Globalization

Globalization
Defined is the system of interaction among the countries of the world in order to develop the global economy. Is a term used to describe the change in societies and the world economy that are the result of dramatically increased trade and culture. Is the tendency of business ,technologies to spread throughout the world or the process of making it.

Contd- Globalization---an economic phenomenon ? --a social phenomenon ? --a cultural phenomenon ? The movement towards the expansion of economic and social ties between countries through the spread of corporate intuitions that leads to the shrinking of the world in economic terms.

Contd- Globalization has many definitions, but generally it refers to various global interconnections. The interconnections exist across a variety of human activities: Economic, Social, Political, Biological

Contd- Globalization refers to the shift toward a more integrated and interdependent world economy, globalization has several different facets including the globalization of markets and globalization of production.

Globalization and Social Change

Distance becomes almost irrelevant. Boundaries are increasingly permeable. Groups and cultures increasingly don't have a territorial basis. Think about the world before globalization: Distance mattered space often measured in time. Territorial boundaries more or less kept things in and out.

Contd- Technological advances. Expansion of international commerce (export & import ) . Rising importance of private capital flows. Increasing travel and migration ( international tourism and domestic diversity ). Increased communication and interaction between people ( through all sorts of people )

Contd- Integration of economies made possible by: Technology Communication net work Internet access Collapse of communism Movement of free trade

Integration of Economies
The increasing reliance of economies on each other. The opportunities to be able to buy and sell in any country in the world. The opportunities for labour and capital to locate anywhere in the world. The growth of global markets in finance. Stock markets are now accessible from anywhere in the world.

Wal-Mart
Estalbshed in Arkansas in 1962 by Sam Walton Largest retailer in world with $218 billions ,1.3 million associates & some 4500 stores. Until 1991 its operations were confined to US By 1990 it realized opportunities are limited Decided to expand globally-critics scoffed Unperturbed started to expand internationly First store in Mexico,then Canada ,Brt.Ger.,Jap

Contd- Falling barrier to cross border investment have made globalization possible. Rapid economic growth in developing nations and market saturation at home have made globalization a strategic imperative. Globalization has increased the opportunities for a firm to expand its revenue by selling around the world and reduce its cost by providing in nations where key inputs are chep

Contd Collapse of communism has swung public money toward free market. Regulatory & administrative barriers to doing business in foreign nations have down , deregulating markets, increasing competition and welcoming investment by foreign businesses. This has allowed business both large & small from both advd. Nation& devep.to expd.intrny

Globalization of Market
The globalization of markets refers to the merging of historically distinct and separate national markets into one huge global market place. Falling barriers to cross border trade have made it easier to sell internationally. The taste and preferences of consumers in different nations are beginning to converge on some global norm.By offering a standardized product worldwide, they help to create global market.

The Globalization of Production

--Refers to 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 ( such as labor, energy, land, capital ).By doing this, the companies hope to lower their overall cost structure, allowing them to compete more effectively.

Drivers of Globalization
Two main factors: Decline in barriers to the free flow of goods, services and capital. Technological change communication, information processing and transportation technologies.

Declining Trade and Investment Barriers

International trade occurs when a firm export goods & services to consumers in another country. Foreign direct investment occurs when a firm invests resources in business activities outside its home country. Many barriers took the form of high tariffs on imports of manufactured goods? Great depression of the 1930s

Contd- Accordingly advanced nations committed to remove barrier to the free flow of goods between nations. This was laid down in the General agreement on Tariffs and Trade ( GATT). Many countries have also been removing restrictions to foreign direct investment

Managing in the Global Market Place

Need to recognize that managing an international business differs from that of managing a purely domestic business--? Countries are different-differ in culture, political system, economic system, legal system & level of economic development. It therefore require that an international business vary its practices country by country.

Contd- International business must decide where in the world to site its production activities to minimize cost-? Must decide which foreign markets to enter & to which avoid. Must choose the appropriate mode for entering a particular foreign country--

X Contd- Is it best to export its product to foreign contr. Should the firm allow a local Co.to produce its product under license in that country ? Should the firm enter into a joint venture with a local firm to produce its product in that country ? Should the firm set up a wholly owned subsidy to serve the market in that country ?

Contd- Understanding rules governing the international trading and investment system? Has to deal with Govt. restrictions on international trade and investment. Even though many govt.are normally committed to free trade, they often intervene to regulate cross-border trades and investment.

Contd- Cross-border transactions require that money be converted from the firm s home currency into a foreign currency and vice-versa. Currency exchange rates vary in response to changing economic conditions. International business must develop policies for dealing with exchange rate movements.

Contd- In sum managing an international business is different from managing a purely domestic business: 1-Countries are different. 2-The range of problem faced in international business are wider, complex. 3-To work within limits imposed by Govt. 4-International transactions involve converting money into different currencies.

Question-?
Ultimately, the study of international business is no different from the study of domestic business. Thus, there is no point in having a separate course on international. Evaluate this statement

Different Entry Mode & Strategic Alliances

The decision of which foreign markets to enter, when to enter them, and on what scale. The choice of entry mode, and The role of strategic alliances. Basic Entry Decisions which foreign market? 1 Potential market for an international business depends on balancing the benefits, costs and risk associated with doing business in that country.

Contd-2-Economic benefits of doing business depends on factors such as-size of market, the present wealth ( purchasing power ) of consumers in that market, and likely future wealth of consumers. 3-Long-run benefits also depend on likely future economic growth rates and economic growth appears to be a function of a free market system & a country s capacity for growth.

Contd-4-The benefit cost-risk trade off is likely to be most favorable in politically stable developed and developing nations that have free market system. 5-Value an international business can create in a foreign market-depends on suitability of its product and nature of indigenous competition

Timing Of Entry
1 Entry is early when an international business enters a foreign market before other foreign firms and late when it enters after other international business have already established themselves. 2-The advantages of early entry are known as first-mover advantages to stop rivals and capture demand by establishing brand name.

Contd-The second advantage is to build sales volume in that country the cost advantage may enable the early entrant to cut prices below that of later entrant. The third advantage is to create switching costs that tie customers into their products or services. Disadvantages may give rise to Pioneering costs.

Pioneering costs ?
Pioneering costs arise when the business system in a foreign country is so different from that in a firm s home market that the enterprise has to devote considerable effort, time and expense to learn the rule of the game. Pioneering cost include the cost of business failure if the firm, due to its ignorance of the foreign environment, makes some major mistakes.

Contd- Research seems to confirm that the probability of survival increases if an international business enters a national market after several other foreign firms have already done so. The later entrant may benefit by observing and learning from the mistake made by early entrant. Pioneering cost also include the cost of promoting and establishing a product including the cost of educating customers.

Scale of Entry
2-Entering a market on a large scale involves the commitment of significant resources. Entering a market on a large scale implies rapid entry. Dutch insurance co. ING into the U.S. insurance market in 1999 it had to spend several billion dollars to acquire its U.S. operations. Even some large firms prefer to enter foreign markets on a small scale& then build slowly.

Question
The study of international business is fine if you are going to work in a large multinational enterprise, but it has no relevance for individuals who are going to work in small firms. Evaluate this statement

Entry Mode ?
Once a firm decides to enter a foreign market, the question arises as to the best entry mode.The following are the mode of entry: Exporting, Turnkey Projects, Licensing, Franchising, Establishing joint venture OR setting up a new wholly owned subsidiary in the host country. Exporting-to begin their global expansion as exporters and later switch to another mode.

Contd-Advantages-to avoid substantial cost of estblishg 2-may help to achieve experience ,location-econ Disadvantages if lower-cost locations for manufacturing the product abroad & then export from there. 2-High transport costs can make exporting uneconomical, particularly bulk products. 3-Tariff barriers make exporting uneconomical.

Contd-Turnkey Project-the contractor agrees to handle every detail of the project for a foreign client including the operating personnel. At completion of the contract, the foreign client is handled the key to a plant that is ready for full operation. Advantages-The know how required to assemble and run a technologically complex process, such as refining petroleum or steel is a valuable asset.The strategy is particularly

Contd-Useful where FDI is limited by hostgovt.regulations.Govt.of many oil rich countries have set out to build their own petroleum refining industries but lack petroleum refining technology, they gain it by entering into turnkey projects with foreign firms that have the technology. Disadvantages-the firm that enters into a turnkey deal will have no long term interest in the foreign country.Secondly,the firm that -

Contd-Enters into turnkey project with a foreign enterprise may inadvertently create a competitor. Many Western firms that sold oil refining technology to firms in Saudi Arabia, Kuwait etc, now find themselves competing with these firms in the world market.Third,if the firm s process technology is a source of competitive advantage, then selling this technology through a turnkey project is also selling competitive advantage to competitor

Licensing
A licensing agreement is an arrangement whereby a licensor grants the rights to intangible property to another entity ( license ) for a specified period, and in return, the licensor receives a royalty fee from the licensee. The intangible property includes patents, inventions, formulas, processes, designs, copyrights, and trademark.For example, to enter the Japanese market,Xerox, inventor of the photocopier, established a

Contd- Joint with Fuji Photo that is known as FujiXerox. Xerox then licensed its xerographic know-how to Fuji-Xerox. In return, Fuji-Xerox paid Xerox a royalty fee equal to 5% of the net sales revenue that Fuji-Xerox earned from the sales of photocopiers based on Xerox patented know-how Advantage-the primary advantage of licensing is that the firm does not have to bear the development costs and risks associated with

Contd-Opening a foreign market. 2-Licensing is very attractive for firms lacking the capital to develop operations overseas. 3-Licensing can be attractive when a firm is unwilling to commit substantial financial resources to an unfamiliar or politically volatile foreign market. 4-Licensing is also often used when a firm wishes to participate in a foreign market but is prohibited from doing so by barrier of invest

Contd- Disadvantage- It does not give a firm the tight control over manufacturing, marketing. Licensing typically involves each licensee setting up its own production operations .This limits the firm s ability to realize experience and location economies by producing its product in a centralized location. 2-Competing in a global market may require a firm to coordinate strategic moves across countries by using profits earned in one county

Contd- To support competitive attacks in another country. By its very nature, licensing limits a firm s ability to do this.

Franchising
Franchising is basically a specialized form of licensing in which the franchiser not only sells, in tangible property ( normally a trademark ) to the franchisee, but also insists that the franchisee agree to abide by strict rules as to how it does business. It involves long term commitment than licensing & to run the business on an ongoing basis. As with licensing, the franchiser receives a royalty payment. Licensing is pursed by manufacturing

Contd-Firm, franchising is employed by service firms. McDonald s is a good example of a firm that has grown by using a franchising strategy. McDonald has strict rules as to how franchisees should operate a restaurant. These rules extend to control over the menus, cooking methods, staffing policies, design and location of a restaurant.

Contd-Advantages The firm is relieved of many of the costs and risks of opening a foreign market on its own. Instead, the franchisee assumes those costs and risks. Thus using a franchising strategy, a service firm can build a global presence quickly. Disadvantage-significant disadvantage is quality control. Hilton hotel in Hong Kong a traveler expect same quality as in New York.

Joint Ventures
Venture entails establishing a firm that is jointly owned by two or more otherwise independent firms. Fuji-Xerox was set up as a joint venture between Xerox and Fuji Photo. Establishing a joint venture with a foreign firm has a long been a popular mode of entering a new market. Advantage- A firm benefits from a local partner s knowledge of the host country-culture language, political systems and business system

Contd2-when the development costs and\ or risk of opening a foreign market are high, a firm might gain by sharing these costs and or risks with a local partner. 3x-In many countries, political considerations make joint ventures the only feasible entry mode, since it face a low risk of being subject to nationalization or other forms of adverse govt. interference.

Contd-Disadvantage-a firm that enters into a joint venture risks giving control of its technology to its partner. 2x-shared ownership arrangement can lead to conflict and battles for control between the investing firms if their goals and objectives change or they take different views as to what the strategy should be.

Wholly owned Subsidiaries

In a wholly owned subsidiary, the firm owns 100% of the stock. And can be done in two ways-the firm either set up a new operation in that country often referred to as a green-field venture, or it can acquire an establishes firm in that host nation and use that firm to promote its products. Advantage-a wholly owned subsidiary gives a firm tight control over operations in different countries.

Contd-2-when a firm s competitive advantage is based on technological competence, a wholly owned subsidiary will often be the preferred entry mode. Disadvantage-is a most costly method of serving a foreign market from a capital investment standpoint. The risk associated with learning to do business in a new culture are less if the firm acquire an established host-country enterprise.

Strategic Alliances
Strategic alliances refer to cooperative agreements between potential or actual competitors-between firms from different countries. Strategic alliances run the range from joint ventures , in which two or more firms have equity stakes ( Fuji-Xerox ),x to short-term contractual agreements, in which two companies agree to cooperate on a particular task-such as developing a new product.

ContdAdvantages-may facilitate entry into a foreign market. 2-to share the fixed costs and associated risks also of developing new products or processes. Motorola s alliance with Toshiba was partly motivated by a desire to share the high fixed costs of setting up an operation to manufacture microprocessors. 3-to bring together complementary skills and assets that neither company could develop

Contd-On its own. 4-it can make a sense to form an alliance that will help the firm establish technological standard for the industry that will benefit the firm. Disadvantages-give competitors a low-cost route to new technology and markets. 2-alliances have risks. Unless a firm is careful, it can give away more than it receives.

Contd-The disadvantage of strategic alliance is that the firm risks giving away technological know-how and market access to its alliance partner in return for very little.

Theories of International Trade

In New York Times interview conducted in July, 1992,490 CEOs were asked to choose between the following three statements: 1-Free trade must be allowed even if domestic industries are hurt. 2-Trade restrictions are necessary to protect domestic industries. 3-Donot know\ no answer.

Contd-Nearly two-thirds of CEO-61% to be exact agreed with the statement that free trade must be allowed and only 33% agreed that trade restrictions may be necessary.They were than asked to choose between whether ( 1 ) it is important to protect American industries and jobs by limiting imports or( 2-) it is important to allow free trade so the public can buy good products at low prices.Only 29% of CEOs agreed to protect rather than free trade.

Theory--Mercantilism
Mercantilism its principle assertion was that gold and silver were the mainstays of national wealth and essential to vigorous commerce. At that time, gold and silver were the currency of trade between countries; a country could earn gold and silver by exporting goods. By the same token, importing goods from other countries would result in an outflow of gold and silver to those countries.

Contd-The flaw with mercantilism was that it viewed trade as a zero-sum game is one in which a gain by one country results in a loss by another.

Absolute Advantage
Adam Smith ( 1776 ) The Wealth of Nations attacked the mercantilist assumption that trade is a zero-sum game. Smith argued that countries differ in their ability to produce goods efficiently. In his time, the English, by virtue of their superior manufacturing processes, were the world s most efficient textile manufacturers and French due to favourable climate was the most efficient wine industry. The English had an absolute

Contd-Advantage in the production of textiles, while the French had an absolute advantage in production of wine.Thus, a country has an absolute advantage in the production of a product when it is more efficient than any other country in producing it. According to Smith, countries should specilize in the production of goods for which they have an absolute advantage and then trade these for goods produces by other countries.

Contd-Smith s basic argument, therefore is that a country should never produce goods at home that it can buy at a lower cost from other countries.Smith demonstrates that, by specializing in the production of goods in which each has an advantage, both countries benefit by engaging in trade.

Comparative Advantage
David Ricardo took Smith s theory one step further by exploring what might happen when one country has an absolute advantage in production of all goods.According to him,the theory of comparative advantage makes sense for a country to specialize in the production of those goods that it produces most efficiently and to buy the goods that it produces less efficiently from other countries,even if this means buying goods that it produce efficiently

Contd-Ricardo s theory suggest that consumers in all nations can consume more if there are no restrictions on trade. This theory suggest that trade is a positive-sum game in which all countries that participate realize economic gains .As such, this theory provides a strong rationale for encouraging free trade.

Heckscher-Ohlin Theory
Ricardo s theory stresses that comparative advantage arises from differences in productivity. Ricardo stressed labor productivity. Heckscher ( 1919 ) and Ohlim ( 1933 ) put forward a different expiation of comparative advantage. They argued that comparative advantage arises from differences in national factor endowments. By factor endowments they meant the extent to which a country is endowed with such

Contd-resources as land, labor, and capital.Nations have varying factor endowments. The more abundant a factor, the lower its cost. This theory predicts that countries will export those goods that make intensive use of factors that are locally abundant, while importing goods that make intensive use of factors that are locally scarce. Like Ricardo s theory, this theory argues that free trade is beneficial.

The Product Life-Cycle Theory

Raymond Vermon proposed the product lifecycle theory in mid-1960.The theory was based on the observation that for most of the 20 th centuary a very large proportion of the world s new product had been developed by U.S.firms and sold first in the U.S. market. To explain this, Vernon argued that the wealth and size of the U.S.market gave U.S.firms a strong incentive to develop new consumer products. In addition, the high cost of U.S.

Contd- Labor gave U.S.firms an incentive to develop cost-saving process innovations.Just because a new product is developed by a U.S.firm and first sold in the U.S. market, it does not follow that the product must be produced in the United States. It could be produced abroad at some low-cost location and then exported back into the United States.Vernon argued that early in the life cycle of a product,while

Contd-Vernon argued that early in the life cycle of a product, demand is starting to grow rapidly in the United States, demand in other advanced countries is limited to high-income groups.The limited initial demand in other advanced countries does not make it worthwhile for firms in those countries to start producing the new product, but it does necessitate some exports from the United States to those countries.

Contd-As the market in the United States and other advanced nations matures, the product becomes more standardized and price becomes the main competitive weapon.As this occurs, cost consideration start to play. Producers based in advances countries where labor costs are lower than in the U.S. might now be able to export to United States.

New Trade Theory

The new trade theory began to emerge in the 1970s when a number of economists were questioning the assumption of diminishing returns to specialization used in international theory.They argued that increasing returns to specialization might exist in some industries. If international trade results in a country specializing in the production of a certain good, and if there are economies of scale in producing that good, as output of that good

Contd-Expands, unit cost will fall .Economies of scale are unit cost reduction associated with a large scale of output.New trade theory argues that in industries where there are economies of scale, both the variety of goods that a country can produce and scale of production are limited by the size of the market.The domestic market may not be big enough to allow producers to realize economies of scale for certain products and accordingly those

Contd-Products may not be produced thus limiting the variety of products available to consumers.Alternatively, they may be produced, but in such low volume that unit costs and prices are higher. The implication of the theory is that each nation may be able to specialize in producing a narrow range of products than it would in absence of trade, yet by buying goods that it does not make from other countries, each nation can

Contd-Simultaneously increase the variety of goods available to its customers and lower the costs of those goods- x thus trade offers an opportunity for mutual gain even when countries donot differ in their resources endowments or technology. In addition to economic of scale, learning effects also exist in this theory. Learning effects are cost savings that come from learning by doing.

Contd-Labor learns by repetition how best to carry out a task. Labor productivity increases over time and variable unit costs falls as individuals learn the most efficient way to perform a particular task,. This theory suggest that nations may benefit from trade even when they do not differ in resource endowments or technology. Trade allows a nation to specialize in the production of certain products, attaining scale economies

Contd-And lowering the costs of producing those products, while buying products that it does not produce from other nations .By doing this, the variety of products available to consumers in each nation is increased while the average costs of those products should fall, as should their price. Economic of scale and learning effects both increase the efficiency of resource utilization and hence increase productivity.

National Competitive AdvantagePorter s Diamond

In 1990, Michel Porter of the Harvard Business School published the result of an intensive research effort that attempted to determine why some nations succeed and others fail in international business. Porter and his team looked at 100 industries in 10 nations. The task was to explain why a nation achieves international success in a particular industry. Why does Japan do so well in automobile industry? Why do Germany and U.S do so

Contd-Well in the chemical industry? These questions cannot be answered by the Hecksher-Ohlin theory and by the theory of comparative advantage. Porte theorizes that four broad attributes of a nation shape the environment in which local firms compete and these attributes promote or impede the creation of competitive advantage. These attributes are;

ContdFactor endowments skilled labor or the infrastructure necessary to compete in a given industry.He recognizes hierarchies among factors-Basic factors ( natural resources, climate, location, demographics ) and Advanced factors ( communication infrastructure, skilled labor, research facilities, technological know-how ) He argues that advanced factors are the most significant for competitive advantage.

Contd-2-Demand Conditions-the nature of home demand for the industry s product or service. The home demand are important in shaping the attributes of domestically made products and in creating pressures for innovation and quality. A firm s gain competitive advantage if their domestic consumers are demanding. Such consumers pressure local firms to meet high standard of product quality and produce innovative products.( Japan knowledgle buyer

Contd-3-Related and Supporting Industries-the presence or absence of supplier industries and related industries that are internationally competitive.The benefits of investement in advanced factors of production by related and supporting industries can spill over into an industry, thereby halping it to achieve a strong competitive position internationally.Swedish strength in fabricated steel products-ballbearings,cutting tools has given strength-steel inds

Contd-4-Firm Strategy, Structure and Rivalry-the conditions governing how companies are created, organized and managed and the nature of domestic rivalry. Different nations are characterized by different management ideologies-which either help them or donot help them.Engineers in top posotion in German, Japan and with finance bacground leading in U.S.

Contd-Secondly,vigorous domestic rivalry induces firms to look for ways to improve efficiency, which makes them better international competitors. Domestic rivalry creates pressure to innovate, to improve quality, to reduce costs and to invest in upgrading advanced factors.