Chapter 7

The Challenges of Globalization

McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, All Rights Reserved.

Ch. 7 Key Learning Objectives

Defining globalization, and classifying the major ways in which companies enter the global marketplace

Recognizing the major drivers of the globalization process and the international financial and trade institutions that have shaped this process in recent decades

Analyzing the benefits and costs of the globalization of business

Identifying the major types of political and economic systems in which companies operate across the world, and the special challenges posed by doing business in diverse settings

Examining the major codes of conduct governing the social and ethical behavior of transnational corporations

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Introduction to Globalization

Refers to the increasing movement of goods, services, and capital across national borders

Is considered a process—an ongoing series of interrelated events International trade and financial flows integrate the world economy,

leading to the spread of technology, culture, and politics

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Entering the Global Marketplace

Develop global market channels First build a successful business in their home country, then

export products or services to buyers in other countries

Establish global operations Locate manufacturing plants or service operations in other

countries as a way to cut costs; work may also be subcontracted

Develop global supply chains Purchase raw materials, components, or other supplies from

sellers in other countries

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Transnational Corporations (TNC’s) Defined by the United Nations as firms that control assets

abroad 70,000 TNCs operate in the modern global economy They, in turn, have 700,000 affiliates (suppliers, subcontractors,

retailers they have some business relationship with)

Most global commerce is carried out by a small number of powerful firms Next slide lists top 10 non-financial transnational corporations,

ranked in order of the value of the foreign assets they control

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Top 10 Non-Financial Transnational

Corporations Figure 7.1

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Acceleration of Globalization The world’s economy is becoming increasingly

integrated Higher share of output is being exported across national

borders One-quarter of all goods and services produced worldwide is

sold to other nations, rather than domestically This is almost double the percentage of 1960

Shown on next slide, much of this growth has been in the service sector

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Export of Services in Millions of U.S. $, 1990 and 2004

Figure 7.2

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The Acceleration of Globalization Due to following factors

Technological innovation Improved transportation systems The rise of major transnational corporations

• Bigger, well-capitalized, firms are better equipped to conduct business across national boundaries than smaller firms

Social and political reforms • Rise of Pacific Rim growth economies, collapse of former

Central and Eastern European communist countries have opened new regions to world trade

Rise of international financial and trade institutions that stabilize currencies and promote free trade

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International Financial and Trade Institutions World Bank, IMF and WTO are the three institutions

that set the rules by which international commerce is transacted

No business can operate across national boundaries without complying with rules set by World Trade Organization (WTO)

Many businesses in developing countries are dependent on World Bank and International Monetary Fund (IMF) loans to survive

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The World Bank Established in 1944 Provides economic development loans to its member

nations Funds used mainly for roads, dams, power plants,

pipelines, and other infrastructure projects Funding provided by member countries and

international capital markets Negotiates “structural adjustment plans” with countries

it loans to Applies conditions on these countries Conditions are considered by critics to lead to unfair burden

on developing countries

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International Monetary Fund

“Sister” organization to World Bank, created at same time

Purpose is to make currency exchange easier for member countries so that they can participate in global trade

Lends foreign exchange to member countries Also imposes conditions on governments that receive

its loans Has begun to offer debt relief to some nations

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World Trade Organization Founded in 1995, successor to GATT (General

Agreement on Tariffs and Trade) International body that establishes the ground rules

for trade among nations Its major objective is to promote free trade; attempts

to eliminate barriers to trade (e.g. quotas, duties and tariffs)

Conducts “rounds” of negotiations on various topics “Most favored nation” rule means members countries

cannot discriminate against foreign products for any reason

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The Benefits and Costs of Globalization

Globalization is very controversial

Some see it as beneficial, others do not

Next slide summarizes major points on both sides of the debate

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Benefits and Costs of GlobalizationFigure 7.3

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Comparative Political and Economic Systems

Nations differ greatly in their political, social and economic systems

First important dimension to consider is how power is exercised and degree of democratic rights

Past century has been marked by spread of democratic rights to many nations for the first time

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Comparative Political Systems Democracy

Refers broadly to the presence of political freedom Four defining features of democracy (according to

the U.N.) Fair elections An independent media Separation of powers among the executive, legislative, and

judicial branches of government An open society where citizens have the right to form their

own independent organizations to pursue social, religious, and cultural goals

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Comparative Political Systems Military dictatorships

Repressive regimes ruled by dictators who exercise total power through control of the armed forces Examples include Myanmar (Burma), Belarus

Some countries have reverted to authoritarian rule after a period of democracy Example - Pakistan

Rights of citizens to organize for cultural or religious freedoms is restricted in others Examples include Iran, Saudi Arabia

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Comparative Political Systems Degree to which human rights are protected differs

greatly among nations Several international codes of human rights exist

Most important one is United Nations Universal Declaration of Human Rights of 1948

Over half world has adopted these human rights covenants

Still, many violations of human rights still occur: Recent genocides in Rwanda, Sudan Systems where minority groups and indigenous peoples lack

basic human rights, example of Nepal

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Comparative Economic Systems Free enterprise systems

Based on the principle of voluntary association and exchange

Members of society satisfy most of their economic needs through voluntary market transactions

Central state control Economic power is concentrated in the hands of government

officials and political authorities The central government owns the property that is used to

produce goods and services

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Challenges of Global Diversity

Diversity and complexity of systems that transnational corporations face creates challenges, for example If a company does business in a nation that does not grant

women equal rights, should that company hire and promote women at work, even if it violates local laws and customs?

Should a company enter into a business venture with a government-owned enterprise if that government has a reputation for violating its citizens’ human rights?

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Challenges of Global Diversity

Notion of constructive engagement By operating with strong moral principles, transnational

corporations can be a force for positive change in nations where they operate

In some circumstances this is not possible due to extreme conditions, provoking dilemma At what point do violations of political, human, and economic

rights become so extreme that a company cannot morally justify doing business in that country? (relevant question for Shell in Nigeria case)

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Global Codes of Corporate Conduct

The United Nations Global Compact Initiated by Kofi Annan in 2000 A values-based platform designed to promote institutional

learning Corporations are invited to voluntarily endorse core

principles covering labor, human rights, and environmental standards

As of 2006, over 2000 companies had endorsed the principles

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Global Codes of Corporate Conduct

The OECD Guidelines for Multinational Enterprises Code of conduct for corporations developed by member

nations of the OECD The guidelines are voluntary, address employment relations,

information disclosure, environmental stewardship, consumer interests, and the management of technology

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Global Codes of Corporate Conduct The Global Sullivan Principles

The objectives are to support economic, social, and political justice by companies where they do business

Calls on companies to support human rights and to encourage equal opportunity at all levels of employment

The Caux Principles Emphasizes working for the common good and respect for

human rights

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Collaborative Partnerships for Global Problem-Solving

Emerging trend for development of collaborative, multisector partnerships focused on particular social issues or global problems

Involves 3 sectors Business Government Civil society

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Collaborative Partnerships for Global Problem-Solving Civil society

Comprises nonprofit, educational, religious, community, family, and interest-group organizations

Largely represented by nongovernmental organizations (NGOs)

• Concerned with such issues as environmental risk, labor practices, workers’ rights, community development, and human rights

• Has been tremendous growth in NGO’s: from 1,000 in 1996 to over 3,000 in 2006

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Collaborative Partnerships for Global Problem-Solving Collaborative partnerships across all 3 sectors can

draw on unique capabilities of each, as well as overcome particular weaknesses Attributes of each shown on next slides

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Distinctive Attributes of the Three Major Sectors

Figure 7.4