Chapter 1 Globalization

Managing Organizations in a Global Economy: An Intercultural Perspective

First Edition

John Saee

Copyright by South-Western, a division of Thomson Learning. All rights reserved.

The Nature of International Business Management:

Globalization and Its Impact on Management in a Global

Economy

What is international business?International business is the business whose activities involve crossing the national border.

International Business Activities

• International trade: exporting and importing

• Merchandise exports and imports

• Commodities exports and imports

• Service exports and imports

Foreign Investment

International investments take place when residents of one

country supply capital to residents of another country.

Portfolio Investment

Investors are not concerned with controlling the firm. Foreign

financial assets (stocks and bonds) are purchased to obtain return on

investment.

Foreign Direct Investment

FDI is the purchase of sufficient stock in a foreign firm to obtain significant management control.

International trade/globalization is not a recent phenomenon.

Why trade between nations?

International Trade Theories

Theory of Absolute Advantage (Adam Smith)

International Trade Theories

Theory of Comparative Advantage (Ricardo)

Factor Proportions Trade Theory (Hecksher-Ohlin Theory)

International Product Life Cycle (Vernon)

International Trade Theories

Porter’s Competitive Advantage of Nations

Theory of International Investment

Why Companies Go Global

Why Enter Foreign Markets?The reasons for going abroad are the desire to increase profits and sales and to protect them from competition.

Why Companies Go Global

Increase profits and sales by entering new markets:Emerging new marketsCreation of large new markets due to

economic integration

Faster-growing foreign markets

Why Companies Go GlobalObtain greater profits

Less competitionReduced cost of R&D per unit of

productLower manufacturing costs

Protect markets, profits, and salesProtect domestic marketProtect foreign markets

Why Companies Go GlobalGuaranteed supply of raw materialsAcquire technology and management

know-howGeographic diversification Satisfy management’s desire for

expansion

The Modern Market Place Foreign Trade Volume

According to the statistics released by the World Trade Organization and the United Nations, the volume of world trade has grown consistently faster than the volume of world output since 1950.

Trade in goods and services is approaching $8 trillion. With world GDP $30 trillion, one quarter of everything produced in the world is exported.• Leading exporters and importers in

merchandise trade.• Leading exporters and importers in

services. • Australia’s international trade.

Direction of Trade: Developed nations trade primarily with other developed nations and so do the developing nations.

Trends: developed countries, especially USA and Japan, increasingly trade with developing nations; developing nations increasingly trade with each other.

Foreign Direct Investment VolumeAccording to the United Nations data,

between 1984 and 1996 the average yearly outflow of FDI from all countries increased by 830% to U.S. $349 billion. This compares with a 92% expansion in world trade and a 27% expansion in world output over the same period (Hill 1999).

Direction Industrialized nations invest primarily

in other industrialized nations just as they trade more with them.

The Role of MNCs in the World EconomyThere are 63 000 transnational

corporations with around 700,000 foreign affiliates in the world today (UNCTAD 2000).

The global 500 list by Fortune.The national composition of the largest

multinationals.

Less than 30 countries in the world have GDP exceeding total revenues of General Motors.

The importance of international business has changed dramatically over time.Foreign trade and foreign direct

investments have experienced explosive growth.

Large MNCs play increasingly important roles in the world economy.

National economies are becoming more and more interdependent.

Changes in the world environment: Shrinkage of time and space due to

increased application of technology. Institutional developments and

arrangements. Economic integration. Unification and socialization of the

global community.

Globalization of the World Economy

What is Globalization?Sociologists’ definition: Globalization is a concept which is

describing the ever-intensifying networks of cross-border human interaction (Hoogvelt 1997).

Economists’ definitions:Globalization is a drive toward the

“commercial integration of world economies” (Drago et al. 1992, p.192).

Causes of market and industry globalization: (1) Technological forces

IndustrializationTransportationInformation and communicationIncreased role of technology

Globalization as a move away from “an economic system in which national barriers are district entities, isolated from each other by trade barriers and barriers of distance, time, and culture and toward a system in which national markets are merging into one huge global marketplace” (Hill 1999, p.5).

(2) Social forces• Consumerism.• Convergence in consumers’ tastes.• Education and training.

(3) Political and legal forces• Reduced barriers to trade.• Increased protection of the intellectual property.• Reduction of the government interference in the

economy and privatization.

(4) Economic forces Increased competition, trade, incomes. Instututional developments and

arrangments.

GlobalizationThe globalization debate: prosperity or

impoverishment?

Is the shift toward a more integrated and interdependent global economy a good thing?  

Challenges of Managing Organizations within the Global

Marketplace**