steel companies
are from Asia, seven of them from China (another of the 12, ArcelorMittal, is
nominally based in Luxembourg, but its controlling interest is in India).
Anti-globalisation
In Unit 2 we heard the voice of Nelson Mandela, articulating the fears of
developing countries that globalisation represents no more than colonialism in
a new form. We also saw in the case study what sort of action a national
government in a developing country, in this case Bolivia, can take if it feels
foreign multinational companies are exploiting it. The anti-globalisation
movement is about more than just a few radical fringe protestors in the
developed countries. In 2002, the American philosopher Noam Chomsky said:
‘The term “globalization” has been appropriated by the powerful to refer
to a specific form of international economic integration, one based on
investor rights, with the interests of people incidental. That is why the

business press, in its more honest moments, refers to the “free trade
agreements” as “free investment agreements” (Wall Street Journal). Accord-
ingly, advocates of other forms of globalization are described as
“anti-globalization”; and some, unfortunately, even accept this term, though
it is a term of propaganda that should be dismissed with ridicule. No sane
person is opposed to globalization, that is, international integration. Surely
not the left and the workers movements, which were founded on the
principle of international solidarity – that is, globalization in a form that
attends to the rights of people, not private power systems.’
(http://noam-chomsky.tumblr.com/post/11071212008/the-term-
globalization-has-been-appropriated-by)
Corporate social responsibility

The World Business Council for Sustainable Development defines corporate
social responsibility as:
‘the continuing commitment by business to behave ethically and contribute
to economic development while improving the quality of life of the work-
force and their families as well as of the local community and society at
large’.
(Holme and Watts, 2000)
What the rise of the corporate social responsibility (CSR) agenda means is that
customers are increasingly concerned about the ethics of businesses, including
issues such as their treatment of the natural environment, exploitation of child
labour, and other practices. Businesses need to be alert to the concerns not just
of customers but of all their stakeholders. This is an increasingly fraught area,
as priorities and even recognised issues vary from one country to another,
depending on their different cultures. There have been attempts to establish
globally recognised standards for CSR and the United Nations has combined
with campaigning organisations such as Oxfam and Amnesty International to
agree ten principles called the UN Global Compact.
1. Businesses should support and respect the protection of internationally
proclaimed human rights.
2. They should make sure that they are not complicit in human rights abuses.
3. Businesses should uphold the freedom of association and the effective
recognition of the right to collective bargaining.
4. The elimination of all forms of forced and compulsory labour.
5. The effective abolition of child labour.
6. The elimination of discrimination in respect of employment and
occupation.
7. Businesses should support a precautionary approach to environmental
challenges.
8. Undertake initiatives to promote greater environmental responsibility.
Recommended reading: the 9. Encourage the development and diffusion of environmentally friendly
chapter ‘Corporate Social technologies.
Responsibility’ in Hamilton and
Webster (2012); 10. Businesses should work against corruption in all its forms, including
http://www.unglobalcompact.org. extortion and bribery.

We shall return to the issue of CSR in Unit 9.
Shortages of natural resources

We are beginning to see and understand shortages of hitherto abundant natural
resources, such as clean air, clean water, forestry, fisheries, and fossil fuels
including, perhaps foremost of all, oil and gas. ‘Peak oil’ refers to the point in
time when oil extraction reaches its peak, currently forecast to be no later than
2020, although previous forecasts have been pessimistic and have already
passed, after which oil production and then availability will go into decline.
Predictions of the consequences, assuming replacements for oil are not
developed in time, range from the obvious price increases and shortages to a
range of goods such as motor cars, fertilisers, detergents, solvents and adhesives
all becoming unaffordable luxuries, air travel being severely restricted (and so
curtailing globalisation), populations concentrating in cities, and suburbs
becoming the new slums. Such apocalyptic visions may be exaggerated, but oil-
dependent businesses cannot afford to make that assumption.
The internet
The internet has brought about rapid change in business processes. These
include: new ways of doing business online, which has turned the retail world
upside down (Amazon was a new online start-up in 1994 and less than 20 years
later had global revenues of over $60 billion) but also affects other industries
from small consultancy firms to global stock traders; the new phenomenon of
cybercrimes such as fraud and other financial crimes, copyright infringement
and other intellectual property issues, and industrial espionage; and problems
with social media such as new ways of marketing online and employee
behaviour issues.
The illegal economy

Investopedia defines the illegal economy like this:
‘The segment of a country’s economic activity that is derived from sources
that fall outside of the country’s rules and regulations regarding commerce.
The activities can be either legal or illegal depending on what goods and/or
services are involved.’
(http://www.investopedia.com/)
Some sphere of entrepreneurship will always seek to subvert rules and

regulations where possible, but we are concerned here with the component of
the ‘black economy’ that is actually illegal, and includes bribery (still accepted
business practice in some cultures), exploitation of state fragility, illicit trade
such as in recreational drugs, organised crime, and corruption of state officials.
Crime has always existed (although cybercrime is new), but the international
dimension brings added risks for business.
The World Economic Forum produces an annual global risks report. The report
published in January 2011 identified 37 major risks for that year, most of which
remain current. These include terrorism, global government failures, economic
disparity and demographic challenges. The full list is available in a PDF
(http://riskreport.weforum.org/).

If we apply the same approach, of anticipating change and managing risk, to

the chocolate industry in particular, we can identify the following significant
changes:
■ Consolidation of the chocolate industry, most recently with the Kraft
acquisition of Cadbury.
■ Growers seeking a greater share of the proceeds of the industry, promoting
growth of the Fair Trade movement (global macroeconomic imbalance).
■ Governments in the growing countries supporting the Fair Trade movement
(anti-globalisation).
■ Consumers in developing countries supporting the Fair Trade movement
(CSR).
Recommended reading: the
chapter ‘Managing a Changing ■ Some evidence of political instability in the growing countries, with civil
Environment’ in Capon (2009); war in Ivory Coast from 2002 to 2004, and disputes over the 2010
Johnson and Scholes (2002). elections..
ga
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Consider the sort of changes that are likely to affect the chocolate industry
Lear
ivit
3d in the next five years or so. Select one of the most significant changes likely
y
to happen, and indicate how the Big Chocolate manufacturers should plan
for it.
eedb ac
F
You could have chosen further consolidation of the chocolate industry, with
3d the prospect of further mergers or acquisitions involving the Big Chocolate
companies. It is likely, since Kraft acquired Cadbury, that Nestlé, Mars,
Hershey and Ferrero are contemplating further consolidation. If you chose
this change, you should comment on its effects on competition in the
industry and the implications for consumers.
You could have chosen strengthening of the growers’ position and the rise
of Fair Trade, supported by ethical concerns of consumers. This threatens
Big Chocolate’s margins, and may lead to moving manufacturing operations
closer to the growers. If you chose this option you should comment on how
Big Chocolate should best deal with the growers, their representatives and
the Fair Trade movement.
You could have chosen another change altogether. If so, you should show
evidence, either relating it to one of the six major changes already identified
or to the risk report of the World Economic Forum.
3.1 In 2011, the biggest company in the world by revenue was Exxon Mobil.
Taking it as an example, briefly distinguish its national, regional and
international business environments.
3.2 ‘Customers should always come first!’ Summarise two arguments for a
business considering stakeholders other than its customers.

3.3 Briefly explain why PESTLE is a useful tool for analysing the global
3.4 Consider the list of five changes in the global economy listed above. Think
of another likely change, and summarise what effect this might have on
the operation of a large multinational corporation.

3.1 National: Exxon Mobil is a US-based oil and gas multinational, listed on
the New York Stock Exchange, headquartered in Texas, and operating
under US Federal Law. Regional: the most important global region for
Exxon Mobil is the Middle East, as the greatest proportion of its oil is
sourced from Saudi Arabia, Kuwait and Iraq. International: Exxon Mobil
is the largest oil refiner in the world, with 37 oil refineries in 21 countries,
exploration in six continents, and customers all over the world.
3.2 The owners could equally be argued to be paramount – they own the
business and it is their money the business spends. Employees are also
vital to a business – if all your employees withdraw their labour (legally)
there would not be much customer service. The same argument could be
made about everyone in the supply chain, without whose contributions
the business would not get far. A distinct argument is that a coalition of
different interests goes to making up any business, and all of their needs
must be addressed in some way. Another argument is that analysis of all
a company’s stakeholders can play a vital part in understanding the
business and developing its strategy.
3.3 PESTLE provides a framework for identifying and analysing the full range
of issues confronting any business. It gives structure to any brainstorming
of all the issues affecting a business, making it less likely that a thorough
analysis will miss anything important. It is especially useful for helping to
understand market growth or decline, and from this the best strategy for
a business to pursue. Similarly, it may be used to review a strategy, or
simply to orient an organisation to what is happening in the world around
it.
3.4 You could have chosen any of the 30 or more additional risks identified
by the World Economic Forum in their 2011 report. One of those,
terrorism, speculates that repeats of the sort of action that destroyed the
World Trade Center in New York City on 11 September 2001 could
continue to represent a threat of significant damage and loss of life, not
just impeding business, but forcing expensive counter-measures, with
substantial opportunity cost for businesses.
Summary
In this unit you have examined the global business environment, distinguishing
its national, global-regional and international dimensions. You have followed
the example of the chocolate industry throughout this unit, as an illustration of
how the global business environment works, and considered environmental
scanning as a tool for exploring the environment of any business or industry.
You have looked at who influences businesses, and why they are described as
stakeholders. You have studied how to identify stakeholders and evaluate their
power and interest in a business, using stakeholder mapping techniques.

You have used PESTLE analysis to understand better the global business
environment, applying it to the example of the chocolate industry.
Lastly, you have considered the main changes affecting the global business
environment, and how these impact upon an organisation’s business strategies
and risk management.
In the next unit, we shall move on to consider the globalisation of markets and
industries.

Unit 41 Globalisation of markets
and industries
‘Companies must learn to operate as if

the world were one large market –
ignoring superficial regional and
national differences.’
Levitt, 1983
Introduction
Markets and industries are going global. Theodore Levitt spotted the
trend in 1983, and although his forecasts have not always been accurate,
he expounded one core thesis on which there is universal agreement,
and general recognition that his forecast has been borne out. That is that
global markets have emerged for more-or-less standardised products,
and have grown on an unprecedented scale, creating substantial new
business opportunities, with vast economies of scale, for any business
with global reach and the ambition to match.
The language we use when we discuss this trend is overlapping and

confused: people refer almost interchangeably to countries, economies,
markets and industries. In this unit we will clarify our use of these terms,
in order to distinguish clearly between markets and industries, and to
enable us to make a meaningful distinction between market globalisa-
tion and industry globalisation.
We shall look more closely at market structures, which we touched upon

as the competitive environment in Unit 1, and consider what they mean
for enterprises seeking to compete in these markets, and how they affect
their business performance.
We shall identify and analyse the concepts of market concentration and

market power, and the relationship between these two concepts.
And we shall take up Michael Porter’s Five Forces framework for industry
analysis, which we introduced in Unit 1, and apply it to some real
examples.

4.1 Distinguish between market globalisation versus industry globalisa-
tion.
4.2 Describe various market structures and their implications for
competition and performance.

Unit 4 Globalisation of markets and industries
4.3 Assess market concentration and its relationship with market

power.
4.4 Apply the Porter Five Forces framework for industry analysis.
Prior knowledge
This unit is the fourth in a series of ten, and it would make sense to follow the
units sequentially, studying Units 1 to 3 before this one. However, it is possible
to study this unit without having studied the previous three. Some general
knowledge of economics, business, management, marketing or finance would
also be helpful, as would any practical experience in these fields. A background
in marketing would be especially helpful, although not essential.
Resources
The relevant reading for this unit may be found in the chapter ‘Analysing Global
Industries’ in your core textbook (Hamilton and Webster, 2012). Supplementary
references are provided in the text.
4.1 Market and industry globalisation

What we understand by a market
When people first came together to exchange goods, in early societies, they did
it in a market, a place in a village set aside for the purpose of putting up stalls,
buying and selling what they needed and what they had made, gathered, grown
or reared. Markets played a significant role in the formation of towns, with
important buildings like churches and civic halls, shops and hotels, and later
banks and post offices, springing up around them. Markets still sometimes
work like this – the largest market square in Europe, in Krakow, Poland, dates
back to the fifteenth century. The Oxford English Dictionary defines a market
as ‘a regular gathering of people for the purchase and sale of provisions,
livestock, and other commodities’, but this definition does not really reflect all
the contemporary realities of how markets work.
For example, a stock exchange comprises buyers and sellers coming together to
trading floor trade shares and other securities, but the days of the trading floor with its open
outcry system are largely over, with most transactions conducted on computer
screens since 1986. Consumer goods, including food, home furnishings and
electronic equipment, typically reach their buyers via a distribution chain
open outcry leading to retail outlets, including local shops, supermarkets and shopping
malls. Business-to-business transactions often occur via interaction of sales and
procurement professionals representing the respective parties. And an increas-
ing proportion of buying and selling takes place over the world wide web.
In business terms, we mean something more when we refer to a market, and

recognise it as not only the marketplace – whether real or virtual – but also:
■ The process whereby the economic forces of supply and demand meet.
■ The distribution systems by which sellers make goods and services available
and facilitate transactions.
■ The consumers or groups of customers who may be interested in buying.
■ The mechanisms for setting prices.

Perhaps foremost of all these factors is the question of who is in the market to
buy, or who are the customers, or who are the people and organisations with
needs that may be satisfied by the goods or services supplied. In this spirit,
Philip Kotler and Fernando Trias de Bes define the market as:
‘the set of persons/companies who buy or might buy products or use services
in a given situation in order to cover a given need’.
(Kotler and Trias de Bes, 2003)
Defining a particular market involves:

■ Deciding which goods or services to include – should liquefied petroleum
gas (LPG) fuel for cars be considered as part of the car fuel, oil or energy
markets?
■ Identifying the firms competing in the market – do we include in the energy
market all the companies in the gas supply chain, all the companies in the
electricity supply chain, the nuclear industry, the wind and wave power
specialists, all the companies involved in the oil exploration, extraction and
refining processes, all the downstream petrochemical businesses, and
others?
■ Indicating the geographical area where the firms compete – as we saw in
Unit 3, this can be confusing, as regions overlap.
If there is no longer a need, in most cases, for people to travel to markets to buy
goods; if distance is no object and distribution may be rapidly conducted
through international transportation; if barriers to international trade are
diminishing (as we saw in Units 1 to 3); if worldwide multimedia communica-
tion is easy and rapid; and if consumers’ tastes are becoming global; then we
can see that markets are becoming global.
The global market for books could be said to include publishers, printers,
writers and editors, designers, independent booksellers, multiple chains such
as Borders in the US and Waterstones in the UK, and online booksellers, notably
Amazon. But this really only describes the supply side. What is usually meant
in any discussion of a market for books is, for example, the market for
academic textbooks, or the libraries market, or self-help books, or crime fiction,
or another genre. This affirms Kotler and Trias de Bes’s definition that places
the emphasis on the demand side, and yet it is clear that without the supply
side there would be nothing for customers to buy.
The difference between an industry and a

market
The answer to much of the confusion in understanding markets lies in
distinguishing them from industries. It makes sense to talk about the auto-
mobile industry, since cars have generic functions for users, and the
manufacture and distribution of cars follow common processes, regardless of
the type of car. But it makes no sense to talk of an automobile market, as the
market for a prestige car like a Porsche or a Ferrari is very different from the
market for a four-wheel drive vehicle like a Range Rover or a Mitsubishi. A
typical market in the automobile industry is the family hatchback market,
where, in the UK, the Ford Focus, Vauxhall Astra, Volkswagen Golf and others
compete.

cross elasticity of demand Markets exist where there is competition. Economists refer to cross elasticity of
demand to measure the likelihood of customers switching to an alternative
product in response to a price increase, for example. This depends on customers
seeing other products as alternatives. In the case of the automobile industry, a
prospective customer contemplating buying a new Porsche would be unlikely
to switch to a Range Rover simply because the price of Range Rovers fell. That
would represent a complete change in behaviour almost equivalent to the
customer deciding to buy a yacht instead. If we follow the buyer behaviour, we
can identify where there are competing products, and so where there is genuine
competition, and so where there is a market.
Products and services need not be very similar to be in competition. Fast food
is just such a category. Hamburgers are not much like pizza, except that they
are both foods (and part of the food industry), but they compete in the fast
food market, where a customer wishing to satisfy a need for a quick takeaway
meal may choose between them. Ice-cream is also a food, and part of the food
industry, and arguably a fast food, but a Pizza Hut franchise holder would react
very differently to an ice-cream vendor opening up next door, than they would
to a branch of McDonald’s opening in the same place. The ice-cream vendor
might serve to drive up sales of pizza, whereas the McDonald’s would be
competing for the same customers (the net effect could be to increase the
market, if more customers were drawn to a location with a choice of fast food
outlets, but that is another debate).
We can see an example of Levitt’s theory of globalisation of markets if we

consider another fast food, sushi. On the face of it, this option is culturally
distinctive, but despite traditionalist Japanese misgivings about its authenticity,
a version of sushi has gained popularity in many countries of the world. Sushi
outlets have spread all over North America, in particular, and in the UK, the
YO! Sushi brand has grown rapidly, in just 15 years since start-up, to more
than 1500 employees plus franchises in the UK, Ireland, the US, Russia and the
Middle East. A homogenised version of the Japanese fast food has gone global.
(Source: UK Government Intellectual Property Office, 2007)
Industries may be complicated. There may be hierarchies within them, as in the

food industry, which follows a supply chain from the agriculture, livestock and
fisheries industries through food distribution and processing, to the wholesale,
retail and restaurant industries. Within this hierarchy lie the fresh food industry,
the frozen food industry, the processed food industry, the fast food industry,
and others.
diversification Industries are also complicated by diversification of firms, as some offer so

broad a range of goods that they may be classified in several industries. Diageo
was formed by merging the spirits business of United Distillers with the brewing
business of Guinness to form a combined drinks business. White goods
manufacturing is fairly generic, but leads to products in the distinct washing
machine, refrigerator, dishwasher and electric cooker markets. In the media
industry, Gulf and Western was acquired by Viacom, in turn acquired by CBS,
which is now active in the television broadcasting, radio broadcasting,
television production and distribution, publishing and advertising industries,
among others. And some conglomerates operate in a large number of
unconnected industries, such as Tata Group of India, which includes more than

30 companies in the following industries: steel, power, automobiles, chemicals,

telecommunications, hotels, beverages, and others.
vertical integration Industries may also be complicated by vertical integration or horizontal

integration. Vertically integrated firms occupy different stages of the supply
chain, such as oil companies Exxon Mobil, BP and Shell owning oil
exploration, extraction, refining and retailing (forecourt) operations.
horizontal integration Horizontally integrated firms look for expansion by moving into similar
markets, such as Volkswagen acquiring SEAT and Skoda to sell similar cars
into similar markets, or Associated Newspapers owning the Daily Mail, Mail
on Sunday, Metro, and formerly the Evening Standard newspapers.
Geographical boundaries sometimes serve to keep parts of industries separate,

as it may be uneconomic for firms producing products in different places to
compete in the same markets, perhaps due to transport costs. Firms may also
choose to keep markets separate, as in the example of Volkswagen retaining the
SEAT and Skoda brands. These trends contradict globalisation.
In broad terms, an industry comprises all firms producing similar goods or

services, whereas a market is defined in terms of the demand for similar goods
or services.
Investopedia clarifies that the ‘North American Industry Classification System

(NAICS) (developed by the United States, Canada and Mexico) is widely used
by investors to classify companies. In the NAICS hierarchy, companies that use
similar production processes are categorised in the same industry’ (http://
www.investopedia.com/).
Industry is tending towards globalisation, as increasing numbers of firms

engage in international trade, and global industries are emerging where firms
need to compete globally to stay in business, and their competitive advantage
depends on economies of scale and of scope across many markets.
Markets are also tending towards globalisation, driven by the globalisation of

consumer demand, and the capabilities of industries to spread globally to meet
that demand.
We may identify distinct sets of characteristics of various international business

strategies.
Global strategy – this treats the world as a single integrated unit. The focus is
on increasing profitability through product standardisation and capturing cost
reductions from location economies and economies of scale, but this is at the
expense of responsiveness to local markets.
Multi-domestic strategy – a multi-domestic strategy adapts products for use in

different national markets. This is the opposite of a global strategy. However,
responding to local market conditions and local preferences with differentiated
products does raise costs, and local initiatives may be the result of local
managers protecting their own interests instead of pursuing the corporate good.
International strategy – creates value by transferring key skills, capabilities and

products to local markets. The degree of differentiation developed in the home

Recommended reading: the market is advanced and the intent is that the differentiation delivered in each
chapter ‘Marketing’ in Capon local market reflects this. Local managers have discretion on which products to
(2009); the chapter ‘The offer and how.
Globalization of Business’ in
Harrison (2010); the chapter ‘The
Global Context of Business’ in Transnational strategy – a transnational strategy seeks to combine the
Worthington and Britton (2009); advantages of the global strategy with the advantages of the multi-domestic
Kotler et al (2013); strategy. The aim is to exploit cost and location economies while at the same
http://www.globalizationofbusines time giving local responsiveness.
s.com/).
ga
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Refer back to the organisation you selected in Unit 1. Explain the difference
Lear
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4a between the scope of the company, the industry and its market(s). What do
y
they tell us about industry globalisation and market globalisation?
eedb ac
Consider the example of the fast food hamburger industry and the fast food
F
4a hamburger market. (In truth, it is difficult to distinguish between industry

globalisation and market globalisation, and this example highlights the
difficulty.)
The industry: the fast food hamburger industry comprises many restaurant
chains and their suppliers, producing and serving customers with
hamburgers and a range of related fast food products. The industry
originates in the United States, but may now be found in almost every
country in the world. The global industry leader is McDonald’s, with a
presence in 119 countries, followed by Burger King, and, in the US,
Wendy’s. Some estimates identify more than 100 distinct vendors in the
industry.
The market: the fast food hamburger is one of the most popular food
choices in the world, transcending national boundaries with just a few
cultural exceptions. Some markets prefer variations on the beef-based
hamburger, but most prefer the original product, perhaps even because of
its identity with US culture. The corollary of this is that some markets resent
this intrusion of American culture, and concerns have often been expressed
about the quality of the product, but the trend is for increasing popularity
for the product. There is an established global market for fast food
hamburgers, driven by this consumer demand.
The fast food hamburger is a good example of a homogenous product in
global demand – the market globalisation described by Levitt.
See the case study on McDonald’s in Unit 2, and http://eater.cc/top-burger-
chains, which identifies the top 16 hamburger chains in the US in 2011.

4.2 Market structures, competition and

performance
market structure Market structure is a term describing the characteristics of a market, including
the number of firms competing, the number of buyers, the degree of
competition, and the similarity of the products or services on offer. Market
structures are distinguished by the number of competing firms, the nature of
their products, and barriers to entry to the market. There are many different
types of market structure, and we may classify the main types as follows.
Perfect competition, rarely encountered in business practice, is a theoretical

barriers to entry model whereby a large number of buyers is served by a large number of firms
offering homogenous products, competing freely in a market with no barriers
to entry. Examples include agriculture and currency markets.
Monopoly is where a single firm controls the market, producing its unique
product or service alone, and where there are high barriers to entry. The
corollary of monopoly is monopsony, where there may be many suppliers but
there is only one buyer. Examples of a pure monopoly are rare, but such
markets often include utilities and other markets where there is or has been
state ownership. A typical monopsony would be where a government body is
the sole buyer of services from contractors.
Monopolistic competition describes a structure where slightly differentiated

products are offered by a number of suppliers, with little or no barriers to entry.
Examples include small businesses such as professional services firms and
restaurants.
Oligopoly, perhaps the most common type, is where the market is dominated
by a small number of firms, where there are high barriers to entry, and the
differences between their products may vary. A duopoly is a special case of
oligopoly where there are just two firms dominating the market. And an
oligopsony is where there are many suppliers but just a few buyers. Examples
of oligopoly include banks and supermarkets, among others. The detergent
market is an example of a duopoly, involving Unilever and Procter & Gamble.
What these structures mean for competition is demonstrated by the continuum

depicted in Figure 4.1, from the most competitive, perfect competition, at one
extreme to the least competitive, monopoly at the other. These conditions may
be changed by governments’ competition policies, competition law, and
nationalisation or privatisation.
Market structure influences company performance in a number of ways. The

intensity of competition may affect pricing, margins and profitability. The more
competitive the market, the less profitable it is likely to be. And business
strategies may be directed towards achieving oligopoly or monopoly, in order
to improve profitability. Less competitive businesses may lose shareholders, be
forced to cut costs, reduce employee levels and experience further falls in
performance. More competitive businesses may attract shareholders, add
resources, add value, improve performance levels and become more profitable.
See http://www.bized.co.uk/learn/economics/firms/structure/index.htm for further
explanation of market structure models.

Highly competitive High degree of market power

Perfect competition Monopolistic competition Oligopoly Monopoly
Farming Restaurants Supermarkets Gas transmission
Stocks Small builders Banks Water
Currencies Lawyers Electrical goods Electricity
Landline telecoms?
Figure 4.1: Market structures
Case Study
Coke and Pepsi

One of the best-known duopolies is in the carbonated drinks markets. The
world’s two leading carbonated drinks are Coke, produced by the Coca-
Cola Company, and Pepsi, produced by PepsiCo. Coke and Pepsi compete
in almost every market in the world, often in oligopoly conditions with
other soft drinks, notably Dr Pepper in the US market, but always as two
of the leading competitors. The Coca-Cola Company has a market
capitalisation of $171.8 billion (2012), revenues of $46.5 billion (2011),
and 146,000 employees (2011). PepsiCo has a market capitalisation of
$112.5 billion (2012), revenues of $66.5 billion (2011), and 297,000
employees (2011). These figures include all of their respective business
interests, including a broader range of soft drinks and foodstuffs, but for
both companies the leading product is their eponymous branded drink.
In addition to their flagship Coke and Pepsi cola products, the two rivals
have competing diet cola drinks, cherry colas, orange drinks (Fanta and
Tango), lemon-lime drinks (Sprite and 7-Up) and others in directly
competing categories (for example Fresca and Mountain Dew). In 2011,
Coke sold $28 billion worth of carbonated drinks, Pepsi sold $12 billion.
In the US market, the two have competed head-to-head for decades.
Coke has been the market leader for most of that time, with Pepsi
challenging. Since the 1930s, Pepsi has attempted to overtake Coke via
marketing strategies such as price reductions, increased bottle sizes,
sponsorship, advertising campaigns and so on. In 1975, Pepsi launched
the ‘Pepsi challenge’, proving through a series of public tastings that
consumers preferred the taste of Pepsi to Coke. In 1975 Coke sole 1.1
billion cases to US consumers, compared to Pepsi’s 775 million cases. The
Pepsi Challenge campaign helped Pepsi increase volume by 5.5 per cent
by 1979, compared to Coke’s volume increase of 2 per cent. This
provoked Coke to tamper with the formula for their product and to
launch ‘New Coke’ in 1985. This was a mistake.
US consumers reacted against the change to their favourite cola, and
Coke’s sales fell. The Coca-Cola Company realised they had made a
mistake and reintroduced the original formula ‘Classic Coke’ alongside
‘New Coke’. But the damage had been done and, in 1985, Pepsi was the
top-selling soft drink in the US, ahead of ‘New Coke’ and ‘Classic Coke’
combined.

The damage was short-lived, and once Coke dropped the ‘New’ formula,
they regained market leadership, which they have held ever since. But the
case shows that corporate decision making can make a big difference to
corporate performance, and market leadership cannot be taken for
granted. Most commentators have held for some time that Pepsi has lost
the cola war, and in 2012 Pepsi slipped to third highest selling carbonated
soft drink in the US, behind Coke and Diet Coke.
(Sources: Oliver, 1986; http://www.independent.co.uk/life-style/food-and-
drink/news/why-things-taste-bitter-for-pepsi-2257844.
html; http://www.businessinsider.com/how-pepsi-lost-cola-war-against-
coke-2012-5?op=1)
ga
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Consider the case study above. The Pepsi Challenge proved that consumers
Lear
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4b preferred the taste of Pepsi to Coke. Why were Pepsico unable to convert
y
this advantage into market leadership, and what role did the market
structure play in this failure?
eedb ac Pepsico has larger revenues than The Coca-Cola Company, but these are
F
4b derived from other products (diversification) and their sales of cola have
generally lagged behind Coke. Note that Coca-Cola has a larger market
capitalisation. Coke’s market leadership may be attributed to first-mover
advantage (see Unit 5 for further discussion of this concept), and/or the
resource benefits of market leadership, and/or long-term consumer brand
loyalty, and/or better market positioning (Coke emphasises family values in
contrast to Pepsi’s celebrity endorsements), and/or other factors.
Despite its marketing blunder with ‘New Coke’ in the 1980s, Coke has been
able to exploit its market leadership to sustain its position relative to Pepsi
over time. The Coke/Pepsi duopoly may be tending to oligopoly, with the
rise of other competitors, meaning Pepsi is not in as strong a position as the
Pepsi Challenge evidence would suggest. As competition intensifies, Pepsi’s
competitive weaknesses outweigh its perceived taste advantage. In any
case, tastes may be changing, as the rise of the diet drinks market, and the
notable success of Diet Coke, suggests.
Pepsico has been unable to exploit its perceived taste advantage because:
■ The market structure appears to favour the market leader, Coca-Cola,
perhaps because of its first-mover advantage.
■ Pepsico’s diversification appears to have distracted it from the
competition with Coke.
■ Coke has pursued more effective marketing and advertising over the
long term, with the singular exception of the ‘New Coke’ fiasco.

eedb ac
Some commentators consider Pepsi’s marketing has been particularly
F
k
■
4b poor (controversies over celebrity endorsers, syringes found in cans,

allegations of racism and so on – see, for example the Business Insider
continued reference, http://www.businessinsider.com/how-pepsi-lost-cola-war-
against-coke-2012-5?op=1).
4.3 Market concentration and market

power
Another way of understanding the different market structures we discussed
above is to consider how much of the market is concentrated in the hands of
relatively few firms – 100 per cent in the case of a monopoly, the highest level
of concentration, compared to a very low concentration figure when the market
is shared among many participating firms. We can measure the degree of
concentration ratio competition in a market by using a concentration ratio, which measures the
share of the industry or market held by the largest firms.
The number of firms included in the calculation will vary depending on how
many firms have a disproportionate share of the market. In some markets there
may be five or six large firms that are dominant. In other markets only two or
three large firms dominate. Choosing which concentration ratio to use is a
matter of judgement. For example, a five-firm concentration ratio of 60 per
cent means the top five firms in the industry account for 60 per cent of total
sales, but you may get a very different figure if you chose instead the top four
firms, or the top six firms.
A more accurate measure of market concentration is the Herfindahl–
Hirschmann Index (HHI). This calculates the concentration based on the sum
of the squares of all of the market shares of all the firms. An HHI below 100
indicates a highly competitive index. An HHI between 1000 and 1800 indicates
moderate concentration. An HHI above 1800 indicates high concentration.
HHI is less used, except by specialists, because accurate and comparable market
data, especially for smaller firms, is often hard to obtain.
The Guardian newspaper undertook some analysis of the global chocolate
market in 2009, and found a total of $82.5 billion spent on chocolate
confectionery products worldwide at that time. They identified the market
shares of the top four companies as follows:
■ Kraft (including Cadbury) $14.2 billion (17 per cent)
■ Mars $13.3 billion (16 per cent)
■ Nestle $11.7 billion (14 per cent)
■ Ferrero $6.7 billion (8 per cent).
Based on these figures, originating from researchers Euromonitor International,

and the assumption that the global chocolate confectionery market is
dominated by those four, we can calculate a concentration ratio for those four
of 56 per cent – highly concentrated. But choosing how many companies to
include in the ratio calculation is matter of judgement, and adding a fifth
company, Hershey, who were the next biggest in 2009 with revenues of $5.2
billion (6 per cent), increases the concentration ratio, albeit for the top five, to

61 per cent – even higher. The ratio would also change if we looked selectively
at global regions. Hershey may only be the fifth biggest chocolate company in
the world, but is the market leader in the US with a 42.5 per cent market share.
(Sources: Allen and Ridley, 2010; http://www.euromonitor.com/chocolate-
confectionery)
The distribution of power in a market is determined by the measure of market

concentration. The more concentrated a market is, the more power is
concentrated in the hands of a few companies that dominate that market. For
example, Google wields substantial power by dominating the web search
market. With 70 per cent of the US market, and more than 90 per cent of the
market in Western Europe, Google can give or withhold great visibility to
companies promoting their products or services on the web. More than three-
quarters of all web searches only click on the first three links identified by
Google. Expedia has complained that its travel services links appear below
Google’s own, and firms may occasionally appeal to regulators about un-
favourable treatment.
ga
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The world beer market is dominated by three companies that hold almost
Lear
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4c half the total market share (based on 2010 figures for volume sold).
y
■ Anheuser-Busch InBev of Belgium has 350 million hectolitres.

■ SABMiller of the UK has 250 million hectolitres.
■ Heineken of the Netherlands has 200 million hectolitres.
■ Others have 1000 million hectolitres.
Calculate to one decimal place the concentration ratio for the top three,
based on these figures.
Carlsberg of Denmark is the fourth biggest, with 125 million hectolitres,
meaning the top four have more than half of the market share.
Recalculate to one decimal place the concentration ratio for the top four,
based on these figures.
Summarise how much power these three or four companies have over the
global beer market, as a consequence.
eedb ac
The concentration ratio for the top three is 44.4 per cent.
F
4c The concentration ratio for the top four is 51.4 per cent.
The global beer market is an oligopoly with the top three or four companies
holding considerable power, especially since the trend is to greater
consolidation in the market. In 2007, half of the beer market was shared
among twice as many companies – eight. Their nearest competitors are also
much smaller, and in some markets the dominance of the big three or four
is even greater (for example, Anheuser-Busch InBev has over 70 per cent of
the market in Brazil).

4.4 Applying Porter’s Five Forces

framework
In Unit 1 we introduced Michael Porter’s Five Forces framework for industry
analysis and business strategy development. You will now apply the framework.
To recap, Porter’s Five Forces analyse the competitive environment, or micro
environment, and take account of both the two horizontal factors – the threat
of new entrants to the market and the threat of substitute products or services
– and the two vertical factors – the bargaining power of suppliers and the
bargaining power of buyers – and how these factors combine to influence the
fifth force, competition among established rivals. See Figure 1.4 in Unit 1 to
visualise the framework.
The threat of new entrants. Profitable markets yielding high returns tend to
attract new firms. This may result in many new entrants, which eventually will
decrease profitability for all firms in the industry. Established rivals therefore
seek to erect barriers to entry (as we discussed under market structures, above).
Barriers may include absolute cost barriers, economies of scale, contracts with
suppliers or customers, control of intellectual property such as via patents,
product differentiation, vertical integration (again, see market structures,
above), and other barriers. Perhaps most significant is brand building –
established firms will seek to build successful brands and ensure brand loyalty,
to discourage switching.
The threat of substitute products or services. The existence of products beyond

the normal competitive boundaries increases the likelihood of customers
switching to substitutes. For example, substitutes for the meat industry include
fish and other proteins, and the air travel industry may sometimes find train
services substituting for their services. Substitute products or services are
produced by a different industry, but may fulfil the same function for
customers. Customers may be more likely to seek substitutes if there are
changes in relative prices or quality, or if it is easy to switch.
Bargaining power of suppliers. This is about the input side. Suppliers have high
bargaining power if the raw materials, labour, knowledge, components or
services they supply are costly to replace or difficult to substitute. Suppliers
have low bargaining power if there are many of them, they supply
undifferentiated products, or if they are threatened by substitution. In medieval
societies, many bakers were often at the mercy of a local miller, who
monopolised the supply of flour. Vertical integration is one strategy to mitigate
the impact of suppliers.
Bargaining power of buyers. This is about the output side. Firms may have
more power, and may command brand loyalty or a price premium, if their
products are well differentiated, there is a large number of customers, or there
are barriers to customers switching. Buyers, or customers, are more likely to
consider switching if they have access to information, the costs of switching
are relatively low, or the alternatives have clear price or performance
RFM analysis advantages. Recency, frequency and monetary (RFM) analysis is a method of
analysing customer behaviour: recency asks how recently the customer bought;
Frequency asks how often the customer buys; and monetary value asks how
much the customer spends. RFM analysis can help track switching patterns
and determine whether customers are likely to switch.

Lastly, we consider the fifth force, competitive rivalry, which derives from the
other four forces.
Rivalry among existing competitors. In most industries, the intensity of

competitive rivalry is the key driver of the competitiveness of the industry.
Competition can be based on policies relating to the four Ps of price, product,
promotion and place, or strategies related to growth and expansion through
four Ps mergers and acquisitions, or sustaining competitive advantage through
innovation. Competition will be more intense when there is a large number of
competing firms, or when firms have similar-sized market shares, or when there
is little product differentiation, or when the market is growing slowly, or when
new capacity is added in large increments. Firms will sometimes enter into
cartels to prevent mutually disadvantageous price wars or other damaging
competition, despite the prohibitions of competition law, as we shall see in Unit
cartel 6.
Taking the Five Forces as a whole, a key consideration in conducting an analysis

of a firm is the degree of pressure on it from each of the forces. This may be
measured by a crude scale of high, medium or low pressure for each force, and
provides a useful shorthand for assessing the firm’s competitive situation – the
higher the aggregate pressure, the more difficult is the firm’s situation.
Porter’s Five Forces framework has become one of the most popular tools for
evaluating firms’ strategic positions in their industries and markets, but it is
only a tool, and neither perfect nor the last word. Criticisms of Porter’s Five
Forces include the view that they are underpinned by three questionable
assumptions, that buyers, suppliers and competitors are unrelated and do not
collude, that structural advantage (creating barriers to entry) is the prime source
of value, and that uncertainty is low, allowing participants in a market to plan
for and respond to competitive behaviour. Some would add a sixth force,
complementers, referring to complementary products that are used together by
customers, such as computer hardware and software. Firms supplying one such
Recommended reading: Porter product may be heavily reliant on the complementary products of a supplier, as
(1979); Porter (1980); Porter illustrated by the symbiotic relationship between Microsoft and Intel.
(2008); Downes (1997); Coyne
and Subramaniam (1996).
ga
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Following on from the case study, consider the example of Coca-Cola.
Lear
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4d Conduct a Five Forces analysis of The Coca-Cola Company with regard to its
y
main product, Coca-Cola (Coke) in the global carbonated soft drinks

market. You should identify who or what is involved in each of the five
forces, measure the pressure from each force and determine whether it is
high, medium or low, and lastly consider whether there is any other
important factor for Coca-Cola that is not addressed by the Five Forces.

eedb ac
Rivalry among existing competitors. This is intense. Coke’s main competitor
F
k
4d is Pepsi, both in its home (US) market and in the global market; Coke has
sustained a long-term advantage over Pepsi, but often only by a narrow
margin, and as the ‘New Coke’ debacle in the 1980s demonstrated (see
case study) this cannot be taken for granted. In many separate national
markets there is also intense competition from indigenous soft drinks,
including Dr Pepper in the US. Pressure = high.
The threat of new entrants. There are plenty of opportunities for new
entrants, with few constraints on consumer switching and low barriers to
entry. Indeed, supermarkets’ own-label colas often enter the market, albeit
rarely at a global level, and often at a much lower price. However, Coke is
the biggest brand in the world (according to Interbrand research) and
commands substantial brand loyalty, which limits the potential for new
entrants to sustain competition. Pressure = medium.
The threat of substitute products or services. There are many potential
substitutes, including tap water and almost any other drink. Recent decades
have seen the emergence of diet drinks, where Coke responded by
developing Diet Coke, and energy or sports drinks, where Coke also has a
market presence (Powerade and others). The Pepsi Challenge proves that
there is nothing especially distinctive about the Coke taste, which should
ease substitution, but again, the brand is not easy to substitute, and in the
absence of any new product innovation, this threat is low. Pressure = low.
Bargaining power of suppliers. The ingredients and components that make
up Coke are not very highly differentiated – indeed, water, sweeteners and
packaging are commoditised. Coke tends to spread its supply base
throughout the world, and as such has no major suppliers upon whom it is
dependent, and no supplier would want to lose the Coke account. Pressure
= low.
Bargaining power of buyers. Coke’s biggest immediate customers include
large supermarket chains such as Wal-Mart and Tesco, who are powerful
buyers and have their own labels to sell. However, Coke’s ultimate
customers are the consumers, and they show strong brand loyalty to Coke,
which in turn pressurises supermarkets and other retailers or intermediaries
(for example McDonald’s) to supply Coke. Some buyers may switch to Pepsi
to attempt to put pressure on Coke, but as long as Coke’s brand reputation
is intact, this threat is not sustainable. Pressure = low to medium.
Other factors. There are some complementers to Coke, and Coke works
hard to maintain their relationships, with restaurant chains such as
McDonald’s, where Coke complements hamburgers, and with major
sporting stadiums, where Coke is an essential part of the spectator
refreshment package. These are critical relationships for Coke, and a major
competitive battleground with Pepsi, not least since they contribute to
brand building, which our study of the Five Forces identifies as critical.
Pressure = medium to high.
Any web search should yield a number of analyses of Coca-Cola using
Porter’s Five Forces, and their conclusions are not all the same. Have a
search and see where you agree or disagree.

4.1 Briefly explain the difference between industry globalisation and market
globalisation.
4.2 Briefly explain the difference between monopolistic competition and
oligopoly, and give an example of each.
4.3 What does a concentration ratio of 80 per cent for the top three firms in
a market tell us about how much power these firms yield?
4.4 Identify one key criticism of Porter’s Five Forces analysis, and explain
why this criticism matters.

4.1 Industry globalisation describes the trends for firms to enter more into
international trade and to operate in more countries, and for firms to
become global. Market globalisation describes the trend for consumers’
tastes to become homogenised throughout the world, and for consumer
demand to become global. The interesting question is whether industry
globalisation has developed in response to the demands of market
globalisation, or whether industry globalisation has driven market
globalisation.
4.2 Monopolistic competition is a market structure where there are many
suppliers and low barriers to entry, with many examples in the small- to
medium-sized business sector, such as the plethora of small accountancy
firms. Oligopoly is a market structure where the market is dominated by
a small number of firms, such as the market for international auditing
services for multinational corporations, which is dominated by the ‘big
four’ accountancy firms (Deloitte, Ernst & Young, KPMG, and PwC).
4.3 If three firms hold 80 per cent of the market, then that market structure
is an oligopoly, and those three firms wield significant power in that
market. In the US cola market, Coca-Cola has 42 per cent, Pepsi has 30
per cent and Dr Pepper has 17 per cent (2010 figures), making this market
an oligopoly, and widely recognised as one where these huge brands
dominate.
4.4 You could have chosen one of the Five Forces’ underpinning assumptions,
which some have questioned, including the assumption that buyers,
suppliers and competitors do not collude, the assumption that uncertainty
is low, or the assumption that the main source of competitive advantage
is creating barriers to entry. Or you could have chosen the omission of
complementers from the framework. Or you could have characterised the
framework as too mechanistic. Any or all of these criticisms may be
important, especially in a market where one of these factors is particularly
significant – in markets where the success of one product depends on the
success of another, how useful is an analysis tool that ignores this
dimension? (How useful would the Five Forces framework have been for
Intel if they had been unable to identify and secure the collaboration of
Microsoft?)

Summary
In this unit you have examined the globalisation of markets and industries. You
have weighed the accuracy of Levitt’s evaluation that markets and industries
have globalised to the extent that homogenised products such as Coca Cola
and McDonald’s hamburgers outsell their competitors all over the world, and
regional and national differences are relatively unimportant. You have
distinguished market globalisation as undifferentiated consumer demand and
industry globalisation as the drive for industries to operate and compete on a
global scale.
You have scrutinised market structures, recognising the distinctions between

perfect competition, monopolistic competition, oligopoly and monopoly, and
noting the variations of monopsony, duopoly and oligopsony. You have learned
that market structures determine competition, and impact upon company
performance.
You have used concentration ratios and the Herfindahl–Hirschmann Index to

measure market concentration and seen that the measure of market con-
centration determines the distribution of market power.
And you have used Porter’s Five Forces framework for industry analysis,
specifically applying it to the example of the Coca-Cola Company’s global
competitiveness with its leading brand, Coke.
In the next unit, you will go on to understand better the process of inter-
nationalisation.

Unit 51 Internationalisation –
how, where and when
‘Geography might soon become history.’

Friedman, 2007
Introduction
Thomas Friedman’s celebrated quote – and the ironic title of the book from
which it comes (The World is Flat) – refers to the process of globalisation,
internationalisation but it says something profound about internationalisation. What it says
is that humanity has hitherto seen national frontiers as barriers to our
movement, our interaction and our cooperation, in business as in other
fields of human endeavour. And yet we can now see beyond those
barriers.
Implicit in our discussion of globalisation in the preceding units of this

module has been a more fundamental trend, the process of
internationalisation of business. Indeed, internationalisation and
globalisation sometimes blur together, as one often leads to the other.
Internationalisation is essentially expansive, as enterprises and countries
seek to do business together, expanding their horizons, while
globalisation refers to the culmination of that process and the fusing of
national economies into a global economy.
In this unit you will explore how internationalisation has come about
and how it is currently evolving, you will examine where it occurs and
where it may occur in the near future, and you will look at when
enterprises first undertake it, and how they then develop, with a view to
what may happen to the process in the future.
We shall begin by defining internationalisation and considering its key

drivers. As this takes us into the arena of international trade, we shall
look at what is involved in targeting a foreign market for investment,
and correlate targeting the best locations with the business strategies
of organisations. This leads us to the question of how to assess country
attractiveness, already touched upon in Unit 2, and finally to a discussion
of the advantages of being a pioneer or a relative laggard in the race to
enter a new market.

5.1 Define the process of internationalisation.
5.2 Describe some of the key drivers of internationalisation.
5.3 Formulate the main factors to be considered when selecting a
foreign target market.

Unit 5 Internationalisation – how, where and when
5.4 Match the quest for optimal location with the strategic motives for
internationalisation.
5.5 Outline the process of assessing country attractiveness for exporting
or foreign direct investment.
5.6 Summarise the first mover versus late mover advantages.
Prior knowledge
This unit is the fifth in a series of ten, and it would make sense to follow the units
sequentially, studying Units 1 to 4 before this one. However, it is possible to
study this unit without having studied the previous four, albeit there are some
important links from Unit 2 to this one. Some general knowledge of economics,
business, management, marketing or finance would also be helpful, as would
any practical experience in these fields.
Resources
The relevant reading for this unit may be found in Part One, Global Context,
and especially the chapter ‘Assessing Country Attractiveness’ in your core
textbook (Hamilton and Webster, 2012). Supplementary references are provided
in the text.
5.1 The process of internationalisation

To begin with the basics, inter-national means among different nations.
Internationalisation, therefore, is the process whereby there is a growing trend
towards international relations, treaties and alliances between and among
nations, and international trade, overseas ventures and various forms of foreign
investment by businesses. Dictionary definitions speak of bringing something
under international control, and while this may be true in the sense that
international trade and foreign investment de facto cease to be under national
control, the implied sense of unified command is not always borne out by the
realities of international business. Some more specialised sources, such as
Investopedia, speak of ‘designing of a product in such a way that it will meet
the needs of users in many countries’ (http://www.investopedia.com/).
Under internationalisation, the basic element remains the nation, with trade
and shared business ventures between or among nations becoming the norm.
We saw in Unit 1 how foreign trade has existed to some extent ever since
foreign travel became possible and people had goods to trade, how trade
flourished in the late Middle Ages, and how in the latter half of the twentieth
century internationalisation turned to globalisation, with a rapid advance of
the trend (aggregated world exports rose from US$0.5 trillion in 1950 to $12.5
trillion in 2005, while exports represented just 13 per cent of world output in
1970, but had grown to 25 per cent by 2005, and the World Bank predicts they
will grow to 34 per cent by 2030) (Hamilton and Webster, 2012, Chapter 2
‘The Global Economy’).
We find evidence of this trend in many industries, and over a considerable

period of time, demonstrating that the trend is neither short-lived nor likely to
change. The chocolate industry, for example, has been highly internationalised

since the first shipment of cocoa beans intended for chocolate production
arrived in Spain in 1585. In 1925 the New York Cocoa Exchange was
established so that buyers and sellers could get together for transactions,
showing that by then cocoa was already a major international business. And
today there are cocoa exchanges in New York, London, Hamburg and
Amsterdam. International trading in chocolate and chocolate products is less
internationalised but increasing (see http://www.chocolatemonthclub.com/
chocolatehistory.htm).
Johanson and Vahlne (1977) undertook a study of Swedish manufacturing

Uppsala model firms and, based on their findings, posited the Uppsala model. This described
three stages in the process of the internationalisation of a firm:
■ Gaining experience from the domestic market before moving to foreign
markets.
■ Starting foreign operations from culturally/geographically close countries
and moving gradually to culturally/geographically more distant countries.
■ Starting their foreign operations by using traditional exports, and gradually
progressing to establish joint ventures or their own production facilities in
the target country.
A variation of the Uppsala model describes four entry modes to inter-

franchising nationalisation: exporting from a domestic base; licensing or franchising; joint
ventures; and wholly owned subsidiaries.
Empirical studies of firms that have gone through the internationalisation

process, notably in the information technology (IT) sector, have found different
paths, and that some are ‘born global’. It is no accident that this has occurred
born global in the IT sector, as the macroeconomic trend supporting this development is
the rapid growth of information and communication technologies, both
delivered by, and best harnessed by, these firms. In Unit 1 we encountered the
example of the US computer manufacturer Dell, which produced its first
computer in 1985, was selling units abroad in its first year of operation, had
embarked on a global expansion programme within three years, and now has
Recommended reading: the
chapter ‘Internationalization of facilities in Panama, Brazil, the UK, Ireland, Poland, Slovakia, China, India,
Business in a Changing Malaysia and the Philippines, as well as customers worldwide. A different
Environment’ in Harrison (2010); example is of firms originating in small countries, who find the limitations of
the chapter ‘Globalization and their domestic markets encourage them to move rapidly to internationalise.
International Business’ in Daniels
et al (2012); Daly (1999).
ga
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Find an example, either from your personal experience or from research, of
Lear
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5a a firm that has recently started to develop an international dimension to its

y
business. You may wish to use the organisation you selected in Unit 1. To
what extent has it followed the Uppsala model, or has it followed a
different path?

eedb ac
If you chose an IT firm, or a firm from a small country such as Denmark or
F
k
5a Ireland, you may have found a different path from the Uppsala model,
perhaps even an example of a ‘born global’ firm. Otherwise, you should
show the steps the firm has followed, perhaps tentatively exporting to
limited markets at first, followed by more ambitious foreign trade and
investment. Whatever example you choose, you should show evidence of
what is involved in the process of internationalisation.
One exemplar is the Samsung Electronics Corporation of South Korea.
Samsung was incorporated in 1969 and began moving internationally in the
1970s, setting up an overseas sales function and establishing production
plants in the US and Europe. In the late 1980s it added production plants in
Mexico and Southeast Asia. This concluded the first phase of foreign direct
investment. The second phase, in the 1990s, involved major quality, change
and growth programmes, turning Samsung into a truly international
organisation. (Source: Zhou, 2011).
One counter-example is in aviation, where airlines specialising in certain
global regions formed alliances with others, rather than internationalising
themselves, such as British Airways’ alliance with American airline
companies and other global partners.
The following link from Training Week includes examples from Russia,
Belgium and the US (http://utenportugal.org/wp-content/uploads/RVIC-
Internationalization-Case-Studies.pdf).
5.2 Drivers of internationalisation

We may identify four key drivers of internationalisation:
■ The need for market access.
■ The need for lower production costs.
■ The need for natural resources and other assets.
■ Internationalisation of customers and markets.
You may wish to compare these drivers with the drivers of globalisation you
studied in Unit 2. There is considerable overlap, as the pressures are similar, and
the trend is often for internationalisation to progress to globalisation.
Market access is about the constant need for businesses to find new markets and
new customers, in order to grow revenues and profits. Certainly once their
domestic market has reached or is approaching saturation point, businesses
look for new markets and, in some cases, not least the ‘born global’ companies,
this occurs much sooner. Within the English-speaking world, exports to other
English-speaking countries have been relatively common from an earlier stage,
as there are fewer cultural barriers, especially the absence of a language barrier.
We have seen this notably in trade within the former British Empire, and in
transatlantic trade, with UK consumers often not even recognising US imports
as anything other than indigenous UK products (examples include Kellogg’s
cornflakes and Heinz baked beans, both American products but British cultural
icons). Within the European Union (EU), as travel and commerce have been
eased by pan-European legislation, rapid exporting to other EU member states

has become commonplace. In general, the lowering of barriers to imports and

the encouragement of free trade (see Unit 1) have facilitated improved access
to foreign markets for those who need them.
Lower production costs are another constant requirement for business, and
many are driven to find the necessities of their business in countries where they
are cheaper. Land, whether for agriculture, extraction or construction, is often
cheaper in less developed countries than in the more developed economies
where the business need for land is greater. The costs of building new factories
and other installations are also likely to be cheaper in less developed countries.
Labour is an even better example, with some firms locating labour-intensive
operations in countries where wages are cheaper (and labour is plentiful), such
as UK banks creating contact centres in India and US computer firms setting up
manufacturing plants in China. When jobs are exported, in this way, this is
offshoring called offshoring. The corollary of lower labour costs is often lower pro-
ductivity, but it is still a worthwhile practice if the net benefits after costs are
greater. The extent of this phenomenon is such that in 2007 the Financial Times
estimated that 40 per cent of US imports were actually produced by US-owned
companies – many of them in China. Of course, production costs constantly
change as economic conditions change; for example, some offshore production
has shifted from China, as wages there rise, to countries such as Vietnam, and
since the western financial banking crisis we have even seen some jobs returning
to the US, UK and Japan – examples of such ‘re-shoring’ include Whirlpool
and Yamaha.
Natural resources may sometimes only be sourced from certain countries, and
this is markedly true of the major extractive industries, including oil, gas and
minerals. These precious resources must be taken wherever the deposits are
found, leading to operations being located at sea (oil and gas drilling), in
mountain ranges, in hot deserts and in frozen wastelands. Typically, these do
not lie within the countries of origin of the extracting companies. Rio Tinto, the
British-Australian multinational conglomerate whose interests include
diamonds and uranium, attributes demand for steel and aluminium to the
growth of urbanisation, with town and city dwellers using the commodities
extracted primarily from rural locations. For enterprises like Rio Tinto,
internationalisation is driven by the quest for natural resources, and is not an
optional luxury but a business necessity. (See http://www.riotinto.com/
documents/ReportsPublications/Review_86_-Value_and_Growth.pdf)
Internationalisation of customers and markets is about consumer tastes spread-

ing from country to country, and the demand by international customers for
international suppliers. Northern Europeans used to favour beer as their
alcoholic beverage, while Mediterranean Europeans favoured wine, but the
balance is shifting with beer and wine consumed throughout Europe, and while
it is not climatically possible to produce much wine in Northern Europe, beer
is increasingly manufactured in Mediterranean countries. Similarly, many
business buyers operate across a number of countries, and expect their suppliers
to have the same trans-border capabilities, effectively forcing the suppliers to
internationalise to continue to compete.
The wine industry provides an interesting case study. Originating in Europe,

wine production now extends to many countries of the world, notably those
with optimum climate and soil conditions, including California, Chile,

Argentina, South Africa, Australia and New Zealand. Many wine producers,
especially in Europe, are small operations, comprising growers with small
vineyards cooperating in shared vintners (wine production, bottling and sales).
Since the Middle Ages, it has been the custom of many wine producers to
export their products, with perhaps the most famous centre, in Bordeaux,
which was then under English rule, exporting claret to England from at least
the twelfth century. Today, Italy is the world’s leading exporter, with 21 per
cent of global exports, and Europe’s total export share of the world market
stands at 68 per cent.
European vine stocks (the natural resources) were exported to the ‘New World’
from the sixteenth century, and the trade reversed, with New World vines
imported to Europe after the phylloxera blight wiped out old stocks in the mid-
nineteenth century. In a similar pattern, European skills and winemaking
expertise were exported around the world for centuries, but in recent years the
trend has reversed, with Australian and Californian winemakers innovating
and exporting their new knowledge to Europe. Ambitious young European
vintners are migrating to Australia and California to learn new skills and
techniques, often at lower cost bases, free of many of the regulatory restrictions
imposed on European winemaking (the appellation quality standards in France
and their equivalents elsewhere).
The market for wine is becoming more internationalised. Originally confined

to Europe and its colonies, it has spread to almost every country in the world.
In the 1950s and 1960s there was a boom in US wine consumption; in the
1970s and 1980s the Japanese market expanded; and now China is emerging
as the big new market for wine. There remain some countries where alcohol is
culturally unacceptable, and therefore there is no market for wine. (Sources:
Santini and Rabino, 2012; http://business.time.com/2012/02/07/how-global-
economic-shifts-changed-the-wine-industry-for-better-and-for-worse/)
ga
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Read the sources cited for information about the internationalisation of the
Lear
ivit
5b wine industry, along with whatever other sources you can find. To what
y
extent does the wine industry illustrate the four key drivers of
internationalisation? Compare this with another industry of your choice –
perhaps the one that includes the organisation you selected in Unit 1. If you
have cultural concerns about alcohol, identify another industry that shares the
characteristics of the wine industry, and base your answer on that instead.
eedb ac
F
You might have identified the following factors.

5b Market access, as a driver, is shown in the growth of exports of wine. While
European wine consumption has declined, it has been more than
compensated for in the new markets of Brazil, Russia, India and China.
Production costs for new wine producers in Europe are high, due to
restrictions imposed by established producers, but opportunities abound in
Australia, New Zealand, South Africa and elsewhere, where land is cheaper
and there is less regulation.

eedb ac
F
Natural resources, including climatic conditions, land with suitable soil for
k
5b growing vines, vine stocks and grape varieties, are abundant in the new
wine-producing countries, offering substantial scope for new producers to
continued get started and for established European producers to diversify.
Internationalised customers are reflected in how tastes for wine have
crossed borders and seas to countries with no historical wine drinking
traditions, such as China.
Overall, the wine industry has some special characteristics of its own, but
offers strong evidence of all of the drivers of internationalisation.
5.3 Selecting a foreign target market

This leads us to the factors enterprises have to consider when taking their
business international. When it comes to selecting a foreign market to target for
trade or investment, the first step is to screen and evaluate the range of options,
and the first factor to weigh is distance – in a number of senses.
Pankaj Ghemawat (2001) identifies four dimensions of barriers created by

distance, which enterprises have to minimise, and if necessary overcome, in
their internationalisation efforts. These are geographic, cultural, administrative
and economic. The implications for business strategy are that managers have
to make decisions taking account of the constraints of these four dimensions of
distance, and adjusting their strategies to ensure they allow for increased costs,
and risks of problems that may arise. For example, labour costs for a
production facility may be higher in one location, but that location may be
much closer to sources of essential supplies, and so not only might supply chain
costs be reduced, but risks may be mitigated of shortfalls in supply restricting
production.
risk/return ratio The second factor to weigh is the risk/return ratio for each country under
consideration. Some countries may have high attractiveness, in terms of
potential returns, but are also likely to have high risks, while countries with
low attractiveness, in terms of low returns, may also have low risks. The sort
of issues to weigh in calculating the ratio are the economic environment, growth
rates, political stability, disposable income levels, access to resources,
government incentives, level of competition, and so forth. The ratio may
actually be calculated numerically as shown:
R = (Pend – Pstart) /Pstart
where R is the percentage return for the time period and Pstart and Pend refer
to the price at the start and end of the time period.
To illustrate this calculation, a company entering a new country market may be

able to sell $2 million of product at the outset, and increase sales to $10 million
after investing in their presence in that country for one year. In this illustration,
the return for one year is $10 million minus $2 million (= $8 million) divided
by $2 million, which = $4 million. Convert to a percentage by multiplying by
100 and the company shows a 400 per cent return over one year. But what
about the risk? This has to be considered as risk divided by return, or the

amount the company has invested (risked) divided by the $4 million return.
Quantifying all the risks may be tricky – the total cash investment is
straightforward enough, but is there an unknown quantity to pay for extra
insurance or policing? Once all this has been factored in, the lower the figure
calculated for risk, the better the net return.
Of course, there are so many issues and so much data to factor into this
equation that it is not feasible to make the calculation for every possible
country. Instead, an initial screening should narrow down the choice to a small
number of favoured countries, a shortlist, to which this ratio may be applied.
There are a number of sources firms may draw upon to populate their
calculations, including:
■ IMD World Competitiveness Yearbook
(http://www.imd.org/research/publications/wcy/index.cfm)
■ The Economist Intelligence Unit
(http://www.eiu.com/site_info.asp?info_name=about_eiu)
■ GlobalEDGE (http://globaledge.msu.edu/)
■ The World Economic Forum (http://www.weforum.org/).
This concludes the initial screening. We shall return shortly to the process of
assessing country attractiveness. For now, we should note that there are many
factors enterprises need to consider when selecting a foreign target market, the
factors are complex, and no such investment decision should be taken lightly.
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Imagine you are a senior decision maker in an international bank,
Lear
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5c headquartered in the UK. You have been charged with identifying and
y
selecting the best location for a single new centralised customer contact
centre to replace the four small ones you currently have. You have been
given a shortlist that includes: Glasgow, UK; Dublin, Ireland; Madrid, Spain;
and Mumbai, India. Glasgow and Dublin are two of the current four
locations, along with Northampton and Leeds. How do you decide which
location to choose for more detailed assessment?
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The first factor to consider is distance. In geographic terms Mumbai is
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5c further away, but in cultural terms there may be a greater distance to

Madrid. You must also take account of economic and administrative
distances – for manufactured goods, this could be a problem for Mumbai,
but for a call centre the main relevant considerations are
telecommunications infrastructure (lines, bandwidth, cost of calls and so
on).
You may also be concerned about cultural fit, notably language, particularly
if your customer base is predominantly people who speak English as their
first or only language. This would tend to rule out Madrid.
Costs are relevant to the discussion about distance but will encompass,
probably more significantly, issues about land and property costs, labour

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costs, and costs of equipment and materials. As the labour cost in Mumbai
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5c is likely to be much less than the European locations, this will work in its
favour.
continued Other risks to consider could include political and economic stability, and
other constraints from the external environment. Any risk/return ratio is
likely to weigh more issues, on both sides of the equation, for Mumbai,
where both the potential risks and the likely returns will be greater.
In recent years, a number of UK banks facing this sort of decision have
opted for locations in India.
5.4 Internationalisation strategy and

optimal locations
Every enterprise should consider what motivates its quest for inter-
nationalisation, and ensure that it has an explicit internationalisation strategy
that takes account of all of the factors in its thinking. This enables them to
weigh their strategy against their assessments of each possible target market.
The reasons organisations wish to enter a foreign market may vary, and will not
always be based exclusively on a rational assessment of the target market. Some
enterprises are motivated by the desire to establish themselves as the
international market leader, or perhaps a global presence, in their chosen field.
Such a desire is not merely about the subjective opinions or the egos of senior
executives, but may reflect the expectations of shareholders and may influence
the company’s share price. Perceptions in the financial markets can be
important, as we shall see in Unit 7.
Some companies have no aspiration to be a global business, but prefer a

strategy of identifying a small number of markets, from anywhere in the world,
with similar characteristics and good profit potential. Such companies are
aiming for operation in a relatively small number of countries with deeper
market penetration of each.
Other reasoning may not be as an isolated examination of the target market,

but may take account of the international infrastructure and supply chains a
company is building. While one specific market may not seem that attractive,
it may be adjacent to a number of others that are, and may benefit from global-
regional economies of scale or scope.
Once a company has embarked upon a policy of internationalisation, it can be

hard to stop, as the business development generates a momentum of its own,
and reversing may be costly. In this context, internationalisation may not be a
bad strategy, but may simply be easier to continue than a major change of
direction, which a company may be loath to contemplate when business is
going well. The danger of this approach is that it amounts to strategy by inertia,
and a company practising this may find itself overtaken by events.
Some companies pursue growth as a means of increasing absolute profits,

irrespective of how narrow profit margins may be, and once their domestic

Recommended reading: the market is saturated, then international growth is the only option remaining to
chapter ‘International Marketing’ them. This sort of strategy defies the logic of business ratios, but ensures
in Kotler et al (2013); Chapters 6 continuing profit streams, which may be all that investors, or even employees
to 9 in Verbeke (2009); the or other stakeholders, care about.
chapters ‘The Strategy of
International Business’ and
‘Country Evaluation and Selection’ Organisations need to be aware of the range of motivations they may have to
in Daniels et al (2012). internationalise, and work to ensure these remain compatible with objective
assessments of target markets.
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Consider the example of the wine industry from earlier in this unit. What
Lear
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5d sort of considerations might motivate a small- to medium-sized French wine

y
producer to want to acquire a vineyard in Australia? If you have cultural

concerns about alcohol, identify another industry that shares the
characteristics of the wine industry, and base your answer on that instead.
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Among the considerations you may have identified are:
F
5d ■ Desire for a more international presence.

■ Growth of customers, revenues, profits and market share.
■ Constraining competition by taking a share of their competitors’
markets.
■ Risk-spreading through access to a broader range of vineyards, vine
stocks and wines.
■ Expanding their product portfolio to include a more diverse range of
wines to suit differing consumer tastes.
■ Access to new technology, skills and expertise in winemaking.
■ Entry to the Australian market, or an enhanced share of it, for their
French wines.
■ Closing distances to customers in the furthest parts of the world.
Few, if any, of these considerations require the French wine producer to
invest specifically in Australia, but Australia may be deemed to hold
advantages over alternatives such as California, Chile or South Africa, such
as its industry scale, quality of vine stocks and grape varieties, its technical
expertise, or how welcoming it is to foreign investors.
5.5 Assessing country attractiveness

foreign direct investment (FDI) Having identified potential target markets for exporting or for foreign direct
investment (FDI), formulated the factors in selecting a target market, screened
the options to narrow the focus and ensured a compatible match with the
company’s overall international business strategy, a company requires to assess
the selected country’s attractiveness.

Hamilton and Webster (2012) suggest that the process of assessing country
attractiveness may be broken down into a number of steps, including:
■ Initial screening.
■ Assessing the general market or site potential.
■ Assessing the general business environment.
■ Either a product/service market assessment or a production site assessment
(depending on the type of investment under consideration, either exporting
or FDI).
■ Undertaking a risk analysis.
■ Selecting a market or site (the former for exporting, the latter for FDI).
(The choices in certain steps reflect the options of exporting goods or services
to a target market, or making an investment by acquisition or establishing a
new facility in a target market.)
Taking each of the steps in turn, we have already addressed screening.
Assessing the general market or site potential involves measuring the market
potential in terms of the overall market size (using figures such as population,
GDP and disposable income), market growth (using growth rates in the same
figures) and quality of demand (the socio-economic profile of customers in the
market). Site potential includes issues such as availability of raw materials, the
labour pool’s costs, skill base and productivity, and costs of finance, energy,
communications, transportation, taxation and so on.
Assessing the general business environment involves a full PESTLE analysis, as

discussed in Unit 3 and to which we shall return in Units 6, 7, 8 and 9.
A product or service market assessment involves looking at: the size and growth
rate of this specific market (that is, not just the country market, as in the earlier
step, but the market for say, wine, chocolate or cola); the major competitors,
growth rates and market shares; competitors’ prices, marketing and
promotions; distribution networks; relevant local standards and regulations
such as trademark rules; the value of imports and exports of the product; any
tariffs or other trade regulations; any cultural factors that may necessitate
product adaptation (such as the example of McDonald’s dropping beef from its
menu in India – see the case study in Unit 2); and the competitive forces in the
market, which may be analysed using Porter’s Five Forces framework.
(Hamilton and Webster, in the chapter ‘Analysing Global Industries’, provide
a checklist for analysing a country market using the six forces, adding
complementers to Porter’s original five.)
Production site assessment involves examining: foreign ownership of enter-

supply chain disruption prises; the financial system; investment; labour regulations; dispute resolution;
taxation; financial reporting; rules regarding expatriate employees; and any
other practical issues.
Undertaking a risk analysis involves considering wars, revolutions, rebellions,

terrorism, piracy, crime, natural disasters such as earthquakes or hurricanes,
market deregulation
and human-made disasters like stock market crashes. There is also country risk,
which involves anything that could affect how businesses operate in a particular
country, ranging from supply chain disruption to market deregulation or, at

the other end of the spectrum, nationalisation (see the Bolivian gas conflict case
study in Unit 2). The Economist Intelligence Unit conducts country risk
assessments based on ten criteria: security; political stability; government
effectiveness; legal and regulatory; macroeconomics; foreign trade and
payments; financial; tax policy; labour market; and infrastructure. All such risk
analyses must be weighed against the benefits of doing business in a country.
(See Chang, 2010; http://www.eiu.com)
Selecting a market or site involves making a final decision as to whether to

enter a country. There are various ways to make this decision, ranging from
drawing upon all the data gathered to arrive at a ‘gut’ decision, to attempts at
more scientific approaches.
Hamilton and Webster (2012) propose a country attractiveness grid, using

factors judged important to the decision, giving each of them a predetermined
weighting, and comparing the aggregate score for each country in each
category. An example of the grid is shown as Table 5.1, populated by
comparative data for three unnamed countries.
Table 5.1: Country attractiveness grid
Adapted from: Hamilton and Webster (2012), Chapter 5 ‘Assessing Country

Attractiveness’, The International Business Environment, Oxford University
Press.
Factor Weight Country A Country B Country C

Market potential
Size of market 0.3 4 3 3
Growth rate 0.2 2 3 4
Market share 0.3 3 1 3
Investment required 0.4 3 1 4
Tax rates 0.1 2 2 2
Total 14 10 16
Ease of doing business
Starting a business 0.3 3 3 4
Getting credit 0.1 3 2 3
Paying taxes 0.1 3 2 3
Employing labour 0.3 3 2 4
Total 12 9 14
Risk
Political risk 0.4 1 3 2
Supply chain disruption 0.2 2 3 2
Foreign exchange risks 0.2 2 2 2
Total 5 8 6

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Consider the potential for a French champagne house to set up a new
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5e operation in South Africa, producing high-quality sparkling wine using the

y
champagne method, to sell in the international market. Based on the best

information you can find (see suggested sources below), create your own
version of the country attractiveness grid (above), and make a
recommendation as to whether the champagne house should invest in
South Africa as planned. If you have cultural concerns about alcohol,
identify another industry that shares the characteristics of the wine industry,
and base your answer on that instead. (See
http://en.wikipedia.org/wiki/Economy_of_South_Africa;
https://www.economy.com/dismal/outlook/country.aspx?geo=IZAF;
http://www.sawis.co.za/;
http://www.sawis.co.za/info/download/Book_2010.pdf)
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Although it is two decades since the end of apartheid, South Africa remains
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5e a relatively unstable country, economically and politically, at least in

comparison with most European states, including France. At first sight, it
does not seem the most promising country to establish a premium
winemaking operation.
However, South Africa already has an established wine industry of
considerable international reputation, and in fact makes recognised quality
sparkling wines, using the Method Cap Classique, essentially the
champagne method. There is industry infrastructure, including skilled labour
and know-how, and the conditions certainly exist to establish a new
winemaking operation.
A champagne producer would have to weigh in the balance the potential
for this new wine to ‘cannibalise’ internationalise sales of its core product,
champagne. Assuming the decision has already been made to take this risk,
the idea is plausible. Indeed there are several precedents. For example,
LVMH, the French multinational luxury goods conglomerate that owns Moet
et Chandon and Mercier champagnes, produces sparkling wines in Australia
and California. Provided the figures you produce in your country
attractiveness grid bear out this broad analysis, there is no strong reason
why you should not recommend that this investment proceeds.
5.6 First-mover and late-mover advantages

One further consideration when entering a foreign market is whether your
competitors are there before you. There is robust debate, and supporting
research on both sides, as to whether it is best to be the first to enter a new
market, or whether it is better to wait until others have gone first.
first-mover advantage First-mover advantage, sometimes referred to as technological leadership, is

the term used to describe the benefits accruing to a firm by being the first to
trade in a new market, or market segment. The idea arises from markets where
the first to enter is often a patent holder (as in pharmaceuticals) or the pioneer
of a specific technological innovation (as in computer software) and has the

time to establish their brand and customer loyalty before competitors also enter
the market. Yet it may be applied to any new market, and often is. The article
‘First-Mover Advantage’ (at http://www.pearsoned.co.uk/Bookshop/article.
asp?item=312) claims it is true ‘whether the business is seeking to develop new
geographical/demographic markets or segments for existing products, or
whether it is seeking to introduce new products to its existing market segments’.
However, as early as 1998, John Kay identified plenty of examples that contra-
dicted this theory. He noted that first movers EMI in television, Berkey in
pocket calculators, Chux in disposable nappies, Ampex in video recorders and
Gablinger in low-alcohol lagers were eclipsed by respectively Sony, Casio,
Procter & Gamble, Matsushita and Miller Lite. Kay further noted that many
of these pioneers are now forgotten, unknown, or are struggling in business
(Kay, 1988).
‘In 2001’, observed Barry Jopson, ‘the idea of first-mover advantage was
challenged by the academics Peter Golder and Gerard Tellis, whose research
into the history of 66 industries found that companies get limited rewards from
being pioneers. In fact, it is later entrants that tend to succeed’ (Jopson, 2012;
Tellis and Golder, 2001).
Tellis and Golder (2001) show that example companies once believed to be first
movers, including Kodak, Xerox and Apple (actually cited as such in the Kay
article), were in fact late arrivals. They argue that late movers, or ‘fast followers’
as they prefer to categorise them, can use pioneers’ experiences to learn about
consumers’ tastes, new designs, manufacturing techniques and market size,
among other things. Perhaps most significantly, they learn from the costly
mistakes of those who go before them, and do not repeat those mistakes or
incur those costs.
ga
nin ct Compile a list, summarising what you consider to be the top three benefits
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5f of being the first to move into a new foreign market, and the top three
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benefits of being a late mover into a foreign market. Find an example to

illustrate each of the two positions.
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F
Your list of first-mover benefits might include: high initial sales from a
5f unique market presence; securing the best locations, suppliers and other
resources; exploitation of a patent, rights or new technology; establishing
brand identity; establishing customer loyalty; learning more, sooner, about
the new market; extending international reach and so on.
Your list of late-mover benefits might include: learning from pioneers about
market size, consumer tastes, new product design, manufacturing
techniques, best suppliers and so on; avoiding mistakes and unnecessary
costs; exploiting gaps in the market; supplying a demand that has already
been established and so on.
An example of a successful first mover could be Amazon, which as the first
major online bookseller was first to enter many foreign markets, and

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remains the global market leader (by far) despite later efforts by competitors
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5f more experienced in selling books, including major retailers such as Borders

and major publishers like Pearson.
continued McDonald’s often gains first-mover advantage in locations, suppliers and
resources by being first to enter a foreign market, before its international
competitors, and new local competitors, follow.
Apple may be said to have gained first-mover advantage with patented
technology for its smartphone and tablet (iPhone and iPad) apps, but
international competitors such as Samsung and HTC have been gaining with
similar Google Android apps. This had led to many patent disputes in courts
of law.
An example of a successful late mover into a foreign market could be
Alcatel of France entering the Chinese telecommunications market, where
AT&T of the US and Siemens of Germany were already well established, to
form Shanghai Bell, learning from the pioneers, and going on to dominate
that ‘local’ Chinese market.
And Coca-Cola has entered many markets where a demand for carbonated
and sweetened soft drinks was already established, often rapidly gaining on,
and overtaking, local market leaders, exploiting its international brand
marketing strength.
5.1 Briefly describe the three stages of the Uppsala model.
5.2 Why is the need for new markets one of the key drivers of internationalis-
ation?
5.3 Explain the four dimensions Ghemawat identifies for the barrier of
distance.
5.4 How might an enterprise’s strategy contradict objective assessment of a
foreign target market?
5.5 Identify Hamilton and Webster’s six steps for assessing country attractive-
ness.
5.6 In one sentence each, summarise the advantage gained by the first mover
and the late mover into a new market.

5.1 The Uppsala model holds that firms internationalise in three stages:
gaining experience from the domestic market before moving to foreign
market; starting foreign operations from culturally/geographically close
countries and moving gradually to culturally/geographically more distant
countries; and starting their foreign operations by using traditional
exports, and gradually progressing to establish joint ventures or their own
production facilities in the target country.

5.2 Sooner or later every successful enterprise will exhaust the possibilities of
its domestic market (market saturation) and need to look abroad. Even
before this point is reached, competition from rivals, the prospect of new
rivals entering the market, and the threats of product obsolescence and
substitution mean businesses must look for the best advantages they can
gain, wherever they may be found, and that includes (perhaps more than
anything else) new market territories.
5.3 Ghemawat breaks down the barrier of distance into the following
dimensions: geographic, cultural, administrative and economic. Distance
doesn’t just mean physically remote (geography), but includes different
ways of living and working (cultural distance), differences in currencies
and trading arrangements (administrative distance) and differences in
consumer incomes and distribution channels (economic distance).
5.4 An enterprise may have a compelling strategy to establish a presence in a
number of foreign markets even if they are not that attractive, perhaps to
build an international corporate infrastructure, or to gain access to nearby
markets, or to establish a global reputation. An enterprise may need to
increase profits by a small amount, even if margins are not high. Or it
may be the only option for growth. You may have identified something
else – there are many strategic reasons why an enterprise may eschew an
objective assessment of a market’s relative attractiveness.
5.5 The six steps are: initial screening; assessing the general market or site
potential; assessing the general business environment; either a product/
service market assessment or a production site assessment; undertaking a
risk analysis; selecting a market or site.
5.6 The first mover gains the advantage of initial monopoly and the chance
to build a lead in brand and customer loyalty. The late mover gains the
advantage of entering a proven market and learning from the mistakes
of those who have gone before.
Summary
In this unit you have studied the how, where and when of internationalisation:
how enterprises develop internationally, where they choose to go, and at what
stage of development they move.
You have defined the process of internationalisation, and examined the four
key drivers of internationalisation: the need for new markets, lowering
production costs, access to resources, and internationalised customers and
markets.
You have examined the concept of foreign target markets, including
formulating the factors to consider when identifying and selecting a target
market, how to weigh the best locations against the overall business strategy,
and how to implement a methodical process for assessing the attractiveness of
a target market country. Lastly, you reviewed the relative merits of being the
first mover or a late mover into a new market.
This unit completes the contextual framework, or scene-setting, of this module.
From this point forward we shall consider the different dimensions of analysis
implicit in the PESTLE framework, and other issues from the external
environment of business. The next unit will examine the political, economic
and legal environment of the business.

Unit 61 Political, economic and
legal environment
‘In the new model … economic decisions

don’t pay much attention to national
sovereignty in a world where [many] of
the largest economic entities are not
countries but companies.’
Lovins, 2003
Introduction
Amory Lovins was writing about international security, and the growing
power of multinational corporations relative to nation states. But his
thoughts show the close relationships between politics and economics
and the impact of both of these on business. No enterprise exists in a
vacuum, and all have to take account of the political, economic and legal
dimensions of the external environment in which they operate.
In this unit we shall examine more closely the political, economic and
legal dimensions we first discussed in Unit 1 and then again in Unit 3.
We shall clarify exactly what we mean by the political, economic and

legal environment, and compare and contrast political and economic
systems and their importance for business.
We shall examine the different systems of law and how they impact on
business organisations, consider how international law affects
businesses, and look at the legal implications of globalisation.

6.1 Distinguish what is meant by political, economic and legal
environment.
6.2 Compare and contrast major political and economic systems and
their importance for business.
6.3 Compare and contrast the different systems of law and their
implications for international business.
6.4 Define and discuss the role of international law for international
business.
6.5 Describe some of the legal issues arising as a result of globalisation.

Unit 6 Politiical, economic and legal environment
Prior knowledge
This unit is the first of four – the others being Units 7, 8 and 9 – that consider
the dimensions of the PESTLE analysis tool. It is essential that the student first
studies Units 1 and 3, which introduce PESTLE. And as the sixth in a series of ten
units, it is preferable, but not essential, that it is preceded by study of all of the
first five units. In addition, given the scope of this unit, it would also be
beneficial, although again not essential, to have some understanding of political,
economic and legal issues in the contemporary world.
Resources
The relevant reading for this unit may be found in Part Two, Global Issues, and
especially the chapters ‘The Political Environment’ and ‘The Legal Environment’
in your core textbook (Hamilton and Webster, 2012). Supplementary references
are provided in the text.
6.1 Political, economic and legal

environment
The political environment includes all government actions that affect an
local government enterprise, including actions of local government, national government and
international government institutions and agencies. It includes the policies
advocated and pursued by governments in office, and the alternatives mooted
by opposition political parties and lobbyists. It includes not just the policies
but their implications, and potential implications, all of which businesses have
national government to take into account. Many government policies and actions have economic
impact, but they also have broader implications, extending to crises such as
wars and revolutions, social factors ranging from the welfare of the
communities that make up a nation through to social unrest, and additional
particular issues that may impact upon specific industries.
international government
All businesses have to be aware of all government policies affecting all
territories in which they operate, but more specifically there are many
businesses that have to be sensitive to likely political developments in certain
countries. For example, those who invest in countries where there is a
possibility of enterprises being taken into public ownership need to be mindful
of that possibility and have a strategy for dealing with it, as we saw in the
Bolivian gas conflict case study in Unit 2.
The economic environment includes everything related to local, national and

international economic trends such as monetary policy, exchange rates,
inflation, wage rates, unemployment, business cycles, public spending
programmes and reporting conventions. It includes not just events and
Recommended reading: the circumstances within the control or influence of governments, but everything
chapters ‘The International else that occurs in economies, not least the ebb and flow of supply and demand.
Economic Environment’, ‘The
International Political It may be understood largely as the macroeconomic environment of a business,
Environment’ and ‘The Legal but also includes relevant microeconomic issues.
Environment’ in Brooks et al
(2011); the chapters ‘The Political The legal environment includes all existing laws and those enacted by local,
Environment’, ‘The
Macroeconomic Environment’ and national and international governments that may be relevant to enterprises.
‘The Legal Environment’ in This means all company law, employment law, health and safety legislation,
Worthington and Britton (2009). financial regulation, regulations controlling products such as statutory quality

standards, and so forth. In addition, there may be specific legislation relevant

to particular enterprises, such as regulations and controls operated by the Food
and Drug Administration in the US, affecting everyone in the food supply chain,
and special taxes levied on the North Sea oil industry by the UK government.
Actions of governments are critical to all of the political, economic and legal
the state environments, but there is more to each dimension, as the foregoing shows.
The political environment, in particular, is very wide-ranging, encompassing
all sorts of change and potential for things that may happen and may affect
business. Collectively, these three dimensions of the external environment,
which give us the first two and the second last letters of the PESTLE acronym,
describe the actions of the state, as they impact on business.
ga
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Lear
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6a Environment’) describe the case study of Shell in Nigeria, a West African

y
federal republic where oil accounts for 95 per cent of exports and 65 per
cent of government revenues. The oil industry in Nigeria operates in an
unstable environment where Islamists and other groups that want a share of
the oil wealth often attack employees and facilities, meaning contracts are
sometimes not fulfilled.
On the basis of this case study, and whatever other information you can find
about the oil industry in Nigeria, describe and distinguish the political,
economic and legal environment of Nigeria as it impacts on Shell.
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The political environment. Nigeria is politically unstable, currently a

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6a democracy but having experienced military coups within the last 20 years.
The country is divided religiously and politically, and there are significant
security threats to those doing business there.
The economic environment. There are substantial rewards for extracting oil,
but these must be balanced with the knowledge of the security threats, the
risks and costs they bring, and the potential that some of the oil extracted
might not reach its intended customers.
The legal environment. The political instability is reflected in the legal
system, which is modelled on the United States, but compromised by
customary law derived from tribal practices and Sharia law in the northern
parts of the country where Islam is the majority religion and the main
cultural base.
(See review of the Nigerian economy in 2011 and economic outlook for
2012–15, NBS Economic Outlook 2012, at
www.nigerianstat.gov.ng/pages/download/46; http://www.bbc.co.uk/news/
world-africa-21497044; https://www.cia.gov/library/publications/the-world-
factbook/geos/ni.html)
Sharia law

6.2 Political and economic systems

Branches of the state
The form of the Nigerian state may be said to be in flux, politically, eco-
nomically and legally. There are various types of state, which impact differently
on business, but before we examine them, we should consider what states have
in common. All states have three branches: the legislature, the executive and the
judiciary. The extent to which the three branches operate separately is known
separation of powers as the separation of powers, first recognised in the constitution of the ancient
Republic of Rome, the model for many modern states.
The legislature, or the legislative branch of the state, is that which makes the
laws. In the UK, this is Parliament (the House of Commons and the House of
Lords); in the US it is Congress (the Senate and the House of Representatives).
These are both examples of bicameral legislatures, where checks and balances
in the political system are provided by two separate chambers that debate
prospective legislation. Nigeria, having followed the British and American
examples, has a bicameral legislature, a National Assembly, including a Senate
and a House of Representatives. Many other countries, such as India, Russia
and Brazil, have bicameral legislatures. The less common alternative, a
unicameral legislature, features a single debating chamber, with examples
including Sweden, New Zealand and communist states including China and
Cuba. Businesses may lobby the legislature, to influence laws to meet their
needs, and in the US the system of lobbying is especially well established and
sophisticated.
The executive branch of the state is the government, the part of the state that
enacts laws, both the authority and the administration that puts laws into effect.
The leadership of the executive is exercised by the head of state, such as the
emperor in Japan, a king or queen, as in the UK, a president, as in the US and
France, or in non-democratic states a dictator. In some countries the head of
state is more of a ceremonial role, and there is a separate role of head of
government, who de facto leads the executive, such as the prime minister in
the UK, Japan and France. In the US, the president is both head of government
and head of state. The executive extends to government ministers in charge of
various departments, such as finance (the secretary of the treasury in the US, the
chancellor of the exchequer in the UK), trade and industry, and other
departments that have a direct bearing on business. Government ministries are
supported by administrators (civil servants in the UK) and regulatory agencies,
some of which are staffed by non-government employees and are semi-
autonomous. Businesses often lobby governments, to seek to influence policy,
although care must be taken to ensure this remains legal and legitimate, and
does not descend into bribery or corruption.
The judicial branch of the state, or judiciary, is that which interprets and applies
laws, through the courts and processes of law, and through enforcement
agencies, including the police and armed forces. It is the judiciary that maintains
order in a state, and to which businesses, like individual citizens, may appeal if
they believe they have been wronged in matters such as unfair treatment or
broken contracts. These formal processes are the only legitimate recourse to
the judiciary, as any attempts to interfere in their processes are deemed a severe
breach of law, undermining the credibility of the legal system itself. Senior law

officers and courts are appointed by the executive branch, but usually operate
with significant autonomy, as in the case of the Supreme Court in the US, and
the much more recent equivalent in the UK.
Functions of the state

The other arena where different political and economic systems hold things in
common is in the functions of state, albeit their actions may differ. We may
identify at least 12 distinct functions of the state.
Securing the economic and financial system is perhaps the most important
function from a business point of view, as it preserves the conditions for doing
business. During the global financial crisis that began in 2008, a number of
states acted to preserve major banks; for example, the UK government bought
majority shareholdings in Northern Rock and Royal Bank of Scotland, and in
the US, the Federal Reserve extended $30 billion of credit to Bear Sterns.
Maintaining law of contract ensures a legal framework for buying and selling
goods, and is not only a cornerstone of a free enterprise economy but also the
mechanism whereby communist states such as China ensure their international
trade. States that are unable to ensure law of contract become classified as
untenable for business by major corporations, as Shell has identified Congo.
Defence is another vital state function for enterprise, as it ensures business may
be conducted under the provision of law and order and protection from
external attack. International trade with Libya, along with much of its domestic
business, collapsed during the civil war that overthrew the Gaddafi regime in
2011.
Spending and taxation make the state not merely the overseer of an economy
but an active participant in it, and in the most highly developed countries this
means the state is one of the biggest players. In some countries, government
expenditure is more than half of GDP, including Austria, France and Sweden,
as well as the communist countries. There is also significant competition among
states to offer the best corporation tax benefits. (See 2013 Index of Economic
Freedom at http://www.heritage.org/index/explore?view=by-variables)
The negotiator function of the state is effectively to act on behalf of the

enterprises in the country in negotiations with other countries. This may be
bilateral, in negotiating agreements with a second country where the first
country has multiple business dealings, or it may be multilateral through
organisations like the G8 – the group of eight of the wealthiest nations – or the
United Nations or the World Trade Organization.
The regulator function of the state is where a degree of public sector

intervention controls, constrains or manages business activity. Examples of
regulation include increased compliance requirements for banks since 2008,
and the activities of the Monopolies and Mergers Commission in the UK, which
seeks to encourage competition by guarding against firms dominating markets
where it perceives this is to the disadvantage of consumers.
The deregulator function of the state is the converse of the regulator function,
where the state seeks to liberalise, such as the US and European Union both

acting to allow airlines the freedom to set whatever prices they wish for air
travel, paving the way to increased competition from budget airlines like Easyjet
and Ryanair.
The arbitrator function of the state is where it arbitrates or referees between

firms that are in dispute with each other. The sort of issues the state arbitrates
over include breach of contract, patent infringement and abuse of market
power, where the information technology sector has seen significant disputes
between Microsoft, Apple and others, in the US and in Europe.
The customer function of the state is where it buys goods and services from
businesses. Government is big business, even in relatively small states, including
multiple organisations, multiple locations, various facilities and vast numbers
of employees. The state-owned National Health Service in the UK employs 1.4
million people, a rise of 35 per cent between 1999 and 2009, making it the fifth
biggest employer in the world. Two of the bigger employers are also in the
public sector – the Chinese and US military. This generates a significant demand
for goods and services, and many states deliberately buy from their indigenous
companies. (http://www.kingsfund.org.uk/projects/general-election-2010/key-
election-questions/how-many-managers; http://www.bbc.co.uk/news/magazine-
17429786)
The supplier function of the state is where it actually provides goods and
services, as is often the case with publicly owned utilities. It may be that
government considers some of these roles – such as supplies of postal services,
water, sanitation, health, education, roads and railways and other services – to
be too essential to the well-being of the nation to leave to the vagaries of the
private market.
The competitor function of the state is where, rather than monopolise supply
as in some of the above examples, the state competes alongside the private
sector. This frequently happens in education and training services, where the
state funds, or part-funds, colleges, universities and sometimes industry training
bodies. And countries like France support their nuclear power industry to such
an extent that it competes better against other sources of electricity. Sometimes
this leads to complaints of unfair competition.
The subsidiser function of the state is where aid is provided to enterprises that
might otherwise fail. In 2005, the Disney theme parks near Paris were
subsidised by the French government with investments and cheap loans
amounting to $500 million. The European Union calculates that US aerospace
company Boeing has received $28 billion worth of subsidies from the US
government since the mid-1980s. And the European Union, in turn, has by its
own figures issued subsidies of more than €427 billion, mainly to agriculture.
Different political and economic systems

This review of the functions of the state helps us understand better how
different political and economic systems operate. There are broadly four
different types: liberal democracies, authoritarian or absolutist states,
communist states and theocratic states.

Liberal democracies are based on individual freedoms, not least the right to
free enterprise, and the right of citizens to elect their governments. Liberal
democracies are pluralistic societies in which there are open debates about
policy and practice, in which governments are accountable to their people
through frequent and transparent elections, and there are checks and balances
on government institutions embedded in the constitution. Most liberal
mixed economy democracies operate a mixed economy, in which the majority of economic
activity is conducted in the private sector, but the state still plays a significant
economic role. Examples include the highly developed economies of North
America, the European Union and Japan.
Authoritarian or absolutist systems are relatively rare forms of government

where one individual or, more likely, a small group of people exercise political
and economic control. In such systems there are restrictions on activities of
political parties who oppose the ruling group, lack of elections, and few checks
and balances on state power. Examples include Saudi Arabia and Burma.
Communist states are those in which the political system is dominated by a

single political party, and the economy, including production of most goods
and services, is owned and controlled by the state. China, Cuba and Vietnam
are examples, although there were several more in the Soviet era in the
twentieth century. Communist states are less concerned with individual
freedoms and more concerned about meeting the needs of society as a whole.
They operate command economies, where most economic decision making is
subject to central planning. Most communist states now permit some degree of
cooperation and trade with other countries, including private enterprises,
although sometimes companies find there are big restrictions on how they may
operate, such as the restrictions on Google in China (http://www.foxnews.com
/tech/2012/06/01/google-challenges-china-censorship-with-new-search-tool/).
Theocratic states are those where a religion or faith plays a key role, and the
religious leaders are often the same people who hold government office. In these
Recommended reading: Cohen states all political and economic policies are determined by religious
(2008); O’Brien and Williams convictions, such as Islam’s prohibition of certain forms of finance. Examples
(2010). include the Islamic state of Iran and the Christian micro-state of the Vatican.
ga
nin ct Suggest ways in which an oil company seeking to establish an extraction
Lear
ivit
6b facility in a new country might try to influence its government to help

y
establish the facility. Give an example for a country representing each of the
four political and economic systems described above.
eedb ac
Liberal democracy. The business should be able to gain direct access to
F
6b government ministers or administrators and discuss openly the issues

involved, including investment benefits and job creation, and how to
mitigate negative impacts such as pollution. Government representatives
may be lobbied, public pressure may be brought to bear, and often funding
contributions may be made to political parties. Most oil companies operate
in a number of liberal democracies.

eedb ac
Authoritarian or absolutist. Diplomatic representations would have to be
F
k
6b made, with less likelihood of gaining access than in a liberal democracy.
Bribery has often been used despite being illegal in most such countries.
continued Shell has had some success in wooing Saudi Arabia. (See
http://www.shell.com/chemicals/aboutshell/media-centre/
media-releases/2012-media-releases/pr-sadaf-jv-expansion.html)
Communist. Success is likely to depend on political subtlety as well as
tangible economic benefit. Promises or threats may help. China has its own
oil industry but domestic demand exceeds supply, requiring it to import oil,
and it has purchased a small stake in BP. (See
http://www.telegraph.co.uk/finance/china-business/7197087/UK-businesses-
threaten-to-pull-out-of-China-over-protectionism.html)
Theocratic. Religious leaders would have to be convinced the oil production
was in their best interests, including being consistent with their faith.
Negotiations would have to be conducted with great sensitivity. The Islamic
Republic of Iran is a founder member of OPEC, the Organisation of the
Petroleum Exporting Countries, and not likely to welcome foreign
acquisition of its indigenous oil and gas resources.
6.3 Legal systems and international

business
Just as states have different political and economic systems, they also have
different legal systems that impact in different ways on business. Enterprises
that operate in different legal systems around the world need to be aware of,
and compliant with, the different systems that apply in different countries and
contexts. There are four main legal systems, deriving from four different
sources: civil law, common law, customary law and theocratic law.
Most legal systems in the world are based on civil law. Mainly deriving from
the ancient codes of the Roman Empire and later the Napoleonic Code, civil
law systems are based on legislation, which means precedence is given to
written law, legal codes and statutes. Procedures in civil law depend upon
judges collecting evidence and examining witnesses to find the truth. Because
this law is documented, it is easy to refer to, provided there are adequate, secure
storage and retrieval systems, and legal rulings are often straightforward.
Where documentation is not efficient, as in some less developed countries, the
system may be weak. (Note that there is another usage of ‘civil law’, in the UK
and some other countries, referring to resolution of individual disputes outside
the scope of criminal law – this is not what we mean by civil law here.)
Common law systems are found in countries that have close or historic links to
the UK, including the former British Empire and the United States. Common
law, derived from English law, gives greater importance to interpretation and
application of the law, or to judgments in court cases in preference to written
codes or statutes. This means precedent is very important, and that the law
evolves over time as the body of case work grows. Unlike civil law, it is
adversarial in nature, as two sides of a case, often the prosecution and defence,

seek to persuade a judge and jury of their argument. This gives businesses scope
to argue their case where there is room for interpretation. A drawback is that
cases may be decided not on their true merits but on how well lawyers present
their arguments.
Customary law is what is taken for granted in many societies, and may not be
well documented but is widely accepted. It may include rules, values and
traditions derived from life experiences or from religious or philosophical
principles. Countries do not base their legal systems wholly on customary law,
but where civil or common law are not well established, it can be more
important. Tribal or agrarian societies are likely to retain a strong customary
law base, which means businesses operating in the less developed countries are
more likely to encounter customary law there, as Shell found in Nigeria (see
learning activity above).
Theocratic law systems are codes of law mainly based on Muslim Sharia law,
derived from the Quran, and from the teachings of Muhammad and other
prophets. Muslim law systems are the main religious-based legal systems that
materially affect the laws of a number of countries, including the Arab world
and significant parts of Africa and Asia. There are one or two other examples,
including the Talmudic (Jewish) law system of Israel. Theocratic law systems
impact most significantly on personal behaviour, in matters such as
consumption of food and alcohol, gambling and religious practice, but also
affect businesses, not least with Islam’s strict rules on money lending and
interest rates.
Information about legal systems of United Nations member states may be found
at http://www.juriglobe.ca/eng/syst-onu/index.php.
The implications of these four systems of law for business may be recognised
in a number of key areas, including contract law, tort law, criminal law and
international law.
When firms buy or sell services they are, implicitly or explicitly, entering into
contracts covering aspects such as price, payment terms, delivery, duration for
provision of the product or service, acceptable amendments, and what happens
if the contract is not fulfilled. All of this is covered by the legal system, and
when things do not go according to plan, the aggrieved party has recourse to
law. In 2006, in the natural gas industry in the US, Kinder Morgan Texas
Pipeline lost a contract dispute to Cannon-Interests Houston, and had to pay
$4.25 million, about a third of which was legal fees (http://www.
susmangodfrey.com/types-of-cases/business-disputes/breach-of-contract/).
Tort law deals with situations where the behaviour of an individual or a

business has unfairly caused someone else to suffer loss or harm. This could
include negligence causing injury to a customer, as in a notorious case when
McDonald’s was successfully sued by a customer who claimed they were at
fault for her burning herself on coffee purchased from one of their outlets, or
selling defective products, or breaching another firm’s intellectual property
rights such as by counterfeiting (http://www.lectlaw.com/files/cur78.htm).
Criminal law applies as readily to business as to other walks of life, with

financial crimes such as fraud occurring in cases such as the Enron scandal,

where Kenneth Lay and Jeffrey Skilling were among 20 employees convicted
and sentenced to imprisonment in 2006. Corporate manslaughter is a crime in
many jurisdictions, including the UK, where enterprises may be punished for
culpable conduct that leads to death, over and above any damages that may be
claimed by the family of the deceased (http://www.foxnews.com/story/
0,2933,196983,00.html).
In the next section we shall look at international law.
ga
nin ct
Go to http://www.doingbusiness.org (a World Bank website) and download
Lear
ivit
6c the report ‘Doing Business 2013: Smarter Regulations for Small and
y
Medium-Size Enterprises’. Select one of the ten countries recognised as

having the most improved ease of doing business across several areas of
regulation covered by the report, and identify its improvements in global
rankings from 2012 to 2013 in the areas of protecting investors and
enforcing contracts. What have been some of the key developments in the
areas of protecting investors and enforcing contracts?
eedb ac
The ten countries are Poland, Sri Lanka, Ukraine, Uzbekistan, Burundi, Costa
F
6c Rica, Mongolia, Greece, Serbia and Kazakhstan.

Table 6.1 shows the rankings in the two categories, from 2012 to 2013, for
each country.
Table 6.1: Ease-of-doing-business rankings
Country Protecting investors Enforcing contracts

2012 2013 2012 2013
Poland 46 49 84 56
Sri Lanka 46 49 134 133
Ukraine 114 117 44 42
Uzbekistan 136 139 45 46
Burundi 46 49 174 175
Costa Rica 167 169 127 128
Mongolia 29 25 29 29
Greece 155 117 85 87
Serbia 79 82 102 103
Kazakhstan 10 10 28 28
Key investor protection issues have included:

■ Protecting investors from financial abuse for personal gain by senior
executives.
■ Protecting the interests of minority investors.
■ Closer market scrutiny, regulation and disclosure.

eedb ac
Key contract enforcement issues have included:
F
6c ■ Improved judicial systems.

■ Shortened timetables for enforcement.
continued
■ Reducing costs for debt collection, property eviction and other contract
enforcement issues.
6.4 International law and international

business
Wherever an enterprise operates, the legal environment affects how business is
conducted in many respects, including, but not limited to:
■ rights and obligations
■ contracts and formalities
■ administrative requirements
■ choice of production techniques
■ product characteristics
■ packaging and labelling
■ advertising and sales promotions
■ terms and conditions of trade
■ ownership of assets
■ treatment of employees
■ financial reporting.
Hitherto, we have looked at the differences between legal systems in different

countries, but there is an increasing body of international law, spanning
international borders, which businesses operating globally, or even trading
internationally on a more modest scale, must consider. It follows that
international law is particularly important for multinational corporations.
International law is the set of rules generally regarded, and accepted, as binding
in relations between nation states and businesses that are international in scope.
It encompasses public international law, governing the relationships between
international entities, supranational law or regional agreements, and private
international law, which addresses the issue of the appropriate jurisdiction for
resolving conflicts between the laws of different nations.
A number of international codes and conventions have been established that make
it easier for companies to operate in more than one country. Initiated by the US
in 1952, the Uniform Commercial Code, which lays down standard terms for sale
of goods, has been adopted by a number of other countries. There has been the
work of the World Trade Organization, discussed in Units 1 and 2. The United
Nations created the Convention on Contracts for the International Sale of Goods
in 1980. And the International Institute for the Unification of Private Law,
formed in 1964, has 63 member countries. (Sources: http://www.law.
cornell.edu/ucc/ucc.table.html; http://www.uncitral. org/uncitral/uncitral_texts/
sale_goods/1980CISG.html; http://www.unidroit. org/)

International arbitration is often available when disputes arise between firms

from different countries, cultures and jurisdictions. There are a number of
bodies that may help, such as the New York Convention, set up in 1958, and
the International Centre for the Settlement of Investment Disputes, created by
the World Bank in 1965 (http://www.newyorkconvention.org/; https://
icsid.worldbank.org/ICSID/Index.jsp).
Intellectual property rights (IPR), including patents, trademarks and copyrights,

are meaningless in a globalised world unless they are internationally protected.
There are moves towards harmonisation of laws, such as the World Trade
Organization’s Agreement on Trade-Related Aspects of Intellectual Property
Rights of 1994, but patent protection in one country still does not ensure
e-commerce protection elsewhere, even within the European Union. IPR remains a
problematic area, but one where valuable global interests in software, music
and movies are driving agreement on protection. (See http://www.wipo.int;
http://www.wto.org/english/tratop_e/trips_e/trips_e.htm)
The internet is accelerating the process towards the world’s use of a common
Recommended reading: Marson business language, English, and as a substantial communications medium is a
(2011); Glenn (2010); Miller and means for trade, sometimes described as ‘e-commerce’, unrestricted by national
Cross (2008); Schaffer et al. boundaries or laws. Thus the internet is facilitating cooperation around
(2011).
internationalisation of business law. (http://www.ilpf.org)
ga
nin ct
In 2012 Wal-Mart was investigated by the US Department of Justice over
Lear
ivit
6d allegations that the company’s Mexican subsidiary had bribed Mexican

y
government officials to secure permits to build new stores in 2005. By

failing to report this until 2011, Wal-Mart risked violating the Foreign
Corrupt Practices Act, a major US anti-bribery law.
Find out what you can about this case, and explain why this was a matter of
concern for the US authorities, when the alleged crimes took place in
another country, Mexico.
eedb ac
For many years, the Foreign Corrupt Practices Act was rarely enforced.
F
6d However, the US government is increasingly concerned about the impact of

corrupt foreign practices on its domestic market, and by 2012 the Wal-Mart
manager at the heart of the Mexican bribery allegations, Eduardo Castro-
Wright, had become overall vice-chairman of Wal-Mart. The US government
recognises that international businesses may transfer practices, good and
bad, from one jurisdiction to another.
The US government is also concerned about the probity of US companies
abroad as it reflects on the international reputation of the US as a nation.
Wal-Mart is not just the largest US company active in Mexico, but is the
largest private sector employer in that country, and Mexico is an important
trading partner of the US. Having established that Wal-Mart’s senior
management terminated its internal investigations in 2006, the US authorities
realised that all was not above board. Wal-Mart subsequently suspended
senior managers in Mexico and found similar allegations of corrupt practices
in China, Brazil and India. (Source: Barstow and Xanic von Bertrab, 2012)

6.5 Globalisation and legal issues

Globalisation raises significant legal issues for business. Consider the following
case study.
Case Study
Uranium trade restrictions
Uranium is a rare and valuable commodity. It is mined in only a few
countries, with just 11, including Canada, Australia and some of the
former Soviet countries, responsible for 97 per cent of extraction. Less
volatile than its reputation, it has low radioactivity, and being denser than
lead is often used to insulate other radioactive material. Associated with
nuclear weaponry because of its use in the first atomic bomb, it is now
mainly used in nuclear fuels. Since the break-up of the Soviet Union, an
alternative has emerged to mining, in recycling uranium from the former
Soviet nuclear arms industry.
The uranium market is dominated by six countries that process – ‘enrich’
in the jargon – the uranium close to where it is used in the generation of
nuclear power. The six are France, Germany, the Netherlands, the UK, the
cartel USA and Russia, and they operate as a cartel to control the market in
uranium. Since 1972, they have taken various measures to restrict trade in
their interests, including enacting legislation.
In 1991, the United States reached an agreement with the Soviet Union, a
‘swords-to-ploughshares’ deal, whereby a US government-backed
enterprise, the United States Enrichment Corporation (USEC), would buy
uranium from deactivated Soviet warheads and ‘de-enrich’ it to make it
usable in nuclear power plants. This provoked a reaction from a coalition
of US uranium mining companies and trade unions, who filed a petition
with the US Department of Commerce and the International Trade
dumping Commission, alleging dumping. (There are laws against dumping in more
than 90 countries worldwide, and it is condemned by both the General
Agreement on Tariffs and Trade and the World Trade Organization.) The
situation was further complicated when the Soviet Union dissolved at the
end of 1991, as anti-dumping law requires investigation on a country-by-
country basis, and there was then a Commonwealth of Independent
States (CIS) to deal with.
Thus began nearly 20 years of legal disputes. In 1992 the US Department
of Commerce ruled that six CIS states – Kazakhstan, Kyrgyzstan, Russia,
Tajikistan, Ukraine and Uzbekistan – were selling uranium to the US at less
than fair value, and these governments all signed quota-based deals to
stop imports until prices reached a higher level, known as ‘suspension
agreements’. Two of these countries quickly rescinded the agreements,
and in 1993–94 Russia negotiated an amendment effectively ending their
agreement. The next decade saw much legal wrangling until, by 2001,
most restrictions had been lifted.
In 2000, USEC filed new petitions alleging dumping in the US market by
their European competitors (France, Germany, the Netherlands and the
UK) benefiting from state subsidies in their home countries. These claims
were upheld in 2001 and in 2004 punitive import duties were applied to

Case Study
make up the difference. France took the case to the US Court of Appeals,
but the decision was reaffirmed in 2005.
Recommended reading: TradeTech From 2011 US imports of Russian uranium resumed, with all restrictions
(2011); the chapter ‘Unfair Trade due to be phased out, subject to periodic adjustments, by 2021. It is likely
Laws and Other Mischief’ in
Stiglitz (2002); Insight Briefing that the legal disputes will continue
(2008).
ga
nin ct
Consider the case study above. To what extent do you agree that the legal
Lear
ivit
6e disputes over international trade in uranium arise from globalisation?

y
Explain why.
eedb ac
F
Uranium is only used by countries with nuclear industries, of which there are
6e 30. Countries with nuclear weapons capability are even fewer, with only
eight having successfully detonated nuclear devices. Uranium is only mined
by 20 countries, and only six have enrichment capability. To this extent, the
uranium industry and market is international, but not global. However, the
implications of the uranium trade are global, as the countries involved are
some of the most influential in the world, including four of the five
permanent members of the United Nations Security Council (the exception
being China, which produces, uses and imports, but does not export,
uranium), and at least 45 countries are known to have uranium reserves. In
addition, uranium is used in producing electricity, which is then exported to
other nations.
Nevertheless, purified uranium is a commodity with uniform global use. We
may also see the legal disputes over international trade in uranium as a
product of globalisation, as international agreements restricting its trade are
devised in response to globalisation, and apply to all countries. The
international uranium market also provides useful illustrations of the
phenomena of cartels and dumping, both symptoms of a globalised
economy.
6.1 Briefly describe the political, economic and legal environment in which
France Telecom operates, clearly distinguishing the three dimensions.
6.2 Give an example of the UK government participating in the UK economy
in each of the following roles: supplier, competitor and subsidiser (three
examples in total).
6.3 How does Sharia law constrain the operation of banks from outside
Islamic culture?

6.4 What is the definition of ‘value’ in the Uniform Commercial Code, a

yardstick definition in international law?
6.5 Why might dumping be against the interests of some companies?

6.1 France Telecom is a French multinational corporation in the field of
telecommunications, where its main brand is Orange. Political environment:
originally owned by the French government, it was privatised in 1998,
following a directive of the European Union, making competition manda-
tory for public services. The French government continues to hold a 27 per
cent stake and reserves the right to name its Chief Executive Officer.
Economic environment: France Telecom is one of the top 40 French com-
panies, but half of its 180,000 employees are outside France, and it holds a
50 per cent stake in Deutsche Telekom. It competes internationally in
Europe, Russia, the USA, Southeast Asia, the Indian subcontinent and
several mainly francophone African countries; its main competitors include
Bouygues and Vivendi domestically, and Vodafone and other mobile
telecommunications providers globally. Legal environment: in most of the
markets where France Telecom operates, including its home market, there
is a high degree of government regulation, and need for compliance.
(Between 2008 and 2011, 60 France telecom employees committed suicide,
some alleging work stress attributed to government investigations.) (Source:
http://www.bbc.co.uk/news/world-europe-18717025)
6.2 Among the examples you could have selected are: supplier of postal
services through the Royal Mail; competitor in the banking industry
through its ownership of Royal Bank of Scotland Group; subsidiser of the
higher education industry through grants to universities.
6.3 Sharia law prohibits the fixed or floating payment or acceptance of specific
interest or fees when lending money. It also prohibits Muslims from
investing in enterprises that practise this, which it defines as usury. This
effectively excludes non-Muslim banks from the markets for Muslim
customers and investors, which is bigger than several Muslim states,
including Pakistan. In response, a number of non-Muslim banks have
established Sharia-compliant operations, including Barclays, Lloyds and
Royal Bank of Scotland. (See http://www.islamic-bank.com/sharia-
finance/)
6.4 Part One, section 204 of the Uniform Commercial Code, defines value,
with certain exceptions, in the following terms:
‘a person gives value for rights if the person acquires them: (1) in return
for a binding commitment to extend credit or for the extension of
immediately available credit, whether or not drawn upon and whether or
not a charge-back is provided for in the event of difficulties in collection;
(2) as security for, or in total or partial satisfaction of, a preexisting claim;
(3) by accepting delivery under a preexisting contract for purchase; or (4)
in return for any consideration sufficient to support a simple contract’.
(http://www.law.cornell.edu/ucc/ucc.table.html)
6.5 Dumping brings into a market cheap imports that can impact negatively
on sales, prices and profits for domestic enterprises. Companies with

surplus products to offload on foreign markets might see opportunities to

damage international competitors while getting rid of their surpluses, but
this is certainly not in the interests of those competitors. (Source:
http://www.stewartlaw.com/stewartandstewart/PracticesServices/TradeRe
mediesPractice/AntiDumpingLaw/tabid/69/language/en-US/Default.aspx)
Summary
In this unit you have explored the range of political, economic and legal issues
in the external environment as they impact upon business.
You have defined and distinguished the political, economic and legal environ-
ments of business, and compared and contrasted different political and
economic systems and the impacts they have upon business.
You have looked at different systems of law, and international law, as they
affect business, and considered how globalisation is changing the legal
environment.
This has been the first of four units looking at the six dimensions of the PESTLE
analysis tool, and you will return to the remaining dimensions in Units 8 and
9, but next you will turn your attention to international financial markets and
institutions.

Unit 71 International financial
markets and institutions
‘Money makes the world go round’

(lyric by Fred Ebb, sung by Liza Minnelli and Joel Grey in the
musical film Cabaret, 1972)
Introduction
Does money really ‘make the world go round’? The Bible claims that ‘the
love of money is the root of all evil’ (1 Timothy 6:10, circa 1st to 2nd
century), and the Beatles sang that ‘money can’t buy me love’ (Lennon
and McCartney, 1964). Yet money is perhaps the most pursued com-
modity on earth, the universal measure of wealth, the motivator of all
sorts of human activity and the engine of international business.
In this unit you will explore the importance of money for business, and
define and understand the related concepts of currency, interest rates,
inflation and exchange rates. You will look at who regulates money and
its use – what are the important financial institutions and what exactly
they do.
You will consider what is happening in the world of finance, and what
role is played, for business, by international financial markets. And you
will assess what seems to have gone wrong in recent years, under-
standing and evaluating the global financial crisis.
All of this should help you better understand the international financial
framework within which businesses operate.

7.1 Define the concepts of currency, inflation, interest rates and
exchange rates.
7.2 Name the key international financial institutions and describe their
role.
7.3 Explain the contemporary developments in the finance industry in
international context.
7.4 Analyse the role and importance of international financial markets.
7.5 Critically evaluate the impact of the global financial crisis on
businesses.

Unit 7 International, financial markets and institutions
Prior knowledge
This unit examines a dimension of the external environment of the business that
is embedded in the E in the PESTLE acronym, in the sense that finance is a crucial
aspect of economics. As such it is the natural companion to Unit 6, and should
be read after that unit, and before tackling Units 8 and 9. It would be beneficial,
although not essential, to have some understanding of economic and financial
issues in the contemporary world, but no such prior knowledge is assumed.
Resources
The relevant reading for this unit may be found in the chapter ‘The Financial
Framework’ in your core textbook (Hamilton and Webster, 2012). Supplementary
7.1 Currency, inflation, interest rates and

exchange rates
Money is anything generally accepted in exchange for goods and services. This
includes not just coins and banknotes, but cheques (‘checks’ in the US) and
negotiable instrument other negotiable instruments. The origins of money lie in the need for traders
to have something to exchange in the absence of ready goods that both parties
bilaterally wished to barter; coins have been found that date back to the seventh
century BC, and metallic non-coin currency 300 years earlier. The introduction
of money made it easier to compare the relative values of different goods and
barter services, and international traders carried the concept around the globe.
Money functions as:

■ a medium facilitating the exchange of goods and services
■ a common measure for pricing and valuing sales, costs, profits and assets
■ a standard of deferred payment
■ a store of wealth.
At first, coins had to have intrinsic value, containing enough precious metal
(usually gold or silver) to ensure their exchange value. Later money moved from
being a commodity itself to being representative, essentially assured by the
government or institution issuing it, representing a promise to pay, enabling a
shift from coins to paper money. (The first paper money was in China in the
ninth century, but was not widely adopted elsewhere for another 1000 years.)
For instance, all paper money issued by the Bank of England states ‘I promise
to pay the bearer on demand the sum of...’
Today most countries have their own currency – dollars ($) in the United States,
yen (Y) in Japan, yuan or renminbi (CNY) in China, pounds sterling (£) in the
UK, and so on – and these may be exchanged. There are exceptions, such as the
euro (€) in the countries of the Eurozone, and external adopters of the US

dollar, but it is more common for each country to have its own currency. Each
government and its central bank have to ensure confidence in its currency, that
is, a shared willingness to accept their currency in exchange for goods and
services. Without this confidence, there would be a breakdown in the financial
system.
liquidity Money may be distinguished by degrees of liquidity into ‘narrow’ money and
‘broad’ money. The more liquid, or narrow, money includes coins, notes and
deposits in current accounts held in banks. Less liquid, or broad, money also
includes deposits in less immediately accessible accounts, along with funds
deposited by governments and financial institutions. Sometimes currency means
the money available in coins and banknotes, sometimes the term is used
synonymously with money, and sometimes it refers specifically to the form
money takes in a particular economy, such as dollars in the US.
Economists speak of the money supply as the total amount of money available
in an economy at a particular point in time. Money supply is seen as a way of
controlling inflation or boosting the economy. However, growth in money
supply and price inflation tend to go hand in hand.
Inflation may be understood as a general increase in the level of prices for goods
and services. This is harmful to confidence and usually bad for consumers, as
it means their currency buys fewer goods and services. Inflation can have some
positive effects, as it can lead to growth of investment in capital projects, due
to rises in capital values, and it can cause interest rates to be lowered.
% 3 interest
ratre
2
0
2008 2009 2010 2011 2012 2013
Figure 7.1: United Kingdom base interest rates
Interest is the price charged by a lender to a borrower. Interest rates are

therefore the listed prices for borrowing, representing a cost to borrowers and
income to lenders. For most businesses, the greatest significance of interest rates
is their effect on the cost of borrowing. For businesses in the financial services
sector, such as banks, higher rates can offer an opportunity to earn more income
from interest.

In March 2013, the Bank of England base rate of interest was 0.5 per cent, and
had not changed since it fell from 1.0 per cent four years earlier, having been
in continuous decline from July 2007 (see Figure 7.1). If you are from a country
other than the UK, you may wish to compare this with your own country’s
national interest rates – see http://www.fxstreet.com/fundamental/interest-rates-
table/. For charts of recent rate changes by the seven leading central banks of
the world see http://www.telegraph.co.uk/finance/personalfinance/interest-
rates/8536169/World-interest-rates-in-graphs.html.
Rates from Bank of England

fixed exchange rate Exchange rates express the price of one currency, such as the Japanese yen,
relative to another, such as the US dollar. So, for example, on 4 March 2013,
1 Japanese yen was trading at 0.01 US dollars. Note that the exchange rate for
one currency is expressed in the currency it is being exchanged for, so in the
given example 1 yen was worth 0.01 dollars, or 1 dollar was worth 100 yen.
floating exchange rate For businesses trading internationally, exchange rates have an immediate effect
on the value of foreign sales, profits and assets, and impact on international
competitiveness. You can check your own currency exchange rates (current and
historic) at http://fxtop.com/en/historical-exchange-rates.php.
1.6
USD
EUR
1.4 JPY
CNY
CHF
ratio of exchange rate to mean
GBP
1.2
0.8
0.6
99
01
03
05
07
09
11
.19
.20
.20
.20
.20
.20
.20
.01
.01
.01
.01
.01
.01
.01
jan
jan
jan
jan
jan
jan
jan
Figure 7.2: Exchange rates – six currencies compared with their GNP-
weighted mean
Source: http://commons.wikimedia.org/wiki/File:Currency_gnp_weighted_
comparison_1999_2011.svg]

Figure 7.2 illustrates the fluctuating exchange rates for six of the world’s most
Recommended reading:‘Exchange
Rates’ in the chapter ‘The Global important currencies: the British pound (GBP), the US dollar (USD), the euro
Economy’ in Hamilton and (EUR), the Chinese yuan (CNY), the Japanese yen (JPY) and the Swiss franc
Webster (2012); the chapter ‘The (CHF). As an exchange rate rises, imports become cheaper but exports become
International Economic
more expensive, meaning some businesses gain while others lose. Governments
Environment’ in Brooks et al
(2011); the chapter ‘Finance’ in try to manage exchange rates to favour their domestic businesses over foreign
Capon (2009); Pirie (2012); competitors, sometimes adopting a fixed exchange rate policy to peg the value
Journal of International Financial of their currency to another, sometimes a floating exchange rate policy, where
Markets, Institutions & Money;
the value of the currency is determined by the markets. There is also a middle
http://www.bankofengland.co.uk/
education/Pages/poundsandpence ground where governments try to manage their currency to float within certain
/1a.aspx. limits, sometimes known as ‘dirty floating’.
ga
nin ct What is the ‘Law of One Price’? Research and describe it. Give an example
Lear
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7a of a market where it appears to work, and one where it does not.

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F
The law of one price is an economic concept or hypothesis that in an

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7a efficient market, where goods are identical, prices will tend to converge to
one price. Investopedia defines it in this way:
efficient market ‘The theory that the price of a given security, commodity or asset will
have the same price when exchange rates are taken into consideration.
The law of one price is another way of stating the concept of purchasing
power parity.’
(http://www.investopedia.com/terms/l/law-one-price.asp)
(See Unit 1 for an explanation of purchasing power parity, or PPP.) Assuming
that there are no transportation costs, barriers to trade, or local market
variations such as differing sales taxes, identical products sold in different
countries should sell for the same price. If the exchange rate for £1 = $1.50,
then a coat selling for £100 in London should sell for $150 in New York. If
the actual price in New York is $160 then a trader could buy coats in
London for the equivalent of $150 and sell them in New York for $160 (or
at least for more than $150). The extra demand in London (coats bought by
the trader) and the extra supply in New York (by that trader) would cause
the equivalent prices to converge until they were equal.
Financial markets provide many examples where the law applies. Where
commodities are traded in financial markets, sellers offer an asking price,
and buyers offer a bid price. There is a small spread between the asking
price and the bid price, and all trade falls within that spread. (This may seem
like a case where the law does not apply, but economists argue that it
applies both to the asking price and to the bid price.)
A famous example where the law did not apply was of shares in Royal
Dutch/Shell. Following their 1907 merger, holders of Royal Dutch Petroleum,
traded in Amsterdam, and Shell Transport shares, traded in London, were
entitled respectively to 60 per cent and 40 per cent of all future profits.
Royal Dutch shares ought therefore to have been priced at 50 per cent more
than Shell shares. However, they diverged from this by up to 15 per cent.
The discrepancy ended with their final merger in 2005.

F eedb ac
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Price dispersion measures the extent to which the ‘law’ does not hold. You
7a may wish to consider this in relation to the Economist’s Big Mac Index (see
the McDonald’s case study in Unit 2) (http://www.economist.com/search/
continued apachesolr_search/big%20mac%20index).
You might also find it instructive to consider the prices of any well-known
electrical goods available worldwide, comparing the prices in the US, one of
the large Western European economies, and one of the leading Asian
economies. Compare the prices, and then reflect on why they differ.
7.2 International financial institutions

There are a number of international financial institutions, in both the public
and private sectors, whose effective operation impacts on the functioning of
the international economy.
International financial institutions

The Bank for International Settlements, founded in 1930, is the world’s oldest
international financial organisation. It promotes international monetary and
financial cooperation and has the central banks of 58 countries as members
(http://www.bis.org/).
The World Bank, founded in 1944, provides loans to developing countries for
capital programmes. It aims to reduce poverty, promotes foreign investment
and international trade, and facilitates capital investment. The World Bank
comprises the International Bank for Reconstruction and Development, which
has 188 countries as members, and the International Development Association,
which has 172 countries as members. The World Bank Group also includes
three other bodies: the International Finance Corporation, the Multilateral
Investment Guarantee Agency and the International Centre for Settlement of
Investment Disputes (http://www.worldbank.org/).
The International Monetary Fund, founded in 1944, has grown from 29

member countries at inception to 188 today. It works ‘to foster global monetary
cooperation, secure financial stability, facilitate international trade, promote
high employment and sustainable economic growth, and reduce poverty around
the world’ (http://www.imf.org/). It is often seen as the international lender of
last resort for countries in financial difficulties.The European Central Bank,
founded in 1998, is one of the institutions of the European Union (EU), the
largest economic bloc in the world. It is the central bank for the euro, and is
responsible for the monetary policy of the 17 EU states that make up the
Eurozone (http://www.ecb.int/).
Central banks
A central bank, or reserve bank, or monetary authority, is a public body that
manages a state’s currency, money supply and interest rates, and usually also
oversees the country’s commercial banking system, and mints or prints the
country’s currency.

The Reserve Bank of India, by way of illustration, was founded in Calcutta in

1935, moved to Mumbai in 1937 and was nationalised by the Government of
India in 1949. It describes its function as ‘...to regulate the issue of Bank Notes
and keeping of reserves with a view to securing monetary stability in India and
generally to operate the currency and credit system of the country to its
advantage’ (http://www.rbi.org.in/). It is the monetary authority, regulator and
supervisor of the financial system, the manager of foreign exchange, the issuer
of currency, banker to the government, banker to the banks, and has a wider
development role.
A list of the central banks of the leading economies of the world may be found
at http://www.bis.org/cbanks.htm.
Private financial institutions

There are a great many other financial institutions that carry out a range of
functions vital to business, and many of them operate internationally. They
include banks, insurance companies, pension funds, unit trusts, hedge funds,
venture capital companies and private equity funds. All of them act as
intermediaries between those who those who want to borrow money and those
who want to lend.
Retail banks take deposits from private individuals, businesses and other
organisations. They lend money directly to others or invest it in stocks and
shares. Pension funds take longer-term savings. Investment banks lend to large
firms. Venture capital companies and private equity funds gather funds together
SWIFT and use them to finance companies, often start-ups, for a share in the ownership
of the company, taking high risks for potentially high returns.
Private financial institutions are important to international business for several

functions:
■ To mobilise savings, and provide credit at home and abroad.
Recommended reading: the ■ To provide domestic and international payments systems, such as SWIFT.
chapter ‘International Financial
Markets and Institutions’ in ■ To reconcile the short term needs of savers with the long term needs of
Rugman and Collinson (2012); business borrowers.
Hubbard (2007); Howells and Bain
(2007). ■ To spread risk across a large number of projects and/or countries.
ga
nin ct Identify the central bank of the United States, clarify its relationship to
Lear
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7b government, and describe its role in some detail.

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The central bank of the United States is the Federal Reserve System, known
F
7b informally as the Fed. It was established in 1913 by Act of Congress, and is

headquartered in Washington DC, the federal capital of the US and seat of
national government. It is managed by a seven-strong Board of Governors
appointed by the President, and is answerable to the federal (US-wide, or
national) government, audited by the Government Accountability Office. It
claims a structure that is both public and private, operating ‘independently

eedb ac
within the government, but independent of it’ and does not require public
F
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7b funding. The US Government receives all of the system’s annual profits,
after a statutory dividend of 6 per cent on member banks’ capital
continued investment is paid, and an account surplus is maintained. In 2010, the
Federal Reserve made a profit of $82 billion and transferred $79 billion to
the US Treasury. It is sometimes described as a ‘decentralised central bank’
and has 12 regional Federal Reserve Banks in major cities around the
country.
The purposes and functions of the Fed include: oversight of monetary policy
and the economy, including managing the currency, setting goals, interest rates
and foreign exchange rates; the implementation of monetary policy;
maintaining the stability of the financial system and providing financial services
to depositors and the US Government; developing international banking links
and foreign currency operations; supervision and regulation of US commercial
banks and financial institutions, including approving acquisitions and mergers;
sustaining a membership base of commercial banks; publishing financial
information; and consumer protection.
(Sources: http://www.federalreserve.gov/pf/pf.htm; http://www.philadelphiafed.
org/education/teachers/resources/fed-today/fed-today_lesson-3.pdf)
7.3 Contemporary developments in

international finance
The drivers of contemporary developments in international finance include
economies of scale, economies of scope, the quest for increased market share,
and a number of other factors.
Financial organisations achieve scale economies through mergers and acquisi-

tions, rationalising their purchasing of supplies, and making savings by
removing duplication, such as in head office functions. In an era of international
expansion this seems logical, but research yields mixed evidence, with some
studies showing that limits to economies of scale are reached when organisa-
tions are still not that large. ‘Until recently few studies have found evidence of
significant scale economies among banks’ (Wheelock and Wilson, 2011). And
see the case study below.
The idea of economies of scope is that the added costs of selling new products
alongside old ones are small compared to the increase in revenues that can be
attained. For example, banks diversifying into insurance or credit cards can
deploy their existing skills in marketing lending services to the marketing of
these products, often through the same sales channels.
The motivation of growing market share is that it reduces competition, as in

when one bank acquires another. Not only is the new enterprise bigger, it is less
vulnerable to takeover and so its market share is more secure.
Among the other factors driving contemporary developments are: the global
financial crisis (see case study); funding the increase in international trade that

followed the Second World War; increased demand from economic expansion
in Southeast Asia; attempts to avoid regulation by the financial authorities; the
oil price boom of the 1970s, which led to oil-producing countries having big
trade surpluses; and opportunities arising from deregulation of financial
markets from the 1970s.
The main developments may be summarised under two headings: industry

restructuring and cross-border integration; and product diversification and
innovation.
Industry restructuring and cross-border

integration
The last 50 years have seen banks shift from confining their operations to their
domestic market, to increasing internationalisation. A pattern of domestic
consolidation, with mergers in the UK such as Lloyds with TSB, Royal Bank of
Scotland with NatWest, and Halifax with Bank of Scotland, has been extended
to cross-border integration. Another example of domestic consolidation is in
the US, where Peter Stella (2009) found that between 2001 and 2008 the five
biggest US banks increased their market share from 32 per cent to 50 per cent.
Sometimes foreign expansion has been prompted by slow growth or limited
opportunities in the domestic market, as in the case of the Royal Bank of
Scotland (see below).
On a global scale, Allesandri and Haldane (2009) reported that in 1998 the
five largest global banks held about 8 per cent of the world’s banking assets,
and over the following ten years that figure doubled to 16 per cent. Deutsche
Bank was broken up after the Second World War and only reunified in 1957.
It remained within Germany alone until the mid-1970s, but has since expanded
to operate in more than 70 countries around the world (see http://www.
db.com).
Restructuring has also been about consolidation in product terms as well as

size. In the UK, building societies have existed since the eighteenth century as
mutual associations owned by their members for the purposes of saving and
using those savings to build and lend on property. Deregulation of the British
banking laws in the 1980s enabled building societies to compete with
traditional banks, and many then felt constrained by their mutual status.
demutualised Between 1989 and 2000, ten building societies demutualised, either becoming
a bank, or being acquired by a larger bank. Between 2008 and 2012 the number
of building societies in the UK fell from 59 to 47. Around the world, banks
and insurance companies have pursued strategies to become large financial
conglomerates offering a wide range of products on an international scale.
Product diversification and innovation

The traditional core activity of banks was borrowing and lending money both
to individuals and to organisations, while companies that wrote insurance
policies and offered protection against risks were separate entities. There was
also a degree of specialisation, with some banks concentrating on private wealth
management, some on corporate work and some on retail banking. In some
countries, mutual societies, such as building societies in the UK, took savings
and made loans for property purchase. As regulations separating these

functions have been reduced or removed, firms have diversified across this
range of activities and beyond.
Among the new products that have emerged are:

■ Derivatives – the right to buy or sell existing products (shares, bonds,
currencies, commodities) in the future at an agreed price.
■ Swaps – derivatives that firms use to protect themselves against adverse
movements in interest rates, inflation, exchange rates, or defaulting.
■ Options – another form of derivatives, to buy or sell a specified amount of
a specified product over a specified period of time (limiting exposure to the
initial price paid).
■ Hedge funds – actively managed investment funds calculated to reduce risk
by what is sometimes described as betting on failure.
ga
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Financial regulation, both domestically and internationally, is imposed by
Lear
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7c governments and international bodies to maintain order in the financial

y
system and protect customers. But to what extent does it succeed, and to
what extent are businesses constrained by financial regulation? Investigate
this topic (there is a section on financial regulation in the chapter ‘The
Financial Framework’ in Hamilton and Webster, 2012), and identify and
analyse an example of successful financial regulation, and an example
where it constrains business.
eedb ac
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Effective financial regulation can help to protect customers against fraud,

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7c ensure that payments systems operate smoothly, maintain liquidity in the

system, and avoid or mitigate financial crises.
Examples of successful financial regulation could include: the BASEL III
requirement, increasing the amount of equity that has to be held by capital
banks against the possibility of losses (http://www.bis.org/bcbs/basel3.htm);
the 2011 US enquiry into failures of corporate governance and risk
management in banks, imposing tighter scrutiny; consumer protection in
measures such as the UK government requiring banks to repay mis-sold
payment protection insurance.
Examples of constraints on business could include: growth of small- to
medium-sized enterprises being held back by compliance requirements set
with the needs of large enterprises in mind; damage to costs, sales and
profits of financial enterprises such as banks; trading disadvantages for
enterprises based in highly regulated environments versus those based in
countries with lax or non-existent regulatory systems.

7.4 International financial markets

Financial markets are those where securities (stocks and bonds), commodities
(precious metals, agricultural produce) and monetary assets (notably currencies)
are traded, bringing together buyers and sellers into one place. The leading
world centres for financial markets are New York, both for its main stock
NASDAQ exchange and the NASDAQ, Tokyo and London.
The purposes of financial markets may be to raise capital, establish prices,

transfer risk, transfer liquidity, or further international trade. Primary markets
issue new bonds and shares to raise capital, while secondary markets include
stock exchanges for buying and selling existing shares. Capital markets are
essentially long term, representing investments of a year or more, and some-
times much longer. The money markets and foreign exchange markets are more
short term in nature.
International financial markets comprise:

■ Capital markets, including stock markets, which provide business finance
by issuing shares or common stock, and facilitating their subsequent
trading, and bond markets, which provide financing by issuing bonds, and
credit crunch facilitating their subsequent trading.
■ Commodity markets, which facilitate the trading of commodities.
■ Money markets, which provide short-term debt financing and investment.
sub-prime lending ■ Derivatives markets, which provide instruments for the management of
financial risk.
■ Futures markets, which provide standardised forward contracts for trading
products at some future date.
■ Insurance markets, which facilitate the redistribution of various risks.
■ Foreign exchange markets, which facilitate the trading of foreign exchange.
recession
From time to time, markets are affected by financial crises, and there is no
commonly accepted theory that explains this. Each crisis has its unique
characteristics, but common features include increasing speculation, rising
prices and market euphoria, followed by a turning point, falling prices, panic
and pessimism. A consequence of internationalisation and globalisation is that
Recommended reading: Valdez financial crises spread internationally. One of the most recent crises, sometimes
and Molyneux (2010); the chapter called the credit crunch, the effects of which were still being felt in 2013, was
‘International Financial Markets precipitated from 2007 (although it is often called the 2008 financial crisis)
and Institutions’ in Rugman and with the bursting of the US house prices bubble, and the revelation of the extent
Collinson (2012); Howells and
Bain (2007); Sorkin (2010); Tett of sub-prime lending and securitising bonds based on those loans. This led to
(2010); http://www.bbc.co.uk/ a collapse in the value of securities, hedge fund and bank failures, government-
news/special_reports/global_ funded rescue packages, emergency stabilisation measures, and the onset of
economy/. global recession.
ga
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The European sovereign debt crisis was an ongoing financial crisis that made
Lear
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7d it difficult if not impossible for the governments of some countries in the

y
Eurozone (notably Greece) to repay their debt without external assistance.

Explain the causes of the European sovereign debt crisis, and comment on
their impact on business.

eedb ac
The causes of the European sovereign debt crisis include the following:
F
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7d ■ Political pressure towards European monetary union led to countries like
Greece being able to join the euro without complying with all the
continued required criteria (for instance, Greece’s budget deficit was reported as a
compliant 1.6 per cent, when in fact it was 12.5 per cent and rising).
■ National governments capped spending to comply with euro monetary
unification requirements, but local governments continued to compile
debt that was not recorded at European level.
■ Governments borrowed excessively, and governments of poorer
countries, such as Greece, were able to do so taking advantage of
preferential interest rates based on the lending risk to the richer
countries in the Eurozone.
■ Once they were part of the Eurozone, countries like Greece had no
further incentive to curtail spending or borrowing, and built up
unsustainable debts.
■ High public sector wages and pensions fuelled mounting national debts.
■ The crisis was exacerbated by the credit default swap market exposing
the extent of exposure.
The European sovereign debt crisis led to financial aid being provided to
Greece, Portugal, Ireland, Spain and Cyprus, at some damage to the
economies of the more stable and prosperous Eurozone economies, notably
Germany. The implications of the crisis for business include greater difficulty
securing credit, the likelihood of higher interest rates, losses from currency
weakness, and reduced spending power for consumers.
(Sources: http://www.spiegel.de/international/europe/the-ticking-euro-
bomb-how-the-euro-zone-ignored-its-own-rules-a-790333.html;
http://www.competitionmaster.com/ArticleDetail.aspx?ID=4546e4b3-8b0c-
465b-b2b8-46ef69cc14f3)
7.5 The global financial crisis

We may gain a clearer understanding of the global financial crisis precipitated
in 2007/08 by reference to the case study on the experience of the Royal Bank
of Scotland.
Case Study
Royal Bank of Scotland

The Royal Bank of Scotland was founded in 1727 in Edinburgh, and gives
its name today to the international financial conglomerate and UK-listed
public limited company Royal Bank of Scotland Group (RBS). Its first
branch outside Scotland was opened in London in 1874, but a
subsequent agreement was reached whereby English banks would not
open branches in Scotland, and vice versa, outside London – this informal
agreement held until the 1960s. However, meanwhile RBS had acquired

English banks that traded under the Williams & Glyn’s Bank name. In
1969, RBS acquired the National Commercial Bank of Scotland to become
the largest clearing bank in Scotland, and in 1985 absorbed the Williams
& Glyn’s Bank under the RBS name.
From the 1980s, RBS diversified into a wider range of financial services,
including personal and business banking, private banking, insurance (with
brands including Direct Line and Churchill) and corporate finance. In
2000, RBS acquired National Westminster Bank (NatWest), an older and
much larger banking group, incorporating Ulster Bank, Coutts and other
subsidiary brands, thus becoming the second largest bank in the UK, after
HSBC.
International expansion had developed alongside these diversifications
and acquisitions. RBS opened its first foreign branch in New York in 1960,
and acquired Rhode Island Bank Citizens Financial Group in 1988. In 2005
it acquired a 10 per cent stake in the Bank of China, making it the second
largest shareholder in that bank. In 2007, RBS overcame stiff competition
to acquire Dutch bank ABN AMRO, attracting criticism for allegedly
overpaying. In 2009, RBS was briefly the world’s largest company,
measured both by assets (£1.9 trillion) and by liabilities (£1.8 trillion).
The ABN AMRO acquisition coincided with the onset of the global
financial crisis, widely considered to be the worst financial crisis since the
Great Depression Great Depression of the 1930s. Encouraged by the success of its
leveraged acquisition of NatWest, RBS believed the highly leveraged deal
acquiring ABN AMRO would also be positive, but the economic climate
was no longer as propitious. RBS also seemed unaware (perhaps through
lack of due diligence) that this acquisition exposed the company to sub-
prime lending and the losses of hedge funds securitising it.
In 2008, to cover the enormous costs of the ABN AMRO acquisition, RBS
announced a rights issue to raise £12 billion in capital, which at the time
leverage was the largest ever rights issue in the history of UK business. At the same
time, it began to consider the possibility of selling some subsidiaries such
as its insurance brands. In the context of widespread losses in the financial
services industry, including HBOS and Lloyds TSB in the UK, and the
collapse of Northern Rock, RBS reported a loss of £24.1 billion for 2008,
the biggest loss in British corporate history.
rights issue
RBS effectively failed in 2008 and was ultimately only rescued by £45
billion of government aid. The fallout led to disposal of non-core
businesses, notably Direct Line in 2012, the removal of the entire senior
management team of RBS, the retrospective stripping of the knighthood
of its former chief executive Sir Fred Goodwin, public condemnation of
the ‘bonus culture’ in banks, and widespread loss of confidence in the UK
banking system.
During 2008 and 2009 the UK government took an increasing stake in
RBS, and other banks, in order to shore up the sector, and in 2009 the UK
Financial Services Authority launched a formal investigation into what
necessitated the government bailout. Since 31 March 2012, RBS has

effectively been a nationalised company, with 82 per cent of its shares

held on behalf of the UK Government, and its future remains uncertain.
Recommended reading: http://www.rbs.com/;
http://www.guardian.co.uk/business/2011/dec/12/rbs-collapse-timeline;
http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/8176
145/RBS-timeline-where-it-all-went-wrong.
html; Financial Services Authority Board Report (2011).
ga
nin ct
To what extent does the case study of Royal Bank of Scotland illustrate the
Lear
ivit
7e general characteristics of the global financial crisis? Identify, describe and

y
explain three features of the crisis that are illustrated by this case.
eedb ac
F
Among the features of the crisis you could have identified are:
7e ■ Risk of over-extension by diversifying into too many new products or
services – RBS extended rapidly over 20 years, but there is little evidence
they extended beyond their core capabilities, or that this contributed to
their downfall.
■ Risk of over-extension by making too many acquisitions and growing too
rapidly – RBS exemplified this, rising from being one of three small banks
in Scotland in 1980, to the second biggest UK bank by 2000, and in
2009 briefly the biggest company in the world, taking on more assets
than it could support in an economic downturn.
■ Over-exposure to sub-prime lending in the housing market – RBS
avoided this until its acquisition of ABN AMRO, possibly missing the risk
through insufficient due diligence, caused by its enthusiasm to complete
the deal.
■ Making unsustainable hedge fund losses by securitising sub-prime loans
– RBS became exposed to this, again, through its ABN AMRO
acquisition.
■ Hubris – the general feeling in the banking industry that they could not
fail, and that their leaders were especially insightful.
■ Overpayment of executive bonuses, regardless of performance, leading
to greater losses – RBS paid bonuses in line with industry norms, but
despite the subsequent public outcry, the contribution of this issue to
the financial crisis has been exaggerated.
■ Shoring up of major international banks by government rescue packages
– RBS would have failed without UK government aid, and being
considered ‘too big to fail’ (because of the consequences for consumers
and the UK economy) was eventually the biggest recipient of
government aid, being effectively nationalised.

eedb ac
Global recession damaging business value with falling share prices – RBS
F
7e share price fell from a high of 600 pence in April 2007 to less than 15
pence in January 2009.
continued ■ The credit crunch making it harder for businesses to borrow – RBS has
certainly been constrained by this, but it is probably the least of its
concerns.
7.1 Find out which three countries in the world have the highest, and which
three the lowest, inflation rates, according to the most up-to-date figures
available.
7.2 Which international organisation evaluates the economy of each of its
member countries by conducting an annual audit, checking economic
data, monetary exchange rates and international trade information?
7.3 Explain what a hedge fund does, and why this could be helpful to
business.
7.4 Distinguish between a primary and a secondary financial market.
7.5 What are ‘sub-prime loans’ and what was their role in the global financial
crisis?

7.1 The three countries with the highest rates, according to the CIA World
Factbook, are Venezuela, Congo and Argentina, and the three lowest are
Seychelles, Ireland and Gabon (figures accurate at 2010, with some
estimates up to 2012). Average world inflation is 2.5 per cent. (Source:
https://www.cia.gov/library/publications/the-world-
factbook/rankorder/2092rank.html)
7.2 The International Monetary Fund.
7.3 Hedging means managing risk by balancing speculation with a counter-
investment to minimise potential losses. Hedge funds are investment
products that aim to make an absolute return for their investors, and do
not all ‘hedge’ – some say they should really be called ‘absolute return
funds’, as they protect their investors by ensuring absolute returns,
balancing the investors’ risks elsewhere. This means that businesses with
a range of risky investments can cover them to some extent by investing
in hedge funds.
7.4 Primary markets are capital markets that issue new bonds and shares, or
in other words are the primary source of new venture capital. Secondary
markets are capital markets where existing shares may be bought and
sold, such as the London Stock Exchange.
7.5 The seeds of the global financial crisis were sown where credit was too
easily obtained, and borrowers represented too high a risk for lenders.
US lenders labelled good risk borrowers as ‘prime’, and by euphemistic

extension, poorer risks as ‘sub-prime’, and competing lenders took a

greater share of sub-prime loans to achieve short-terms sales and profits
at the risk of longer-term losses. When housing prices in the US fell, from
2007, increasing numbers of sub-prime borrowers defaulted, exposing
the lenders to increasing losses, worsened by the securitising investment
strategies they had pursued to disguise the risk.
Summary
Financial crises notwithstanding, financial markets and institutions are
growing, extending and becoming more sophisticated and more influential on
an international scale. In this unit you have explored these financial markets
and institutions, and gained a better understanding of how ‘money makes the
world go round’.
In this unit, you have examined and understood the monetary concepts of
currency, inflation, interest rates and exchange rates, and how they affect
businesses. You have looked in particular at the experiences of banks and other
businesses competing in the financial services sector, and considered how
financial institutions such as central banks and international bodies regulate
the use of money for all businesses.
You have reviewed what happens in international financial markets, and how
these affect business, not least in times of crisis, studying especially the global
financial crisis from 2007, and the European sovereign debt crisis from 2009.
All of this should help you better understand the international economic and
financial environment within which business operates. In the next unit, you
will go on to consider another crucial environmental factor – technological
change.

Unit 81 Technological change
‘We’re changing the world with

technology’
Bill Gates, quoted in Harms and Yamartino, 2010
Introduction
In Stanley Kubrick’s iconic film, 2001 A Space Odyssey (1968), an ape
throws a bone into the air and, as it spins, the image changes to a
futuristic wheel in space. It is said that Kubrick captures, in that moment,
the entirety of human history, in the shift from prehistory to the future.
He also shows a connection in the evolution of technology.
Technology is a misunderstood concept. Most people, when it is

mentioned, tend to think of new technology. New technology is usually
equated with the electronic technologies of the computer, the micro-
processor, and the internet. But this merely highlights the most
conspicuous technology of our time, and only scratches the surface of
the subject of technological change.
In this unit you will gain a deeper understanding of what technology is

and how it affects our lives, not least in its business applications. You
will examine the field of innovation and the related business function of
research and development (R&D). You will explore the global markets
for technology development and innovation, and you will consider the
problem of protecting innovation to maintain competitive advantage,
and why sometimes a business interest in this may be in conflict with
consumer interests.
You will develop a strong sense of the impact of technology, and of

technological change, in the business environment.

8.1 Define technology and innovation.
8.2 Identify drivers of research and development and innovation.
8.3 Assess the importance of the global markets for technology
development and innovation.
8.4 Explain some of the issues associated with protecting innovation in
an international context.

Prior knowledge
This unit is the third of four – the others being Units 6, 7 and 9 – that consider
studies Units 1 and 3, which introduce PESTLE, and preferably Unit 6, which
deals with the political, economic and legal dimensions. In addition, given the
scope of this unit, it would be beneficial, although not essential, to have some
understanding of technological issues in the contemporary world.
Resources
The relevant reading for this unit may be found the chapter ‘The Technological
Framework’ in your core textbook (Hamilton and Webster, 2012). Supplementary
8.1 Technology and innovation

James Watt is popularly believed to have invented the steam engine. He didn’t.
What he did was improve the steam engine to make it useful to industry, by
adding a condenser to the early steam engine design, and later developing rotary
motion. Prior to Watt’s contributions, the steam engine was only useful for
pumping water; afterwards it was used for steam trains and steam ships, to
power grinding, weaving and milling, and became the engine of the industrial
mass production revolution. Watt provided the turnkey technology to automate mass production
and to speed up transportation.
Technology is the means of doing things. Hamilton and Webster (2012, in the
chapter ‘The Technological Framework’) define it as ‘the know-how or pool of
ideas or knowledge available to society’, but it is a bit more than that – it is the
application of that know-how to make things happen. Technology is about the
use of tools, equipment and machinery, the devising of systems and methods,
for solving problems and accomplishing goals. Understood in this way, it is the
core of what business is about.
Technological advance is about the advent of new technology in any period, and
its application to make change, to improve processes, or to change ways of
thinking, enabling further technological advance. Technological advance may
encompass anything from incremental improvements such as modifying
manufacturing processes, to quantum leaps such as the invention of the
telephone. Technological advance, or technological change, has been a constant
throughout human history, from stone axes to smartphones.
The technology of the stone axe may seem simple and remote to us, but it was
a breakthrough for Stone Age people (around 2.6 million years ago). Stone axes
were difficult to make, requiring knowledge and skills that had to be taught and
shared, and because they needed to be made with hammers, they were one of
the first examples of humankind’s abstract thinking, using tools to make tools.
However, these problems were worth overcoming, as they gave Stone Age
societies a new edge (literally) in hunting and surviving. Smartphones may be
the modern equivalent, a hand-held technology offering multimedia
interconnectivity to people in multiple locations, and portable processing power
for making calculations and performing a rich variety of work tasks. (Source:
Clark, 2012a).

When Bill Gates said the words that opened this unit, he was making a claim
for his corporation, Microsoft, but he was also being tautological. Technology,
by its very definition, changes the way we work, the way we live and the world
in which we live. This process may be described as innovation.
Firms innovate when they exploit new knowledge, often in the creation of new
products and services, and also sometimes in developing new processes or
adapting existing products or processes. Often, innovation involves new
intellectual property inventions or discoveries, and leads to the development of new intellectual
property, such as patents, copyrights and trademarks. The commercial
exploitation of such intellectual property is often what confers competitive
advantage in a market or industry.
Taking up and responding to technological change and innovation are among

the key differentiators of the global competitive market. These factors include,
as we saw in Unit 3, the speed of adoption of new technologies, the rate of
technology transfer, the commitment to research, and spend on research, by
government, universities and industry, and not least technological innovation.
When innovation spreads from one enterprise, country or industry to another,

this is known as technological diffusion. Internationalisation and globalisation
are trends that encourage technological diffusion, through activities including
trading, investment and competitive strategies. International technological
diffusion has been growing rapidly, notably since 1990, when high-technology
Asian tiger exports began to emerge from China, the so-called Asian tiger economies
emerged, and other growth indicators include foreign licensing agreements and
foreign ownership of patents.
In modern history we can identify a series of waves of innovation, including the

Recommended reading: the Industrial Revolution, from the late eighteenth century, beginning with water-
chapter ‘The Technological powered cloth weaving, the advent of steam power driving the production and
Environment’ in Brooks et al distribution of manufactured goods, an expansion in chemical industries at the
(2011); the chapter ‘Technological end of the nineteenth century with the development of high explosives and
Change’ in Harrison (2010); the
chapter ‘Technological Change synthetic dyes, and the growth of oil power in the early twentieth century, along
and International Production’ in with the application of electricity to industrial processes. The latest wave in the
Guy (2009); Stewart (1998); late twentieth century saw the emergence of microprocessor and telecom-
http://www.ipo.gov.uk/. munications technologies and the advent of the internet.
ga
nin ct
Identify an industry other than electronics or computing, where technology
Lear
ivit
8a is changing rapidly and innovation confers competitive advantage. Give an

y
example of recent technological advance in that industry, and show how

enterprises are using it for competitive advantage.
eedb ac
You may have identified pharmaceuticals, which is an industry where new
F
8a drugs and treatments are constantly being innovated (albeit the rate of
innovation appears to be slowing). For example, ranitidine, an anti-ulcer
drug better known by the trade name Zantac, was introduced in 1981
(1983 in the US) and was the world’s biggest-selling prescription drug by
1988. Zantac’s owner, Glaxo, secured a 17-year US patent from 1978

Unit
Unit 8
8 Technological
Technological Change
change
eedb ac
(although it was 1983 before they obtained permission to market the drug).
F
k
8a By the time the Zantac patent finally expired in 1997, it had been prescribed
to more than 240 million patients, and it was the most profitable
continued prescription drug ever produced. Glaxo invested a significant part of the
proceeds in new research and development, to try to invent the next
successful drug.
You may have identified biotechnology, the entire industry of which is
innovatory, and includes new fields like genomics and biorobotics. The
multinational agriculture corporation Monsanto has made significant
innovations in the field of genetically modified crops, having been among
the first to conduct field trials in 1987. In 1995 Monsanto developed an
insecticidal protein, Bacillus thuringiensis, which genetically modifies
agricultural seeds, and sells versions for (among other crops) maize and rice,
enormously popular in Asia, despite approval reservations in the European
Union. Monsanto has made a significant contribution to tackling food
shortages in underdeveloped countries, and has grown to be the world’s
leading company in this field.
You may have identified nanotechnology, which involves the manipulation
of matter on the atomic and molecular scales. Among the major
international companies involved in this sector are 3M, Johnson & Johnson
and Tetra Pak, and applications include bandages being infused with silver
nano-particles to heal cuts faster, and cars being manufactured with nano-
materials to require fewer metals and less fuel to operate in the future.
There are many other examples, such as:
■ robotics in manufacturing
■ robotics in agriculture
■ genetics in medicine
■ transplants and implants in medicine
■ keyhole surgery
■ laser video displays and other display technology innovations
■ biofuels
■ wind and wave turbines
■ solar power developments
■ new weapons technologies
■ simulators in many industries
■ artificial intelligence
■ ‘M-commerce’
■ 3D printing (see Unit 10).

8.2 Drivers of research, development and

innovation
Technological development is important for business as it creates:
■ Opportunities for new or improved products, leading to higher revenues,
profits and growth.
■ Opportunities for new or improved processes, leading to higher productivity
and lower costs.
■ Potential to freeze out rivals, as Apple did with its iPod MP3 player and
iTunes format.
■ Leverage for smaller enterprises to compete with larger ones.
However, the potential for firms to innovate and create new technological
research and development advantage is directly related to their investments in research and development
(R&D), which can be expensive and time consuming. How willing firms may
be to make that sort of investment will depend upon the intensity of
competition, how quickly their products become obsolete, how quickly
customer expectations change, the influence of government policy, and whether
their scale permits sufficiently large R&D (it is easier for bigger companies).
Note that there is not an absolute correlation between spend on R&D and
innovation – strategic alignment and a culture that supports innovation are
also important. And this is not to claim that some cultures (or some ethnic
groups) are more disposed to innovation, but that competing forces, such as
strongly embedded customs or traditions, can inhibit the pace of adoption of
innovation. (See Jaruzelski et al, 2011)
The rate of innovation varies according to sector, industry, size of firm and
geographical location. Taking the last first, in 2002 nearly 83 per cent of R&D
was carried out in the US, Japan and the EU, falling to 76 per cent by 2007 as
Asia increased its share, largely due to China, India and Korea (Hamilton and
Webster, 2012). The highest R&D spending remains concentrated in businesses
based in the most developed economies. Figure 8.1 (on page 133) shows R&D
by country as a percentage of GDP.
Table 8.1: Top ten spenders on R&D

Source: Jaruzelski et al (2011)
Rank Company R&D spending % of HQ location Industry
2010 ($bn) sales
1 Roche Holding 9.6 21.1 Switzerland Healthcare
2 Pfizer 9.4 13.9 USA Healthcare
3 Novartis 9.0 17.9 Switzerland Healthcare
4 Microsoft 8.7 14.0 USA Software and internet
5 Merk 8.6 18.7 USA Healthcare
6 Toyota 8.5 3.9 Japan Auto
7 Samsung 7.9 5.9 S. Korea Computing and electronics
8 Nokia 7.8 13.8 Finland Computing and electronics
9 General Motors 7.0 5.1 USA Auto
10 Johnson & Johnson 6.8 11.1 USA Healthcare

In terms of size, empirical evidence shows that the larger the firm the more likely
it is to invest more in R&D. Table 8.1 (on page 132) shows the top ten R&D
investors in the world in 2010, in absolute terms (converted to US dollars), and
Figure 8.1: R&D by
every one of them is a large, well-known multinational corporation.
country as percentage of
GDP
Source: OECD (2011) ◆ 1999
ISR ◆
FIN ◆
SWE ◆
KOR (1999, 2008) ◆
JPN ◆
DNK ◆
CHE (2000, 2008) ◆
USA (1999, 2008) ◆
DEU ◆
AUT ◆
ISL (1999, 2008) ◆
OECD (1999, 2008) ◆
AUS (2000, 2008) ◆
FRA ◆
BEL ◆
CAN ◆
EU27 ◆
SVN ◆
GBR ◆
NLD ◆
IRL ◆
NOR ◆
CHN ◆
LUX (2000, 2009) ◆
PRT ◆
CZE ◆
EST ◆
ESP ◆
ITA ◆
RUS ◆
NZL (1999, 2007) ◆
HUN ◆
ZAF (2001, 2008) ◆
TUR ◆
POL ◆
GRC (1999, 2007) ◆
SVK ◆
CHL (2008)
MEX (1999, 2007) ◆
% of GDP
0 1 2 3 4 5

You may be surprised that Apple is not on the list in Table 8.1. Despite a global
reputation for innovation, Apple is very selective about its investment. By 2012,
Apple’s R&D spend had risen to $3.4 billion, still not enough to feature in the
world’s top ten (http://techcrunch.com/2012/10/31/apples-rd-spending-climbs-
1-billion-to-3-4-billion-during-fy-2012/).
By way of comparison, Hamilton and Webster (2012) give the corporate

sources of the top five patent applications in 2008 (figures from the World
Intellectual Property Organization; http://www.wipo.int/) as Panasonic of
Japan, Huawei of China, Bosch of Germany, Koninkluke Philips of the
Netherlands and Qualcomm of the US. Hamilton and Webster also note that
small- to medium-sized enterprises may be important innovators by measures
other than R&D or patent applications, but they don’t say which measures.
In terms of industry, or sector, the highest intensity of R&D activity is in

pharmaceuticals, biotechnology, healthcare equipment and services, technology
hardware and equipment, and software and computer services. The lowest
intensity of R&D activity is in oil and gas production, industrial metals,
construction, food and drug retailing, transportation, mining and tobacco. As
a general rule, high- and medium-technology sectors spend more on R&D while
low-technology sectors spend less.
Global consulting firm Booz and Company have published online (2012) an
interactive graph, allowing comparison of R&D as a percentage of revenue and
total R&D spend by regions and industries as it changes from 2004 to 2011
(see http://www.booz.com/global/home/what-we-think/global-innovation-
1000/rd-intensity-vs-spend).
We may conclude that R&D, technological advance and innovation are driven
by the following:
■ Firm size, with larger firms better able to spread the risk across a variety of
innovative projects, although smaller firms often innovate as a means of
competing with larger firms.
■ Country base, with the more developed countries more likely to spend more
on R&D, and to apply for and secure patents.
■ Industry sector, as there is a greater imperative for firms in fast-moving,
technologically changing sectors to innovate in order to continue to
compete.
■ Business culture, where it is receptive to innovation, as many enterprises
see it as the only way to ensure future sales, profits and growth.
There remain other considerations that may contribute to innovation including

greater creativity at the individual, team and organisation levels, business
processes that accommodate this creativity, and factors such as the psycho-
logical climate, the physical environment in businesses, market conditions and
geopolitical culture. Innovation lies at the cutting edge of enterprise, involves
a high degree of risk, and is insufficiently recognised by reference to numerical
indicators. An old saying holds that necessity is the mother of invention, and
the essential truth at the heart of this is that when the conditions exist for
innovation, when, for example, there is a problem to be solved, it is more likely
that the means will be found to solve it. Sources: Anthony, 2012; Govindarajan
and Trimble, 2010; Ries, 2011; http://www.newandimproved.com/newsletter/
2120.php)

ga
nin ct
Towards the end of 2012, Scott Anthony wrote:
Lear
ivit
8b ‘Over the last three years I have consistently stated my belief that Asia was
y emerging as a global innovation powerhouse. It’s one of the primary
reasons why I moved to Singapore in early 2010... The overarching trend I
continue to see is a shift in the world’s innovation energy to the east.’
(Anthony, 2012)
Investigate the status of Singapore as one the world’s growing innovators.
What evidence can you find to support Anthony’s claim, for Singapore in
particular? What factors might account for this?
eedb ac
F
Singapore ranked third in the 2012 Global Innovation Index

8b (http://www.wipo.int/econ_stat/en/economics/gii/index.html), for the second
year running. From 2012 to 2015 Singapore plans to spend US$12.9 billion
in research, innovation and enterprise development. As far back as 2009,
the Boston Consulting Group surveyed 110 countries for ‘government
policies and corporate performance most encouraging to innovation’
(Business Week) and found Singapore ranked first – South Korea, another
Asian tiger economy, was second and the US was eighth
(http://www.doingbusiness.org/data/exploreeconomies/singapore/).
One of the reasons for this is the coordinated approach led by government,
linking research in universities to commercial opportunities in the business
sector (Jewell, 2012). Sheer commitment expressed in R&D investment is a
key factor, with the country’s planned expenditure on R&D set to rise to 3.5
per cent of GDP by 2015. Another factor is the ease of doing business in
Singapore, ranked first (of 185 countries) in the rankings compiled by the
World Bank, for both 2012 and 2013. Business Week suggests that a policy
of actively seeking to attract highly skilled foreign workers, and offering
scholarship funding to its citizens to pursue doctorates abroad, are major
contributory factors (http://www.businessweek.com/globalbiz/content/
mar2009/gb20090316_004837.htm). World-leading innovations from
Singapore include a haemostatic valve (for heart surgery) and a personal
alarm sounder for mobile phones (Jewell, 2012). It is clear that Singapore’s
success is not just built on high spend in R&D.
8.3 Global technology markets

Moore’s Law holds that computer processing power doubles every two years.
It is named after Gordon Moore, one of the founders of Intel, who put forward
the theory in 1965. The law has held since then; indeed Intel have argued the
rate of doubling has accelerated to every 18 months, although some forecasters
now believe it is slowing to once every three years. The trend cannot last
indefinitely, and was applied originally to computer hardware, and specifically
the number of transistors than can be fitted onto a microchip. But it illustrates
the rapid growth of high technology in the last half-century.

Technology is spreading rapidly around the world, and this is exemplified by

information and communications technology (ICT). India and other Asian
countries have benefited from advances in telecommunications, computing and
the internet, which enable customer contact centres and ICT support functions
to be located anywhere in the world. Indian people’s command of the English
language and idioms, coupled with low labour costs and increasing labour
skills, amounts to a winning combination. More than half of the world’s top
500 companies outsource ICT and related jobs to India.
The trends of internationalisation and globalisation are not confined to ICT. We

have seen in Units 1 to 5 how international trade has grown, supply chains
have become global, and increasing numbers of enterprises have opened up
global markets for their products and services. This is especially true in the
sphere of high technology, where there is a strong motive to seek the best
expertise, ideas and innovation around the world, to promote international
exploitation of national technologies and to encourage the globalisation of
innovation. Brands such as Apple, Microsoft and Google have global
recognition, global demand and global participation in new product
development.
We can see evidence of the internationalisation of technology development in:

■ growth of international trade in high technology products
■ growth of foreign-owned patents and trademarks
■ rising international trade in high-technology products.
We can see evidence of the globalisation of technology development in:

■ global exploitation of technologies through patents, licences, and so on
■ global sourcing of R&D through alliances and joint ventures with foreign
enterprises and universities
■ global ‘outsourcing’ of R&D to foreign subsidiaries (Mani, 2001).
As in other spheres, the trends towards internationalisation and globalisation

are uneven, with enterprises from some countries more internationalised and
globalised than others. The US, Europe and Japan have led the way, but are
increasingly being overtaken by China, India and other Asian economies. Figure
8.2 shows the changes in world market shares (exports) of the leading countries
from total trades in high-technology products between 1999 and 2005. The
trend clearly shown is that China is growing faster than the US, Europe and
Japan, with substantial growth in its manufacturing capabilities.
ICT and the internet are key factors in enabling global markets for technology
development and innovation. The following timeline, dating backwards from
2012, provides a frame of reference (http://www.globalization101.org/
information-technology/):
16 years ago: internet commercialised
15 years ago: first mobile phone with internet connectivity
13 years ago: Google named the search engine of choice by PC magazine
10 years ago: Blackberry launched
7 years ago: Facebook launched

5 years ago: Twitter launched

4 years ago: iPhone, the first of the smartphones, introduced
3 years ago: Groupon introduced
1 year ago: 17 million smart tablets sold – estimated 100+ million by 2014
Every 60 seconds (so it seems): new apps, tailored to users’ specific needs
created
Web 2.0 We might add the development of Web 2.0 over the past ten years or so, and
the greater use by business of social media such as Facebook, Twitter and
LinkedIn. To understand the relevance to business of these developments in
new hardware, software and connectivity, we need to look at their application
to international trade.
25.00
● ●
●
20.00 ◆ ◆ ◆
◆ ◆ ● ◆
●
◆ ● ●
15.00
■ ■
■ ■ ■ ▲
■ ■
10.00 ▲
▲
▲
5.00
▲ ▲
▲
0.00
1999 2000 2001 2002 2003 2004 2005
Figure 8.2: Leading countries’ market share in international technology trade

Source: Gatelli and Tarantola (2007)
Case Study
E-commerce
E-commerce, powered by the internet, is a vivid example of how
technology can expand trade beyond any constraint of national borders.
E-commerce is helping create global markets for many goods and services,
and facilitating technology transfer and innovation across markets.
In 2002, an estimated 10 per cent of the world’s population was using the
internet. By 2010, this estimate had risen to 30 per cent, or about two
billion people. Europe had roughly double the number of users as North
America, and Asia had roughly double the number of users as Europe,
with well over 800 million people. See Figure 8.3 for 2011 figures
showing continuation of this trend. In addition, nearly every business of
any substance is using the internet, with over 140 million domain names
in current use.

1.1%
6.2% Oceania/
Africa Australia
10.4%
Lat Am/Caribb
12.0%
North
America
3.4%
22.1% Middle East
Europe
44.8%
Asia
Figure 8.3: Internet users in the world by global region

Source: Internet World Stats – www.internetworldstats.com/stats.htm
Basis: 2,267,233,742 internet users on 31 December 2011
Copyright © 2012, Miniwatts Marketing Group
If the internet is one of the drivers of internationalisation and

globalisation, then e-commerce may be said to be the force that is making
it a reality.
E-business is the term for the application of ICT and the internet to all
aspects of business (including supply chain management, e-procurement,
enterprise systems such as finance and HR, in-company intranets, and so
on). E-commerce refers specifically to trade, the interaction of buyers and
sellers, online. (Note that some sources now distinguish ‘m-business’ or
‘m-commerce’, essentially the same things as e-business and e-commerce,
but designed to be used via mobile or handheld devices.)
E-commerce takes the form of both B2B (business-to-business) and B2C
(business-to-consumer) transactions. B2B is estimated to represent around
double the sales volume of B2C e-commerce. This is significant, bearing in
mind that online retailing (B2C e-commerce) is rising to close to 10 per
cent of all retailing. In the US, B2B e-commerce is estimated to be around
$559 billion by the end of 2013 (Forrester). The trends all point upward.
E-commerce includes ‘e-tailing’ or virtual storefronts by retailers on the
world wide web world wide web, the gathering of supplier and customer data using the
web and social media, email communication between buyers and sellers,
secure monetary transactions, and electronic data interchange (EDI), the
business-to-business exchange of data.
The benefits of e-commerce include: speed; safe, secure and verifiable
transactions, using EDI; lower costs due to reduced travel and staff time;

better warehouse logistics, with more precise control of inventory; better

integration of support functions due to shared real-time information and
communications; and more efficient strategic alliances.
The problems and limitations of e-commerce include: concerns around
privacy, lack of trust and lack of security; technical issues with both
hardware and software; expensive offline marketing costs; ongoing
distribution and storage costs; lower barriers to entry for new
competitors; and the persistence of offline competition.
Whatever its pros and cons, e-commerce is both an enabler of global
markets for technology (and other products and services) and an
innovative new technology in its own right.
(Sources: Turban et al, 2012; Chaffey, 2011;
http://www.internetworldstats.com;
http://blogs.forrester.com/category/ecommerce)
ga
nin ct
Return to the example of the organisation you selected in Unit 1. Bearing in
Lear
ivit
8c mind that the discovery or invention of new materials is an important area

y
of technological development, give some examples of new materials that

have affected your chosen organisation and/or give examples of imaginary
(but feasible) new materials that could affect your chosen firm or industry.
eedb ac
F
Real examples you may have identified include:

k
8c ■ advanced ceramics in car engines

■ carbon fibres in aircraft manufacture
■ superconductors in electronics
■ Teflon in lubricants and cookware
■ new fabrics such as Gore-Tex
■ fibre optics in communications
■ new materials in food technology
■ nano-materials.
Your examples should be more than just a list. You should amplify by
describing how the new materials have impacted on the firm or industry –
have they lowered costs, improved performance or durability, improved the
customer experience, helped establish premium value and prices, opened up
completely new markets, for example?

8.4 Protecting innovation

The internationalisation and globalisation of technology markets mean that
information and ideas can spread around the world very quickly, new products
and services may be copied, and new processes may be imitated. The protection
of innovation, technological advances and ideas with commercial potential is
important to businesses that invest heavily in R&D, as otherwise their R&D
investments may be wasted. Most developed nation states have extensive legal
arrangements for protecting patents, designs, trademarks and copyrights within
their jurisdictions.
However, there are a number of problems in protecting inventions and innova-

counterfeiting tions worldwide. It is impossible to prevent counterfeiting altogether, especially
when counterfeiters remote from the product’s or brand’s country of origin
(typically acting in less developed countries with weaker policing) evade law
enforcement and produce replicas that are difficult to distinguish from the
genuine article. Luxury consumer goods such as designer label clothing and
accessories are particularly susceptible to counterfeiting (with forged brand
logos), as are heavily taxed goods such as cigarettes and alcohol. Nevertheless,
international law enforcement targets counterfeiters with the financial support
of the multinational corporations that own the brands, due to their wealth, an
option that is not available to smaller enterprises. The International Anti-
Counterfeiting Coalition estimates the scale of the problem at US $600 billion
per year (https://www.iacc.org/about-counterfeiting/).
More fundamental problems arise from the difficulties in extending intellectual

property rights beyond the country of origin.
Cost. There is the barrier of cost, as the charges for filing patent applications
in some jurisdictions may be high, perhaps prohibitively high, and enforcing
protection in the courts, when necessary, can also be very expensive. Hamilton
and Webster (2012) note that it is much more expensive to secure patent
protection applying across the European Union than the United States, with
the EU’s own calculation that the cost across 13 of its member states is about
€20,000 or about ten times the cost in the US. Attempting to secure patent
protection all over the world is much more costly.
Multiple applications. The administrative inconvenience, and again cost, of

submitting applications for patents or trademarks in many different countries
all with different rules and regulations, meaning the same application cannot
simply be repeated, represent a barrier to international protection. Translation
into multiple languages is just one dimension of this, and only large firms able
to retain large legal teams and other experts can hope to overcome this.
Differing protection periods. The period of time that legal protection covers
varies significantly from one jurisdiction to another. For example, standard
copyright is 70 years in the European Union, but 95 years in the US, and design
protection covers 15 years in Japan but 20 years in Germany. These variations
make it more difficult to ensure continuous worldwide protection, and add to
the cost and administrative burdens.
All of these problems point to the need for harmonisation of international

protection of intellectual property, but progress is slow. It began with the Paris

Convention for the Protection of Industrial Property in 1883, revised and

amended in 1900, 1911, 1925, 1934, 1958, 1967 and 1979. This remains an
ongoing and incomplete process, administered by the World Intellectual
Property Organization (http://www.wipo.int/treaties/en/ip/paris/trtdocs_wo020.
html).
industrial espionage Another issue is industrial espionage, typically involving theft (or attempted
theft) of trade secrets belonging to one firm, by another. This is distinct from
pure espionage, or spying, which is about inter-country theft of secrets, a
national security question, and refers instead to espionage for commercial
purposes, effectively the theft of a firm’s R&D investments. Examples include:
■ A lawsuit in 2003 by Lockheed Martin against Boeing, over theft of
confidential documents in competitive bidding for US government contracts,
which led to revocation of $1 billion of US government contracts with
Boeing (http://news.bbc.co.uk/1/hi/business/4595745.stm).
■ An attempt in 2006 by an employee of Coca-Cola to sell the formula for a
soft drink to Pepsi for $1.5 million (Clark, 2006).
■ Chinese hackers stealing programming code and users’ email account
information from Google in 2010, which provoked a diplomatic row
(Branigan and Anderson, 2010).
Clearly, one important way in which firms need to secure their intellectual
property is by putting in place security measures to prevent and thwart such
theft. Note that it is important to distinguish illegal industrial espionage from
legal competitive intelligence, which involves acquiring information from public
sources – firms must also be careful to ensure that no trade secrets leak in this
way (Benny, 2013).
Protection of intellectual property is clearly in firms’ interests, and yet it may

not be in consumer interests (White, 2012). The argument here is that patent
protection stifles innovation for a period, and prevents new products, or
product variations, reaching consumers. Some argue that this represents over-
regulation of markets, and limits choice. For example, the first iPhone was
released by Apple in June 2007, and the first comparable competitor smart-
phone, the HTC Dream, not until October 2008, by which time Apple had sold
over 5 million iPhones. Some argue that first-mover advantage (see the
discussion in Unit 5) is sufficient reward for innovation, and patent protection
is not necessary. A related argument is that innovation is essentially a collabora-
tive process, with incremental innovations building on one another, and that no
single contributor deserves to monopolise the market benefits, as a result of
being the best at negotiating the legal process for patent protection. (Guglielmo
Marconi is popularly credited with inventing radio, largely because of winning
the patent battles against Nikola Tesla, despite the balance of contemporary
evidence suggesting Tesla was the more important innovator; http://www.
pbs.org/tesla/ll/ll_whoradio.html.)
Further questions about whether patents help or hinder innovation arise from
concerns that the patent system favours more developed countries, as the less
developed ones tend to be more users than generators of innovation, and so
are forced to pay higher prices.

ga
nin ct
Web 2.0 is the term popularly used to describe the technological
Lear
ivit
8d development of the world wide web since around 2004 (although the term
y
existed before then), whereby web pages moved from being rather static to
more dynamic, with more interactive features and more user-generated
content. To what extent do you believe Web 2.0 enables or supports
innovation, and what issues does it raise for protection of intellectual
property? Illustrate your opinions with examples.
eedb ac
F
Many firms use Web 2.0 technologies as a key customer interface, such as
8d having a presence on Facebook. More broadly, firms use Web 2.0 for
knowledge management, crowdsourcing, customer relationship
management, and learning and development, all of which may be sources
crowdsourcing of ideas and innovation. Collaborative communities such as blogs, wikis and
social networks are ideal for colleagues to discuss and develop innovation,
and they support the theory that innovation is essentially collaborative or
co-creative, and not typically the work of an isolated genius. Software
developers are especially keen on this sort of approach, and large
technology companies are well disposed towards it. (See
http://www.innovationmanagement.se/2011/03/16/innovation-in-large-
companies-the-use-of-web-2-0-as-an-innovation-pathway/)
Market research is another area where Web 2.0 technologies may be used,
such as for online focus groups, to gather and process huge volumes of
customer information to inform R&D. And customer activity, using Web 2.0
applications, is itself a valuable source of market research, tracking actual
consumer behaviour online. See the case study in the chapter ‘The
Technological Framework’ in Hamilton and Webster (2012) for more details.
The existence of online records of conversations, sharing of designs and
code, and so forth, enables firms to track progress of new product and
process development, and to assert ownership, but it also means much of
this information is more exposed to the risk of theft. This arises not so much
from external hacking (although that is certainly a possibility) as from the
ease by which an employee may steal the information from the firm. This
places a significant onus on trust, and on ensuring employees are suitably
rewarded and motivated to remain loyal to the firm. It also places
considerable importance on online security.
8.1 What is the difference between a patent and a copyright?
8.2 Which global region is growing fastest in R&D expenditure? Support
your answer with evidence and examples.
8.3 Explain why B2B e-commerce is much larger than B2C.
8.4 What sort of risks do firms take with their intellectual property when they
do business in China?


8.1 Copyright is a right that applies when a work is fixed, by being written
or recorded by an original author. A patent is a way of protecting some-
thing practical, such as a formula, a unique process or a distinctive
technique. Copyright usually need only be asserted by the author, whereas
a patent must be applied for and agreed by an appropriate authority.
Copyright usually lasts for the lifetime of the author, whereas a patent is
for a set period, varying depending on the jurisdiction.
8.2 The fastest growth is in Asia, notably China, which has the second-highest
R&D spend in the world, behind the US, spending as much as Germany,
France and Italy combined. South Korea is also in the top seven, and other
Asian tiger economies rank highly. China has rapidly grown its R&D
spend over ten years, outpacing GDP growth, and doubling its R&D
intensity from 1999 to 2009. See learning activity 8b on Singapore, above,
and these sources (http://www.euractiv.com/innovation-enterprise/world-
innovation-landscape-asia-analysis-517583; Global Innovation Index
2012; Wood, 2012; Simon, 2011).
8.3 A key reason is that the B2B market in general is bigger than the B2C
market. Furthermore, some of the problems and issues we identified for
e-commerce apply more to the consumer market, such as concerns about
privacy, while some of the benefits apply more to the business market,
such as warehouse logistics. B2B transactions also tend to be much larger,
more concentrated, and are more likely to involve sustained relationships
with repeat selling to the same buyers, because of shared interests in
maximising profits.
8.4 Firms doing business in China are entering a very differently regulated
market from say, the US, Europe or Japan. This exposes them more to
the risks of piracy and counterfeiting, and theft of their intellectual
property. This is not because the Chinese are in any way more disposed
to this sort of criminal activity than the other countries mentioned, but
because the protections businesses take for granted may not exist, and a
culture of respecting intellectual property is less developed. There are laws
protecting businesses, and as is the case in entering any new foreign
market, firms need to acquaint themselves with the legal environment and
ensure they are acting to protect their interests. (See Gupta and Wang,
2001; Harris, 2011).
Summary
Innovation and technological change are the leading edge of human endeavour
in general and business activity in particular.
In this unit you have examined the meanings of technology, technological

change and innovation, and how they are managed by businesses. You have
identified the drivers of R&D and innovation, and explored some of the issues
for firms in harnessing innovation to improve revenues and profits and achieve
business growth. You have evaluated how important global markets are for
technology development and innovation, and you have learned more about the
issues involved in protecting innovation on an international scale.

Overall, you should have gained a better appreciation of the technological

environment in which business operates, and the challenges posed by tech-
nological change.

Unit 91 Socio-cultural and
environmental issues
‘There is no such thing as society.’

Margaret Thatcher, British Prime Minister, 1987
Introduction
Margaret Thatcher went on to qualify, ‘There are individual men and
women, and there are families. And no government can do anything except
through people, and people must look to themselves first’; however, her
statement typified the ethos of her government and the prevailing culture
of Britain in the 1980s. Society may be difficult to define, and a difficult
concept to understand, especially for a business focused on the hard
numbers of profit-and-loss accounts and balance sheets. But no business
operates in a vacuum, and rather must be acutely sensitive to changes in its
external environment including social norms and the values and
expectations of the people who are their stakeholders and customers.
Concern for wider issues in society, and for the ecological environment as
well, is often of direct benefit to business, and can actually help fulfil its
objectives. Enterprises need to be responsive to stakeholder wishes and
customer needs, and if business objectives are aligned with broader social,
cultural and ecological issues, then that is more likely to be the case and
everyone should benefit.
In this unit, you will examine the socio-cultural and ecological environment
of business, the last two of the six dimensions of the PESTLE analysis
framework. You will consider the dynamics of society as they impact on
business, including demography, social structure, culture and ethics, and
look at how these are further complicated for international businesses.
You will explore the ecological environment, and the key developments in
it that impact upon business, in some ways changing business altogether.
This unit will conclude your study of the six dimensions of the PESTLE
analysis framework for understanding the business environment and how
they may affect the operations of business organisations.

9.1 Identify the main elements of the social and cultural environment.
9.2 Analyse the impact of socio-cultural differences on business in
international context.
9.3 Examine how responsiveness to ecological issues can benefit
business.
9.4 Evaluate the impact of globalisation on the ecological environment.

Prior knowledge
This unit is the fourth of four – the others being Units 6, 7 and 8 – that consider
studies Units 1 and 3, which introduce PESTLE, and preferably Units 6, 7 and 8,
which deal with the political, economic, financial, legal and technological
dimensions. In addition, given the scope of this unit, it would be beneficial,
although not essential, to have some understanding of social, cultural and
environmental issues in the contemporary world.
Resources
The relevant reading for this unit may be found in the chapters, ‘The Socio-
cultural Framework’ and ‘The Ecological Environment’ in your core textbook
(Hamilton and Webster, 2012). Supplementary references are provided in the
text.
9.1 The social and cultural environment

Society and business
Society is made up of many people and many things, some of which are easy
to recognise and measure – quantifiable – while others are less tangible, but
qualitative widely recognised – qualitative rather than quantitative issues. We may use
some of the quantitative data to compare different societies, while recognising
that this gives us an incomplete picture of those societies overall.
One example of this is demography. The demographics of a country include:

quantitative population size, with data on birth rates, death rates and migration rates; age
distribution; gender distribution; ethnic groups; and data about the workforce,
including participation rates. Demographic information is important to any
demography business in understanding its customer base, and the potential for it to sustain
its value chain in any country, including maintaining levels of employment,
accessing the right skills, and the participation of the suppliers it needs.
If you live in a country where population growth is relatively static, you may
not have considered population change as having much effect on the economy
and specific businesses within it, but countries with sharply declining
populations find it difficult to sustain economic activity, while those
experiencing significant population growth have a different set of problems.
The most populous country on earth is China, with 1.3 billion people or nearly
20 per cent of the world’s population. From the 1950s, China’s government
began to see population growth as a constraint on economic growth, and since
one-child policy 1979 has implemented a one-child policy to control the growth in the birth rate
(http://www.chinability.com/Population.htm).
China’s population continued to grow for decades (it is now levelling off)
despite lower birth rates, largely because of the global phenomenon of an
ageing population. Improved health care, and increasing life expectancy, mean
an increasing proportion of old people in the population, which has many
economic implications. There is a larger market for the sort of products and

Unit 9 Socio-cultural and environmental issues
services favoured by older people – the so-called ‘grey dollar’; there is an

international trend towards raising retirement ages, increasing competition in
the workforce, increasing demands on pension funds, and where these are
publicly provided, the tax burden to support them, and increased dependency
rates.
World population has been growing since the end of the Second World War,
from 2.5 billion in 1950 to 4.1 billion in 1975 to 7 billion in 2011. India is the
second most populous country with 1.2 billion people, and almost 80 per cent
of the world’s populations live in its poorest countries. The main implications
for business are that there are growing markets, but constraints on buying
power linked to poverty and shortages, rising demand, growing labour pools
and increasing competition. Table 9.1 shows the main trend, and the regional
distribution, of world population, with a forward projection to 2050.
Table 9.1: World population growth (millions)

Data from United Nations (2004)
1950 1999 2008 2050
World 2521 5978 6707 8909
Africa 221 767 973 1766
Asia 1402 3634 4054 5268
Europe 547 729 732 628
Latin America & Caribbean 167 511 577 809
North America 172 307 337 392
Oceania 13 30 34 46
social structure Another example is social structure. This includes, but is not limited to: the
division of income, wealth and by extension power and influence in a country;
the division into social classes such as industrial workers, peasants, entre-
preneurs, a poor underclass, and a middle class of professionals and
administrators; the division between urban and rural populations; and division
into tribes, clans or castes.
India has the best-known example of a caste system, where people are fixed in
their social status according to their occupations, and these roles are fixed by
heredity. The caste roles are shown in Figure 9.1 (on the next page), and have
social mobility little or no social mobility. Thus occupations are fixed not just for life, but for
descendants’ lives, and no employer can retain people from the wrong castes for
certain roles, despite government attempts to overcome this restriction
(Economist, 2007).
The social infrastructure of a country includes aspects such as housing, health

and education, and the extent to which these services are widely available
influences the stability of the workforce and affects the buying power of
customers.
Quantitative data may be used to measure these indices of social structure, such
as literacy rates, access to levels of education, or emphasis on type of education
(scientific, technical, the arts, and so on) measured by funding and participation
rates. This is where questions of social structure start to blur into aspects of
social culture.

Brahmin
(priest)
Kshatriya
(ruler, warrior)
Vaisya
(businessperson, professional,
civil servant)
Sudra
(semi-skilled or unskilled worker)
Pariah
(outcast, ‘untouchable’)
Figure 9.1: India’s caste system
Culture and business

A national culture includes: its language(s); religion, ethics and moral codes; its
values and taboos; the prevalent attitudes of its people (expressed in social
norms and rules of behaviour); social habits, manners and customs; its music,
literature, art and architecture; personal presentation and dress codes; diet;
aesthetics; and so forth.
The culture of a country means a great deal for how businesses operate there.
National culture is much harder to quantify than social structure, as it includes
many intangible elements, but a notable attempt has been made by Professor
Geert Hofstede (2003), who identified five dimensions of culture:
■ Power/distance.
■ Individualism/collectivism.
■ Uncertainty avoidance.
■ Masculinity/femininity.
■ Long-term orientation.
The power/distance dimension may be measured by an index of the extent to

which the less powerful members of organisations and institutions (like the
family) accept and expect that power is distributed unequally. This represents
inequality (more versus less), but defined from below, not from above. It
suggests that a society’s level of inequality is endorsed by the followers as much
as by the leaders. For business, this has relevance to the transferability of a
management style from one culture to another. Examples of countries with high
power-distance index scores would be China, India and the Arabic-speaking
countries; examples of low scores would be Japan and Australia.
The individualism/collectivism dimension considers the degree to which individ-

uals are integrated into groups. At the individualist end of the continuum, we
find societies in which the ties between individuals are loose: everyone is
expected to look after himself or herself and their immediate family. At the

collectivist end, we find societies in which people from birth onwards are
integrated into strong, cohesive groups, often extended families (with uncles,
aunts and grandparents) that continue protecting them in exchange for
unquestioning loyalty. The term ‘collectivism’, in this sense, has no political
meaning: it refers to the group, not to the state. For business, this has relevance
for ways of individual and team working. The United States is a typically
individualistic national culture; Japan and China are more collectivist.
The uncertainty avoidance dimension deals with a society’s tolerance for

uncertainty and ambiguity. It measures to what extent a culture conditions its
members to feel either comfortable or uncomfortable in unstructured situations.
Unstructured situations are novel, unknown, surprising and different from the
usual. Uncertainty-avoiding cultures try to minimise the possibility of such
situations by strict laws and rules, safety and security measures, and on the
philosophical and religious level by a belief in absolute truth. People in
uncertainty-avoiding countries also tend to be more emotional, and motivated
by inner nervous energy. The opposite type, uncertainty-accepting cultures, are
more tolerant of opinions different from what they are used to; they try to have
as few rules as possible; and on the philosophical and religious level they are
relativist and allow many currents to flow side by side. People within these
cultures are more phlegmatic and contemplative, and not expected by their
environment to express emotions. For business, all of this has serious
implications about attitudes to risk. Examples of countries with low scores on
the uncertainty avoidance index include Indonesia and Singapore; high-score
examples include Greece and Italy.
The masculinity/femininity dimension is perhaps the most controversial of

Hofstede’s five, referring to the distribution of roles between the genders, which
is another fundamental issue for any society, and to which a range of solutions
are found. Hofstede, who is also interested in organisational culture, made a
global study of IBM that revealed:
■ Women’s values differ less among societies than men’s values.
■ Men’s values from one country to another contain a dimension from very
assertive and competitive and maximally different from women’s values on
the one side, to modest and caring and similar to women’s values on the
other.
Hofstede calls the assertive pole ‘masculine’ and the modest, caring pole
‘feminine’. The women in feminine countries have the same modest, caring
values as the men; in the masculine countries they are somewhat assertive and
competitive, but not as much as the men, so that these countries show a gap
between men’s values and women’s values. For business, this impacts on
organisational culture, the roles taken by men and women in the business,
especially in management, and the values the organisation presents to the
market. The UK and Japan are examples of more masculine cultures; the
Scandinavian countries have more feminine cultures.
The long-term orientation dimension, and its opposite, short-term orientation,

were added by Hofstede later, following studies among students in 23 countries
around the world, using a questionnaire designed by Chinese scholars. Values
associated with long-term orientation are thrift and perseverance; values
associated with short-term orientation are respect for tradition, fulfilling social

Recommended reading: the obligations and protecting one’s ‘face’. Both the positively and the negatively
chapter ‘The International rated values of this dimension are found in the teachings of Confucius, the most
Cultural, Demographic and Social influential Chinese philosopher, who lived around 500 BC; however, the
Environment’ in Brooks et al dimension also applies to countries without a Confucian heritage. One obvious
(2011); the chapter ‘Culture and
Organizations’ in Capon (2009); implication of this for businesses is the extent to which they are content to
the chapter ‘The Demographic, accept short-term losses in pursuit of long-term gains. Apart from China, other
Social and Cultural Context of East Asian countries such as Taiwan and South Korea have a more long-term
Business’ in Worthington and orientation; countries with a more short-term orientation include Nigeria,
Britton (2009).
Germany and Canada.
ga
nin ct Think about the business you selected for your study in Unit 1, and consider
Lear
ivit
9a its operation in its home country relative to its operation in another market
y
it has entered in another country. Identify the differences that arise from the
differing social structure and demographics, and the differences that arise
from the different culture. How easy was it for the business to adapt?
eedb ac
The example of Sony is instructive. Sony, the multinational media
F
9a conglomerate, takes its culture from its home country, Japan, where
groupism dominates – the culture that the collective needs and goals of
employees are more important than individual needs – and there is a culture
groupism of considerable respect for authority and for seniority. In Sony, this
expressed itself as a hierarchy where experienced engineers were more
esteemed than even senior executives. In 2001 Sony formed a joint venture
with Ericsson, the Swedish mobile phone manufacturer, and initially
headquartered the venture in the UK. This made sense as the language of
the joint venture was English, rather than Japanese or Swedish, but the
venture found other cultural frictions. Ericsson’s Swedish culture was more
individualistic, but decision making was more collegiate, due to
decentralisation and democratisation of management, neither of which was
the norm for Sony. Ericsson employees found Sony to be conservative
(‘more like a family business’); Sony employees found Ericsson to be too
informal (‘a network culture’). The culture clash is often referenced, but may
be overstated, as there were other business reasons for the failure of the
venture. In 2012, Sony acquired Ericsson’s stake in the venture and the
headquarters was transferred to Japan. (Sources: Arthur and Gartside, 2011;
Singh, 2011; Ahmed and Pang, 2009; Frendberg, 2006)
9.2 Impact of socio-cultural differences on

business
Business ethics is the term used to describe the philosophy of a business, and the
values – either explicit or implicit – that inform its work. To succeed in any
market in the long term, the ethics of a business have to be consistent with the
ethics of the country and people who make up that market. We may recognise
this by reference to the following aspects:
■ Religion and secularism.
■ Degree of centralisation.

■ Individualism/collectivism.
■ Language.
■ Communications.
■ Time.
Religion and secularism

Religion is important to many societies. Some enshrine it in their constitution
and laws, and even where such practice has become obsolete, legacies remain.
Islam’s five pillars, Christianity’s ten commandments and Buddhism’s eight
precepts are all examples of religiously inspired ethical codes that influence
behaviour and the conduct of business. Some religions lay down strict rules
about preparation and consumption of foods, which have a major impact on
food businesses, and some limit trade on certain religious days and dates, which
affects all businesses. We saw in Unit 6 how Sharia law, and other forms of
theocratic legal systems, constrain what business may do, notably in banking
and financial services.
secular Some states are explicitly secular, which is to say they are not governed by any
religious precepts. This is a common characteristic of states with multiple
religions and a policy of toleration. Some secular states may inhibit overtly
religious enterprises from operating in some contexts, such as schools in the
US, but on the whole secular states impose fewer restrictions on business. There
is a trend towards secularism in many of the most developed countries,
including the US and Europe.
Centralisation
Hofstede’s power/distance index implies that more centralised control fits with
societies with large power distances, such as many African and Arab countries,
while decentralisation fits with societies with small power distances, such as
the US and the UK. We should expect companies like Emirates Bank and
Kuwait Petroleum Corporation to have more centralised control, and
companies like General Motors and Pearson to have less centralised control, as
indeed is the case.
Individualism/collectivism
Asian and Latin American cultures tend to be more collectivist, while European
and North American cultures tend to be more individualistic. This is a broad
generalisation, but is borne out by some specifics. In relatively collectivist Japan,
changing jobs for career advancement is considered unethical, whereas this is
commonplace and widely accepted in the more individualist United States. In
US manufacturing industry, executive pay is 28 times that of the average
employee, while in Japan the top executive earns about 10 times the average
employee (Mitchell, 2003). In the wake of the global financial crisis, complaints
have been expressed in the relatively individualist UK that banking executives’
salaries are too high.
Language
Language is one of the most obvious indicators of culture. English is de facto
the global language of business, and the internet is driving this, as we saw in
Unit 8. However, many people speak Chinese/Mandarin, Arabic, Hindi or

Spanish as their first language, and businesspeople who can speak to these
employees and customers in their own language will hold a distinct advantage.
Many businesses continue to pursue translation and localisation services to
ensure adaptation of their marketing messages and product information to
different cultures.
Communications
The ways in which people communicate at work are clear indicators of cultural
difference, with Europeans and North Americans accustomed to formal
meeting agendas, while Asians prefer a looser approach to meetings, taking a
more holistic if less structured approach to discussing issues. Negotiations are
another example – Japanese and Koreans prefer to focus on areas of agreement,
trusting that other details that may be in dispute will eventually be accom-
modated, while American and Australian negotiators will focus on the areas of
dispute, pressuring their opposite numbers to reach agreement.
Time
Different cultures hold different attitudes to time, and some commentators
distinguish between clock time cultures and event time cultures, where the
former let the clock determine their behaviour and the latter follow the natural
course of events. Businesspeople from clock time cultures like North America,
Western Europe and Australasia place great emphasis in turning up on time to
meetings, whereas businesspeople from event time cultures like the
Mediterranean, Middle East, South Asia and Latin America take a more relaxed
approach.
ga
nin ct Mandarin is the most commonly spoken first language in the world. Should
Lear
ivit
9b we expect it to become the international language of business in the

y
future? Explain why.
eedb ac
Mandarin is spoken by 900 million people as their first language, or about
F
9b 14 per cent of the world’s population. English is spoken by 375 million

people as their first language. However, few people speak Mandarin as a
second language, with the total number of speakers around 1025 million,
and an overall total of 1200 million speakers of all variations of Chinese. By
contrast, many people, including most Europeans, speak English as their
second or third language, with total speakers around 1500 million. There
are 100,000 native English-speaking language teachers working in China,
and the trend (fuelled by the internet) is towards even greater adoption of
English. So despite the growth of the Chinese economy, and the size of the
Chinese population, the current evidence indicates that Chinese people are
adopting English rather than the other way around (Clark, 2012b).

9.3 The ecological environment

There is growing public and business awareness of issues in the ecological
environment, fuelled by the impact of significant natural disasters such as the
2004 Indian Ocean tsunami, and disasters partly caused by enterprises, such as
the 2010 Deepwater Horizon oil spill and the 2011 Fukushima Daiichi nuclear
accident. Advances in science have revealed a number of issues of which people
were previously unaware, and some new issues have emerged in recent years.
Esty and Winston (2006) identify the following top ten global ecological issues:
greenhouse gases ■ Climate change – build-up of greenhouse gases leading to global
warming.
■ Energy – carbon source depletion and potential fuel shortages.
■ Water – quality issues and shortages.
■ Biodiversity and land use – habitat destruction, species decline, and so on.
global warming
■ Chemicals, toxins and heavy metals – contamination and health issues.
■ Air pollution – risks to public health.
■ Waste management – storage, disposal and toxicity.
■ Ozone layer depletion – global problems from damage to the
carbon source depletion stratosphere.
■ Oceans and fisheries – depletion of fish stocks and damage to marine
ecosystems.
■ Deforestation – leading to soil erosion, flooding and other consequences.
biodiversity There may well be other ecological issues of equal significance. The challenges
for businesses are to minimise the impact on these issues by their own business
activities, and those of firms in their supply chain, and to look for ways to
directly tackle these issues, and perhaps accomplish greater business success by
heavy metals doing so. Responsiveness to ecological issues is not just about ethical practice
or being seen to do the right thing, but about looking to achieve competitive
advantage through an ecologically positive business strategy. The case study of
Puma is instructive.
ozone layer depletion Case Study

Puma
Puma is a sport and lifestyle company, specialising in sport footwear,
owned by the French multinational conglomerate Pinault-Printemps-
Redoute, with 2010 revenues of €2.7 billion and 11,000 employees
worldwide. Puma was recognised for its ecological business strategy in
the British media, when it won the biodiversity category and was also the
overall winner of the Guardian Sustainable Business awards in 2012.
In November 2011, writing in Puma’s first ever ‘Environmental Profit &
Loss Account’, its executive chairman, Jochen Zeitz, said, ‘I sincerely hope
that the Puma EP&L and its results will open eyes in the corporate world
and make the point that the current economic model, which originated in
the industrial revolution some 100 years ago, must be radically changed.
A new business paradigm is necessary and a transformation of corporate
reporting will be central to this – one that works with nature and not
against it.’

While some businesses work solely to financial measures of performance

and risk, others have more complex scorecards and dashboards, among
other things taking account of the long-term availability of natural capital.
Puma is working to a ‘sustainability scorecard’ and by 2015 aims to cut
total water use, energy, CO2 emissions and waste by 25 per cent, against
a 2010 baseline, and to make sure that at least 50 per cent of its products
are made from more sustainable materials. In one project, it has
developed Puma Re-Suede made of completely recycled polyester fibres,
recovered from manufacturing scrap waste. Due to an advanced chemical
recycling process, producing Re-Suede rather than using original new
material cuts energy use and emissions by 80 per cent.
(Sources: Beavis, 2011; Anderson, 2011; http://www.puma.com)
Puma is not an isolated example. Many global enterprises recognise that it is

no longer enough to think about land as simply something to cultivate for
agriculture, or to build on for industry. There are questions of land use, soil
and geology; oceans, seas and freshwater supplies; plant and animal life;
minerals, chemicals and gases; air, atmosphere and climate issues; and changes
to all of these. Business, especially international business, faces unprecedented
environmental challenges, as it attempts to make the best use of what nature has
to offer, and plans to ensure natural resources continue to be available in the
future.
Other examples of businesses using ecological strategies for competitive

advantage include:
■ Toyota developed an energy-efficient car, the Prius, effectively invented
the ‘hybrid’, a new personal transport category distinct from the ‘car’,
and this helped propel Toyota to overtake General Motors, for a while, as
the world’s leading automotive manufacturer.
■ Starbucks found that customers were taking a second paper cup to avoid
burning their hands on hot coffee. Recognising how wasteful this was,
Starbucks designed a new cup with a built-in insulating layer. Although
the new cup cost more, it included more recyclable content.
■ 3M installed adjustable decks in their trucks, reducing daily truckloads by
40 per cent and saving US$110,000 per year, in just one facility.
■ Coca-Cola sell more ecologically friendly display refrigerator cabinets to
their retailer customers, not just because of the eco-friendly message
about reduced greenhouse gas emissions, but because their energy saving
profile saves the retailers money.
Thinking of the world’s big ecological issues as not so much a set of problems
as opportunities for changing business strategies to accomplish more, represents
a new, positive mindset for international business. General Electric’s Chairman
and Chief Executive, Jeffrey R Immelt, calls this approach ‘ecomagination’: ‘It
turns out that by fighting against emission of greenhouse gases, we’ve achieved
not only a positive ecological effect, but we’ve also found a new money maker.’
A 2008 report from the European Union, ‘Innovative Business Models with
Environmental Benefits’, described case studies of eight successful business

Recommended reading: the models, showing outcomes as diverse as reduced chloride in wastewater, energy
chapter ‘The Ecological savings in street lighting in England, and from car sharing in Switzerland. This
Environment’ in Brooks et al report provides substantial evidence that companies incorporating EU
(2011); the chapter ‘The Ethical environmental policy into their business strategies are achieving significant
and Ecological Environment’ in
Worthington and Britton (2009); environmental outcomes.
Esty and Simmons (2011);
Welford (1996);
http://coolbrandsstories.wordpress
.com/2010/08/22/
ge-ecomagination/;
http://ec.europa.eu/environment/e
nveco/innovation_technology/pdf/
nbm_report.pdf
ga
nin ct
Think about the business you selected for your study in Unit 1, and analyse
Lear
ivit
9c what it has done, or could do, in response to any of the major ecological
y
issues you have studied. You may wish to focus on how the business
reduces costs relative to its competitors, how it aims to reduce ecological
risk, how it adds value, or how it increases income (or a combination of
these).
eedb ac
F
Examples of the sorts of actions you may have identified include:

k
9c ■ Cost reduction – waste reduction, such as by using less water or power

or raw materials (or recycling materials) leads to improved productivity
and cost reduction; avoiding fines by ensuring compliance with
environmental legislation; efficiency savings in the value chain, working
with suppliers and/or customers (as in the 3M example above).
■ Risk reduction – ecological risks include the chance of inadvertently
causing pollution, perhaps through emission of toxic gases or chemicals,
or oil spills, the possibility of compliance failure, falling foul of
environmental legislation, or potential business disruption arising from
some sort of internal eco-system failure or external environmental
disaster. Managing these risks or anticipating them before they arise
helps prevent or minimise loss, damage or any sort of negative
ecological impact.
■ Value add – ecological design (such as the Toyota Prius example, above);
ecological innovation; building a ‘green’ corporate reputation (like
Puma).
■ Income increase – positioning products, and building customer loyalty
around customers’ ecological values; targeting specific customer
segments with offers of ecological value (such as the Coca-Cola
example, above).

9.4 Globalisation and ecology

The two key concepts in the global ecological environment are scarcity and
sustainability.
Scarcity
All goods in an economy are relatively scarce, but most may be substituted to
some extent at least by something else. Natural resources may be an exception
to this rule, and energy is a good example, with fossil fuels becoming scarcer,
and alternatives, such as use of wind and water power, not developing quickly
enough to replace them.
For example, the global economy is heavily dependent upon oil, both as a
source of fuel and as a raw material for processing into a range of agricultural
and industrial products. But supply of any resource is finite, and many have
speculated about what we will do when the oil runs out. ‘Peak oil’ refers to the
point when maximum extraction has been reached and supply will go into
decline (http://www.peakoil.net/). World production previously reached a high
in 2005, but that point was subsequently over-reached in 2011, and some
forecasts now predict 2020 as the peak. Predictions vary as to consequences of
post-peak production – oil prices will certainly rise, but the extent of
implications may depend on how quickly alternatives to oil are developed.
Among the goods that may become less affordable are motor cars, air travel,
fertilisers, detergents, solvents and adhesives. The effects on travel alone could
mean long-distance journeys being severely curtailed, populations concentrating
more in cities and suburbs becoming the new slums. Some analysts argue that
such speculation is exaggerated.
Sustainability
The United States Environmental Protection Agency states:
‘Sustainability is based on a simple principle: Everything that we need for
our survival and well-being depends, either directly or indirectly, on our
natural environment. Sustainability creates and maintains the conditions
under which humans and nature can exist in productive harmony, that
permit fulfilling the social, economic and other requirements of present and
future generations. Sustainability is important to making sure that we have
and will continue to have, the water, materials, and resources to protect
human health and our environment.’
(http://www.epa.gov/sustainability/basicinfo.htm)
Hamilton and Webster cite the example of the world’s two largest consumer
products companies, Procter & Gamble (P&G) and Unilever, who have
announced sustainability initiatives. P&G aims to power its plants with 100
per cent renewable energy, use 100 per cent renewable or recycled materials
for all products and packaging, and design products to maximise conservation
of resources. Unilever aims by 2020 to halve the ecological impact of its
footprint, help more than one billion people act to improve their health and
wellbeing, and sustainably source 100 per cent of its agricultural raw material
(the chapter ‘Corporate Social Responsibility’ in Hamilton and Webster, 2012).

Globalisation
There is some debate regarding to what extent the acceleration of the range of
ecological issues identified by Esty and Winston (2006) (and others) is a
consequence of the actions of businesses extending their operations
internationally, and of the phenomenon of globalisation. For instance, growing
awareness of the effects of carbon emissions and greenhouse gases on climate
change has prompted international government efforts to curtail burning of
fossil fuels, and this has met some resistance from the growing economies of the
emerging countries as unfairly focused on them. Of more than 1000 coal-fired
power plants planned worldwide, three-quarters are in China and India
(Carrington, 2012). However, it should be noted that China and India have
been enacting ecological legislation for decades.
India, in its constitution, commits the state ‘to protect and improve the
environment and to safeguard the forests and wildlife of the country’. The
Indian government established its Department of the Environment in 1980,
changing its name to the Ministry of Environment and Forests in 1985. India’s
Environment (Protection) Act of 1986 followed the Bhopal Gas Explosion
(http://edugreen.teri.res.in/explore/laws.htm; http://news.bbc.co.uk/onthisday/
hi/dates/stories/december/3/newsid_2698000/2698709.stm).
If governments of some countries come into dispute with others over these
shared international responsibilities, it is equally clear that governments
sometimes target multinational corporations as those whom they perceive to be
causing the most ecological damage. Positive ecological policies by international
businesses may be seen as partly a response to this. There have also been other
consequences.
climate change denial Climate change denial is at least partly a response on behalf of global corporate
interests to mitigate their actions and allow greater freedom for potentially
ecologically damaging actions. With the accumulation of evidence supporting
climate change it is hard to see any other explanation for continued denial.
‘Ninety-seven per cent of climate scientists agree that climate warming trends
over the past century are very likely due to human activities, and most of the
leading scientific organizations worldwide have issued public statements
endorsing this position’ (NASA; http://climate.nasa.gov/evidence/). (See also
Goldenberg, 2013)
A further consequence of the external pressure on business is the phenomenon

of ‘greenwashing’. This means misleading customers about the environmental
practices of a business, or the environmental benefits of its products or services.
There are 73 per cent more ‘green’ products on the market today than five years
ago, but more than 95 per cent of consumer products claiming to be green have
been found to be guilty of greenwashing. For example, claiming to be ‘CFC
free’ is meaningless when CFCs are actually illegal (http://sinsofgreenwashing.
org/).
There is general agreement that the main causes of greenhouses gases, and
hence climate change, are burning fossil fuels, intensive agriculture using
chemicals, and land use change such as deforestation and desertification, and
that the bulk of this activity is by businesses rather than individuals or
governments. However, there is little if any evidence that these causes have been

accelerated by the globalisation of business, industries or markets, except to

the extent that the emergence of newly developing economies adds to the
activity. If anything, heightened international awareness of the actions of global
businesses places greater constraints on them in this, as in other spheres.
Governments are acting internationally, with the Kyoto Protocol, an
international agreement initiated in 1997, linked to the United Nations
Framework Convention on Climate Change, which commits governments by
setting internationally binding emission reduction targets.
(See http://www. climatechangechallenge.org/Resource%20Centre/Climate-
Change/3-what_causes_climate_change.htm; Dessler and Parson, 2010; http://
unfccc.int/ kyoto_protocol/items/2830.php)
ga
nin ct Climate change may be described as a globalised issue that affects the
Lear
ivit
9d whole world. Describe some of the effects of climate change and evaluate
y
its business impact. Consider in particular the organisation you chose in Unit
1 and the specific impact on that organisation.
eedb ac
F
Among the effects you could have identified are:

k
9d ■ Risks to unique and threatened systems, such as extinction of plant and

animal species, coral reef damage, and vulnerability of people in the
Arctic and exposed small islands – this impacts most obviously on
businesses in marine and fisheries industries.
■ Risk of extreme weather events, including droughts, heatwaves and
flooding – this impacts on any business located in an exposed or
sensitive place.
■ Distribution of impacts and vulnerabilities, with forecasts of particular
dangers to the poor and the elderly, not just in developing countries but
in the developed countries too.
■ Aggregate impacts, with net costs of supposed benefits (such as warmer
conditions for currently colder climes) against losses actually increasing.
■ Risk of large-scale singularities, such as rising sea levels – the impact of
this will be a long time, perhaps generations, in coming, but cannot be
dismissed simply because it is long term.
The economist Nicholas Stern says:
‘Climate change presents a unique challenge for economics; it is the
greatest and widest ranging market failure ever seen.’
(Stern, 2006 ; see also Stewart and Elliott, 2013)

9.1 Are international markets for beverages culture-specific, and can a drinks
vendor hope to overcome cultural differences?
9.2 What sort of language barriers might arise between people from different
cultures who both speak English?
9.3 What is the Polluter Pays Principle? Investigate, define it, and give an
example.
9.4 Present some clear evidence of the phenomenon of climate change.

9.1 Different cultures favour different beverages, such as tea in China and
coffee in the US, but no country has a single beverage so predominant
that it excludes others. There is a market for tea in the US and for coffee
in China, and Coca-Cola is sold in both countries. Certain beverages may
be more popular in some countries, but there is usually scope to build a
market for something new.
9.2 Different vocabulary (the saying is that Britain and America are two
countries divided by a common language). Different grammar and
spelling (written Indian English and American English are very different).
Gender expectations, religious views and other cultural tensions.
Differences in accent, dialect, idiom, and so on. Other issues in spoken
language such as volume, tone of voice, timing, and so on. Facial
expressions and body language. Language may be a great unifier, but it is
not a universal solution for overcoming cultural barriers.
9.3 Legislators in many countries target the source of an ecological threat –
the ‘polluter’ – and aim to ensure they are responsible, accountable, and
make appropriate recompense. The polluter is usually seen as a business.
One recent example of the Polluter Pays Principle was the Deepwater
Horizon oil spill, where US law held BP primarily accountable, more than
100,000 lawsuits have been lodged in US courts, and BP’s eventual total
liability is estimated at over US$20 billion. (See Grantham Research
Institute and Clark, 2012)
9.4 Among the specific evidence you may have identified:
■ The level of CO2 has not been above 300 parts in a million for
650,000 years, until 1950; since then it has risen dramatically to
nearly 400 parts per million.
■ The World Glacier Monitoring Service collects annual data on glacier
retreat and mass balance. From this data, glaciers worldwide have
been found to be shrinking significantly, with strong glacier retreats in
the 1940s, stable or growing conditions during the 1920s and 1970s,
and again retreating from the mid-1980s to the present time.
■ The decline in Arctic sea ice – satellite observations show that Arctic
sea ice is now declining at a rate of 11.5 per cent per decade, relative
to the 1979–2000 average.
Other evidence you could have drawn upon includes borehole
temperature profiles, floral and faunal records, stable isotope and other

sediment analyses, and sea level records. (Sources: http://climate.nasa.gov/

evidence/; Zemp et al, 2008); http://www.climatechangechallenge.org/
Resource%20Centre/Climate-Change/3 what_causes_climate_change.
htm)
Summary
Socio-cultural and ecological issues are of great importance to all businesses,
and an understanding of them, and responsiveness to them, is critical to
international business success.
In this unit you have concluded your study of the remaining dimensions of the
PESTLE analysis framework for examining the business environment. You have
explored demography, social structure, culture and ethics, and analysed the
impact of the socio-cultural differences on business in an international context.
You have examined the ecological environment and how responsiveness to
ecological issues can benefit business. And you have evaluated the impact of
globalisation on the ecological environment.
You will now conclude this module by exploring future developments in

business and management.

`
Unit 101 Future developments in

business and management
‘The empires of the future are empires of

the mind.’
Winston Churchill, 1943
Introduction
It is dangerous to move from discussing contemporary developments, which
are known and demonstrable, to future developments, which are often the
subject of speculation and guesswork. But the past and present are the best
guides to what may happen in the future. Recent generations have seen
the world move from an industrial age into a post-industrial era, where the
emphasis on making things gives way to the knowledge of how to design
and develop things. From the mid-eighteenth century, agrarian societies
began to give way to industrial societies, and in some parts of the world
that process is not yet complete, but the next phase is already upon us, and
Information Age we have moved into what is sometimes called the Information Age, or
the knowledge economy.
Churchill anticipated this in his speech at Harvard University during the
Second World War, foreseeing that the colonial era was coming to an end,
and the future of the economies of the world lay in acquiring and sharing
new knowledge. That knowledge is increasingly springing up from all
knowledge economy corners of the globe.
In the final unit of the module, you will consider the implications of this,
and apply this thinking to the developments taking place at present. You
will look in particular at the emergence of new economies, and what impact
this is having and is likely to have in the future on international business
relations. You will examine a number of developments we have touched
upon in earlier units and consider their potential future impact. And you
will look in particular at the issue of corporate social responsibility.
This unit will draw together all the threads on the contemporary business
environment discussed in the previous units, and look ahead to the future
of business and management. (See Brinkley, 2006).

10.1 Describe the key developments in the emerging economies and their
impact on business.
10.2 Assess the likely future impact of globalisation on issues including
knowledge, technology, demography, migration and crime.
10.3 Debate the role of corporate social responsibility in international
business.

Prior knowledge
This unit is the tenth and last of the units that comprise the learning pack in
Contemporary Developments in Business and Management, and it would make
sense to study it last. No other prior knowledge is required.
Resources
The relevant reading for this unit may be found in the chapter ‘Corporate Social
Responsibility’ in your core textbook (Hamilton and Webster, 2012). You should
also refer back to Hamilton and Webster (2012, Part One, the Global Context)
for references to future developments. Supplementary references are provided
in the text.
10.1 Developments in emerging economies

Emerging economies may be understood as those in which rapid growth and
industrialisation is taking place, along with new developments in keeping with
the knowledge economy. Until recently, the global economy was dominated by
North America, the European Union and Japan but, as we saw in Unit 2, a
number of new economies are emerging, sometimes characterised as the G20,
the CIVETS group and most notably the BRIC countries – Brazil, Russia, India
ASEAN-China Free Trade Area and China. The ASEAN-China Free Trade Area, launched in 2010, is the largest
global-regional emerging economy in the world.
China, in fact, is the world’s second largest economy (after the US) measured
both by gross domestic product (GDP) and by purchasing power parity (PPP),
and is forecast to overtake the US in the next few years. China is the fastest-
growing major economy, the largest exporter and the second largest importer
of goods in the world (The Economist, 2011).
India’s rise is not quite so dramatic, but it is already the third largest economy
in the world measured by PPP, and is forecast to continue to grow (Virmani,
2005).
The significance of this lies in the context that the US has been the largest
economy in the world for over a century, and the UK was the largest for at least
a century before that. But the world is changing. Globalisation means that
resources such as venture capital, specialist know-how and increasingly skilled
labour are readily available throughout the world, and this creates
opportunities for new enterprises, and entire industries, to start up anywhere
in the world. Countries that were previously thought of as ‘underdeveloped’
are now recognised as ‘developing’ or ‘emerging’, which may make pre-
sumptions about their destinations but at least recognises they are on the
journey. Emerging economies include those where investment is seen as
potentially highly rewarding, but where the risks taken are greater. They are
characterised by more liquidity in local debt and equity markets, and the
existence of market exchanges and regulatory bodies. The lesser emerging
economies may not have the same levels of market efficiency or accountancy
standards as Europe or the US (or China or India), but they certainly have the
financial infrastructure of a currency, banks and a stock exchange.

Unit 10 Future developments in business and management
In 2012, the French economist Julien Vercueil suggested a somewhat Euro-

centric working definition of an emerging economy in terms of three criteria:
■ Intermediate income – its PPP is between 10 per cent and 75 per cent of
the average PPP for European Union countries.
■ Catching-up growth – during at least the last decade it has experienced
brisk economic growth that has narrowed the income gap with developed
economies.
■ Institutional transformations and economic opening – during the same
period, it has undertaken profound institutional transformations,
integrating it more into the world economy.
The World Bank estimated in 2011 that by 2025 half of all global economic
growth will derive from the four BRIC countries plus South Korea and
Indonesia (http://www.thejakartapost.com/news/2011/05/18/ri-may-become-
one-six-major-economies.html).
What is happening is not simply that a number of poorer countries are joining
the more wealthy – rather, a number of economies are growing so rapidly that
they are poised to overtake the former global leaders and establish a new
economic order in the world. Columbia University (http://www.vcc.columbia.
edu/content/emerging-market-global-players-project) tracks the economic
performance of 14 countries it identifies as ‘emerging market global players’:
Argentina, Brazil, Chile, China, Hungary, India, Israel, South Korea, Mexico,
Poland, Russia, Slovenia, Taiwan and Turkey. The information gathered by the
project includes data on foreign investment in each country, and data on the
performance of the top multinational enterprises from each country. One such
enterprise is the China International Trust and Investment Corporation (CITIC)
Group – see case study below.
Case Study
CITIC Group
The China International Trust and Investment Corporation, now known
simply as CITIC, is a multinational conglomerate with a difference – it is
owned by the central government of the People’s Republic of China.
Formed in 1979, and headquartered in Beijing, CITIC assumed its present
form in 2011, and is listed on the Hong Kong stock exchange with a
market capitalisation of 128 billion Chinese yuan renminbi (RMB). In
2008, around 80 per cent of the total assets of the CITIC Group were in
its financial subsidiaries, mainly banks, but the Group has increasingly
moved into non-financial activities, which have since grown to supply
more than half its revenues. Its more than 40 subsidiaries are in eight
main areas, including trade, IT services, manufacturing, energy and
resources, engineering and contracting, property and infrastructure,
investment holdings, and banking and financial services.
CITIC has overseas investments in Australia, Angola, Canada, New
Zealand, the United States and Hong Kong, among others, and a global
workforce of 140,000.

Case Study
At the end of 2010, CITIC Group’s operating income was RMB 263.9
billion and net profit was RMB 33.4 billion. In 2012 CITIC was ranked in
the Global 500, Fortune magazine’s list of the world’s leading companies,
at number 194. This means it is a bigger company than well-known
Western multinationals such as AstraZeneca, Philip Morris and 3M.
(Sources: http://www.citic.com/wps/portal/enlimited/;
http://money.cnn.com/magazines/fortune/global500/)
In fact CITIC is not exceptional. In 2012 there were 73 Chinese-owned

companies in the Fortune Global 500 – 20 of them bigger than CITIC – and
226 of the 2000 biggest companies in the world, behind only the US with 524
and Japan with 258. There were also 8 Indian companies in the Fortune Global
500. More generally, multinational corporations from emerging economies are
making their mark globally – Samsung of South Korea is a worldwide
household name in electronics; HTC of Taiwan is one of Apple’s main
international competitors in smartphones; Grupo Modelo of Mexico has an
iconic global brand in Corona beer; Embraer of Brazil is a world-leading
aerospace company; Gazprom of Russia is the world’s largest extractor of
natural gas; and Tata of India is a multinational conglomerate with market-
leading positions in cars, steel, power, chemicals and other sectors. CITIC is
representative of a trend towards greater penetration of global markets by
multinationals from emerging economies. (Sources: http://www.china.org.
cn/top10/2012-04/20/content_25195668.htm; http://timesofindia.indiatimes.
com/business/india-business/Eight-Indian-companies-in-Fortune-500-list-IOC-
Reliance-lead-pack/articleshow/14783233.cms)
The collapse of the Soviet bloc may not have been quite the end of communism
as an international force, but the economic reforms in China, which have made
its growth in international business possible, are a parallel trend. Most of the
communist, communist-leaning, or recently communist states are now trading
freely with the rest of the world, with the notable exception of North Korea,
and to an extent Cuba.
Asian Tigers In the 1990s the term Asian Tigers was coined, in reference to the four emerging
economies of Singapore, Hong Kong, Taiwan and South Korea. Such has been
their growth – Singapore and Hong Kong are now leading international
financial centres, while Taiwan and South Korea are world leaders in high-
technology manufacturing – that many now classify them as developed rather
than developing economies. Their levels of industrialisation and standard of
living compare with those of Japan, North America and Europe.
Recommended reading: van

The key developments in the emerging economies are that they are growing
Agtmael (2008); Magnus (2010); rapidly, innovating, accumulating wealth, increasingly competing with the more
OECD Policy Brief (2009) developed economies, and look set to overtake them in the years ahead. The
International Monetary Fund believes that emerging economies, especially
China, India and those in Asia in general, are leading the world out of the
recession precipitated by the global financial crisis (http://www.imf.org/
external/np/exr/key/emkts.htm).

ga
nin ct Is the importance of emerging economies exaggerated? To what extent do
Lear
ivit
10a you agree that emerging economies are likely to catch up or overtake the
y current leading economies of the world over the next generation? Support
your opinion with evidence and examples.
eedb ac
It is easy to forget the view of the world from the perspective of the US in
F
10a the latter half of the twentieth century, when many believed there were no
significant markets outside North America and Europe, but the world has
clearly changed since then. Fifty years ago, there were hardly any major
Asian branded goods available in North America or Europe, but now there
are too many to list.
China is indisputably on the rise, and is poised to become the largest
economy in the world in a few years’ time. The only question mark is over
its political culture and whether its communist ideals will ultimately
contradict its global free market aspirations, but they have not so far. India
and Brazil are different: their countries are being transformed, albeit not
always at the pace sometimes suggested; their economies are dynamic and
growing, but they do not (yet) have a significantly higher share of world
GDP than they had before. Russia is a sophisticated economy, and has
global geopolitical significance, but its economic strength is largely limited
to oil and gas at present (van Agtmael, 2008).
In 1990, only 25 companies from emerging economies had revenues over
US$1 billion per year. By 2008, there were more than 500, of which 100
had revenues over $10 billion, and three – Gazprom, China Petroleum and
Petrochina – had revenues over $100 billion (Magnus, 2010).
Singapore, Hong Kong, Taiwan and South Korea are already success stories,
but economic progress elsewhere, such as in Mexico, Latin America and
sub-Saharan Africa, is uneven. Overall, then, the evidence is mixed, but
continuation of the trends of the last 25 years, over the next 25, will see
China at least become the world’s leading economic power, and in all
probability the economic centre of the world will shift to Asia – we cannot
be certain when forecasting the future, but this projection seems more than
likely.
10.2 Future trends in globalisation

The knowledge economy
The world we inhabit is increasingly one of uncertainty: international relations
are in a state of flux, economic and business models are being questioned,
economies and technologies are advancing. In particular, the shift from
manufacturing to knowledge means that occupations, and the way people and
their organisations add value to economies, are changing significantly.
Knowledge and its application are increasingly how organisations and countries
gain competitive advantage. Knowledge spreads fast around the world,
interacts cross-border and among groups remote from each other, and despite

the current advantage the more developed economies hold in their long-
established universities, the new economies are catching up fast. As we saw in
Unit 8, research and development in the business sector is no longer the
prerogative of the developed economies. The notion that the West could remain
the centre of innovation and design, while outsourcing low-skilled work to
developing economies, a popular view in the 1980s and 1990s, did not last
long.
Mahindra & Mahindra of Mumbai, India, is looking to build on its automotive

expertise, gained in its core markets of tractors and affordable sports utility
vehicles, by seeking to acquire luxury car manufacturing capability. This
suggests a strategy based on developing and acquiring more specialist
knowledge than its competitors of high-value products in its chosen market
segments. And many software companies in Bangalore – India’s silicon state –
are taking the same approach. The developing economies are staking a claim
to compete at the high end of the knowledge economy.
Where this will lead is hard to say, but it seems likely to point to a proliferation
Recommended reading: Lauder et
al (2012); Edmondson (2010); of new, varied, high-tech and constantly changing products and services
Bolshaw (2012); Crabtree (2013); available to markets all over the world. This has been the pattern with long-
Kay (2000). standing knowledge products such as books and music, and this is how it looks
for early products supported by electronic platforms such as smartphones and
tablets.
Technological advance
In Unit 8 you noted the acceleration and globalisation of technological advance,
with the emergence of all sorts of new technologies including microelectronics,
biotechnology and nanotechnology.
Technological advance has been a constant of human history, but not at an

even rate. Modes of transport, on foot or by horse over land, and by oar or sail
over water, remained relatively unchanged for centuries, until the advent of
steam power in the nineteenth century made possible the technological advance
of much faster transportation by railway and by steamship. Heating and
lighting depended for centuries upon the naked flame (stoves, candles, oil
lamps, and so on), until the advent of gaslight and power in the nineteenth
century and electricity at the dawn of the twentieth century. Just as these
technologies took a major step forward in the nineteenth century, so the
twentieth century saw the innovations of underwater transportation (the
submarine), air transportation (the aeroplane) and transportation beyond the
earth’s atmosphere (spacecraft). The twentieth century also saw the beginnings
of the technological advances we now laud as new.
To what extent can we discern clues in recent technological advances as to the

likely technological advances of the future? Mistaken forecasting in the past
suggests this is more difficult than it seems. The ‘futuristic’ imaginings of films
of the 1950s seem ludicrously remote from the realities we have since
experienced – we do not inhabit space stations, or dress in one-piece shiny suits,
or travel in electric hovercraft. The technology existed in the 1990s for
affordable home videophones, and yet these never became commonplace. In
2013, Google has experimented with Google Glass, a personal computer with
head-mounted display in the style of spectacles, but it remains to be seen

whether there is demand, just as wrist-mounted computers based on flexible

polymers have never become a viable new product.
Discernible trends for computing technology in 2013 included remote access

and control, voice activation and alternative user interfaces to the mouse and
keyboard, and 3D printing. ‘Smart homes’ where systems and appliances are
controlled by computers offer potential. Enhanced robotics could point to
breakthroughs in many fields. Forward-looking international businesses
continue to invest large sums in research and development, hoping to anticipate
future demand. (Sources: http://www.google.com/glass/start/; http://www.
entrepreneur.com/article/222592; Moskvitch, 2013)
Demography and migration

You noted in Unit 9 the changes in the world’s population, with the greatest
growth in Asia, and a number of related demographic trends affecting
international business, not least the world’s ageing population due to growing
prosperity, improved healthcare and longer life. Migration is another major issue.
Ease of travel and transportation, coupled with improved communications and

greater understanding of the world, mean many people are more open to the
potential to improve their standard of living by moving abroad. Refugees from
wars, political oppression and difficult local economic conditions increasingly
see migration as a viable alternative. However, this can be a source of alarm for
the countries attracting the migrants.
Despite forging the largest empire the world has ever seen, and forming
Commonwealth international bonds still celebrated in the Commonwealth, the UK – in common
with many European countries – has a culture often antipathetic to immigrants.
The US traditionally took a more open view, welcoming new immigrants to
build the nation, and in the words inscribed on the Statue of Liberty, ‘give me
your tired, your poor, your huddled masses yearning to breathe free’. Yet today
the borders of the US are more restrictive, amid growing concerns about unfair
labour market competition from cheap migrant workers.
The International Organization for Migration (IOM), in its 2010 report,

estimated that there were 214 million migrants in the world, an increase from
150 million ten years earlier, or more than 3 per cent of the world’s population.
Implications of migration are usually discussed in reference to national
economies, but there are implications for businesses too, in terms of the
availability and mobility of skilled labour pools. Free international movement
of labour can only be seen as a factor intensifying globalisation. (See The
Guardian, 2013; IOM, 2010)
Crime
You briefly considered crime in the context of intellectual property in Unit 6.
Crime is, in fact, a more general and rising danger in an increasingly inter-
nationalised and globalised environment. Globalisation, insofar as it removes
barriers to international movement, risks making it easier for criminals to
operate on the same global scale as businesses.
Among the illicit goods that may be more easily transported across borders are
firearms, drugs, foodstuffs unsuitable for human consumption, counterfeit

items, protected artworks, pornography, and people sold into sex slavery. The
valuable trade in these goods encourages and supports organised criminal
activity. And criminals themselves may also move more freely.
There are many well-known examples of this. Cocaine is produced in high

volumes in Columbia, trafficked by criminal gangs and smuggled into the US
and other wealthy countries where there is an illegal market for recreational
mafia use. Russian mafia traffic young women for the vice trade in Western Europe
and elsewhere. And, as we saw in Unit 6, counterfeit items are produced in
Asian countries where intellectual property laws are not so well enforced and
then exported to more lucrative markets abroad. The use of the internet also
facilitates international crime, such as paedophile rings.
The United Nations Office on Drugs and Crime (https://www.unodc.org/)

analyses and seeks to combat a number of transnational crime threats, which
it identifies as human trafficking, migrant smuggling, the illicit heroin and
cocaine trades, cybercrime, maritime piracy and trafficking in environmental
resources, firearms and counterfeit goods. It draws significant support from
INTERPOL (http://www.interpol.int/), the International Criminal Police
Organization, which has facilitated international police forces’ cooperation
since 1923 (and has been known by its current name since 1956).
International businesses need to be alert to the possibility that their networks

– employees, facilities and supply chains – may be used by criminals, and need
to guard against the possibility of their legitimate business efforts being
undermined by illegal competition. It seems likely that this will become an even
more significant issue in the years ahead. (See also Aguillar-Millan et al, 2008).
ga
nin ct Select a feature of the knowledge economy and analyse its impact on
Lear
ivit
10b international business. You may wish to focus in particular on the role of
y
universities as increasingly international businesses.
eedb ac
You may have selected one of the following:
F
10b ■ Universities increasingly draw their students – both undergraduate and

postgraduate – from around the world, and have internationalised the
content of their teaching programmes. They also offer distance and
online teaching, reaching students remote from their base, and
spreading knowledge faster around the world. The programme you are
studying is an example of this.
■ The internet is driving faster growth of knowledge economy sectors like
education, healthcare and professional services. The internet creates
opportunities for fast spread of data, and enables upgrading of that
data to more usable information. The internet is allowing knowledge
workers from emerging economies to integrate faster with organisations
and people in more developed economies (Sheng, 2012).
■ Home working by knowledge workers. Many, especially highly skilled
employees, choose to work from home, as it gives them greater

eedb ac
flexibility, while the employers are able to draw from a more
F
k
10b geographically spread labour pool. One downside is the lack of face-to-
face interaction with colleagues, and in 2013 Yahoo banned its
continued employees from remote working to encourage them back into their
offices. But the trend remains towards more home working (Ryan,
2013).
■ Innovation. There is a trend towards more technological advance, more
new products and services and more innovation in general, with an
emphasis on new and better managed knowledge. In the future,
international businesses will need to focus more on their knowledge
creation and sharing functions, on greater investment in research and
development, and on protecting their intellectual property and
combating fraud.
■ Broader range of reporting. There is growing pressure for governance
and reporting on less tangible issues, previously regarded ‘soft’ issues
like environmental or socio-cultural impact. See the next section on
corporate social responsibility (CSR).
There are, of course, many other issues you may have selected and
analysed.
10.3 Corporate social responsibility

Values, ethics and corporate social responsibility
In Unit 9 we saw that enterprises are increasingly concerned not just with the
political, economic, financial and legal issues that directly and immediately
affect them, but with the wider social, cultural and ecological issues that also
affect them, perhaps (but not necessarily) not so directly or immediately.
Business ethics was once seen as a marginal consideration, but increasingly
customers, stakeholders and the wider public are interested in what enterprises
stand for, and it is common for a business to have an explicit statement of
values, addressing that interest.
This is where the field of corporate social responsibility (CSR) has emerged. It
has been growing in importance in recent years, and it seems reasonable to
assume this trend will continue.
Milton Friedman (1970) defined the responsibilities of business as ‘to use its
resources and engage in activities designed to increase its profits so long as it
stays within the rules of the game, which is to say, engages in open and free
competition without deception or fraud’. This narrow sense of the
responsibilities of business dominated for a period, but has increasingly yielded
to broader theories, pressure of public opinion, and legislation addressing more
wide-ranging issues, including the ecological environment, discrimination in
corporate manslaughter employment, health and safety, and corporate manslaughter (a crime in
England and Wales since 2007). This last has seen rising prosecutions, and three
convictions by the beginning of 2013 (Gosden, 2013).

Most people today take a broader view of CSR than Milton Friedman.
Enterprises are believed to have responsibilities towards a range of stakeholders,
including: their owners, investors and shareholders; their customers and
potential customers; their employees and their families, including retired
employees drawing pensions from their funds; their contractors, suppliers and
partners; and others (stakeholder analysis was discussed in Unit 3); they are
expected to be publicly accountable wherever they are located, and they are
expected to behave responsibly towards the natural environment.
In this context, CSR may be understood as a form of self-regulation by

enterprises, whereby they monitor and ensure their active compliance with both
the letter and the spirit of the law, accepted ethical standards, national customs
and international norms. It may be further understood by reference to the other
terms and language associated with it, such as corporate citizenship, corporate
conscience, social performance and responsible business. Many companies have
statements of corporate social responsibility, departments of staff dedicated to
balanced scorecard it, and forms of measurement and reporting via a balanced scorecard or similar,
or ‘triple bottom line’.
Triple bottom line is also known as ‘people, planet and profit’, a phrase coined
by John Elkington in 1994 and adopted as the title of Shell’s first sustainability
report in 1997. Triple bottom line measures not just the financial or economic
indicators of corporate success, but social indicators affecting consumers and
communities where the enterprise has a presence, and environmental indicators
such as use of raw materials, waste disposal and production of ecologically
positive products. Triple bottom line has not only been adopted by a number
of enterprises, but has also been contemplated by local government in parts of
the US and Australia (Elkington, 1999; The Economist, 2009).
Many multinational companies such as Sony, IBM and the subject of the case
study, CITIC, have extensive sections of their websites devoted to statements
about their CSR (http://www.sony.net/SonyInfo/csr/?j-short=csr; http://www.
ibm.com/ibm/responsibility/; http://www.citic.com/wps/portal/enlimited/shzr).
Such statements are typically aligned to the company’s explicit values, and
represent significant corporate expense of time, effort and resources, although
there is some cynicism as to their meaningfulness, and calls for greater
transparency and authenticity (Musafer, 2012).
Global corporate social responsibility

In the international environment, CSR becomes more complex, as there may be
contradictions between the expectations of different communities in different
countries, perhaps arising from different religious or ethical beliefs, or regarding
different expectations of ‘normal’ business practice.
Quality standards vary from one country to another. For many years, in the
West, ‘made in China’ was popularly regarded as an indicator of poor quality,
and has led to US and European companies labelling products differently, such
as ‘designed by Apple in California, assembled in China’. As international
quality standards develop, and are adopted by more countries, and as
enterprises from emerging economies increasingly see high quality as a way for
their products to compete better internationally, the old popular perception
(right or wrong) is being turned on its head. Increasingly, many consumers see

manufacture in China and other emerging economies as a sign of better quality.

The Times newspaper lauded the 2013 decision to build the passenger ship
Titanic II in Shanghai as evidence of increased global confidence in Chinese
manufacture (Lutz, 2012; Lewis, 2013).
Working conditions for employees in poorer countries have become a focus of

popular concern in the more developed countries, with demands for an end to
sweatshops sweatshops. The implication is that companies that offer sub-standard working
conditions for their employees in poorer countries may find their relatively
affluent customers in wealthier countries refusing to buy their products
(Bunting, 2011). Concerns include overcrowded workplaces, lack of health and
safety standards, long working hours, lack of job security and low pay.
While there is often substance to these concerns, the counter-argument is that

conditions tend to reflect the stage of economic development of the countries
where they occur, and may be likened to conditions at a comparable stage of
development in the more developed economies, when the term sweatshop was
coined. Conditions in a Vietnamese factory, perhaps comparable to factory
conditions in the US 100 years ago, are still an improvement on similar long,
unregulated hours working outdoors on subsistence farming (Henderson,
2000). People in emerging economies may also resent the moralising of people
in the more developed economies.
Child labour is a parallel concern. In the more developed economies, it has

become standard practice, usually enshrined in law, to protect childhood,
reserve it for education and play, and prohibit the employment of children
except in limited cases. This has only been the situation since the middle of the
twentieth century, with employment of children under the age of 14 generally
prohibited since the end of the Second World War, but is still not standard
practice in less developed economies.
The International Labour Organization (ILO) claims around 215 million

children in the world work, often full time. The ILO’s International Programme
on the Elimination of Child Labour, initiated in 1992, has grown to become the
biggest dedicated programme combating child labour in the world, and the
largest technical cooperation programme within the ILO. It is now operational
in 90 countries, and claims to benefit millions of children worldwide. According
to ILO figures distributed by the World Bank, child labour accounts for 22 per
cent of the workforce in Asia, 32 per cent in Africa, 17 per cent in Latin
America and just 1 per cent in the US, Canada, Europe and other wealthy
nations (http://www.ilo.org/global/topics/child-labour/lang--de/index.htm;
International Labour Organization, 1999).
Corruption is a major issue for international business, including various forms

of criminal activity extending to bribery, extortion (use of threats or violence),
favouritism in its various forms such as nepotism, embezzlement, fraud and
illegal monetary contributions to political parties. For international businesses,
corruption raises a number of risks, including: excessive costs; the cumulative
effects – costs and otherwise – of similar activity by competitors; legal risks, not
least the threat of prosecution; and damage to corporate reputation.
Transparency International was set up in 1993 to fight corruption, and pub-
lishes research, statistics, case studies and other resources on the incidence and

impact of corruption, both for enterprises and for governments (http://

www.transparency.org.uk/).
The examples of quality standards, working conditions, child labour and

corruption illustrate the range of difference encountered in business practice
around the world, and highlight the difficulty of formulating global CSR
policies. We could add national/cultural differences over issues such as owner-
ship of property, freedom of movement, free speech and association, education,
and other matters emphasising differing values and expectations in a global
context.
The United Nations (UN) Global Compact is one international initiative,

launched in 2000, seeking to address this and to guide businesses on best
practice in CSR. The ten principles of the Global Compact cover human rights,
labour standards, the natural environment, and anti-corruption (the last only
added in 2004), and are derived from the 1948 Universal Declaration of
Human Rights, the ILO’s 1998 Declaration on Fundamental Principles and
Rights at Work, the 1992 Rio Declaration on Environment and Development,
and the 2000 UN Convention Against Corruption. The ten principles are listed
in full in Unit 3. (See http://www.unglobalcompact.org/; http://www.un.org
/en/documents/udhr/; http://www.ilo.org/declaration/lang--en/index.htm; http://
www.unep.org/documents.multilingual/default.asp?documentid=78&articleid=
1163; http://www.unodc.org/unodc/en/treaties/CAC/)
CSR is not just an ethical issue, and just as CEO Immelt at General Electric
(see Unit 9) has seen the potential for harnessing ecological issues to business
advantage, others (including Porter and Kramer, 2006) have seen CSR as a
Recommended reading: the means to create shared value and engage more stakeholders in a business
chapter ‘Corporate Social
Responsibility’ in Hamilton and strategy. Corporate social responsibility continues to dominate debate in the
Webster (2012); Crane et al boardrooms of multinational corporations and in government circles.
(2007); Crane et al (2009); Porter Continuation of present trends suggests it will continue to be a major issue for
and Kramer (2006). all.
ga
nin ct
Analyse the CSR statements given, in the web links above, for Sony, IBM
Lear
ivit
10c and CITIC, identify their similarities and highlight their differences. Can you
y
identify any evidence that they have acted upon these statements?
eedb ac
F
Table 10.1 (on page 173) shows the similarities and dissimilarities between
k
10c Sony, IBM and CITIC.

Overall, the statements of Sony of Japan and IBM of the US are remarkably
similar. CITIC’s statement also shares some similarities, but places different
emphasis on, for example, tackling poverty, not a word that features either
for Sony or IBM, although it is addressed by more specific initiatives. CITIC’s
emphases on relief and charity may also reflect their closer experiences of
very poor communities in China and other developing countries.
Furthermore, CITIC does not appear to share Sony’s and IBM’s view that
innovation and employee well-being are CSR issues.

eedb ac
Table 10.1: Extracts from corporate CSR statements
F
k
10c
Sony IBM CITIC
continued
Environment Environment (climate Environment (protection,
(sustainability, change leadership, disaster rescue and relief,
renewably energy, eco environmental eco-system preservation)
products, biodiversity) management systems)
Diversity and inclusion Diversity and inclusion Helping ethnic minorities
Innovation New opportunities to apply –

our technology and
expertise
Community Community economic Improving local business
engagement (‘needs of development, education, and living environments
communities’ – mainly health, literacy, language
education programmes) and culture
– – Social good, charity,
helping poverty-stricken
areas
Positive working Empowering employees, –
environments and employee well-being
opportunities
Examples of evidence of delivery against statements could include:

■ Sony’s contribution to recovery efforts in the wake of the Japanese
earthquake, described in pp. 8–11 of http://campaign.odw.sony-
europe.com/cross/H032/pdf/CSR2011E_all.pdf.
■ IBM’s Smarter Cities initiative in the UK, described at
http://www.bbc.co.uk/news/business-19876138.
■ CITIC’s Hong Kong subsidiary CITIC Pacific’s work on environmental
protection, nurturing youth and helping those in need, reported at
http://www.citicpacific.com/report/annual/2011/E111.pdf.
10.1 Identify a leading European or North American multinational corpora-
tion whose market position has suffered due to competition from
emerging economies. Briefly describe the relative decline of their
position.
10.2 Why should an international business be concerned about the trend
towards greater migration?
10.3 Briefly describe the three dimensions of triple bottom line.


10.1 Among the examples you could have selected are:
■ The oil industry, dominated in 1970 by the ‘seven sisters’, which
included the companies that are now BP, Chevron and Shell, none of
which was in the world’s top five by production volume in 2012.
Only Standard Oil, now Exxonmobil, was still in the top five
(producing 5.3 million barrels per day), the others being Saudi
Aramco (12.5 million barrels per day), Gazprom (9.7), National
Iranian Oil (6.4) and Petrochina (4.4), from the emerging economies
of, respectively, Saudi Arabia, Russia, Iran and China.
■ US and European car manufacturers were shocked to be challenged
and ultimately overtaken by Japanese competition (Toyota, Honda
and others) from the 1970s onwards, but more dramatic still is the
fact that, by 2010, Hyundai of South Korea had overtaken Ford of
the US, once the world leader, with Hyundai in fourth place to Ford’s
fifth (based on end-2010 production figures).
■ In the market for smartphones, Nokia of Finland dominated from
1996 to 2011, but when Apple launched the iPhone in 2007 it
rapidly became the clear global market leader. Apple and Nokia have
encountered rapidly growing competition from Samsung of South
Korea and HTC of Taiwan, both of which have overtaken Nokia in
the smartphone market.
There are many other examples.
10.2 Increased migration can impact on an international business in a number
of ways, including:
■ Loss of skilled labour from a location where there is high emigration.
■ High immigration to certain locations may mean increased industrial
relations problems arising from fiercer labour market competition.
■ More generally, migration flows can affect the availability of labour
and the required skills levels.
■ Illegal immigrants can pose risks to business of breaching labour
laws.
(See International Business Leaders Forum, 2010)
10.3 Triple bottom line, or people–planet–profit, is concerned with three
distinct but complementary aspects of how a business measures its
performance – social, economic and environmental factors. The
economic or profit measurement is about financial performance or
profit-and-loss; the environmental or planet measurement is about the
impact of the business on the environment and its responsiveness to it;
the social or people measurement is about the business’s interaction with
communities of stakeholders (including employees and consumers) and
the social structure around the business. The metrics of the people and
planet aspects are usually much harder to define.

Summary
In this, the final unit of this module, you have begun to move from looking at
present developments in business and management to anticipating and
forecasting future developments.
You have examined the growth of emerging economies, and the way this is
shifting the balance of wealth, economic and political power and influence in
the world, notably towards China, India and the continent of Asia in general.
You have considered how this creates valuable new markets for international
business.
You have assessed a range of issues in the contemporary world, including the
emergence and growth of the knowledge economy, and other issues arising from
globalisation, notably rapid technological advance, changing demography and
migration, and the dangers of international crime.
And you have debated the increasing role of corporate social responsibility in
international business.
This concludes the learning pack on Contemporary Developments in Business

and Management.

References
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http://www.euromonitor.com/chocolate-confectionery
http://www.fairtrade.org.uk/
http://www.fdiintelligence.com/
http://www.federalreserve.gov/pf/pf.htm
http://www.foxnews.com/story/0,2933,196983,00.html

http://www.foxnews.com/tech/2012/06/01/google-challenges-china-
censorship-with-new-search-tool/
http://www.francetoday.com/articles/2011/05/16/how_about_a_big_mac_au_
poivre.html
http://www.ft.com/cms/s/0/1cb06d30-332f-11e1-a51e-
00144feabdc0.html#axzz2FK9ERydk
http://www.fxstreet.com/fundamental/interest-rates-table/
http://www.globalization101.org
http://www.globalization101.org/information-technology/
http://www.globalizationofbusiness.com/
http://www.google.com/glass/start/
http://www.guardian.co.uk/business/2011/dec/12/rbs-collapse-timeline
http://www.guardian.co.uk/business/2012/jun/22/coffee-shop-revolution-
continues
http://www.ibm.com/ibm/responsibility/
http://www.icco.org
http://www.ilo.org/declaration/lang–en/index.htm
http://www.ilo.org/global/topics/child-labour/lang–de/index.htm
http://www.ilpf.org
http://www.imd.org/research/publications/wcy/index.cfm
http://www.imf.org
http://www.imf.org/
http://www.imf.org/external/np/exr/ib/2008/053008.htm
http://www.imf.org/external/np/exr/key/emkts.htm
http://www.independent.co.uk/life-style/food-and-drink/news/why-things-
taste-bitter-for-pepsi-2257844.html
http://www.innovationmanagement.se/2011/03/16/innovation-in-large-
companies-the-use-of-web-2-0-as-an-innovation-pathway/
http://www.internetworldstats.com
http://www.interpol.int/
http://www.investopedia.com (definition of capital flows, accessed January
2013)
http://www.investopedia.com/ (accessed February 2013)
http://riskreport.weforum.org/
http://www.investopedia.com/terms/l/law-one-price.asp
http://www.ipo.gov.uk/
http://www.isc.hbs.edu/pdf/20061128_Singapore_ACI_Launch.pdf
http://www.islamic-bank.com/sharia-finance/

References
http://www.iveybusinessjournal.com/topics/global-business/the-global-
environment-of-business-new-paradigms-for-international-management
http://www.juriglobe.ca/eng/syst-onu/index.php
http://www.kingsfund.org.uk/projects/general-election-2010/key-election-
questions/how-many-managers
http://www.law.cornell.edu/ucc/ucc.table.html
http://www.lectlaw.com/files/cur78.htm
http://www.marketsandmarkets.com/PressReleases/global-chocolate-
market.asp
http://www.mcdonalds.com/us/en/our_story.html
http://www.mcspotlight.org/company/company_history.html
http://www.microsoft.com
http://www.moneycontrol.com/news/business/tata-steelexamplejob-
creationusa-through-fdi_580350.html
http://www.newandimproved.com/newsletter/2120.php
http://www.newyorkconvention.org/
http://www.nytimes.com/2012/04/29/business/apples-tax-strategy-aims-at-
low-tax-states-and-nations.html?pagewanted=all&_r=0
http://www.nytimes.com/2012/05/02/business/global/bolivia-seizes-local-
assets-of-spanish-utility.html?_r=0
http://www.ons.gov.uk/ons/rel/cpi/consumer-price-indices/december-2012/sty-
a-tale-of-many-price-indices.html
http://www.pbs.org/tesla/ll/ll_whoradio.html
http://www.peakoil.net/
http://www.philadelphiafed.org/education/teachers/resources/fed-today/fed-
today_lesson-3.pdf
http://www.puma.com
http://www.rbi.org.in/
http://www.rbs.com/
http://www.riotinto.com/documents/ReportsPublications/Review_86_-
Value_and_Growth.pdf
http://www.sawis.co.za/
http://www.sawis.co.za/info/download/Book_2010.pdf
http://www.shell.com/chemicals/aboutshell/media-centre/media-
releases/2012-media-releases/pr-sadaf-jv-expansion.html
http://www.significancemagazine.org/details/webexclusive/1314363/RPI-
versus-CPI–-The-Definitive-Account.html
http://www.sony.net/SonyInfo/csr/?j-short=csr
http://www.spiegel.de/international/europe/the-ticking-euro-bomb-how-the-

euro-zone-ignored-its-own-rules-a-790333.html
http://www.stewartlaw.com/stewartandstewart/PracticesServices/
TradeRemediesPractice/AntiDumpingLaw/tabid/69/language/en-
US/Default.aspx
http://www.susmangodfrey.com/types-of-cases/business-disputes/breach-of-
contract/
http://www.ted.com/talks/hans_rosling_reveals_new_insights_on_poverty.
html
http://www.telegraph.co.uk/finance/china-business/7197087/UK-businesses-
threaten-to-pull-out-of-China-over-protectionism.html
http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/8176145/
RBS-timeline-where-it-all-went-wrong.html
http://www.telegraph.co.uk/finance/personalfinance/interest-rates/8536169/
World-interest-rates-in-graphs.html
http://www.theawl.com/2011/11/apple-and-design
http://www.transparency.org.uk/
http://www.un.org
http://www.un.org/en/documents/udhr/
http://www.un.org/esa/population/publications/sixbillion/sixbilpart1.pdf
http://www.uncitral.org/uncitral/uncitral_texts/sale_goods/1980CISG.html
http://www.unep.org/documents.multilingual/default.asp?documentid=
78&articleid=1163
http://www.unglobalcompact.org
http://www.unidroit.org
http://www.unodc.org/unodc/en/treaties/CAC/
http://www.weforum.org/.
http://www.wipo.int
http://www.wipo.int/treaties/en/ip/paris/trtdocs_wo020.html
http://www.worldbank.org
http://www.wto.org
http://www.wto.org/english/tratop_e/trips_e/trips_e.htm
https://icsid.worldbank.org/ICSID/Index.jsp
https://www.cia.gov/library/publications/the-world-factbook/geos/ni.html
https://www.cia.gov/library/publications/the-world-factbook/rankorder/
2092rank.html
https://www.economy.com/dismal/outlook/country.aspx?geo=IZAF
https://www.iacc.org/about-counterfeiting/
https://www.unodc.org/

Index
Index one-child policy 146

quality standards 170–1
Aguilar, Francis 13 technology development 130,
absolutist systems 102, 103 136
Alcatel 94 Chinese language 49
aluminium industry 26 chocolate industry 50–1, 53–5,
Amazon 8, 31 56–8, 61, 73–4, 81–2
Anthony, Scott 135 Chomsky, Noam 58
anti-globalisation 58–9 Churchill, Winston 161
Apple 7, 17, 37–8, 94, 134, 136, Cisco Systems 18
141, 174 CITIC Group 163–4, 172–3
ASEAN-China Free Trade Area 162 CIVETS group 26
Asian tiger economies 130, 135, climate change 157–8, 159–60
164 Coca-Cola 18, 26, 71–2, 76–7, 94,
authoritarian systems 102, 103 154
automobile industry 66, 67, 174 Cold War era 3
aviation industry 83 collectivism 148–9, 151
colonialism 32
B2B market 143 command economies 3
balance of trade 6 commoditisation 7
balanced scorecard 170 common law systems 103–4
Bank for International Settlements Commonwealth 167
117 communications
Bank of England rates 115–16 cultural differences 152
banks 117–18, 120 technology 9, 18, 21, 22, 136
barriers to entry 70, 75 communist states 102, 103
barter 113 comparative advantage 6, 41–2
biodiversity 153 competition 70–2
biotechnology 131 competitive environment 13
Bolivian gas conflict 32–3 complementary products 76
‘born global’ firms 82 computer manufacturers 7
brands 30, 75 concentration ratio 73, 74
BRIC countries 5, 26, 162, 163 conglomerates 1
British Petroleum 46 contract enforcement 105, 106
brownfield development 40 contract law 104
building societies 120 copyright 140, 143
business ethics see corporate social Corn Laws 38
responsibility corporate manslaughter 105, 169
business strategies 17, 68–9 corporate social responsibility 34,
58, 59–60
Canon 46 balanced scorecard 170
capital-intensive industries 6–7 child labour 171
car industry 66, 67, 174 corruption 171–2
carbon source depletion 153 global CSR 170–2
cartels 76, 108 quality standards 170–1
central banks 117–18 self-regulation 170
centralization 151 stakeholders 170
child labour 171 statement of values 169, 170,
China 172–3
CITIC Group 163–4, 172–3 triple bottom line 170, 174
economic growth 162 working conditions 171
intellectual property theft 143 corporation taxes 8, 17–18, 31

Corrigan, Chris 45 Elkington, John 170

corruption 171 emerging economies 162–5
cost and supply factors 27 Enron scandal 104–5
counterfeiting 140 environmental issues 153–5
country attractiveness 89–92 climate change 157–8, 159–60
credit crunch 122 globalisation and 157–8
crime 167–8 scarcity 156
criminal law 104–5 sustainability 156
cross-border integration 120 environmental scanning 47–8
cross elasticity of demand 67 Ericsson 150
crowdsourcing 142 ethics see corporate social
cultural differences 30–1, 48, 49 responsibility
attitudes to time 152 European sovereign debt crisis
centralisation 151 122–3
communications 152 exchange controls 8
individualism/collectivism 148–9, exchange rates 115–16
151 exports (percentage of global GDP)
language 9, 25, 27, 151–2 5
religion and secularism 151 external environment 11–14
see also socio-cultural
environment Fair Trade 16, 54, 55, 61
currency 113–14 fast food 67, 69
customary law 104 Federal Reserve System 118–19
customer behaviour 75 femininity 149
financial capital movement 7–8, 17
Dell computers 7 financial crises 122–6
demography 146–7, 167 financial flows 24, 25
demutualisation 120 financial markets 122–3, 127
deregulation 90 financial regulation 121
derivatives 121 first-mover advantages 92–4, 141
diversification 67 fixed exchange rate 115, 116
Domino’s Pizza 31 floating exchange rate 115, 116
dumping 108, 110–11 foreign direct investment (FDI) 8,
25, 39–40, 89, 90
e-commerce 107, 137–9, 143 foreign indirect investment (FII) 8,
ease of doing business 105 25
ecological environment 153–5 four Ps 76
climate change 157–8, 159–60 France Telecom 110
globalisation and 157–8 franchising 82
scarcity 156 free trade policy 7, 38
sustainability 156 Friedman, Milton 169, 170
economic blocs 25 Friedman, Thomas 80
economic development 23
economic drivers 26 G8 5, 25, 26
economic environment 97 G20 5, 26
ease of doing business 105 Gates, Bill 128, 130
functions of the state 100–1 General Agreement on Tariffs and
see also legal environment; Trade (GATT) 7, 8
political environment General Electric (GE) 1, 17, 35,
economies of scale 7, 26, 119 154, 172
economies of scope 119 Ghemawat, Pankaj 86, 95
efficient markets 116 Glaxo 130–1

Index
global business environment 3, 45, dependence upon foreign

62–3 markets and suppliers 34
business as a transformation increased volatility 34
system 10–12 nationalisation and 32–4
enhanced communications 9, 18, new markets 34–5
21, 22 crime 167–8
external environment 11–14 definitions 23–4
global pattern of wealth 3–5, 11 demography 146–7, 167
international environment 46, ecological issues and 157–8
47, 50 foreign direct investment 39–40
international trade 5–7, 17, 23, indicators 24–5
37–9 international trade 37–9
movement of financial capital key drivers and facilitators 25–9
7–8, 17 knowledge economy 161, 165–6,
national environment 46–7, 48–9 168–9
organisational decision making legal issues 108–9
and performance 17–18 markets and industries see market
PESTLE framework 13, 45, 56–8 and industry globalisation
rapid technological change 8–9, migration 24, 29, 167, 174
18 Porter’s diamond model of
regional environment 46, 47, 49 national advantage 21, 41–2
risk analysis 58 technological advance 166–7
anti-globalisation 58–9 see also technological change
corporate social responsibility GNR (genetics, nanotechnology and
34, 58, 59–60 robotics) 9
global macroeconomic Golder, Peter 93
imbalances 58 Google 8, 17, 31, 136
illegal economy 60–1 Google Glass 166
internet 60 government regulations 29–30
shortages of natural resources GRAIN (genetics, robotics, artificial
60 intelligence and nanotechnology)
stakeholder analysis 52–5 9
global health scares 22–3 Great Depression 124
global languages 9, 25, 27, 151–2 Greenfield development 40
Chinese 49 greenhouse gases 153, 157–8
global strategy 68 greenwashing 157
global technology markets 135–9 grey dollar 147
global village 21 gross domestic product (GDP) 3–4
global warming 153 R & D by country as percentage
globalisation 21–3, 44 of GDP 133
anti-globalisation 58–9 world exports as percentage of
barriers and inhibitors GDP 5
culture 30–1 gross value added (GVA) 4
distance 30 groupism 150
governments 29–30
migration 29 Hamilton, L and P Webster 26, 31,
costs and benefits 31–2 90, 91, 98, 121, 129, 134, 156
access to global talent pool 35 health scares 22–3
access to resources 35 heavy metals 153
balance sheet 35–6 hedge funds 121
cheaper suppliers 35 Herfindahl-Hirschmann Index
corporate reputations 34 (HHI) 73

Hofstede, Geert 148, 149, 151 product diversification and

home working 168–9 innovation 120–1
horizontal FDI 40 international financial institutions
horizontal integration 68 117–19
international financial markets
IBM 172–3 122–3, 127
illegal economy 60-1 international government 97
Immelt, Jeffrey R 154, 172 International Labour Organization
immigration controls 31 (ILO) 171, 172
India international law 106–7
caste system 147, 148 International Monetary Fund (IMF)
economic growth 162 3, 4, 8, 24, 117, 164
environmental safeguards 157 international relations 3
information and communication international strategy 68–9
technology (ICT) 136 international trade 5–7, 17, 23,
knowledge economy 166 37–9
individualism 148–9, 151 international travel 21, 22
industrial espionage 141 internationalisation 80–1, 95
Industrial Revolution 130 assessing country attractiveness
industries: globalisation see market 89–92
and industry globalisation ‘born global’ firms 82
inequality 148 drivers 83
inflation 114 customers and markets 84–5
Information Age 161 lower production costs 84
information and communication market access 83–4
technology (ICT) 9, 18, 21, 22, natural resources 84
136 first-mover and late-mover
innovation 129–31, 143–4, 169 advantages 92–4
drivers 132–5 selection of foreign target market
protecting intellectual property 86–8
140–2, 143 strategy and optional locations
inputs 10–12 88–9
Intel 76, 135 Uppsala model 82, 94
intellectual capital 35 internet 9, 60, 136
intellectual property rights (IPR) e-commerce 107, 137–9, 143
107, 130 knowledge economy 168
protecting innovation 140–2, 143 Web 2.0 137, 142
interest rates 114–15 INTERPOL 168
internal environment 11 interventionism 48
International Bank for investor protection 105
Reconstruction and Development isolationism 46
8
International Centre for the Japanese business methods and
Settlement of Disputes 107 culture 18, 150
international environment 46, 47, Jobs, Steve 37
50 Johansen, J and J E Vahlne 82
international finance Jones, Reginald 17
contemporary developments Jopson, Barry 93
119–20 ‘just-in-time’ inventory management
global financial crisis 123–6 18
industry restructuring and
cross-border integration 120 kabushiki-gais 46

Index
Kay, John 93 market concentration 73–4

keiretsu 18 market power 74
kitemarks 16 market structures 70–3
knowledge economy 161, 165–6, Porter’s Five Forces framework
168–9 75–7
knowledge-intensive industries 7 market concentration 73–4
Kotler, Philip 66 market deregulation 90
Kubrick, Stanley 128 market factors 27
market power 74
labour costs 4, 6, 27, 84 market research 142
labour-intensive goods and services market share 119
6 market structures 70–3
laissez faire 48 marques 17
languages 9, 25, 27, 151–2 masculinity 149
Chinese 49 mass production 129
late-mover advantages 92–4 McDonald’s 24, 26, 27–9, 94
Lay, Kenneth 105 McLuhan, Marshall 21
legal environment 97–8, 103 mercantilism 6
common law systems 103–4 mergers 120
contract law 104 meso environment 13
criminal law 104–5 micro environment 13
customary law 104 Microsoft 76, 130, 136
ease of doing business 105 migration 24, 29, 167, 174
globalisation and 108–9 money 112, 113–14
international law 106–7 monopoly/monopolistic competition
Sharia law 98, 104, 110, 151 70, 71
theocratic law systems 104, 151 Monsanto 131
tort law 104 Moore, Gordon 135
see also economic environment; Moore’s Law 135
political environment multi-domestic strategy 68
leverage 124 multimedia communication 9
Levitt, Theodore 26, 64 multinational conglomerates 1
liberal democracies 102
liquidity 114 nanotechnology 131
local government 97 NASDAQ 122
localisation 25 national advantage 6, 41–2
long-term orientation 149–50 national environment 46–7, 48–9
Lovins, Amory 96 national government 97
nationalisation 32–4, 91
3M 154 natural disasters 49
macro environment 13 natural resources 60, 84
macroeconomic imbalances 58 NBIC (nanotechnology,
mafia 168 biotechnology, information
Mandela, Nelson 31, 34, 58 technology and cognitive
maquiladoras 34 science) 9
Marconi, Guglielmo 141 negotiable instruments 113
market access 83–4 new entrants 75
market and industry globalisation new technologies 9
64–5, 79 New York Convention 107
definition of markets 65–6 Next Eleven (N-11) 26
difference between an industry Nigeria
and a market 66–9 oil industry 98

political and economic systems protectionism 6, 38

98, 99 Puma 153–4
Nokia 174 purchasing power parity (PPP) 4,
116
offshore banking 17
offshoring 84 qualitative measures 146
oil production 60, 98, 156, 174 quality standards 170
oligopoly 70, 71 quantitative measures 146, 147
open outcry 65
options 121 recession 122
organisational decision making and regional environment 46, 47, 49
performance 17 religion 151
outputs 10–12 research and development ( R & D)
ozone layer depletion 153 132–5, 143
Reserve Bank of India 118
Pacific Rim 46 RFM analysis 75
Paris Convention 140–1 Ricardo, David 6
patents 140, 141, 143 rights issues 124
Peak oil 60, 156 Rio Tinto 84
Pepsi 17, 18, 26, 71–2, 77 risk 49
perfect competitions 70, 71 risk analysis 58
performance 70 anti-globalisation 58–9
PESTLE framework 13, 45, 56–8, corporate social responsibility
90, 145, 146 34, 58, 59–60
Peterloo Massacre 38 global macroeconomic imbalances
pharmaceuticals 130–1 58
political environment 97, 98 illegal economy 60–1
authoritarian/absolutist systems internet 60
102, 103 shortages of natural resources 60
branches of the state 99–100 risk/return ratio 86–7
communist states 102, 103 rivalry 71, 76
ease of doing business 105 Rosling, Hans 3
functions of the state 100–1 Royal Bank of Scotland 123–6
liberal democracies 102 Royal Dutch Petroleum 116
theocratic states 102, 103
see also economic environment; Samsung 83, 164, 174
legal environment scale economies 7, 26, 119
political/regulatory drivers 26 scarcity 156
political stability 49 secularism 151
Porter, Michael E 13 self-regulation 170
diamond model of national separation of powers 99
advantage 21, 41–2 Shanghai Bell 94
Porter’s Five Forces 13–14, 75–7 Sharia law 98, 104, 110, 151
portfolio investment 8 Shell 98, 116, 170
Post, James, et al 53 short-term orientation 149, 150
power-distance index 148, 151 Singapore 135
price dispersion 117 Skilling, Jeffrey 105
private funeral institutions 118 smartphones 174
Procter & Gamble 156 Smith, Adam 22
product differentiation 7 social media 137
product groups 6 social mobility 147
production costs 84 social structure 147

Index
socio-cultural environment 145–6, trading floors 65

159 transformation systems 10–12
attitudes to time 152 transnational strategy 69
centralisation 151 Transparency International 171
communications 152 transportation 26
culture and business 148–50 travel 21, 22
individualism/collectivism 148–9, triad 25
151 Trias de Bes, Fernando 66
language 9, 25, 27, 151–2 triple bottom line 170, 174
religion and secularism 151
society and business 146–8 UN see United Nations
Sony 150, 172–3 uncertainty avoidance 149
South African wine industry 92 Uniform Commercial Code 106,
specialisation 7 110
stakeholder analysis 52–5 Unilever 156
stakeholders 48, 170 United Nations 3, 4, 25, 106
Stalin, Josef 8 United Nations Global Compact
Starbucks 8, 14–15, 16, 26, 31, 54, 59, 172
154 United Nations Office on Drugs and
steel industry 58 Crime 168
strategic business units 17 universities 168
sub-prime lending 122 Uppsala model 82, 94
substitute products or services 75 uranium trade restrictions 108–9
suppliers 35, 75
supply chain disruption 90 Vercueil, Julien 163
sustainability 156 vertical FDI 40
swaps 121 vertical integration 68, 75
sweatshops 171 volatility 34
SWIFT 118 Volkswagen 17
SWOT analysis 47
Wal-Mart 107
Tata Group 46, 67–8, 164 Watt, James 129
tax liabilities 8, 17–18, 31 wealth creation 11
technological change 8–9, 18, 128, Web 2.0 137, 142
166–7 web-based technologies 9
drivers 26, 132–5 Welch, Jack 1, 17, 35
global technology markets 135–9 wine industry 84–6, 89, 92
innovation 129–31, 143–4, 169 working conditions 171
protecting intellectual property World Bank 3, 4, 8, 117
140–2, 143 world exports 5
internet 9, 60, 136 World Health Organization 23
e-commerce 107, 137–9, 143 world population growth 147
knowledge economy 168 World Trade Organization (WTO)
Web 2.0 137, 142 7, 29–30, 38, 106, 107
Tellis, Gerard 93 world wide web 138
Tesla, Nikola 141
Thatcher, Margaret 145
theocratic states 102, 103, 104, 151
Third World 3
time: attitudes to 152
tort law 104
Toyota 18, 154


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Contemporary

Unit 1 The contemporary world of business and

Copyright © 2013 University of Sunderland iii

Unit 4 The globalisation of markets and industries 64

Unit 5 Internationalisation – how, where and when 80

iv Copyright © 2013 University of Sunderland

Unit 7 International financial markets and institutions 112

Unit 8 Technological change 128

Copyright © 2013 University of Sunderland v

Unit 10 Future developments in business and management 161

vi Copyright © 2013 University of Sunderland

Welcome to the Contemporary Developments in Business and Management

This learning pack considers contemporary developments in business and

The contemporary world of business and management is changing, and at an

How to use this pack

If you are on a self-study course, or studying independently with remote tutor

Overview of the units

viii Copyright © 2013 University of Sunderland

We provide a number of self-assessment questions at the end of each unit. These

This book provides an overview of the international business environment,

The book is accompanied by an Online Resource Centre, at http://www.

Copyright © 2013 University of Sunderland ix

CAOBISCO, the Association of Chocolate, Biscuit and Confectionery Industries

University of California Press, for Post’s model for identifying stakeholders,

Professor Aubrey Mendelow, for his stakeholder mapping power/interest

The Organisation for Economic Co-operation and Development (OECD), for

x Copyright © 2013 University of Sunderland

‘A strategy is something like: an

Copyright © 2013 University of Sunderland 1

We will look at some real examples of businesses operating around the

Unit learning objectives

2 Copyright © 2013 University of Sunderland

1.1 The global business environment

A number of key characteristics mark the contemporary business world as

We shall consider each of these key characteristics in turn.

The global pattern of wealth

International relations are always changing, and perhaps never as rapidly as

Copyright © 2013 University of Sunderland 3

Purchasing power parity (PPP) is a technique for adjusting the calculation of

The global pattern of wealth can often be self-sustaining. If a company is

4 Copyright © 2013 University of Sunderland

G8 operations in developing countries such as China and customer contact centres

Figure 1.1: World exports as percentage of global GDP

Copyright © 2013 University of Sunderland 5

2,500 Agricultural products 3.5

1,000 Fuels and mining products

Figure 1.2: International trade by product group

An alternative theory, originating with David Ricardo in the nineteenth century,

6 Copyright © 2013 University of Sunderland

capital-intensive and so on) or knowledge-intensive industries to exploit their education

Greater movement of financial capital

We may understand financial capital movement in this way:

Copyright © 2013 University of Sunderland 7

exchange contracts may be dated back to the twelfth century, international

Historically, national governments have sought to restrict the freedom of

In Unit 2 we will go on to look at two specific forms of financial capital

Rapid technological development

Rapid and continuing technological development is now a key characteristic

8 Copyright © 2013 University of Sunderland

is the emergence of new technologies, unknown to previous generations. These

Developing and bringing together the technologies of telephony and the

Communication is not just faster, it is now multimedia. Multimedia messaging

Language used to be a barrier to international communication, but the internet