Sprott School of

Business

BUSI 2701
Fundamentals of
International
Business
Lecture # 2
2701 Section D Administration

Assignment # 1
Due on Thursday, 9th February 2017
Individual paper, 5 pages in length
Tables, data, charts as appendices
You may collaborate on research
Country sign-up sheets will be
available next week
2701 Section G Administration

Mid-Term Exam
On Thursday, 2 nd
of March 2017
 What Is
Globalization?
Globalization refers to the shift
toward a more integrated and
interdependent world economy.

Globalization has several different

facets, including
Globalization of Markets
Globalization of Production
Globalization of Consumers
4
Organization of our course: BUSI
2701
First half of our course is very
general
What exactly is this globalization?
How did it come about?
What does it mean for business? For
Consumers? For Governments?
Is culture still important? Are we
becoming more similar, or more
 Second half of our course we
look at what affects
international business:
Foreign exchange markets
Strategies successful businesses use
How global marketing plays out
And how global supply chains bring
components together into products
We end with Human Resource
Management in International
Globalization

7
Global
Business
Today
4rd Canadian
Edition
Charles W. Hill - Thomas
McKaig

8
Globalization lecture # 2
Learning Outcome:

Understand what
globalization refers to and
how it affects each of us.
Learn some of the history
behind globalization, and what
is driving it now.
Gain an appreciation for the
arguments for and against
globalization. 9
Outline for Today

1.Background to Globalization
2.Case Discussion Tim
Hortons (now part of Burger
King!)
3.The Institutions created by
Globalization
4.Case Discussion Adidas-
Salomon
 What Is
Globalization?
Globalization of Markets
Refers to the merging of separate
national markets into one huge
global marketplace.

Globalization of Production
Refers to the sourcing of goods and
services from locations around the
world to take advantage of national
differences, varying costs, and
quality of factors of production.

11
 What Is Globalization?

Globalization of Customers
Refers to the merging of separate
national markets into one huge global
marketplace.

12
One Definition of Globalization:

The deepening integration of

world economies as a result of
trade and cross-border direct
investment. The enablers of
globalization are politics,
economics, and technology,
and its primary mechanisms are
international trade, foreign
direct investment (FDI),
communications, and travel,
which have fostered more 13
This globalization is evolving
over time:
Trade has existed for
millennia. There were silk
roads from China and the
Orient to Europe, the amber
roads from Eastern Europe,
then the discovery of the
Americas.
Globalization now refers to the
shift toward a more integrated
and interdependent world
economy 14
Globalization Waves
Some conceptualize
Globalization as occurring in
waves:
Out of Africa 100,000 years ago
From the Middle East and Mediterranean
5,000 years ago to 3,000 years ago
From Europe 2,000 years ago
And conquests coming from Asia across
China, India, and into Europe 2,000 to
1,000 year ago.
Then the European colonisations in the
modern era. 15
Lvy (2006) proposes three
waves in modern globalization:
The first wave occurring between
1870 and the start of the First World
War
A second wave, from 1945 to the mid-
1980s, which saw the integration of
economies in the developed world
From the 1980s through the present,
a third wave manifested itself in the
liberalization of politics and trade,
and the formation of the European
Union (EU).
16
Lvy sees five factors as central
to the second and third waves:
The significant innovations in
transportation and communications
A reduction in trade barriers
An increase in foreign direct investment
(FDI) as shown by a tripling of FDI between
1995 and 2005
The increase in global production capacity
due to China and the smaller Asian newly
industrialized countries (NICs)
The increased role of services in global
commerce
17
The Interdependent Global
Economy
In todays world,
national
economies are
merging into an
interdependent
economic
system.

18
Is this your cell phone?
Designed in United States, with
Components from Germany, Korea,
Japan, United States
Assembled in China, and sold in
Canada! 19
The Interdependent Global
Economy
In an interdependent
economic system:
Barriers to cross-border trade and
investment are tumbling,
Perceived distance is shrinking due
to advances in transportation and
telecommunications technology,
Material culture is starting to look
very similar the world over,
And national economies are merging
into an interdependent global
economic system.
20
The Interdependent Global
Economy
Another Example:
A Canadian might drive a car that
was:
Designed in Germany
Assembled in United States by
Daimler Benz
Manufactured from components
made in the UK and Japan, and
Whose components could be
made from raw materials: rubber
from Malaysia or steel from Korea
And you may have filled your car
with gas from a service centre 21
 Going global is not without
problems
The hard reality is that for all the
superficial similarities in material and
popular culture and in business
systems, doing business in foreign
nations still has unique challenges.
Because of different tastes and
preferences, what sells in Britain may
not sell in Thailand.
Business processes that give a retailer a
competitive advantage in the United
States may be difficult to implement in
China.
A brand that means something in Russia
22
may mean little in Indonesia.
Whats Different?

When your parents went to

school/university:
Goods were designed, produced, and
marketed in Canada
There were a few television stations,
generally local
Communication was very expensive
Marketing was highly differentiated

23
The Interdependent Global
Economy
Opening Case:
Food
Retailers are
going global!

Most retailers
are pushing
ahead in their
attempts to
build a global
brand.
24
 Globalization

Globalization of Markets
Low-cost transportation has
made it more economical to
ship products around the
world,
thereby helping to create
global markets.
Low-cost global communications networks, such
as the World Wide Web, are helping to create
electronic global marketplaces.
A logical result of this evolution is the
emergence of global markets for consumer
25
products.
 Globalization

Globalization of
Markets
While modern
communication and
transportation
technologies are ushering
in the global village,
very significant national
differences remain in
culture, consumer
preferences,
What works in one market may or may not
and business practices.
work in another!
26
 Globalization

Globalization of
Production

As transportation costs
associated with the
globalization of
production declined,
dispersal of production to
geographically
widespread locations
Of course this was oftenbecame
to take advantage of much
more economical
lower labour costs!
27
Case Discussion: Tim Hortons

Text page 37 & 38

Think about:
- Why is Tim Hortons popular in
Canada?
- Do you think it could succeed in
other countries? Burger King
definitely does!
- Why did Krispy Kreme donut chain
not do well in Canada?
Global Institutions

As markets globalize business

activities and transcend
national borders, institution
are needed to help manage
and regulate the global
marketplace.
Including the following
organizations:
United Nations (1945)
World Trade Organization (WTO)
International Monetary Fund 29
Global Institutions
World Trade Organization (WTO)
www.wto.org
The World Trade Organization is primarily
responsible for policing the world trading
system and making sure nation-states adhere
to the rules laid down in trade treaties signed
by WTO member states.
The WTO is essentially a world trade
referee for countries wanting to grieve
that parties to trade agreements have
broken the agreements
In Chapter 6 we will take a close look at the
WTO
See also witiger.com/internationalbusiness
30
WTO

Which large country recently

became a member of the WTO?
Give one example of a WTO
trade dispute & resolution?

(See:
https://en.wikipedia.org/wiki/Lis
t_of_WTO_dispute_settlement_ca
ses)
Global Institutions
International Monetary Fund
The IMF and the World Bank were
both created in 1944
IMF was created to maintain order
in the international monetary
system,
Help countries deal with erratic exchange
rates
And the World Bank was created to
promote economic development
Development after a war or natural disaster
32
 Global Institutions
International Monetary Fund
The IMF is often seen as the
lender-of-last-resort to nation-
states whose economies are in
turmoil and currencies are
losing value against those of
other nations.
The point being that if a
country has a currency that is
of a small value, it makes it
hard for them to trade with
www.imf.org/external/about.htm
other countries
And this effects global trade
33
for everybody
Global Institutions
International Monetary Fund
The IMF loans come with strings attached
In return for loans, the IMF requires countries
to adopt specific policies aimed at returning
their troubled economies to stability and
growth
These strings have generated the most
debate
Some critics charge that the IMFs policy
recommendations are often inappropriate
We will look at the debate over the role of the IMF in
Chapter 10.
For more on the IMF see
www.witiger.com/internationalbusiness/IMF.htm 34
IMF examples:

In 1997 1998 Asia crisis

Thailand, Indonesia, Malaysia, Korea
all had currency crisis
Excessive borrowing in foreign
currency with fixed exchange rates
Payment obligations become too
heavy, currency links were broken
Countries like Indonesia were
forced to devalue their
currencies.
35
Example:

Indonesia Rupiah:
Pre-crisis USD $ 1 = 2,000
RU
Post -crisis USD $ 1 = 16,000
RU
What would this mean to you, if you
were a wage earner, making
1,000,000 Rupiah per month
And you owed $10,000 in USD $ for a
car loan?
Your salary just fell from $500 /month36
Or you are in business.

Borrowed $1 million dollars

from Citibank
Pre-crisis took 2,000,000,000
Rupiah
Post crisis took 16,000,000,000
Rupiah

Result of the crisis: businesses

failed, unemployment grew,
civil unrest, government fell
37
 It isnt only developing
countries with large currency
movements.
Canadian Dollar vs. American
Dollar:

Source: Federal Reserve Bank of St. Louis.

See: https://fred.stlouisfed.org/series/EXCAUS
From 2002 to 2014 the Canadian Dollar
appreciated against U.S. Dollar, then
depreciated to now in 2017
CAD/USD
1 January 2010 1 January 2017

Cost in CAD $ to buy USD $1

Assessing the Impact

Imagine you were the owner of a

hotel in Ottawa, and your clients
considered Canada for an annual
conference
In 2012 CAD $1 = USD $0.9839
By 2017 the CAD $1 had
depreciated to USD $0.7571
now
If your hotel charge is CAD $200
per day
For a three-day conference:
In U.S. dollars 2017 2012
CAD $600 @ $0.9839 = USD $ 590

CAD $600 @ $0.7571 = USD $454

Even if the room-rate is held constant, this is
a cost decrease for a U.S. visitor of 54%
(this being ($590 454)/$590 = 0.229 or
23%
An Ottawa hotel room becomes much
cheaper!

See: http://www.bankofcanada.ca/rates/exchange/10-year-converter/
 USDCAD Historical - 1 Year
Cost in CAD$ to buy USD $1

Source: http://www.advfn.com/stock-market/FX/USDCAD/chart
What is the Impact of Currency
Changes?
1)You plan to travel on a
holiday to the United States,
priced in USD$

)A USD $1,000 trip in May 2012

could have cost $1,000 x 1.02
= $1,020 CAD
)That USD $1,000 trip in Jan
2016 now will cost $1,000 x
1.32 = $1,320 CAD
Impact on Business

2) A truckload of produce (fruits

& vegetables) might have cost
$100,000 USD in January 2014

$100,000 x 1.09 = $109,000

CAD
$100,000 x 1.33 = $133,000
CAD now!

So imported food costs 22%

IMF Intervention when countries
lose liquidity (the ability to pay
their bills)
Lends the Government money (in
USD$ or EURO
Tells the Government to
Sell off commercial businesses & assets
Increase taxes / reduce subsidies
Reduce government employee salaries /
reduce minimum wages
Cut back on government spending
Postpone retirement age
Increase domestic interest rates to
business
Global Institutions

The World Bank www.worldbank.org is not

one single entity but rather a group comprised of
the following:
IBRD - the International Bank for Reconstruction
and Development
IDA - International Development Association
IFC - International Finance Corporation
MIGA - Multilateral Investment Guarantee
Agency
ICSID - International Centre for Settlement of
Investment Disputes

46
Global Institutions

47
Global Institutions

The World Bank

Most often it is the IBRD that is involved with
international business opportunities for Canadian
companies
Canada's Dept. of Foreign Affairs has a section on
their website providing an overview of the steps
a company must take to be involved with World
Bank projects
http://www.tradecommissioner.gc.ca/eng/developme
nt-humanitarian-aid-markets/world-bank.jsp

48
World Bank: RECENTLY APPROVED
PROJECTS
Agriculture Development and Food Price
Response
,Mauritania-Aug 02, 2012
Sustainable Management of Agricultural
Research and Technology
Dissemination (SMARTD),Indonesia-Aug
02, 2012
KENYA: NATIONAL URBAN TRANSPORT IM
PROVEMENT PROJECT
,Kenya-Aug 02, 2012
Managing Healthcare Waste and PCBs
,Tunisia-Jul 26, 2012

See: http://www.worldbank.org/projects 49
Drivers of Globalization

1. Decline in barriers
to the free flow of
goods, services,
and capital, since
the end of World
War II
2. Technological
change in
communication,
information
processing, and Source:
P. Dicken, Global Shift (New York: Guilford Press, 1992), p
104

transportation 50
Drivers of Globalization
1. Decline in barriers decrease in
tariffs

Source:
P. Dicken, Global Shift (New York: Guilford Press, 1992), p
104

51
Drivers of Globalization
1. Decline in barriers (continued)
. The lowering of barriers to international trade
enables firms to view the world as their
market, rather than only a single country or a
nearby region.
. The lowering of trade and investment barriers
also allows firms to base production at the
optimal location for that activity, serving the
world market from that location.
. A firm might design a product in one country,
produce component parts in two other
countries,
assemble the product in yet another country,
Source:

and then export the finished product

P. Dicken, Global Shift (New York: Guilford Press, 1992), p
104

around the world. 52

Drivers of Globalization
2. Technological change
. The lowering of trade barriers made
globalization of markets and production a
theoretical possibility.
. Technological change has made it a tangible
reality.
Since the end of World War II, the world has seen
major advances in
communication,
information processing,
transportation technology,
data, via emergence of the Internet and World
Wide Web. Source:
P. Dicken, Global Shift (New York: Guilford Press, 1992), p
104

53
Drivers of Globalization
2. Technological change (continued)
. In 1990, fewer than 1 million users were
connected to the Internet.
. By mid-2010, there were approximately 1.97
billion Internet users, accounting for nearly 29
percent of the worlds population.
The Internet has changed the way people
communicate.
As of September 2009, in Canada there were over
25 million Internet users, and with Canadas
population exceeding 33.4 million, that is
approximately 75 percent of its population.
Source:
P. Dicken, Global Shift (New York: Guilford Press, 1992), p
104

54
Drivers of Globalization
2. Technological
change
(continued)
. Transportation
Technology
Before the advent of
containerization, it could
take several days and
several hundred
longshoremen to unload
a ship and reload goods
onto trucks and trains
Source:
P. Dicken, Global Shift (New York: Guilford Press, 1992), p
104

55
The Changing Demographics of
the Global Economy

56
The Changing Demographics of
the Global Economy

57
Changes in Foreign Direct
Investment

58
The Changing World Order
The economies of many of the former
Communist states were in very poor
condition
More quiet revolutions have been
occurring in India, China, and Latin
America.
The implications for international
businesses may be just as profound as the
collapse of communism in Eastern Europe.
China may move from Third World to
industrial superpower status even more
rapidly than Japan did
Perhaps India will now rapidly develop, 59
Does International Trade lead to
Proverty Reduction?
2011 World Bank research report,
A Comparative Perspective on Poverty Red
uction in Brazil, China, and India
,
Using a common poverty line of $1.25
per person, per day, the studys findings
include:
All three countries had a drop in percentage
of populations living below the poverty line
between 1981 and 2005.
China dropped from 84% in poverty in 1981
to 16% in 2005; India from 60% to 42%; and
Brazil from 17% to 8%. 60
World Bank: Poverty Reduction in
Brazil, China, and India
90%

80%

70%

60%

50%
1981
40% 2005

30%

20%

10%

0%
China India Brazil

61
The Changing World Order

Throughout most of Latin America, debt

and inflation are down,
Governments are returning to selling
state-owned enterprises to private
investors,
Foreign investment is more welcome,
And some of the regions economies are
growing rapidly.
These changes have increased the
attractiveness of Latin America, both as a
market for exports and as a site for foreign
direct investment.
62
Interesting Video ...

http://www.ted.com/talks/paddy
_ashdown_the_global_power_shif
t#t-364257
The Globalization Debate

Is the shift toward a more

integrated and interdependent
global economy a good thing?
Anti-globalization arguments:
Harmful effects on jobs and income
Labor policies
Environmental impact
National sovereignty
Worlds poor

64
Globalization, Jobs and Income

There has been evidence of off-shoring of

Canadian jobs to developing countries,
with fears that this process will have long-
term harmful effects on Canadas well-
being as a whole.
According to IDC Canada forecasts,
Canadian IT off-shoring reached $15 billion
in 2010, representing a growth of
approximately 3.8 percent from 2009

See:
http://www.idc.ca/about/about.jsp
65
Globalization, Labour Policies

A second source of concern is that free

trade encourages firms from advanced
nations to move manufacturing facilities to
less developed countries that lack
adequate regulations to protect labour and
the environment from abuse by the
unscrupulous
Globalization critics often argue that
adhering to labour and environmental
regulations significantly increases the
costs of manufacturing enterprises and
puts them at a competitive disadvantage
in the global marketplace
66
Globalization and National
Sovereignty
Another concern voiced by critics of
globalization is that todays increasingly
interdependent global economy shifts
economic power away from national
governments and toward supranational
organizations such as the World Trade
Organization, the European Union, and the
United Nations
The World Trade Organization is a favourite
target of those who attack the headlong
rush toward a global economy

67
Case Discussion: Adidas sporting
goods
Text page 39
What do you think:
- If companies are sourcing goods
from around the world, is this safe
for consumers?
- Do you think it fair if workers are
fired in France, or Canada, (etc)
and replaced by workers in Brazil,
or Vietnam (etc)
- Is it enough to let companies
monitor themselves internationally,
or should they be more regulated?
More Recent Trends:

Through the 1970s to 1990s

multiple rounds of the GATT
(predecessor to WTO) tariffs and
barriers were reduced.
However, the most recent round in
DOHA has stalled.
Regional trade blocks are
developing while WTO is held up.
These include NAFTA, Mercosur,
European Union, ASEAN, etc.
Now Canada is finalizing CETA (w/
Europe) and considering TPP (w/ 69
And Most Recently: crisis in
Europe!
The U.S. experienced financial
crisis in 2007-2008; America has
only now fully recovered
Excessive debt was the trigger
Europe has been going through its
crisis;
Canada has not done this
deleveraging it may be our turn
for an economic crisis!

70
Some Recommendations:

There were and still are two (2)

schools of thought for addressing
Europes debt crisis:

1.Foster economic growth then the

debt is less of a burden to repay.

2.Adopt austerity reduce

expenditures and government
spending, in time the debt
payments will be more moderate.
71
Globalization Affects National
Sovereignty
As the global economy becomes
more interdependent, economic
power shifts from national
governments toward
supranational organizations like
the WTO, IMF and the EU.

Canada adopts standards and

regulation set by NAFTA, or the
US 72
 How Does Globalization Affect
National Sovereignty?

Critics argue that unelected bureaucrats

have the power to impose policies on the
democratically elected governments of
nation-states
Supporters claim that the power of
these organizations is limited to what
nation-states agree to grant
The power of the organizations lies in
their ability to get countries to agree to
follow certain actions

73
In the absence of global treaties
under the auspices of the WTO,
many countries are entering into
bilateral or regional agreements.

Example: Canada now has a host

of bilateral agreements

Korea Costa Rica

Israel Colombia
Peru Jordan
Panama Chile
74
 Globalization and
Regionalism
There is an ongoing tension between
globalization and regionalism.

As of 2005, there were approximately

300 regional trade agreements (RTA)
either signed or in negotiation,
governing some 40% of world trade.
Further, almost every country on the
planet is now a signatory to at least one
RTA (Lvy, 2006).

75
Canada in regard to
Globalization and Regionalism
Canada is on both sides of the issue:
WTO agreements in services would be a
great advantage
But, the 2003 WTO review of Canadian
trade policies criticized Canadas
willingness to enter into bilateral trade
agreements (Head & Ries, 2004), and
Canada tries to protect a number of
sectors
With the WTO Doha round blocked,
Canada is increasing trade integration
within its region, i.e. relationships with
76
the US and Mexico through NAFTA, and
Canadas regional
marketplace
Between 1990 and 2003, Canadian exports
increased from C$149 billion to C$381 billion.

Of the C$232 billion increase, C$215 billion

(93%) was due to increased exports to the US
(Head & Ries, 2004).

77
Conclusion:
What are the benefits to
Globalization?
Consumers: more variety,
cheaper prices

Individuals: travel, culture,

education, communication

Businesses: larger markets,

lower input costs

78
Canada has been a trading nation
since colonisation:
First we imported
manufactured goods from
Europe in exchange for raw
materials
Now we export resources
around the world, in part to
pay from products not found or
not made in Canada

79
Are there many problems to
Globalization?
Rights: product safety &
quality

Employment: changing
locations

Environment: potential for

degradation

Sovereignty: whos in charge 80

Lecture 2 Summary
Understand what globalization
means, and what is driving
globalization (i.e. less regulation;
more communication &
transportation)
Appreciate how globalization is
affecting us: cheaper consumer
goods, more selections;
increased competition, shifting
levers of control
81