INTERNATIONAL BUSINESS ENVIRONMENT SYBBA

Unit 1: Introduction to Globalization

Globalization: Introduction to Globalization, What is globalization?

The globalization of Markets
The globalization of productions

Drivers of globalization

Meaning of Globalization

The IMF defines Globalization as "the growing economic interdependence of countries

worldwide through increasing volume and variety of cross border transactions in goods and
services and of international capital flows, and also through the more rapid and widespread
diffusion of technology."

As Mitchell succinctly puts it, "globalization for better or worse, has changed the way the
world does business. Though still in its early stages, it is all but unstoppable. The challenge
that individuals and businesses face is learning how to live with it, manage it, and take
advantage of the benefits it offers."

In his Management Challenges for the 21st Century, Peter Drucker cautions: "All institutions
have to make global competitiveness a strategic goal. No institution, weather a business, a
university or a hospital, can hope to survive, let alone to succeed, unless it measures up to the
standards set by the leaders in its field, any place in the world."

We may consider globalization at two levels, viz., at the macro level (i.e., globalization of the
world economy) and at the micro level (i.e., Globalization of the business and the firm).

Globalization means the speedup of movements and exchanges (of human beings, goods, and
services, capital, technologies or cultural practices) all over the planet. One of the effects of
globalization is that it promotes and increases interactions between different regions and
populations around the globe.

Globalization in its true sense is a way of corporate life necessitated, facilitated and nourished
by the trans nationalization of the World economy and developed by corporate strategies
Globalization is an attitude of mind — it is a mind-set which views the entire world as a single
market so that the corporate strategy is based on the dynamics of the global business

UNIT 1 S.S.AGRAWAL COLLEGE OF COMMERCE & MANAGEMENT, NAVSARI Page 1

 INTERNATIONAL BUSINESS ENVIRONMENT SYBBA
environment International marketing or international investment does not amount to
Globalization unless it is the result of such a global orientation.
Over the past three decades a fundamental shift has been occurring in the world economy. We
have been moving away from a world in which national economies were relatively self-contained
entities, isolated from each other by barriers to cross-border trade and investment; by distance,
time zones, and language; and by national differences in government regulation, culture, and
business systems. And we are moving toward a world in which barriers to cross-border trade and
investment are declining; perceived distance is shrinking due to advances in transportation and
telecommunications technology; material culture is starting to look similar the world over; and
national economies are merging into an interdependent, integrated global economic system. The
process by which this is occurring is commonly referred to as globalization.

Globalization of Market
Globalization of markets refers to the process of integrating and merging of the distinct world
markets into a single market. This process involves the identification of some common norm,
value, taste, preference and convenience and slowly enables the cultural shift towards the use
of a common product or service.
The globalization of markets refers to the merging of historically distinct and separate national
markets into one huge global marketplace. Falling barriers to cross-border trade have made it
easier to sell internationally. It has been argued for some time that the tastes and preferences of
consumers in different nations are beginning to converge on some global norm, thereby helping to
create a global market.5 Consumer products such as Citigroup credit cards, Coca-Cola soft drinks,
Sony PlayStation video games, McDonald's hamburgers, Starbucks coffee, and IKEA furniture are
frequently held up as prototypical examples of this trend. Firms such as those just cited are more
than just benefactors of this trend; they are also facilitators of it. By offering the same basic
product worldwide, they help to create a global market.

A company does not have to be the size of these multinational giants to facilitate, and benefit from,
the globalization of markets. In the United States, for example, nearly 90 percent of firms that
export are small businesses employing less than 100 people, and their share of total U.S. exports
has grown steadily over the past decade to now exceed 20 percent.6 Firms with less than 500
employees accounted for 97 percent of all U.S. exporters and almost 3 0 percent of all exports by
value. Typical of these is Hytech, a New York-based manufacturer of solar panels that generates
40 percent of its $3 million in annual sales from exports to five countries, or B&S Aircraft Alloys,

UNIT 1 S.S.AGRAWAL COLLEGE OF COMMERCE & MANAGEMENT, NAVSARI Page 2

 INTERNATIONAL BUSINESS ENVIRONMENT SYBBA
another New York company whose exports account for 40 percent of its $8 million annual
revenues.8 The situation is similar in several other nations. For example, in Germany, the world's
largest exporter, a staggering 98 percent of small and midsize companies have exposure to
international markets, via either exports or international production.

Despite the global prevalence of Citigroup credit cards, McDonald's hamburgers, Starbucks coffee,
and IKEA stores, it is important not to push too far the view that national markets are giving way
to the global market. As we shall see in later chapters, significant differences still exist among
national markets along many relevant dimensions, including consumer tastes and preferences,
distribution channels, culturally embedded value systems, business systems, and legal regulations.

These differences frequently require companies to customize marketing strategies, product

features, and operating practices to best match conditions in a particular country.

The most global markets currently are not markets for consumer products-where national
differences in tastes and preferences are still often important enough to act as a brake on
globalization-but markets for industrial goods and materials that serve a universal need the world
over. These include the markets for commodities such as aluminum, oil, and wheat; for industrial
products such as microprocessors, DRAMs {computer memory chips), and commercial jet aircraft;
for computer software; and for financial assets from U.S. Treasury bills to Euro bonds and futures
on the Nikkei index or the euro.

In many global markets, the same firms frequently confront each other as competitors in nation
after nation. Coca-Cola's rivalry with PepsiCo is a global one, as Boeing and Airbus.

A number of consumer products have global acceptance. For example, Coca-Cola, Pepsi,
McDonald's burgers, music of Madonna, MTV, Sony Walkmans, Levis jeans, Indian
globalization-of- Masala Dosa, Indian Hyderabadi biryani, Citicorp credit cards, etc.

Features of Globalization of Markets

Features of Globalization of markets include:

1. The size of the company need not be too large to create a global market. Even small
companies can also create a global market. For example, Harry Ramsden — a small
British company with an annual sale of US$16 million is trying to sell its product of

UNIT 1 S.S.AGRAWAL COLLEGE OF COMMERCE & MANAGEMENT, NAVSARI Page 3

 INTERNATIONAL BUSINESS ENVIRONMENT SYBBA
fish 'n' chips in Japan based on the Japanese culture.
2. The distinctions of national markets are still prevailing even after the Globalization
of markets. These distinctions require the companies to formulate different strategies
for each market. For example, Coca-Cola, Levis jeans and McDonald employ
separate strategies for each country.
3. Most of the foreign markets are the markets for non-consumer goods like industrial
products' machinery equipment, raw materials, computers, software, financial
products, etc.
4. The global business firms compete with each other frequently in different national
markets including their home markets. For example, Coca-Cola is the global rival of
Pepsi. Similarly, Ford and Toyota, Boeing and Airbus, Caterpillar and Komatsu.
Though these companies compete with each Other, they create a global market.

Reasons for Globalization of Markets

Reasons for Globalization of markets include:

1. Large-scale industrialization enabled mass production. Consequently, the companies

found that the size of the domestic market is very small to suffice the production
output, and thus opted for foreign markets.
2. Companies, in order to reduce the risk, diversify the portfolio of countries.

3. Companies globalize markets in order to increase their profits and achieve company
goals.
4. The adverse business environment in the home country pushed the companies to
globalize their markets.
5. To cater to the demand for their products in the foreign markets.

6. The failure of the domestic companies in catering the needs of their customers pulled
the foreign countries to market their products.

7. The national markets are slowly getting vanished due to the Globalization of markets.
Now, we shall discuss the second aspect of Globalization, i.e., the Globalization of
production.

UNIT 1 S.S.AGRAWAL COLLEGE OF COMMERCE & MANAGEMENT, NAVSARI Page 4

 INTERNATIONAL BUSINESS ENVIRONMENT SYBBA
Implications for the Globalization of Markets

In addition to the globalization of production, technological innovations have facilitated the

globalization of markets. Low-cost global communications networks such as the World Wide Web
are helping to create electronic global marketplaces. As noted above, low-cost transportation has
made it more economical to ship products around the world, thereby helping to create global
markets. For example, due to the tumbling costs of shipping goods by air, roses grown in Ecuador
can be cut and two days later sold in New York. This has given rise to an industry in Ecuador that
did not exist 20 years ago and now supplies a global market for roses. In addition, low-cost jet
travel has resulted in the mass movement of people between countries. This has reduced the
cultural distance between countries and is bringing about some convergence of consumer tastes
and preferences.

At the same time, global communication networks and global media are creating a worldwide
culture. U.S. television networks such as CNN, MTV, and HBO are now received in many
countries, and Hollywood films are shown the world over. In any society, the media are primary
conveyors of culture; as global media develop, we must expect the evolution of something akin to
a global culture. A logical result of this evolution is the emergence of global markets for consumer
products. The first signs of this are already apparent. It is now as easy to find a McDonald's
restaurant in Tokyo as it is in New York, to buy an iPod in Rio as it is in Berlin, and to buy Gap
jeans in Paris as it is in San Francisco.

Globalization of Production

Factors influencing the location of manufacturing facilities vary from country to country. They
may be more favorable in foreign countries rather than in the home country. For example,
cheap labor in developing countries, availability of high' quality and cheap raw material in
other countries, etc., enable the companies to produce the products of high quality and low cost
in various foreign countries.
The globalization of production refers to the sourcing of goods and services from locations around
the globe to take advantage of national differences in the cost and quality of factors of production
(such as labor, energy, land, and capital). By doing this, companies hope to lower their overall cost
structure or improve the quality or functionality of their product offering, thereby allowing them to
compete more effectively. Consider Boeing's 777, a commercial jet airliner. Eight Japanese

UNIT 1 S.S.AGRAWAL COLLEGE OF COMMERCE & MANAGEMENT, NAVSARI Page 5

 INTERNATIONAL BUSINESS ENVIRONMENT SYBBA
suppliers make parts for the fuselage, doors, and wings; a supplier in Singapore makes the doors
for the nose landing gear; three suppliers in Italy manufacture wing flaps; and so on.11 In total,
some 30 percent of the 777, by value, is built by foreign companies. For its most recent jet airliner,
the 787, Boeing has pushed this trend even further; some 65 percent of the total value of the
aircraft is outsourced to foreign companies, 35 percent of which goes to three major Japanese
companies.

Part of Boeing's rationale for outsourcing so much production to foreign suppliers is that these
suppliers are the best in the world at their particular activity. A global web of suppliers yields a
better final product, which enhances the chances of Boeing winning a greater share of total orders
for aircraft than its global rival Airbus industries. Boeing also outsources some production to
foreign countries to increase the chance that it will win significant orders from airlines based in
that country. For another example of a global web of activities, consider the example of Vizio
profiled in the accompanying Management Focus.

Early outsourcing efforts were primarily confined to manufacturing activities, such as those
undertaken by Boeing and Vizio; increasingly, however, companies are taking advantage of
modern communications technology, particularly the Internet, to outsource service activities to
low-cost producers in other nations. The Internet has allowed hospitals to outsource some
radiology work to India, where images from MRI scans and the like are read at night while U.S.
physicians sleep and the results are ready for them in the morning. Many software companies,
including IBM and Microsoft, now use

Indian engineers to perform test functions on software designed in the United States. The time
difference allows Indian engineers to run debugging tests on software written in the United States
when U.S. engineers sleep, transmitting the corrected code back to the United States over secure
Internet connections so it is ready for U.S. engineers to work on the following day. Dispersing
value-creation activities in this way can compress the time and lower the costs required to develop
new software programs.

Other companies, from computer makers to banks, are outsourcing customer service functions,
such as customer call centers, to developing nations where labor is cheaper. In another example
from health care, in 2008 some 34,000 Filipinos were transcribing American medical files (such as

UNIT 1 S.S.AGRAWAL COLLEGE OF COMMERCE & MANAGEMENT, NAVSARI Page 6

 INTERNATIONAL BUSINESS ENVIRONMENT SYBBA
audio files from doctors seeking approval from insurance companies for performing a procedure).
Some estimates suggest the outsourcing of many administrative procedures in health care, such as
customer service and claims processing, could reduce health care costs in America by as much as $
70 billion.14 Robert Reich, who served as secretary of labor in the Clinton administration, has
argued that as a consequence of the trend exemplified by companies such as Boeing, IBM, and
Vizio, in many cases it is becoming irrelevant to talk about American products Japanese products,
German products, or Korean products. Increasingly, according to Reich, the outsourcing of
productive activities to different supplier’s results in the creation of products those are global in
nature, that is, "global products." But as with the globalization of markets, companies must be
careful not to push the globalization of production too far. As we will see in later chapters,
substantial impediments still make it difficult for firms to achieve the optimal dispersion of their
productive activities to locations around the globe. These impediments include formal and
informal barriers to trade between countries, barriers to foreign direct investment, transportation
costs, and issues associated with economic and political risk.
For example, government regulations ultimately limit the ability of hospitals to outsource the
process of interpreting MRI scans to developing nations where radiologists are cheaper.

Reasons for Globalization of Production

Companies globalize the production facilities due to the following reasons:

1. Imposition of restrictions on imports by the foreign countries forces the MNCs to

establish manufacturing facilities in other countries. For example, Toyota of Japan
established its plants in the USA and UK due to the import restrictions.
2. Availability of high-quality raw materials and components in other countries.

3. Availability of inputs at low-cost in foreign countries.

4. Availability of skilled human resources at low-cost.

5. Liberal labor laws in the foreign countries.

6. To reduce the cost of transportation and easy logistics management.

7. Facility of exporting to other neighboring foreign countries.

8. To design and produce the products as per the varying tastes of customers in foreign
countries.
Therefore, the companies tend to produce in different locations of the world in order to

UNIT 1 S.S.AGRAWAL COLLEGE OF COMMERCE & MANAGEMENT, NAVSARI Page 7

 INTERNATIONAL BUSINESS ENVIRONMENT SYBBA
enhance the quality, reduce the cost of production, cost of transportation and delivery time to
the various markets.
Thus, the Globalization of production is locating the manufacturing facilities in a number of
locations around the globe to take the advantages of national differences in cost, quality and
availability of inputs and of reaching various markets in shortest possible span of time.
The process of Globalization of production helps the companies to design the following
strategies:
1. Low-cost leadership,

2. Superior quality, and

3. Superior speed

For example, Jet Airlines — Boeing 777 has 1,32,500 major components. These components
are produced in different locations of the globe. A small optical company in the USA, i.e.,
Swan Optical, manufactures its eyewear in I cost factories in Hong Kong, China, Japan, France
and Italy

In addition to the Globalization of markets and production, a number of factors enable the
process of Globalization fast rate.

Implications for the Globalization of Production

As transportation costs associated with the globalization of production have declined, dispersal of
production to geographically separate locations became more economical. As a result of the
technological innovations discussed above, the real costs of information processing and
communication have fallen dramatically in the past two decades.
These developments make it possible for a firm to create and then manage a globally dispersed
production system, further facilitating the globalization of production. A worldwide
communications network has become essential for many international businesses. For example,
Dell uses the Internet to coordinate and control a globally dispersed production system to such an
extent that it holds only three days' worth of inventory at its assembly locations. Dell's Internet-
based system records orders for computer equipment as they are submitted by customers via the
company's website, then immediately transmits the resulting orders for components to various
suppliers around the world, which have a real-time look at Dell's order flow and can adjust their
production schedules accordingly. Given the low cost of airfreight, Dell can use air transportation

UNIT 1 S.S.AGRAWAL COLLEGE OF COMMERCE & MANAGEMENT, NAVSARI Page 8

 INTERNATIONAL BUSINESS ENVIRONMENT SYBBA
to speed up the delivery of critical components to meet unanticipated demand shifts without
delaying the shipment of final product to consumers. Dell also has used modem communications
technology to outsource its customer service operations to India. When U.S. customers call Dell
with a service inquiry, they are routed to Bangalore in India, where English-speaking service
personnel handle the call.

The Internet has been a major force facilitating international trade in services. It is the web that
allows hospitals in Chicago to send MRI scans to India for analysis, accounting offices in San
Francisco to outsource routine tax preparation work to accountants living in the Philippines, and
software testers in India to debug code written by developers in Redmond, Washington, the
headquarters of Microsoft. We are probably still in the early stages of this development. As
Moore's Law continues to advance and telecommunications bandwidth continues to increase,
almost any work processes that can be digitalized will be, and this will allow that work to be
performed wherever in the world it is most efficient and effective to do so. The development of
commercial jet aircraft has also helped knit together the worldwide operations of many
international businesses. Using jet travel, an American manager need spend a day at most traveling
to his or her firm's European or Asian operations. This enables the manager to oversee a globally
dispersed production system.

THE ROLE OF 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, and transportation
technology, including the explosive emergence of the Internet and World Wide Web.
Telecommunications is creating a global audience. Transportation is creating a global village.
From Buenos Aires to Boston, and from Birmingham to Beijing, ordinary people are watching
MTV, they're wearing blue jeans, and they're listening to iPods as they commute to work.

Microprocessors and Telecommunications

Perhaps the single most important innovation has been development of the microprocessor, which
enabled the explosive growth of high-power, low-cost computing, vastly increasing the amount of

UNIT 1 S.S.AGRAWAL COLLEGE OF COMMERCE & MANAGEMENT, NAVSARI Page 9

 INTERNATIONAL BUSINESS ENVIRONMENT SYBBA
information that can be processed by individuals and firms. The microprocessor also underlies
many recent advances in telecommunications technology. Over the past 30 years, global
communications have been revolutionized by developments in satellite, optical fiber, wireless
technologies, and the Internet and the World Wide Web (WWW). These technologies rely on the
microprocessor to encode, transmit, and decode the vast amount of information that flows along
these electronic highways. The cost of microprocessors continues to fall, while their power
increases (a phenomenon known as Moore's Law, which predicts that the power of microprocessor
technology doubles and its cost of production falls in half every 18 months). 27 As this happens,
the cost of global communications plummets, which lowers the costs of coordinating and
controlling a global organization. Thus, between 1930 and 1990, the cost of a three-minute phone
call between New York and London fell from $244.65 to $3.32.28 By 1998, it had plunged to just
36 cents for consumers, and much lower rates were available for businesses.29 Indeed, by using
the Internet, the cost of an international phone call is rapidly plummeting toward zero.

The Internet and World Wide Web

The explosive growth of the World Wide Web since 1994 when the first web browser was
introduced is the latest expression of this development. In 1990, fewer than 1 million users were
connected to the Internet. By 1995, the figure had risen to 50 million. By 2010 the Internet had
1.97 billion users. The WWW has developed into the information backbone of the global
economy. In the United States alone, e-commerce retail sales reached $165 billion in 2010, up
from almost nothing in 1998.Viewed globally; the web is emerging as an equalizer. It rolls back
some of the constraints of location, scale, and time zones. The web makes it much easier for
buyers and sellers to find each other, wherever they may be located and whatever their size. It
allows businesses, both small and large, to expand their global presence at a lower cost than ever
before. It enables enterprises to coordinate and control a globally dispersed production system in a
way that was not possible 20 years ago.

Transportation Technology

In addition to developments in communication technology, several major innovations in

transportation technology have occurred since World War II in economic terms, the most
important are probably the development of commercial jet aircraft and super freighters and the

UNIT 1 S.S.AGRAWAL COLLEGE OF COMMERCE & MANAGEMENT, NAVSARI Page 10

 INTERNATIONAL BUSINESS ENVIRONMENT SYBBA
introduction of containerization, which simplifies transshipment from one mode of transport to
another. The advent of commercial jet travel, by reducing the time needed to get from one location
to another, has effectively shrunk the globe. In terms of travel time, New York is now "closer" to
Tokyo than it was to Philadelphia in the Colonial days. Containerization has revolutionized the
transportation business, significantly lowering the costs of shipping goods over long distances.
Before the advent of containerization, moving goods from one mode of transport to another was
very labor intensive, lengthy, and costly. It could take days and several hundred longshoremen to
unload a ship and reload goods onto trucks and trains. With the advent of widespread
containerization in the 1970s and 1980s, the whole process can now be executed by a handful of
longshoremen in a couple of days. Since 1980, the world's containership fleet has more than
quadrupled, reflecting in part the growing volume of international trade and in part the switch to
this mode of transportation. As a result of the efficiency gains associated with containerization,
transportation costs have plummeted, making it much more economical to ship goods around the
globe, thereby helping to drive the globalization of markets and production. Between 1920 and
1990, the average ocean freight and port charges per ton of U.S. export and import cargo fell from
$95 to $29 (in 1990 dollars).

The cost of shipping freight per ton-mile on railroads in the United States fell from 3.04 cents in
1985 to 2.3 cents in 2000, largely as a result of efficiency gains from the widespread use of
containers. An increased share of cargo now goes by air. Between 1955 and 1999, average air
transportation revenue per ton-kilometer fell by more than 80 percent 35 reflecting the falling cost
of airfreight, by the early 2000s air shipments accounted for 28 percent of the value of U.S. trade,
up from 7 percent in 1965.

The Emergence of Global Institutions

After the destruction of the Second World War and the hardships caused by the Great
Depression (1929-1939), many nations of the world faced challenges. Leaders looked for
solutions to global conflict, poverty, injustice and instability. Intergovernmental groups like the
League of Nations (1920-1946) had tried and failed to promote peace and economic security.
So, world leaders came together to think of a new approach.

Their ideas led to the creation of several new institutions. An institution is an organized social
structure that tends to be complex and long-lasting. Institutions affect how communities are
organized by influencing behavior, customs, and laws. In this case, leaders wanted to create

UNIT 1 S.S.AGRAWAL COLLEGE OF COMMERCE & MANAGEMENT, NAVSARI Page 11

 INTERNATIONAL BUSINESS ENVIRONMENT SYBBA
institutions that would help communities or networks of people. These institutions would work
toward particular social, political, or economic goals.

The new institutions formed at the end of the Second World War were political, economic, and
even non- governmental. But as you'll see, the distinction between these isn't always very neat.
As we discuss these world institutions, we'll consider how effective they were at influencing
people's lives. How did the world change as a result of these new institutions?

The Development of Political Institutions

The League of Nations, formed in 1918, had been intended to prevent another world war. But
in 1943, at the height of World War II, it had obviously failed. Global leaders knew they
needed a new institution that could carry out similar goals but in a different way. So in 1945
they formed the United Nations (UN).Headquartered in New York, the United Nations was
designed to provide what the League of Nations had not: collective security. This basically
means that all members (meaning nations, not individuals) have a duty to come together as an
international community and resist aggression. Ideally, this means preventing aggression in
the first place. But the United Nations does have some tools for dealing with aggression
and conflict if they occur. One of these tools is the United Nation's judicial arm, which
deals with legal issues. This judicial arm is called the International Court of Justice (ICJ)
headquartered in the Hague, a city in the Netherlands. The Court's role is to resolve disputes
between member states to advise the United Nations' various agencies.

The United Nations has also created measures for protecting global health and human rights.
Perhaps the best example of this is the 1948 Universal Declaration of Human Rights (UDHR).
It is a set of standards for human rights, the treatment of women and children, and labor.
Another example was the UN's creation, in 1984, of a special agency called the World Health
Organization (WHO). This agency's goal is to ensure public health globally.

So, the UN clearly serves many different functions, all aimed at a better, healthier, fairer, and
more peaceful world. This has led some to describe the UN as a "world government" that
controls an international community. But it functions quite differently from a government. The
United Nations is not like a sovereign nation that can punish its citizens. Instead, it must
influence its member states through treaties, monitoring, special procedures, and commissions.

These are definitely impressive aims, but has the United Nations met these goals? Has the
United Nations eliminated conflict and human rights abuses? Absolutely not. Over half a

UNIT 1 S.S.AGRAWAL COLLEGE OF COMMERCE & MANAGEMENT, NAVSARI Page 12

 INTERNATIONAL BUSINESS ENVIRONMENT SYBBA
century after the United Nations was formed; there are still many violent conflicts and human
rights abuses. But we have to look at the evidence and think about the scale of the conflicts.
Does the evidence show an overall reduction of violence? Have human rights abuses increased
or decreased over the decades? And for whom have these measures been most effective? To
answer these questions, we can consider evidence like human rights reports, changes in
population, and mortality rates. We know the shifts are occurring, but it'sa lot trickier to figure
out what's causing them.

Globalizing Trade: The Economic Institutions

The simple fact that the United Nation was formed shows that countries were really concerned
about reducing violent conflict after the end of World War II. But the violence of war wasn't
the only concern. Many leaders were also worried about economic instability and poverty.
After the Great Depression, most world economies were still struggling. Even before the war
ended in 1944, some leaders met in the United States to address this problem. Their goal was
to think of policies for regulating the global economy. They wanted to prevent the ups and
downs of the interwar period and ensure stable currencies.

Out of these discussions, two crucial institutions were formed. The first was the International
Monetary Fund (IMF). The second was the International Bank for Reconstruction and
Development, which later became the World Bank. The original goals of these institutions
were to help control the destructive ups and downs of global markets. They were created to
ensure that the world economy was growing in a balanced way.

The original goals of the IMF and the World Bank were protecting employment and
standards of living. They also wanted to make sure trade was balanced and not dominated by
specific countries. Both institutions therefore invested in helping member countries develop
their resources and productive powers. The IMF's written mission reflected this, with its
emphasis on international cooperation, balanced growth of international trade, and stability.
Its initial goals were largely focused on regulation. The World Bank had a slightly different
focus: reconstruction and development.

Working together, the idea was that they would help member states share risk, resources, and
information. This was meant to be non-political. Each state's voting power was aligned to its
economic contribution. This non- political style was important, because member states
wanted to avoid the nationalist policies that had made the Great Depression so devastating.

UNIT 1 S.S.AGRAWAL COLLEGE OF COMMERCE & MANAGEMENT, NAVSARI Page 13

 INTERNATIONAL BUSINESS ENVIRONMENT SYBBA
Instead, these institutions worked by creating more cooperation. The IMF, for example, gave
loans to developing countries to cover trade deficits (shortages). The World Bank made
massive investments in the form of debt relief and reconstruction projects, particularly in
Europe.

Those were the original goals of these two organizations. But over time, this changed. The
goal became opening up markets around the world, which is called economic liberalization.
The idea is that markets would be less regulated, allowing networks of exchange to operate
more freely. The international institution that most pushed for economic liberalization is the
World Trade Organization (WTO), which was founded in 1995.

How did these institutions change the world? Over several decades, the global markets did in
fact become increasingly connected into broad networks. This allowed money and investment
to move a lot more easily. These institutions also played crucial roles in managing financial
crises and economic transitions. For example, they encouraged centrally-planned economies
from the former Soviet Union to move toward open markets.

Non-Governmental Institutions

Another type of institution that attempts to make change at the global level are international
non-governmental organizations (INGOs). From as early as the nineteenth century,
organizations like the International Committee of the Red Cross and Oxfam International
have worked to tackle global health problems and poverty. More recently, human rights
advocacy organizations, like Amnesty International and Human Rights Watch, have had a
major effect on how people understand their role in the world. These organizations have
allowed many more people see themselves as global citizens participating in an international
community. Environmental activist organizations like Greenpeace have had a similar effect.
That's because these groups have increasingly used media campaigns to raise awareness.
These campaigns promote a feeling of global responsibility.

This belief in the importance of common action highlights the ways these institutions shape
people's communities. When you think about it, this is a powerful—and effective—belief.
INGOs^22 squared like Amnesty International have been effective by building upon the
United Nations' human rights efforts. They've called attention to abuses and pushed for
violent acts like rape to be defined as war crimes. They also helped mobilize world opinion

UNIT 1 S.S.AGRAWAL COLLEGE OF COMMERCE & MANAGEMENT, NAVSARI Page 14

 INTERNATIONAL BUSINESS ENVIRONMENT SYBBA
against things like nuclear testing and the racist system of Apartheid in South Africa.

How did they accomplish this? By changing world opinion. And that's no small thing. It
creates a powerful feeling of connectedness and shared responsibility. It's so powerful that
American President Dwight Eisenhower once said, when asked to continue nuclear testing,
"the new thermo-nuclear weapons are tremendously powerful; however, they are not… as
powerful as is world opinion today in obliging the United States to follow certain lines of
policy."

Some conclusions

The world is now connected in unprecedented ways because of international political and
economic institutions and global NGOs. They've created broader, more fluid networks. And
they've also created greater, more encompassing senses of community. But these connections
have not always been even. The effects have been partial, inconsistent, short-lived, or even
negative in some cases. They haven't always managed to prevent crises. Many people get left
behind. Also, in pushing economic liberalization, these institutions have resulted in fewer
social protections. In many cases, in order to receive debt relief, loans, or other investment,
countries have been forced to reduce social protections like healthcare. Collectively, these
changes have created more uniformity on a global scale—for better or for worse.

Drivers of Globalization

The external environmental factors contributing to the globalization include:

1. Establishment of WTO

2. Emergence and Growth of Regional Integration

3. Declining in Trade Barriers

4. Declining Investment Barriers

5. Increase in FDI

6. Technological Changes and

7. Growth of MNCs.

Establishment of WTO: WTO was established with effect from 1st January 1995 after the
outcome of Uruguay round. GATT was converted in to WTO for strengthen the world
economy and lead to more trade, investment, employment and income growth throughout the

UNIT 1 S.S.AGRAWAL COLLEGE OF COMMERCE & MANAGEMENT, NAVSARI Page 15

 INTERNATIONAL BUSINESS ENVIRONMENT SYBBA
world.

Regional Integration: It means countries of the same areas increases the size of market,
aggregate demand for products and services, quantity of production, employment and
economic activity. People get variety of products at lower prices which enhance their
purchasing power, standard of living. E.g. EU, NAFTA, ASEAN, SAARC, LAFTA, APEC
etc.

Declining in Trade Barriers: The trade barrier like quotas and tariffs rates were imposed by
Govt. to protect domestic business from international business was reduced after World War
II. So, free flow of goods and services could be easy for developing countries too.

Declining Investment Barriers: Global business firms invest capital in order to establish
manufacturing and other facilities in foreign countries. But foreign govt. imposes barriers on
foreign investment to protect domestic industries. But various countries now removing these
barriers on FDI in order to encourage the growth of global business.

Increase in FDI: The investment made by a company in new manufacturing and/or

marketing facilities in a foreign country is known as FDI. There are number of reasons for the
growth of FDI, like: increase in sales and profits, enter into rapidly growing markets, reduce
costs, consolidate trade blocs, protect domestic markets, protect foreign markets, acquire
technological and managerial know-how.

Technological Changes: Technological changes are amazing after 1980s. It’s a revolution in
case of Telecommunication, Information Technology, Transportation Technology, On-line
Globalization, Internet, Microprocessors and World Wide Web. It converts the global
company to virtual global company.

Growth of MNCs: A multinational corporation/company is an organization doing business

in more than one country. Transnational company produces, markets, invests and operates
across the world. MNCs and TNCs have been growing and spreading their operations due to
market, financial and other superiorities and expansion of international markets.

UNIT 1 S.S.AGRAWAL COLLEGE OF COMMERCE & MANAGEMENT, NAVSARI Page 16

 INTERNATIONAL BUSINESS ENVIRONMENT SYBBA
Note: Full Names:
EU: European Union
NAFTA: North American Free Trade Agreement
LAFTA: Latin American Free Trade Agreement
ASEAN: Association of South East Asian Nation
SAARC: South Asian Association of Regional Co-operation
APEC: Asia-pacific Economic Co-operating
OPEC: Organization of Petroleum Exporting Countries

Works Cited

Hill, C. W. INTERNATIONAL BUSINESS: COMPETING IN THE GLOBAL MARKETPLACE. The

McGraw-Hill Companies, Inc.

UNIT 1 S.S.AGRAWAL COLLEGE OF COMMERCE & MANAGEMENT, NAVSARI Page 17