Chapter 1 Globalization and

Multinational Firm

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Chapter Details
 Concept of globalization and international
business,
 Forms of globalization
 Reasons for international business expansion
 Drivers of market globalization
 Domestic vs international business

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Globalization—An unstoppable
force?
 This is the golden age for business, commerce
and trade. Never before in the history of the
world has there been such an opportunity to
sell as many goods to as many people as there
is right now.
 With instant information and communication,
virtually everything is available to anyone,
anywhere. Markets are now global and many
corporations are often richer and more
powerful than many countries.
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 There has always been trade between
countries and societies, but never on a
scale close to today's levels.
 A combination of reduced trade barriers,
financial liberalization and a technological
revolution have completely changed the
nature of business in virtually all of the
industrialized countries.

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 More trade,more markets,more business,more
information, more jobs,more opportunities.
 This whirlwind of economic activity has brought
many benefits, and wealth,to many people.This is
the promise of a globalized world.
 There has been faster economic growth, higher
living standards, accelerated innovation, and new
opportunities for both individuals and countries.
Accompanied by a revolution in information and
technology, the world is very much a smaller and
more integrated planet than ever before.

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 But if globalization can generate
wealth, it can also take it away:
 The billions of investment dollars that washed up on
Asian shores in the mid-1990's abruptly reversed
direction in 1997, sending millions of people back
into poverty in what has become known as the Asian
financial crises, although its impact was so
widespread it affected countries on virtually every
continent.
 The benefits of globalization have largely bypassed
over half of the world's population, or close to 3
billion people who make do on less than US$2 a day.

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Statistics

 Of the world's six billion people, 1.2 billion live in

extreme poverty, or on an income of roughly US
$1 a day or less. Just under 3 billion people live on
$2 a day or less.

 Industrialized countries, with 19 per cent of the

world's population, account for 71% of global
trade in goods and services, 58 per cent of
foreign direct investment, and 91% of all Internet
users.

 More than US$1.5 billion is now exchanged on

the world's currency markets each day.
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 Globalisation
 There was a time when most regions were
economically self-sufficient. Locally produced foods,
fuels and raw materials were generally processed for
local consumption. Trade between different regions
was quite limited.
 Today, the economies of most countries are so
interconnected that they form part of a single,
interdependent global economy.

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Globalization Definition

 -“Processes by which goods, services, capital,

people, information, and ideas flow across
national borders.” (Grewal/Levy)

 - “Trend toward greater economic, cultural ,

political, and technological interdependence
among national institutions and economies.”
(Wild/Wild/Han)

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 In Conclusion

Globalization is the ongoing process that deepens and

broadens the relationships and interdependence among
countries.
Globalisation refers to the increasing integration of
markets (exchange) and production. It incorporates the
mobility of resources (capital, labour, ‘organization and
knowledge’).

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Globalization Involving Us All

 Your Everyday Life:

◦ Wake up to a GE alarm clock made in China
◦ Slip on Adidas sandals made in Indonesia
◦ Put your American Eagle clothes on from Mexico
◦ Unplug your Nokia phone made in the U.S. and Taiwan
◦ Hop into your Toyota made in Kentucky
◦ Listen to musical play from England
◦ Grap a Starbuck’s coffee harvested in Columbia

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Two Characteristics: Two Forces:

Denationalization- national
boundaries becoming less Falling Barriers
relevant. to Trade/
Investment
• GATT
• WTO

Internationalization- entities Technological

cooperating across national Innovation
borders. • Internet
• Communication
• Transportation
Globalization (Continued)
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Globalization (Continued)

Top Ten Globalized Countries

Datenreihen1

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Globalization’s Current Issue
 Rise of the Anti-Nike Movement (1990’s-
early 2000’s)
◦ One of the top companies that use factories
◦ Manufactured lower cost products in factory
countries
 Underpaid workers in Indonesia
 Less than minimum wage (2,100 rupiah to $1 U.S.)
 Child labor (12 and under) in Cambodia and
Pakistan
 Poor work conditions in China and Vietnam
 Auditors found out poor health and safety standards in
several plants
Dr. Binod Ghimire, Lecturer,Tribhuvan
University 15
 Globalization’s Current Issue
(Cont.)
Nike’s Response: Learning to Become a Global
Corporate Citizen.

• New Staff and Training

• Dedicated to labor and environmental compliance

• Increase Monitoring of its Suppliers

• Safe/clean work conditions, respectful labor-management
relations and fair wages.

• Relations with Non-Profit Organizations

• United Nations Global Compact

,
.
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 Unethical Problems:

• Global Inequality
− Widening gap of rich and Sweatshop ( Factories) in Malaysia
poor
• Environmental Regulations
◦ Unhealthy plants
◦ Emission of harmful toxins
 Exploits Labor Standards
◦ Reduction of wages
◦ Long hours (12 or more)
◦ No benefits

Globalization and Ethics

h
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Globalization and Marketing
 Expands the market  Two Strategies for
in which consumers Businesses:
buy from anywhere. ◦ Global Strategy
◦ Access EBay sellers  Reduce marketing costs
from across the globe. by standardizing product
and marketing strategy
◦ Multi-National
Strategy
 Adapt products and
marketing strategies in
each national market to
suit local preferences

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Several views about Globalization
a. Economic View: Integration with world
economy. Global linkage
b. Company View: Multi-plant operations.
Establishing plants around the world.
c. Competition view: Compete in free market.
d. Structural view: Synonymous to multinational
enterprises

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Assignment:

Explain arguments for and

against Globalization.

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 Globalization

• Increases wealth and

efficiency in developed
and developing nations
• Creates jobs in
developed and
Advantages: developing nations
• Advances developing
nations’economies
• Decreases poverty in
developing nations

• Wild, J., Wild, K., & Han, J. (2008). International Business: The Challenges of Globalization. UpDper.rBSiandoddleGRhivimeri,rNe,J:LPeecatursroenr,PTrriebnhtiucveaHnal.
University 21
Causes of Globalisation:
1. Improved Communications
 The development of communication
technologies such as internet, email and mobile
phones have been vital to the growth of
globalisation because they help MNCs to
operate throughout the world.
 The development of satellite TV channels such
as Sky and CNN have also provided worldwide
marketing avenues for the concept and
products of globalisation.

Dr. Binod Ghimire, Lecturer,Tribhuvan

University 22
Causes of Globalisation
2. ImprovedTransport
 The development of refrigerated and
container transport, bulk shipping and
improved air transport has allowed the
easy mass movement of goods
throughout the world.This assists
globalisation.

Dr. Binod Ghimire, Lecturer,Tribhuvan

University 23
Causes of Globalisation:
3. FreeTrade Agreements
 MNCs and rich capitalist countries have
always promoted global free trade as a
way of increasing their own wealth and
influence.
 International organisations such as the
World Trade Organisation and the IMF
also promote free trade.

Dr. Binod Ghimire, Lecturer,Tribhuvan

University 24
Causes of Globalisation:
4. Global Banking
 Modern communication technologies allow vast
amounts of capital to flow freely and instantly
throughout the world.
 The equivalent of up to $US1.3 trillion is traded
each day through international stock exchanges
in cities such as NewYork,London andTokyo.

Dr. Binod Ghimire, Lecturer,Tribhuvan

University 25
Causes of Globalisation:
5.The Growth of MNCs
 The rapid growth of big MNCs such as Microsoft,
McDonalds and Nike is a cause as well as a
consequence of globalisation.
 The investment of MNCs in farms, mines and factories
across the world is a major part of globalisation.
 Globalisation allows MNCs to produce goods and
services and to sell products on a massive scale
throughout the world.

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The Effects of Globalisation:
1. Changed Food Supply
 Food supply is no longer tied to the
seasons.We can buy food anywhere in the
world at any time of the year.

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The Effects of Globalisation:
2. Division of Labour
 Because MNCs search for the cheapest
locations to manufacture and assemble
components, production processes may
be moved from developed to developing
countries where costs are lower.

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The Effects of Globalisation:
3. Less Job Security
 In the global economy jobs are becoming more
temporary and insecure.
 A survey of American workers showed that
people now hold 7 to 10 jobs over their
working life.

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 The Effects of Globalisation:
4. Damage to the Environment
 More trade means more
transport which uses more fossil
fuels and causes pollution.
 Climate change is a serious
threat to our future.

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The Effects of Globalisation:
5. Cultural Impact
 Websites such as YouTube connect people
across the planet. As the world becomes
more unified, diverse cultures are being
ignored. MNCs can create a monoculture
as they remove local competition and
thereby force local firms to close.

Replacing

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The Effects of Globalisation
6.Increase in anti-Globalisation
Protests
 There is a growing awareness of the
negative impacts of globalisation.People
have begun to realise that globalisation
can be challenged by communities
supporting each other in business and
society and through public protest and
political lobbying.

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Nature and Forms of globalization
 It has four dimensions.
a. Economic globalization- It is inter linkage of the
market in goods, services, capital, trade and
finance. It is contributed by liberalization,
deregulation, privatization and declining costs of
transport.WTO and many regional blocs have
given impetus for this process.
b. Cultural globalization- Globalization has brought
cultural diversities together to form a global
culture. Advances in communication, television
network, transportation technologies have been
reducing the barriers of distance and culture.

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c. Political globalization- Exchange of views and
experiences between nations regarding the
establishment of good governance system, legal system,
human rights, free media etc. Regional grouping of nation
creates pressure for democracy and human rights. It is
shifting away from command economy and mixed
economy to the free market model. .

d. Environmental globalization- World is facing global

warming, depletion of the ozone layer, loss of bio-
diversity, pollution etc.World community is trying to
encourage countries to adopt legal and other measures
to protect the environment.

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GLOBALIZATION
 Challenges that must be confronted to
succeed in a global business environment
include:
◦ Cultural Business Challenges
◦ Political Business Challenges
◦ Geoeconomic (geographic and economic)
Business Challenges

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 Cultural Business Challenges

 Cultural business challenges include differences

in…
◦ Languages
◦ Cultural interests
◦ Religions
◦ Customs
◦ Social attitudes
◦ Political philosophies
◦ Business practices
◦ Work ethic
◦ Currencies

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 Political Business Challenges
 Political business challenges include:
◦ Numerous rules and regulations surrounding the
business activity
◦ Tax implications
◦ Problems in importing and exporting
◦ Trade agreements
◦ Differences in laws such as privacy,security

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 Geoeconomic Business
Challenges

 Geoeconomic - refers to the effects of

geography on the economic realities of
international business activities
◦ Distances
◦ Time zone differences
◦ Skilled labor supply & cost of labor
◦ Cost of living
◦ Infrastructure issues

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 Multinational Companies
 It is generally defined as a company engaged in
producing and selling goods and services in more
than one country. It ordinarily consists of a parent
company located in the home country and at least
three or four subsidiaries in other countries.
Types of MNCs
a. Raw material seekers: cheapest raw materials
are brought from the local suppliers, processed it and
shipped them to the home country to be used for
production. During colonial period, it was done to
exploit raw materials.

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b. Market Seekers:It is the modern form
of MNC that goes overseas to produce and
sell in foreign market. Most common form
of MNCs. Recently, Japanese and Korean
firms are investing different countries.

c.Cost Minimizers:These firms seek out

and invest in lower-cost production sites
overseas. It is to remain cost competitive
both at home and abroad.
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 International Business

International Business is a mechanism to bring about

globalization.

International business consists of all commercial

transactions—including sales, investments, and
transportation—that take place between two or
more countries

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 International Business (IB) deals with the nature,
strategy and management of international business
enterprises and their effects on business and national
performance (e.g., efficiency, growth, profitability,
employment).
 IB is interdisciplinary. It draws, among others, on
economics, politics, sociology, marketing, management
(human resources,strategic).

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 Origins of IB
 IB is the result of the internationalisation of
production and the emergence of the
multinational corporations (MNCs), the
subject matter of IB.
 Internationalisation of production (‘globalization’)
involves international capital flows, international
trade of commodities (exports-imports) and
Foreign Direct Investment (FDI) by MNCs.

Dr. Binod Ghimire, Lecturer,Tribhuvan

University 43
Origins of IB
 Until the 1980s, there has been a tendency towards concentration
of industry, and oligopolistic (market control by small number of producers
who can influence price and affect competitors) market structures. Firms
have observed a ‘law of increasing size’ consisting of fourstages:
 First, the owner managed and controlled small firm (nineteenth
century).
 Second, the public limited ‘national’ company (limited liability,
separation of ownership from management).
 Third, the multidivisional organisation (division- based),
separation of strategic (long term) and operational (day-to-day)
decisions.
 Fourth, multinational corporations (MNCs) with production
activities outside (and including) their home-base.

Dr. Binod Ghimire, Lecturer,Tribhuvan

University 44
 Drivers of Globalization
A. Technological advancement: (in terms of communication,
production, and transportation)
B. Comparative/ Competitive advantage
C. Decreasing barriers to trade and investment
D. International media exposure
E. Increasing market size
F. Growing consumer pressures

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Factors Contributing to Rapid
Growth of International Business
A. Increase in and Expansion ofTechnology
Vast improvements in transportation and communications
technology—including the development of the Internet—
have significantly increased the effectiveness and efficiency of
international business operations.

B. Liberalization of Cross-Border Trade and Resource

Movements
Over time most governments have lowered restrictions on
trade and foreign investment in response to the expressed
desires of their citizens and producers. In addition, the
General Agreement on Tariffs and Trade, the development of
economic blocs such as the European Union, and other such
facilitating mechanisms have provided increased access to
many foreign markets.

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C. Development of ServicesThat Support International
Business
Services provided by government, banks, transportation
companies, and other. Businesses greatly facilitate the
conduct and reduce the risks of doing business
internationally.

D. Growing Consumer Pressures

Because of innovations in transportation and
communications technology, consumers are well-informed
about and often able to access foreign products. Thus
competitors the world over have been forced to respond to
consumers’ demand for increasingly higher quality, more
cost-competitive offerings.

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E. Increased Global Competition
The pressures of increased foreign competition often
persuade firms to expand internationally in order to gain
access to foreign opportunities and to improve their overall
operational flexibility and competitiveness.

F.Changing Political Situations

The transformation of the political and economic policies of
the former Soviet Union and the People’s Republic of China
has led to vast increases in trade between those countries
and the rest of the world. In addition, the improvements in
national infrastructure and the provision of trade-related
services by governments the world over have further led to
substantial increases in foreign trade and investment levels.

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G. Expansion of Cross-National Cooperation
Governments have increasingly entered into cross-
national treaties and agreements in order to gain
reciprocal advantages for their own firms, to solve
problems jointly that one country cannot solve alone,
and to deal with areas of concern that lie outside the
territory of all countries.

Often, such cooperation occurs within the

framework of international organizations such as the
United Nations, the International Monetary Fund, the
World Trade Organization, and the International Bank
for Reconstruction and Development (World Bank).

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 What’s Wrong with Globalization

 Threats to national sovereignty.

 Economic growth and environmental stress.
 Growing income inequality and personal stress.
 Offshoring – the transferring of production abroad –
is controversial in terms of who benefits when costs
are reduced and whether the process exchanges
good jobs for bad ones.

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 Reasons for International Business Expansion
 To Expand Sales: Pursuing international sales increases the potential
market and potential profits (Companies may increase the potential
market for their sales by pursuing international consumer and
industrial markets.)
 To Acquire Resources: IB may give companies lower costs, new and
better products, additional operating knowledge (Foreign-sourced
goods, services, components, capital, technology, and information
can make a firm more competitive both at home and abroad.)
 To Diversify or Reduce Risks: International operations may reduce
operating risk by smoothing sales and profits, preventing
competitors from gaining advantage (Firms seek foreign markets in
order to minimize cyclical effects on sales and profits. Defensively,
they may also wish to counter the potential advantages that
competitors might gain from participating in foreign market
opportunities.)
Domestic Vs InternationalBusiness

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Suggested Activities for
Students
 Make an informal survey of objects in your home
to determine where they were made. Observe
and share what items are made from where.
OR
 Select a meal and list all the components of that
meal.Where does each component come from?
OR
 Visit a local supermarket. Look at the labels and
find out the geographic origin of each product on
the shelves. Share your findings with the class.
What conclusions can you draw?

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