Business and Global Economy - Exam

Roll Number – GM21CM043

Ans 1)

International Business vs Globalisation

International Business refers to the conduct of trade and investment activities by an

organisation across national borders. So, it can take the form of international trade or
international investment.

International trade refers to exchange of products or services beyond a nation’s borders.

This can happen through export or import (global sourcing).

Globalisation on the other hand refers to increasing integration amongst global markets and
is characterised by the growing interdependency of nations world-wide.

From the above definitions, it is clear that Globalisation is broader term encompassing many
dimensions including increasing interconnectedness of various stakeholders and market
players being buyers, sellers, governments etc. and it has impact at business enterprise
level as well as societal level.

Therefore, international business is focused more on organisation/ enterprise level activities

whereas globalisation refers to interconnectedness between global markets and is therefore
much bigger in scope. For this reason, we can say that international business can be
globalisation but globalisation does not necessarily mean international business.

Globalisation – When a nation or state becomes truly global in all aspects

Globalisation can be described through its driving forces, dimensions, societal

consequences and business-level consequences.

The driving forces of globalisation include –

 Reduction in barriers of trade and investment
 Liberalisation and opening up of previously closed economies
 Industrial developments in emerging economies
 Technological advancements on a global scale
Advances in technology are particularly significant in creating connectivity in customers,
suppliers, governments. Globalisation has the world economy increasingly dynamic as
advancements have taken place in IT, Digitisation, Communications, Internet etc which
fundamentally affect all value creating activities at firm-level like manufacturing, distribution,
transportation etc. The dynamism of globalisation is also reflected in emergence of regional
blocs of economies, increase on financial flows and investment between economies,
similarities in lifestyles and needs and so on. At business-level, globalisation forces firms to
re-imaging their value-chain activities - like sourcing, manufacturing, marketing and
distribution - as any activity can be performed in any market on a global scale.

Critics argue that there are some adverse societal consequences as well of globalisation like
interference with sovereignty of the state, increasing the gap between rich and poor,
exploitation of labour in developing and emerging economies and harm caused to natural
environment by unhindered industrialisation. However, it can not be denied that global trade
and investment in emerging economies like India and South Africa can help address many
issues in such countries.

To summarise, when a nation or a state manages to overcome the challenges associated

with globalisation and the drivers of globalisation manage to create some of the substantial
benefits at firm-level and societal level which can result from globalisation, then we can say
that a nation or a state has become truly global in all aspects.
Ans 2)

Mc Donald’s (McD)’s decision to expand to North Korea

North Korea is opening up its economy. It required to analyse the situation and determine
whether McD should expand its business to the country – whether it would be worth the
investment for McD to expand to North Korea.

The above decision requires that we apply the PESTEL framework to McD’s possible
expansion in North Korea. PESTEL stands for Political, Economic, Socio-cultural or Social,
Environmental and Legal. This means that the economy of North Korea should be critically
analysed on each of the above dimension to enable McD to decide whether to make
investment and expand business activities to North Korea.

Given below is an illustrative analysis of North Korea under PESTEL framework - indicating
factors relevant to North Korea which may impact business activities of McD in the country.

Political Factors
 North Korea has historically been an authoritarian regime with one major dynasty of
rulers governing the state for decades. The dictators who have governed the country
thus far have been widely regarded eccentric personalities and some are alleged to
have gone to extreme lengths to preserve the political power.
 The flow of information in the country is extremely restricted and there are many
allegations of basic human rights violations (as per the UN charter) against the
government. In fact, there are reported instances of North Korean citizen defecting to
China and South Korea to escape political persecution.
 UN has enforced embargoes against North Korea and Iran labelling them as state
sponsors of terrorism

Existence of such factors at the very least indicate political instability and so
investment by McD to expand business should be considered to be extremely risky to
say the least.

Economic Factors
 There may be uncertainty around the data pertaining to economic indicators released
by the government making economic decisions taken on the basis of the same to be
not completely accurate.
  Based on unofficial sources, the percentage of extremely poor population in the
country may be much higher than expected and so revenue generation may not
happen for McD to level anticipated.
 There is a significant market share to be captured based on pent up demand for
international products, particularly legacy products and services like McD’s but
accurate data may need to be collected and analysed before decision of investment
is made. This may entail significant capital cost for market research etc.
 The fact that the country scores among the lowest on political and economic freedom
index should also raise red flags for McD.

Socio-cultural Factors
 As mentioned above, quite a significant percentage of population has grown under
abject poverty in North Korea. That coupled with the fact that the flow of information
in the country is extremely restricted makes for a very low context and volatile socio-
cultural environment.
 From the long-term point of view, McD would have to invest substantially in market
research as well as training of staff etc to create a sustainable business.

Environmental Factors
 Given the totalitarianism regime, the regulations pertaining to environment may not
exactly be stable and reliable over long-term.
 Also, lack of data or lack of accuracy pertaining to environmental data may cause
ambiguity as to compliances needed on the part of McD and may increase costs
associated with the same.

Legal Factors
 Again, given the totalitarianism regime, the legal environment may not exactly be
stable to create fair and just laws against which the company would be held
accountable.
 Ambiguity in legal environment may lead to unnecessary legal costs at a later stage.
Substantial legal expenditure may have to be incurred in the event matters are
referred to international courts of justice.

Thus, we can say that based on the PESTEL analysis it seems like an extremely risky
proposition for McD to invest and expand business activities to North Korea. Having said
that, McD given the deep pockets of the company, the company may invest in conducting a
thought independent market research to determine the probable profitability of such an
expansion and where it meets the required ROI targets, the company may consider some
investment to test the market on pilot basis.

The above analysis can be further substantiated with SWOT (Strengths, Weakness,
Opportunities, Threats) Analysis. A brief in this regard is mentioned below.

 Strengths – McD’s legacy and time-tested business model is a huge strength

 Weaknesses – The company’s heavy reliance on debt to run its business may be
considered a weakness
 Opportunities – The fresh market opening up may provide an opportunity to explore a
new segment and generate more revenue
 Threats – The risk associated with above mentioned political and economic factors
may indicate threats to business along with competition that may arise.

Further, in this decision, McD should consider the four types of risks associated with
internationalisation of business, namely
Cross-cultural risk - a situation or event where a human value has been put at stake
due to a cultural misunderstanding.
Country risk - the possible adverse effects on company activities and profits caused by
changes in the political, legal, and economic environment in the foreign country.
Currency risk - the risk of negative changes in exchange rates.
Commercial risk - the possibility of a firm’s loss from poorly developed or executed
business strategies, tactics, or procedures.

Therefore, to summarize, the required decision question may be analysed using established
frameworks like PESTEL and SWOT and considering the risks associated with the
expansion option from McD’s point of view.
Ans 3)

Protectionist policies – Can they be beneficial?

Protectionism refers to national economic policies designed to restrict free trade and protect
domestic industries from foreign competition.

Despite the benefits of free trade, governments around the world regularly intervene in the
business activities happening in the economies they govern. The key rationale behind the
such protectionism is the protection of nation’s economy and its market players namely
industries and workers. Governments particularly impose barriers to protect infant industries.
Such barriers can be either defensive or offensive. The nature and outcomes of such
barriers can differ across economies depending upon a variety of factors.

Government intervention arises typically in the form of

tariffs,
nontariff trade barriers, and
investment barriers.

Tariffs are taxes on imported products, to collect revenue for the government and protect
domestic industries from foreign competition. Nontariff trade barriers are policies that restrict
trade without directly imposing taxes. Governments also impose standards as well as
administrative and bureaucratic procedures, currency controls etc to protect local economy
and minimize loss of local currency. FDI and ownership restrictions ensure that the nation
maintains partial or full ownership of firms within its national borders.

Governments impose such policies of trade and investment barriers to achieve political,
social, or economic objectives. They may provide subsidies, by payments or other material
support.

Some of the benefits of protectionist policies are as follows:

 With dumping, firms charge abnormally low prices abroad. This is countered by
levying anti-dumping duty which protects industries within border of the nation.
 Tariffs collected can be used for infrastructural and other developments in the nation
which will fasten economic growth of the nation
 Small industries cannot by themselves stand up to MNCs and they require
government support to fact such stiff competition. Protectionist policies give the
government a way to perform this function.
 Governments support homegrown firms by providing investment incentives and
biased government procurement policies. (By way of subsidies etc mentioned above)
 Such policies, if implemented in correct measure, can help protect and preserve the
national security, national natural resources and also national cultural identity and
heritage. Like South Africa being a natural resource rich country, may need
government to implement such policies to protect such resources from exploitation by
developed and rich economies.
 Government intervention and trade barriers can raise ethical concerns that affect
developing economies and low-income consumers and they also can be used to
offset such harmful effects.
 Regional economic blocs promote growth by promoting economic inclusion of
countries with similar geographies and other parameters. This can used as a
leverage in global trade to face competition from developed economies.
 It increases market size by integrating the economies within a region. It increases
economies of scale and factor productivity among firms in the member countries and
attracts foreign investors to the bloc.