International business Management (MGT 520) VU

Lesson 6

International Business: Globalization

Learning Objectives:

Introduce the student to the contemporary issues in international business that illustrates the
unique challenges of international business.

2. Point out the macro-economic and political changes that have taken place in the last 30
years, and suggest the implications of these changes for international business

3. Illustrate the importance of information technology and technological changes in

driving the globalization of products and markets.

4. Explore the changing nature of firms that do business outside their national borders -
many small firms in remote locations can now market their products and services world
wide through the internet.

5. Highlight some of the concerns raised by critics of globalization, and the adverse
effects globalization can have on some firms and individuals.

6. Explore the challenges that globalization holds for managers within an international
business.

Lecture Overview
THE GLOBAL GROCER

INTRODUCTION
WHAT IS GLOBALIZATION?
The Globalization of Markets
The Globalization of Production

DRIVERS OF GLOBALIZATION
Declining Trade and Investment Barriers
The Role of Technological Change
THE CHANGING DEMOGRAPHICS OF THE GLOBAL ECONOMY
The Changing World Output and World Trade Picture
The Changing Foreign Direct Investment Picture
The Changing Nature of the Multinational Enterprise
The Changing World Order
The Global Economy of the 21st Century

THE GLOBALIZATION DEBATE: PROSPERITY OR IMPOVERISHMENT?

Antiglobalization Protests,
Globalization, Jobs, and Incomes
Globalization, Labor Policies, and the Environment
Globalization and National Sovereignty
Globalization and the World’s Poor

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International business Management (MGT 520) VU
The changing demographics of the global economy.
1. The U.S. share of world output has declined dramatically in the past 30 years (See Table
1.2), and a much more balanced picture is now developing among industrialized
countries. Looking ahead into the next century, the share of world output of what are
now referred to as “developing countries” is expected to greatly surpass that of the
current “industrialized countries.”

2. The source and destinations of FDI has also dramatically changed over recent years,
with the US and industrialized countries becoming less important (although still
dominant) as developing countries are becoming increasingly considered as an attractive
and stable location for investment (See Figures 1.3 and 1.4).

3. A number of large multinationals are now non-U.S. based, and many are recognizable
brand names in the worldwide (e.g. Sony, Philips, Toshiba, Honda, BMW). The new
large multinationals are not only are originating in other developed countries, but there
are an increasing number of multinationals based in developing countries. Table 1.3
shows the change in the home country of multinationals since 1973. The country focus
on Korea’s new multinationals clearly illustrates the growth of developing country
multinationals.

4. An increasing number of small firms are becoming global leaders in their field, giving
rise to the mini-multinational. The management focus segment on Harry Ramsden’s
illustrates the opportunities available to small firms.

5. The fall of communism and the development of free markets in Eastern Europe and
the former Soviet Union create profound opportunities, challenges, and potential
threats for firms.

6. The economic development of China presents huge opportunities and risks, in spite of
its continued Communist control.

7. For North American firms, the growth and market reforms in Mexico and Latin
America also present tremendous new opportunities both as markets and sources of
materials and production.

8. The path to full economic liberalization and open markets is not without obstruction.
Economic crises in Latin America, South East Asia, and Russia all caused difficulties in
1997 and 1998. In response, much trade was curtailed, and some countries imposed
new controls. Malaysia, for example, suspended foreigners from trading in its equity
and currency markets to “prevent destabilizing influences.” While firms must be
prepared to take advantage of an ever more integrated global economy, they must also
prepare for political and economic disruptions that may throw their plans into disarray.

E. The globalization debate: prosperity or impoverishment?

1. Is the shift toward a more integrated and interdependent global economy a good thing?
While many economists, politicians and business leaders seem to think so, globalization
is not without its critics. Globalization stimulates economic growth, raises the incomes
of consumers, and helps to create jobs in all countries that choose to participate in the
global economy. (Your textbook is strongly in favor of free trade). Some of this
growth, however, creates “sweatshop” jobs, increases pollution, and draws people from
the countryside into ever more crowded cities and slums. (On some college campuses
there have been student protests that the clothing sold in the bookstore is made in

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overseas sweatshops. In response, some college bookstores have altered their
procurement decisions. But does that action change the conditions of the sweatshops
or merely deny jobs to foreign workers?)

2. In developed countries, labor leaders lament the loss of good paying jobs to low wage
countries. When the NAFTA agreement was signed, some politicians warned of a
hearing a “giant sucking sound” as jobs left the USA for Mexico. Even if the jobs are
not lost, it creates downward pressure on wages in industries where overseas
production is a viable option. The availability of jobs for unskilled workers is clearly
threatened when those jobs can be more efficiently performed elsewhere. One solution
to this problem is to increase the education and training of workers in developed
countries to maintain employment, and simply let the unskilled jobs go to locations
where unskilled workers will accept lower wages.

3. Lower labor costs are only one of the reasons why a firm may seek to expand in
developing countries. These countries may also have lower standards on environmental
controls and workplace safety. Nevertheless, since investment typically leads to higher
living standards, there is often pressure to increase safety regulations to international
levels. No country wants to be known for its poor record on health and human safety.
Thus supporters of globalization argue that foreign investment often helps a country to
raise its standards.

4. There is also political and economic pressure on firms not to exploit labor or the
environment in overseas operations. Western firms have been the subjects of
consumer boycotts when it has been revealed that they, or their independent suppliers,
operate at standards below that in developed countries.

5. With the development of the WTO and other multilateral organizations such as the EU
and NAFTA, countries and localities necessarily cede some authority over their actions.
If the USA wanted to “protect its domestic lumber industry” by preventing imports of
lumber from Canada, the dispute would likely be settled by an international arbitration
panel set up by the NAFTA agreement or the WTO. Because of its trade agreements,
the USA would likely be forced to open its markets to importation of lower cost, higher
quality Canadian lumber. While this would clearly be good for consumers, the
domestic lumber industry would protest. While clearly some sovereignty has been
ceded, it has been done to protect the best interests of consumers. If a nation wanted
to retreat into a more protectionist position, it could clearly choose to withdraw from
its international agreements.

F. Managing in the global marketplace.

1. As their organizations increasingly engage in cross-border trade and investment, it

means managers need to recognize that the task of managing an international business
differs from that of managing a purely domestic business in many ways. Countries
differ in their cultures, political systems, economic systems, legal systems, and levels of
economic development.

2. These differences require that business people vary their practices country by country,
recognizing what changes are required to operate effectively. It is necessary to strike a
balance between adaptation and maintaining global consistency, however. Coca-Cola
would not be as successful, nor would Coke be Coke, if it tasted like ginseng in one
country, lemon in another, and rhubarb in a third. Clearly some adaptations need to be
made to correspond with local regulations and distribution systems, but some things

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need also remain consistent in order to benefit from economies of scale in advertising
and production.

3. As a result of making local adaptations, the complexity of international business is

clearly greater than that of a purely domestic firm. Firms need to decide which
countries to enter, what mode of entry to use, and which countries to avoid. Rules and
regulations also differ, as do currencies and languages.

4. Managing an international business is different from managing a purely domestic

business for at least four reasons: 1) countries differ, 2) the range of problems and
manager faces is greater and more complex, 3) an international business must find ways
to work within the limits imposed by governmental intervention and the global trading
system, and 4) international transactions require converting funds and being susceptible
to exchange rate changes.

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