International Business

Fourth Edition

CHAPTER 1
Globalization

2-3

The Global Retail Market

Development Drivers
Top 25 Retailers

%
16
2000

40

2009

Market Share

Decline in cross-border investment barriers. Saturation and slow growth in local markets. Carrefour began the expansion followed by Tesco and Wal-Mart. Retailers believed they would benefit from economies of scale from global buying power. These retailers held strong domestic market positions.

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But, It Isnt Easy

National differences in tastes and preferences.
Reduces opportunity for scale economies.

Difficulty in establishing common retail model.

Impacts:
Labor costs. Desirable locations. Sophistication of local supply base.

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Globalization
Trade and investment barriers are disappearing. Perceived distances are shrinking due to advances in transportation and telecommunications. Material culture is beginning to look similar. National economies merging into an interdependent global economic system.

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2-6

Globalization: Pros& Cons

Pros
Increased revenue opportunity through global sales. Reduced costs by producing in low cost countries.

Cons
Different nations = different problems. Similarities between nations may be superficial. Global planning may be easy, but global execution is not.

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2-7

What is Globalization?
Markets The shift toward a more integrated and interdependent world economy.

Production

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Globalization of Markets
Merging of historically distinct and separate national markets into one huge global marketplace.

Facilitated by offering standardized products:

Citicorp Coca-Cola Sony PlayStation McDonalds

Does not have to be a big company to participate:

Over 200,00 U.S. companies with less than 100 employees had foreign sales in 2000.

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The Largest Global Markets

Industrial Goods and Materials Commodities such as aluminum, oil and wheat. Industrial products such as microprocessors, aircraft. Financial assets such as U.S. Treasury bills and Eurobonds.

Not Consumer Goods

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Globalization of Production
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 (labor,energy, land and capital). Companies hope to lower their overall cost structure and/or improve the quality or functionality of their product offering - increasing their competitiveness.

Global Products

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Macro Factors
Decline in Trade Barriers

Globalization
Technological Change

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International Trade: When a firm exports goods or services to consumers in another country. Foreign Direct Investment: When a firm invests resources in business activities outside its home country.

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General Agreement on Tariffs and Trade

Member states (140) in eight negotiating rounds worked to lower barriers to the free flow of goods and services. In the most recent round, the Uruguay Round, nations agreed to enhanced patent, copyright and trademark protections and established the World Trade Organization.

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Average Tariff Rates on Manufactured Products as Percent of Value

1913 France Germany Italy Japan Holland Sweden Britain U.S.A.
Table 1.1

1950 18% 26 25 11 9 23 14

1990 5.9% 5.9 5.9 5.3 5.9 4.4 5.9 4.8

2000 3.9% 3.9 3.9 3.9 3.9 3.9 3.9 3.9

21% 20 18 30 5 20 44

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Fewer FDI Restrictions

Between 1991 and 2000 of the 1,121 changes worldwide in laws governing FDI, 95% created a more favorable investment environment. During 2000, 69 countries made 150 changes to FDI regulations, 147 or 98% were more favorable to investment.

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The Growth of World Trade and Output

2500 2000 1500 1000 500 0 1950 1960 1970 1980 1990 2000 Figure 1.1
GDP Trade

Trade Output

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2-17

The Role of Technological Change

Microprocessors and Telecommunications The Internet and World Wide Web

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Worldwide E-Commerce Growth Forecast

8000 7000 6000 5000 4000 3000 2000 1000 0 2000 2001 2002 2003 2004
Figure 1.2

Rest of World Latin America W.Europe Asia Pacific North America

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1500-1840

The Shrinking Globe

Best average speed of horse-drawn coaches and sailing ships, 10mph.

1850-1930

Steam locomotives average 65mph. Steamships average 36mph.

1950s

Propeller aircraft 300-400 mph.

1960s

Figure 1.2

Jet passenger aircraft 500-700mph.

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Implications for Production and Market Globalization

Production dispersed to economical locations due to transportation and communication advances.

New markets opened through WWW. Jet aircraft move people and goods. Global media creating a worldwide culture.

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The Changing Paradigm of the Global Economy

Old:
U.S. dominance of the world economy and world trade. U.S. dominance in world FDI. U.S. firms dominance of international business. of the world economies (Communist dominated) were offlimits to western businesses.

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The Changing Pattern of World Output and Trade Output measured by GNP.
COUNTRY
United States Japan Germany France United Kingdom Italy Canada China South Korea
SHARE OF WORLD OUTPUT 1963 SHARE OF WORLD OUTPUT 2000 SHARE OF WORLD EXPORTS 2000

40.3% 5.5 9.7 (W. Ger.) 6.3 6.5 3.4 3.0 NA NA

27% 14.2 7.3 5.2 4.1 4.1 2.0 3.2 1.4

12.3% 7.54 8.7 4.7 3.7 3.7 4.4 3.92 2.7

Table 1.2

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Percentage Share of Total FDI Stock, 1980-2000

45 40 35 30 25 20 15 10 5
U.K. Germany

1980 1990 2000

U.S.A.

Japan

France

Netherlands

Dev. Countries

Figure 1.4

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FDI Inflows, 1988-2000

($ Billions)
1000 800 600 400 200 0 Developed Countries Developing Countries United States China

Figure 1.5

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The National Composition of the Largest Multinationals

1973
U.S.A. Japan U.K. France Germany
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1990
31.5% 12 6.8 10.4 .9

1997
32.4% 15.7 6.6 9.8 12.7

2000
26% 17 8 13 12
Table 1.3

48.5% 3.5 18.8 7.3 8.1

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The Changing World Order

The fall of Communism in Eastern Europe and the former Soviet Union. Czechoslovakia has divided itself into two states. Yugoslavia has divided into 5 (often warring) successor states. Pro-democracy movement (suppressed) in China. Latin America has seen both democracy and free market reforms.

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The Global Economy of the 21st Century

1. Will economic and political reforms hold? 2. Economic problems are no longer isolated and can become global.

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Globalization
Jobs and Income
Firms move jobs to low cost countries. Countries specialize in efficiently produced goods and import those they can not efficiently produce. Increases income in less developed countries. May lead to income inequality.

Labor Policies and the Environment

Firms move to countries with weak laws. Economic progress leads to stronger laws. By creating wealth and incentives for technology improvements, world will be better. Tie strong laws to international agreements. Firms are not amoral.

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Environmental Performance and Income

Environmental Performance Index
7.0 6.5 6.0 5.5 Finland Germany Netherlands Bulgaria

Ireland Jamaica Korea China S.Africa India Tunisia Trinidad Kenya Nigeria Egypt Thailand Malawi Tanzania Bangladesh Bhutan Ethiopia 6 7 8 9 10 11

5.0

Income Index
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Globalization and National Sovereignty

Under the new system, many decisions that affect billions of people are no longer made by local and national governments but instead, if challenged by any WTO member nation, would be deferred to a group of unelected bureaucrats sitting behind closed doors in Geneva. The bureaucrats can decide whether or not people in California can prevent the destruction of the last virgin forests or determine if carcinogenic pesticides can be banned from their foods; or whether European countries have the right to ban dangerous biotech hormones in meat At risk is the very basis of democracy and accountable decision making. Ralph Nader.

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Globalization and National Sovereignty

WTO EU WTO UN
Supranational organizations are limited to powers granted by member countries and serve the collective interests of its members. Power is derived from the organizations ability to sway members to action.
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Founded 1994 140 members Police GATT trading system

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Globalization and the Worlds Poor

Critics argue that globalization has not helped poor.

1870: per capita income of 17 richest nations was 2.4x that of all other countries. 1990: it was 4.5x larger.
Other factors may have influenced the gap.

Totalitarian governments. Economic policies that destroyed wealth creation. Little protection of property rights. Expanding populations. War.

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Managing in the Global Marketplace

An International Business is any firm that engages in international trade or investment.

Managing an international business is different than managing a domestic business:

1. Countries are different. 2. Problems are more complex. 3. Must work within government regulations. 4. Currency conversion presents unique problems.

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