Week 2: Introduction

to International INSTRUCTOR:

Business MC ARON J. MONREAL, CPA

RESOURCE:
INTERNATIONAL BUSINESS: THIRD EDITION
WALL, S. MINOCHA, S. REES, B.
 Patterns and Trends in International Business
 Patterns and trends in business activity worldwide – a result of some of the strategic choices taken by firms
with an international orientation and in part the stimulus for future changes of direction by firms
 Event Examples (Figure 1.1)
 Patterns and Trends in International Business
 Figure 1.1 indicates some aspects of the growth in international trade and capital inflows using index
numbers based on 1980, showing 1 for exports and foreign direct investment respectively
 Between 1980 and 2007, world exports of goods and services have more than doubled in real terms,
reaching over $17 trillion in 2007 and accounting for over 31% of the world’s GDP.
 It is worth noting that, while the high-income economies have accounted for most of this growth in the
absolute value of global exports with the developing economies’ exports rising at an above average rate of
6% per annum in real terms between 1980 and 2007. This trend has resulted in the exports-to-GDP ratio of
the developing economies rising much further than that of the high-income economies.
 Over the same time period flows of the world foreign direct investment have increased more than fivefold
in real terms, reaching around $1.8 trillion in 2007, and $4 trillion above the previous peak in the year
2000.
 Patterns and Trends in International Business
 There has also been rapid growth in cross-border mergers and acquisitions (M&A) since 1990, despite a
decline over the 2000-03 period. Much of this activity has been concentrated in financial services, life
sciences, telecommunications, and the media, with M & A being a key factor in accounting for the rise of
foreign direct investment.
 There have been more globally-dispersed value chains. With improved international communications
helping MNEs to coordinate and control geographically-dispersed activities, including service functions,
the result has been an increased propensity for MNEs to shift certain production and service activities to
low-cost centers overseas.
 Shift from bi-polar world economy to tri-polar world economy.
 There has been the growth of regional trading arrangements, which give preferential treatment to trade in
goods and services between members of these blocs. Only countries within the particular regional trading
bloc (e.g. the EU, NAFTA) benefit from these RTAs, which have increased substantially in number over
the past decade or so.
 Patterns and Trends in International Business
 Growth of bilateral investment and trade treaties are also shown (an example is the double taxation
treaties).
 Growth of sovereign wealth funds. Sovereign wealth funds (SWFs) are government owned investment
vehicles managed separately from the official reserves of the country. They have usually been accumulated
by those governments as the result of high global commodity prices for their exports. The SWFs will often
be invested in projects with higher risks but higher expected future returns. Professional portfolio
management techniques are often adopted with a view to generating a sustainable future income stream via
investments in bonds, equities and other assets.
 Growth of ‘defensive techniques’ to combat global insecurity
 Changing area patterns of international costs particularly the international labor costs in terms of ‘Relative
Unit Costs’.
 Other International Patterns and Trends
 International Communication - For example, the time spent on international telephone calls has risen from
33 billion minutes in 1990 to over 120 billion minutes by the end of 2008. Internet usage is also rising
exponentially, with the 2008 Human Development Report (UNDP 2008) noting that the number of Internet
hosts per 1000 people worldwide had risen from a mere 1.7 in 1990 to 136 in 2005/06 with cellular mobile
phone subscribers per 1000 people worldwide also rising from only 2 in 1990 to 341 in 2005/06 (UNDP
2008).
 International travel. The number of international tourists has more than trebled from 260 million travellers
a year in 1980 to over 800 million travellers a year in 2008.
 International growth in leisure pursuits. In 1880 some 80% of the time left over after necessities such as
sleeping and eating were attended to, was used for earning a living.
 International growth in ageing populations. Between 1950 and 2008 the median age (at which 50% of the
population is below it and 50% above) of the world’s population rose by only 3 years, from 23.6 years in
1950 to 26.5 years in 2008.
 Other International Patterns and Trends
 International growth in currency transactions. The daily turnover in foreign exchange markets has
dramatically increased from $15 billion in the mid-1970s to over $2400 billion in 2008. This has
contributed to greater exchange rate volatility, on occasions putting severe pressure on national economies
and currencies (e.g. Argentina’s peso in 2001/02).
 International growth in countertrade. When conventional means of payment for international transactions
are difficult, costly or not available, then a range of barter (swap)-type transactions may be used instead.
Whereas such ‘countertrade’ only accounted for 2% of world trade in 1975, by 2008 over 20% of world
trade involved some element of barter, with the former Soviet Union and the Eastern European economies
particularly active in using countertrade.
 Globalization
 Different definitions of globalization
 the process of transformation of local phenomena into global ones. It can be described as a process by which the
people of the world are unified into a single society and function together. This process is a combination of
economic, technological, sociocultural and political forces’ (Croucher 2003: 10).
 a widening, deepening and speeding up of interconnectedness in all aspects of contemporary social life from the
cultural to the criminal, the financial to the spiritual’ (Held et al. 1999: 2).
 increasing global interconnectedness, so that events in one part of the world are affected by, have to take account
of, and also influence, other parts of the world. It also refers to an increasing sense of a single global whole’
(Tiplady 2003: 2).
 the worldwide movement towards economic, financial, trade and communications integration. Globalisation
implies opening out beyond local and nationalistic perspectives to a broader outlook of an interconnected and
inter-dependent world with the free transfer of capital, goods and services across national frontiers’ (Business
Dictionary).
 Globalization
 Different definitions of globalization
 refers to the shift toward a more integrated and interdependent world economy . . . [through] the merging of
historically distinct and separate national markets into one huge global market place’ (Hill 2005: 6).
 process by which the whole world becomes a single market. This means that goods and services, capital and
labour are traded on a worldwide basis, and information and the results of research flow readily between countries’
(Black 2002).
 reflects a business orientation based on the belief that the world is becoming more homogenous and that
distinctions between national markets are not only fading but, for some products, will eventually disappear’
(Czinkota and Ronkainen 1999: 454).
 Globalization
 Three (3) Key Elements of Globalization
1. Shrinking space. The lives of all individuals are increasingly interconnected by events worldwide. This is not only
a matter of fact but one which people increasingly perceive to be the case, recognizing that their jobs, income
levels, health, and living environment depend on factors outside national and local boundaries.
2. Shrinking time. With the rapid developments in communication and information technologies, events occurring in
one place have almost instantaneous (real time) impacts worldwide. A fall in share prices in Wall Street can have
almost immediate consequences for share prices in London, Frankfurt or Tokyo.
3. Disappearing borders. The nation-state and its associated borders seem increasingly irrelevant as ‘barriers’ to
international events and influences. Decisions taken by regional trading blocs (e.g. EU, NAFTA) and
supranational bodies (e.g. IMF, World Trade Organisation) increasingly override national policy making in
economic and business affairs as well as in other areas such as law enforcement and human rights.
 Globalization
 Different views in globalization
 Economists - focus on the growth of international trade, the increase in international capital flows, and the
progressive dominance of the multinational enterprise (MNE) form of business organization within domestic and
global business activity;
 Political scientists - view globalization as a process that leads to the undermining of the nation-state and the
emergence of new forms of governance;
 Sociologists - view globalization in terms of the rise of a global culture and the domination of the media by global
companies;
 International Relations Experts - tend to focus on the emergence of global conflicts and global institutions.
 Globalization features
 Different Features of Globalization
1. New Markets
2. New Tools of Communication
3. New Actors
4. New rules and norms
 Growing global markets in services – banking, insurance, transport.
 New financial markets – deregulated, globally linked, working around the clock, with action at a distance in real
time, with new instruments such as derivatives.
 Deregulation of antitrust laws and growth of mergers and acquisitions.
 Global consumer markets with global brands.
 Globalization features
 Different Features of Globalization
1. New Tools of Communication
 Internet and electronic communications linking many people simultaneously.
 Cellular phones and mobile telephony.
 Fax machines.
 Faster and cheaper transport by air, rail, sea and road.
 Computer-aided design and manufacture.
 Globalization features
 Different Features of Globalization
1. New Actors
 Market economic policies spreading around the world, with greater privatization and liberalization than in earlier
decades.
 Widespread adoption of democracy as the choice of political regime
 Human rights conventions and instruments building up in both coverage and number of signatories – and growing
awareness among people around the world.
 Consensus goals and action agenda for development.
 Conventions and agreements on the global environment – biodiversity, ozone layer, disposal of hazardous wastes,
desertification, climate change.
 Multilateral agreements in trade, taking on such new agendas as environmental and social conditions.
 New multilateral agreements – for services, intellectual property, communications – more binding on national
governments than any previous agreements.
 Outcomes of Globalization
 Hyperglobalists envisage the global economy as being inhabited by powerless nation states at the mercy of
‘footloose’ multinational enterprises bestowing jobs and wealth creation opportunities on favored national
clients. National cultural differences are largely seen by these progressively powerful multinationals as
mere variations in consumer preferences to be reflected in their international marketing mix.
 Transformationalists recognize that globalization is a powerful force impacting economic, social, and
political environments, but take a much less prescriptive stance as to what the outcomes of those impacts
might be. Globalization involves a complex set of intermittent, uneven processes with unpredictable
outcomes rather than a linear progression to a predictable end-state.
 Globalization under Four Separate Headings
 1. Globalization and market – the rise of standardized products purchased in huge volumes by consumers
worldwide.
 2. Globalization and production - the cost-based advantages of alternative production locations which
might lead to such outsourcing, and possibly less tangible factors.
 3. Globalization and the role of the nation-state - positive role in the world through its monopoly of
military power which, though rarely used, offers its citizens relative security in a highly dangerous world.
Further, it provides a focus for personal and communal identity and finally, in pursuing national interest
through cooperation and collaboration, nation states actually empower themselves.
 4. Globalization and new rules and norms - the importance of good governance and transparency, an
absence of corruption and appropriate property rights to the establishment of a sustainable globalised
economic environment.
 The Multinational Enterprise (MNE)
 Also called as the ‘Transnational’
 a company that has headquarters in one country but has operations in other countries.
 Dunning (1993) defines a multinational as a firm ‘that engages in foreign direct investment and owns or
controls value-adding activities in more than one country’.
 Ranking Multinationals based on the amount of foreign assets they control and in terms of a
‘transnationality index’.
 Foreign assets. primarily based in the petroleum/energy, telecommunications, and motor vehicle sectors.
 Transnationality index. takes a more comprehensive view of a company’s global activity and is calculated as the
average of the following three ratios:
1. foreign assets/total assets;
2. foreign sales/total sales;
3. foreign employment/total employment.
The Multinational Enterprise (MNE)
How Important are the Multinationals?
 In 2007 an estimated 79,000 multinational enterprises, collectively controlled a
total of around 800,000 foreign affiliates (subsidiaries), employed almost 82
million people worldwide and accounted for sales revenue of over $31 trillion,
some 11% of world GDP.
How Important are the Multinationals?
 Types of Multinational Enterprise (MNE)
1. Global corporations - that view the whole world as their marketplace, with goods and services
standardized to meet the needs of consumers worldwide.
2. Multidomestic corporations - comprise a relatively independent set of subsidiaries, each producing
goods, and services focused on a particular local market.
3. Transnational corporations - that integrate a geographically dispersed set of specialised activities into a
single production process.
 “ Case Study

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