Chapter 1 - Globalization

2 Chapter 1 - Globalization        Globalization  The widening and deepening of interdependent relationships among people from different nations. International Business  Any commercial transaction between 2 or more countries The Forces Behind the Current Extent of Globalization 1. Increase in and application of technology  Improvements in transportation and communication networks 2. Liberalization of cross-border trade and resource movements 3. Development of services that support international business activities  Banking, transportation, etc. 4. Growing consumer pressures  Consumer demand for foreign products and on MNC behaviors 5. Increased global competition  Born-global Companies  companies that start out with a global focus because of their founders’ international experience 6. Changing political situations and government policies 7. Expanded cross-national cooperation  WTO, IMF, NAFTA, EU, treaties, and agreements Positive aspects of globalization (as decided by the class): 1. Specialization  leads to lower costs and higher availability 2. Strengthening of political relationships 3. Spreading of culture 4. Lower costs/innovation 5. Sustainability Negative aspects of globalization (as decided by the class): 1. Higher income inequality 2. Poor labor standards/exploitation 3. Losing employment to outsourcing 4. Lower quality 5. Security issues 6. Environmental stress Three major negatives of globalization 1. Threats to national sovereignty  Sovereignty  a country’s freedom to “act locally” and without externally imposed restrictions  Small countries feel threatened and overly dependent  Cultural homogeneity threatens uniqueness 2. Environmental Stress  Depletion of resources/pollution/climate change 3. Growing income inequality and stress  Greater division between rich and poor  Threat of job loss leads to personal stress Factors affecting globalization 3 o Size of countries  smaller countries tend to be more globalized than larger ones, mainly because their smaller land masses and populations permit a lower variety of production. o Per capita incomes  Countries with higher per capita incomes tend to be more globalized than those with lower ones because their citizens can better afford foreign products, travel, and communications. o Variance among globalization aspects  Although a country may rank as highly globalized on one dimension, it may be low on another, such as the U.S. being high on technological scales but low on economic ones.  Ownership and Production Location Domestic Owned In house, at home Not Owned Outsourced (at home) Abroad Offshored Outsourced (abroad)  Reshoring  Production is offshored and then brought back home  Positives to Offshoring o Chance to sell at lower costs o Chance to sell more home goods in the host country o Growth in host country creates more jobs at home o Moving simple production abroad boosts productivity at home o Jobs abroad help host country buy more from home Negatives to Offshoring o Lower costs do not lead to lower prices o Jobs are lost at home o Low wages put pressure on remaining home jobs o Exploits host country labor o Loss of control over suppliers o Risk of losing technology due to lax IP protection   Why do firms go international? o To expand sales (growth and efÏciency) o To acquire resources (not everything can be found at home)  Labor, products, components, services  Foreign capital  Technology/information/knowledge o To minimize risk (“business is like a football game with no 4th quarter”)  Business cycle differences amongst countries  Diversify suppliers across countries  Counter competitors (domestic) moves and advantages 4       Merchandise exports and imports  tangible products – goods – that are respectively sent out of and brought into a country. For most countries, the export and import of goods are the major sources of international revenues and expenditures. Service Exports and Imports  international nonproduct sales and purchase o Travel, transportation, banking, insurance, and the use of assets such as trademarks, patents, and copyrights Turnkey Operation Construction projects performed under contract and transferred to owners when they’re operational Companies also receive fees from management contracts  arrangements in which they provide personnel to perform management functions for another, such as Disney’s management of theme parks in France and Japan Companies also receive royalties from licensing agreements  where they allow others to use some assets – such as trademarks, patents, copyrights, or expertise. Companies also receive royalties from franchising, a contract in which a company assists another on a continuous basis and allows use of its trademarks.  Investments o Foreign Direct Investment (FDI)  the investor takes a controlling interest in a foreign company o Joint Venture  When two or more companies share ownership of an FDI, the operation is a joint venture o Portfolio Investment  A noncontrolling financial interest in another entity. It consists of shares in or loans to a company (or country) in the form of bonds, bills, or notes purchased by the investor.  Types of International Organizations o Collaborative arrangements  Denotes companies’ working together o Strategic alliance  refers either to an agreement that is of critical importance to a partner or one that does not involve joint ownership o Multinational Enterprise (MNE)  usually signifies any company with foreign direct investments  UN uses the term transnational company (TNC)  Institutions  systems of established and prevalent social rules that structure social interactions o Language, money, law, systems of weights and measures, table manners, and firms are all institutions  The Floating Subsidiary Dilemma  When an international manager is pulled by both their home country and host country (business and government), and has multiple conflicting demands