CHAPTER-1

GLOBALIZATION AND INTERNATIONAL BUSINESS

Concept of Globalization:

Globalization is the word used to describe the growing interdependence of the world’s
economies, cultures, and populations, brought about by cross-border trade in goods and services,
technology, and flows of investment, people, and information. Countries have built economic
partnerships to facilitate these movements over many centuries. But the term gained popularity
after the Cold War in the early 1990s, as these cooperative arrangements shaped modern
everyday life.

Globalization is the process by which ideas, knowledge, information, goods and services spread
around the world. In business, the term is used in an economic context to describe integrated
economies marked by free trade, the free flow of capital among countries and easy access to
foreign resources, including labor markets, to maximize returns and benefit for the common
good.

Globalization is driven by the convergence of cultural and economic systems. This convergence
promotes and in some cases necessitates increased interaction, integration and interdependence
among nations. The more countries and regions of the world become intertwined politically,
culturally and economically, the more globalized the world becomes.

According to WHO, globalization can be defined as,” the increased interconnectedness and
interdependence of peoples and countries. It is generally understood to include two inter-
related elements: the opening of international borders to increasingly fast flows of goods,
services, finance, people and ideas; and the changes in institutions and policies at national
and international levels that facilitate or promote such flows.”

Forms of Globalization:

1. Political Globalization
Political globalization refers to the diplomatic negotiations between nation-states. It includes the
standardization of global rules around trade, criminality, and the rule of law.
International bodies including the United Nations, European Union and World Trade
Organization are key multinational organizations designed to facilitate increasing political
globalization. This includes growing free trade and multilateral agreements on investment.
One of the biggest positives of political globalization is that it creates international rule of law. It
helps prevent war crimes and polices bad actors on the international stage. It can also help speed
up other forms of globalization, like economic globalization, because standardized rules around
food and trade standards makes it easier for companies to sell their goods overseas.

An argument against political globalization is that it involves countries meddling in each other’s
business. Many people think we shouldn’t interfere in the decisions of other nations. Another
criticism is that it led to the spread of the political ideology of neoliberalism that increases the
gap between the rich and the poor.

2. Social Globalization
Also known as sociological globalization, social globalization refers to the integration of our
societies.

Not to be confused with cultural globalization, sociological globalization refers to the idea that
we now live in a shared society. (There are many different cultures within a society. But a
society is a group of people who all live together).
And now more than ever, it feels as if we all live in one society instead of a group of different
societies. For example:

 What happens in Afghanistan can affect what happens in the United States.
 A contagion in China spreads to all corners of the world.
 A nuclear weapon in North Korea can threaten lives in New Zealand.

So, it appears, we are now all a common society who need to learn to get along despite our
different cultures and beliefs because what we do affects people all around the world.

Another aspect of social globalization is the movement of people. People can go from one
country to another easily, and those who are most highly educated can get jobs in different
nations with more ease than ever.

3. Economic Globalization
Economic globalization refers to the ways corporations do business as multinational
organizations nowadays.

Whereas once McDonald’s only existed in the USA and HSBC only existed in the UK, now
these companies are all over the world in a ‘globalized economy’.

You will also notice the movement of manufacturing industries to developing nations to make
the most of low wages and lowers the price of goods. This can help developing nations increase
overall employment but can be considered exploitation of nations with poor working conditions.
It also takes good paying jobs away from developed nations.

4. Technological Globalization
Technological globalization refers to the spread of technology around the world.
Examples of this include the spread of the internet, solar panel technology and medical
technologies – which can all help improve the lives of people around the world.

The spread of technologies can be interpreted as the ‘rising tide lifts all boats’ argument.
Globalization means we can make the most of the best technologies from all around the world to
make everyone’s lives better and improve everyone’s economies.

5. Financial Globalization
Financial globalization refers to the ease at which money can be spread around the world.

The growth of stock exchanges like the NYSE and FTSE as well as internationalization of
financial markets has made it easier for people to transfer money internationally.

The benefit of this is that it’s easy and cheap to get investments for new business ventures. You
can find a Chinese, French or Canadian investor to wire you some money to start your business
instead of just relying on local investors!

But many nations also face backlash because of the sense that overseas companies buy out too
much of their businesses, real estate and farming land – which could be a threat to a nation’s
sovereignty.

6. Cultural Globalization
Cultural globalization refers to the spread and mixing of cultures around the world.
The possible effect of ‘homogenization’ of culture, where dominant nations like the United
States spread their cultures through television and movies, which leads to the dilution and loss of
local and indigenous cultures.

One example is the spread of punk music from the UK and USA around the world in the 1970s.
Other examples include the spread of Disney music, secularism and consumer culture.
Concepts related to cultural globalization include cultural adaptation, cultural diffusion,
and hierarchical diffusion.

7. Ecological Globalization
Ecological globalization refers to the idea that the world needs to be considered one
interconnected ecosystem.
This means that the world needs to work together to address ecological issues that cross the
borders of nation-states.

Examples include:

 The hole in the Ozone layer, which required the world to ban CFCs.
 Climate Change, which will affect the poorest nations (particularly low-lying nations in
the Pacific and South-East Asia) even though much of the damage is caused by
developed nations like the United States.
To address these issues, climate accords like the Kyoto Protocol and the Paris Climate
Agreement have been put into place, where each nation agrees to invest in lowering its carbon
emissions.

Drivers of market globalization:

Contemporary issues and challenges of globalization:

1. Exploitation

American companies have been known to use cheap foreign sweatshop labor to make cheap
American goods. Wealthy, industrialized countries have shipped their trash to China and
Malaysia. Exploiting cheap markets and tax regulations in developing nations has caused
pollution and suffering in those countries, even as profits soar abroad.

The outsourcing of labor also leaves a dearth of jobs in industrialized countries, where labor is
more expensive. When the United States outsources manufacturing to cheaper competitors in
foreign markets, domestic manufacturing laborers lose their jobs. Higher unemployment leads to
discontent, strain on the social safety net, and lower tax revenue from income. Laborers whose
skills are less relevant in a global marketplace will have a hard time adjusting to a world
dominated by globalization.

2. High Investment Costs

Globalization presents challenges for multinational corporations in terms of capital investment

and leadership. Setting up a business in a new country, especially a developing country, requires
substantial upfront capital. The needed infrastructure may not be in place.

Roads, electrical grids, broadband internet, water, and sanitation may need to be upgraded or
developed from scratch. It can also be difficult to find and retain managers with the requisite
skills to add value to the company and work effectively within the local culture.

3. Confusing Local Systems

Multinational corporations also face the challenge of contending with different laws in different
countries. Sometimes they must contend with different types of legal and banking systems
entirely. Difficulty navigating these systems may lead to impediments in expanding to new
countries and severe repercussions for missteps made.

4. Weak Regulation

Fewer regulatory bodies exist for international business enterprises. Navigating the international
markets can thus sometimes feel like the Wild West. Interconnected markets also mean that with
a lack of regulation, if something goes wrong, the repercussions will resound globally. The
global financial crisis, for example, hit many nations hard.

5. Immigration Challenges

Increasing populations of immigrants and refugees present a challenge for industrialized nations.
Though countries may wish to help, too large an influx puts a strain on resources and social
structures. Countries find themselves limited in the aid they can provide without detriment to
their own citizens.

6. Localized Job Loss

Globalization can contribute to a decline in job opportunities as companies move their

production facilities overseas. Forbes reports that the move toward globalization has led to
deindustrialization throughout the United States, which was once home to many more factories
and auto plants. When American companies move their production to China and other countries
with plentiful, cheap labor, American workers suffer under factory closures, layoffs, and
skyrocketing unemployment rates where they live. According to the Economic Policy Institute,
the U.S. trade deficit with China — that is, the amount by which our imports, which tend to cost
U.S. jobs, exceed our exports, which tend to provide them — has lost the United States 3.4
million jobs since 2001.
Concept of International Business

Nature of international business:

The main features of international business are as follows:

1. Involves Two Countries – International business is possible only when
there are transactions across different countries.
2. Use of Foreign Exchange – Every country has its own different currency.
This gives rise to the problem of exchange of currencies as foreign currency
is used in making transactions.
3. Legal Obligations – Each country has its own laws regarding foreign
trade, which have to be complied with. Further, there is more government
intervention in case of international transactions.
4. High Degree of Risk – International business faces huge risk due to long
distances, risk of fluctuations in two currencies, fear of obsolescence, etc.
5. Heavy Documentation – It is subject to number of formalities. Many
documents have to be filled in and despatched to the other party.
6. Time Consuming – The time gap between sending and receiving of goods
and payment is wider as compared to inland trade.
7. Lack of Personal Contact – It lacks direct and personal contact between
importer and exporter.

Scope of International Business Activities :

International business is an integrative study that has the potential to provide you with an overall
business perspective (as opposed to functional view like marketing, financing, management etc)
grounded in global environment. To be realistic, it involves the broadest and most generalized
study of the field of business, adapted to a fairly unique across the border environment. Many
conditions and environmental variables that are significant in internal business (such as foreign
legal System, foreign exchange markets, inflationary trends, and cultural differences) are mostly
irrelevant to domestic business. However, global integration in trade, investment, factor,
technology and communication has been in practice for economies together. International
business can well be broken down into foreign trade, trade in services, portfolio investment and
direct investments (FDIS).

1. The fundamental and the largest international business activity in many countries is the
foreign trade comprising exports and imports. Physical goods / commodities or
merchandise leave the country in export. Imports are those goods brought across the
national borders into a country.
2. The international firms also trade in services banking, insurance, consulting, travel and
transportation etc. earn in the form of feel or royalties. The fees are earned through short
or long term contractual agreements such as consultancy or management contracts or turn
key projects. Royalties are received from the use of one company’s name, trademark,
 patent or process by someone else. Alternatively a firm can earn royalties from abroad by
licensing the use of its technology information, Franchise in overseas markets.
3. Portfolio investments are financial investments made in foreign countries. The investor
purchases debt or equity in the expectation of financial return on the investment.
4. Foreign direct investment or direct investment is one in which investor is given collecting
interest in foreign company. FDI maybe in the form of a Joint Venture or a wholly owned
subsidiary. Joint venture is a shared ownership stake with equal share in a foreign
business. A wholly owned subsidiary can be established in foreign markets either in the
form of totally new operation or acquisition of an established firm and use the firm to
promote its products.

Factors supporting International Business expansion: (do it from the book, pg

no.-7)

Reasons for International business expansion-why an enterprise goes to IB?

1: Increase in Revenue
An increase in revenue is one of the main benefits of globalization. Marketing your product
overseas exceeds the number of potential clients, thus providing a better increase in revenue.
Global expansion equals business growth, which is not limited to the average income your home
market can offer for your company.

2: Increase in Savings
While expanding globally offers better opportunities for gaining profit, it also allows for cheaper
costs. Usually, it is cheaper to do business abroad because you can reduce production costs in
more affordable countries. Likewise, the wage that you must pay for your international
employees may be less than the salary you pay for your local employees, considering the
distinction in minimum wage around the world. For example, one of the reasons that Apple
outsources its manufacturing in China is to increase labor savings.

3: A More Extensive Customer Base- More Opportunities for Growth

Growth and reinvention are the keywords associated with international expansion. For the most
part, a product or a convenient service in one market will not necessarily suit another. To cater to
the needs of your new customer base there must be some adjustments made. These meaningful
adjustments will most likely increase the chances of growth and development of your current
product, thus allowing the investment and introduction of improved products or services. For
example, Mcdonald’s had adjusted their meal options to cater to the needs of their customers all
around the world, thus upgrading their original menu.

4: The Importance of Stability

A stable economy is not guaranteed; that is a fact that has become unfortunately apparent since
the start of the COVID-19 pandemic. Although it is an extreme case, nothing is inevitable, and
nothing should be taken for granted, especially in the business world. Hence why it is so
important to not depend on the economic stability of one country alone, but rather raise your
chances of economic survival by diversifying your markets.

5: Access to More Talents

Gaining access to a broader, more diverse pool of talents can only improve a company for the
better. Different talents from different parts of the world can hold on to new sets of valuable
skills that your current, local talents may lack. Access to new talents offer diversity, a cultural
outlook, and language variety. Following that, it is safe to say that international talent comes
with a unique point of view and improves innovation within a company, raising its prestige.
Netflix is an excellent example of the usage of new talents in strengthening its brand. Netflix
successfully created series and films in many different languages and cultural backgrounds,
reaching a larger audience of viewers as a result.

6: Reputation and Prestige

It is a well-known fact that a good reputation is critical for any business, for it approves your
company’s reliability and makes for an attractive brand. International expansion is the stamp of
approval that shows that your company and product are successful, credible, and of high quality
– all thanks to the added prestige that comes from going global. Since this process of
international expansion is not an easy one to achieve, once you succeed in building a
multinational cooperation, you gain recognition for your worldwide brand.

7: Gain a Competitive Edge

In this fast age of innovation, companies must use any advantage they have to stay relevant in the
face of today’s competitive market. Globalization is just the competitive edge that your company
needs for it to get ahead of your competitors in entering a new marketing field. Besides the fact
that globalization gives your company the reputation and prestige that others may lack,
globalization also grants access to new technologies and industry ecosystems that you can use to
your advantage.

Difference between Domestic Business and International Business :

S.No.DOMESTIC BUSINESS INTERNATIONAL BUSINESS

Domestic business refers to the International business refers to the
business where economic business where economic
transactions are conducted transactions are conducted across
within the geographical border with several countries in the
01. boundaries of the one country. world.

02. In Domestic business buyer In International business buyer and

 and seller belong to same
country. seller belong to different countries.

Domestic business is limited to International business is quite

03. territory. wide.

In Domestic business selling In International business selling

04. procedure remain unaltered. procedure changes.

Quality of product or standards Quality of product or standards are

05. may be lower. expected and enforced.

In domestic business it is very In international business, business

easy to conduct business research is very expensive and
06. research. hard to conduct.

07. It deals with single currency. It deals with multiple currencies.

In domestic business capital In international business capital

08. investment is less. investment is huge.

There are few restrictions on There are a lot restrictions on

09. domestic business. international business.

The nature of customers in The nature of customers in

domestic business is international business is
10. homogeneous. heterogeneous.

In domestic business the In international business the degree

11. degree of risks are low. of risks are high.