International Business and Trade

The Challenges
of Globalization
CHAPTER 1 GLOBALIZATION
Globalization : Meaning

Forces Driving Globalization

Untangling the Globalization

Debate

Key Players in International

Business

Why International Business is

Special?
Emirates’ Global Impact
Dubai, The United
Arab Emirates – The Emirates
Group, founded in 1985 and
headquartered in Dubai, is one
of the world’ leading
commercial air transportation
service providers.
Emirates has built up a
strong brand name as a leader
in the aviation industry,
particularly in terms of its
excellent customer service and
its rapid growth.
https://www.bloomberg.com/opinion/articles
 It provides passenger, cargo, and postal carriage
services to approximately 100 destinations worldwide.
The company is also involved in the wholesale
and retail of consumer goods, in-flight and institutional
catering, holiday service, and hotel operations in
Europe, The Middle East, Africa, Asia, Australia, and
North America.
The Group’s operations are global in many ways.
Emirates is renowned for its excellent customer
service, but how does it attract new customers and
keep current customers happy when it operates
worldwide in many different countries and cultures?
 The Answer is that global customers need global
services too. If you visit Emirates’ Web site ( see
www.emirates.com ) you will see that it has multi-
language booking services, customized in-flight
entertainment and provides international food and
drink during the flight. Furthermore, Emirates Group
employs about 50, 000 people, and its interesting to
note that its cabin crew is highly diverse in terms of
nationality, religion, languages.
In fact, the group operates a global recruitment
process, and its staff from cabin crew to engineers,
comes from all over the world. That is an example of
how globalization is reshaping our personal lives and
altering activities of International Companies.
 The Birth of Globalization

Globalization is reshaping our lives and leading

us into unchartered territory. As new technologies
drive down the cost of global communication and
travel, we are increasingly exposed to the traits and
practices of other cultures.
As countries reduce barriers to trade and
investment, globalization forces industries to grow
more competitive if they are to survive.
 The Birth of Globalization

Globalization refers to the trend toward

greater economic, cultural, political, and
technological interdependence among
national institutions and economies.
What is Globalization?
It encompasses the socio-economic
reform process of eliminating trade,
investment, cultural, information
technology, and political barriers across
counties, which could lead to increased
economic growth and
the geo - political integration and
interdependence among nations of the
world.
 Globalization as a trend is characterized by the
following:

Denationalization – (national boundaries are becoming

less relevant)

Internationalization –
(entities cooperating across national boundaries)

The greater interdependence that globalization is

causing means an increasingly freer flow of goods,
services, money, people, and ideas across national
borders.
 Globalization of Markets and
Production

Two areas of business in which

globalization is having profound
effects are:

1. Globalization of Markets
2. Globalization of Production
 Globalization of Markets

Globalization of markets refers to convergence in buyer

preferences in markets around the world.

This trend is occurring in many product

categories, including consumer goods, industrial
products, and business services. Clothing retailer L.L.
Bean, shoe producer Nike, and electronics maker Sony
are a just few companies that sell global products.
 Global Products

Semiconductors (Intel, Philips)

Aircraft (Airbus, Boeing)
Construction equipment (Caterpillar, Mitsubishi)
Autos (Honda, Volkswagen)
Financial Services (Citicorp, HSBC)
Air travel (Lufthansa, Singapore Airlines)
Accounting services (Ernst & Young, KPMG)
Consumer goods (Procter and Gamble, Unilever)
Fast Food (KFC, Mc Donalds)
 Globalization of Markets
Advantages:
- Reduces marketing costs (standardizing certain
marketing activities)
- Creates new market opportunities
domestic market saturation / untapped markets (ex. Search
engines Google and Yahoo)
- Levels uneven income streams
Supplementing domestic sales with international sales
- Yet local needs are important
Think global act local
Think Global and Act Local: Application
The benefit of serving customer with an
adapted product may outweigh the benefit of a
standardized one. For instance, soft drinks, fast food,
and other consumer goods are global products that
continue to penetrate market around the world. But
sometimes these products require small
modifications to better suit local tastes.
In southern Japan, Coca-Cola sweetens its
traditional formula to compete with sweeter-tasting
Pepsi. In India, where cows are sacred and the
consumption of beef is a taboo, McDonald’s market
the “Maharaja Mac” – two all-mutton patties on a
sesame-seed bun with all the unusual toppings.
 Globalization of Production
Globalization of Production refers to the dispersal
of production activities to locations that help a
company achieve its cost-minimization or quality-
maximization for a good or service.

This includes the sourcing of key production inputs

(such as raw materials or products for assembly ) as well
as the international outsourcing of services
 Globalization of Production
Advantages:
- Access lower-cost workers (reduced overall production
costs through access to low-cost labor ex. India, China and
Philippines)
- Access technical expertise
(companies also produce goods and services abroad to benefit
from technical know-how ex. Film Roman produces the TV series
The Simpsons, but it provides key poses and step-by-step frame
directions to AKOM Production in Seoul, South Korea)
- Access production inputs
(allows companies to access resources that are unavailable or
more costly at home ex. Japan’s largest paper company – Nippon
Seishi )
 Forces Driving Globalization

Two main forces underlie the globalization of

markets and production: falling barriers to trade and
investment and technological innovation. These two
features, more than anything else, are increasing
competition among nations by leveling the global business
playing field.
Greater competition is simultaneously driving
companies worldwide into more direct confrontation and
cooperation.
 Forces Driving Globalization
Falling Barriers to Trade and Investment

- General Agreement on Tariffs and Trade (GATT)

- World Trade Organization (WTO)
- Regional Trade Agreements
- Trade and National Output
General Agreement on Tariffs and Trade (GATT)

A treaty designed to
promote free trade by reducing
both tariffs and non tariff barriers
to international trade.
General Agreement on Tariffs and Trade (GATT)

The treaty was successful in its early years.

After four decades, world merchandise trade had
grown 20 times larger, and average tariffs had fallen
from 40 percent to 5 percent.
Significant progress occurred again with 1994
revision of the GATT treaty. Nations that had signed
on to the treaty further reduced the average tariffs
on merchandise trade and lowered subsidies
(government financial support) for agricultural
products. The treaty’s revision also clearly defined
General Agreement on Tariffs and Trade (GATT)

intellectual property rights – giving protection to

copyrights (including computer programs, databases,
sound recordings, and films), trademarks and service
marks, and patents (including trade secrets and
know-how). A major flaw of the original GATT was
that it lacked the power to enforced world trade
rules. Likely the greatest accomplishment of the
1994 revision was the creation of the World Trade
Organization.
 Tariffs and Non-tariff Barriers

Tariffs – are essentially taxes levied on

traded goods.

Non-tariff barriers – are limits on the

quantity of an imported product.
World Trade Organization (WTO)
An international organization that
enforces the rules of international
trade.

There are three main goals of the WTO:

- to help free flow of trade
- help negotiate the further opening
of markets.
- settle trade disputes among others.
What the World Trade Organization does ???

• Administering trade agreements.

• Acting as a forum for trade
negotiations.
• Settling trade disputes.
• Reviewing national trade policies.
• Assisting developing countries
with trade policy issues, through
technical assistance and training
programs.
• Cooperating with other
international organization like
IMF and World Bank.
 Difference Between GATT and WTO
GATT was ad hoc and provisional. WTO is permanent.

GATT has contracting parties. WTO has members.

GATT allows existing domestic WTO does not allow violations

legislation to continue even if the on the agreement.
agreement is violated.

GATT was less powerful and its WTO is more powerful and its
dispute settlement mechanism dispute settlement mechanism
was less efficient. was more efficient.
Regional Trade Agreements
The North American Free Trade Agreement
(NAFTA) I

An agreement among the United

States, Canada and Mexico designed to
remove tariff barriers between the three
countries.
 The European Union (EU) is a
political and economic union of
28 member states that are located
primarily in Europe. Its members have
a combined area of
4,475,757 km2 (1,728,099 sq mi) and
an estimated total population of about
513 million.

The EU has developed

an internal single market through a
standardized system of laws that apply
in all member states in those matters,
and only those matters, where
members have agreed to act as one.
ASEAN MEMBER COUNTRIES

ASEAN was established on 8 August

1967 in Bangkok by the five original
member countries: Indonesia,
Malaysia, Philippines, Singapore, and
Thailand. Brunei Darussalam joined
on 8 January 1984, Vietnam on 28
July 1995, Laos and Myanmar on 23
July 1997, and Cambodia on 30 April
1999.
 Trade and National Output

Gross Domestic Product (GDP) – is the value

of all goods and services produced by a
domestic economy over a one-year period.
( excludes nation’s income generated from
exports, imports and the international
operations of its companies).
 Trade and National Output

Gross National Product (GNP) – is the value of

all goods and services produced by a
country’s domestic and international
activities over a one-year period.

GDP or GNP per capita – nation’s GDP or GNP

divided by its population.
 Per capita income: Implications

• Per capita income is often used to measure a sector's

average income and compare the wealth of different
populations.

• Per capita income is often used to measure a country's

standard of living. This helps to ascertain a country's
development status.

• It is one of the three measures for calculating the

Human Development Index of a country.
 Forces Driving Globalization

Technological Innovation

- E-mail and Videoconferencing (operating across

borders and time zones complicates the job coordination and
controlling business activities)
- Internet and World Wide Web (companies uses the
internet to quickly and cheaply contact managers in distant
locations / eliminating intermediaries)
 Forces Driving Globalization
Technological Innovation

- Company Intranets and Extranets (internal company

web sites and information networks (intranets ) give
employees access to company data using personal
computers ex. Volvo Car Corporation)
- Advancement in Transportation Technologies
(ex. Global Positioning System (GPS) with Radio Frequency
Identification)
 The World Bank is agency
created to provide financing for
national economic development
efforts. The initial purpose of the
World Bank was to finance the
European reconstruction following
the Second World War. It later
shifted its focus to the general
financial needs of developing
countries.
 The International Monetary
Fund (IMF),
It is an international
organization headquartered in
Washington, D.C., consisting of 189
countries working to foster global
monetary cooperation, secure
financial stability, facilitate
international trade, promote high
employment and sustainable
economic growth, and reduce
poverty around the world while
periodically depending on
World Bank for its resources.
Untangling the Globalization Debate

Arguments against globalization

- Eliminates Jobs in Developed

Nations.
- Lowers Wages in Developed Nations.
- Exploits Workers in Developing
Nations.
Untangling the Globalization Debate

Arguments favoring globalization

- Increases wealth and efficiency in all

nations.
- Generates labor market flexibility in
developed nations.
- Advances economies of developing
nations.
Globalization and National Sovereignty
National sovereignty involves the idea that a
nation-state:
1. is autonomous
2. can freely select its government
3. cannot intervene in the affairs of other
nations
4. can control movements across its borders
5. can enter into binding international
agreements.
Globalization and National Sovereignty

Opposition groups allege that

globalization erodes national sovereignty and
encroaches on the authority of local and state
governments. Supporters disagree, saying that
globalization spreads democracy worldwide
and that national sovereignty must be viewed
from long-term perspective.
 Globalization and Inequality Debate
For debate over inequality within nations, studies
suggest that developing nations, studies suggest that
developing nations can boost incomes of their
poorest citizens by embracing globalization and
integrating themselves into the global economy.

In the debate over inequality between nations,

nations open to world trade and investment appear
to grow faster than rich nations do. Meanwhile,
economies that remain sheltered from the global
economy tend to be worse off.
 Globalization and Inequality Debate

Finally, for the debate over global inequality,

although experts agree inequality has fallen in recent
decades, they disagree on the extent of drop.
International Business Concepts
International Business is any commercial transaction
that crosses the borders of two or more nations

Imports – goods and service purchased abroad and

brought to the country.

Exports – goods and services sold abroad and sent out

of a country.

e-business (e- commerce) – use of computer networks

to purchase, sell, or exchange products; service
customers; and collaborate with partners.
Key Challenges Facing International Business

Technological Sophistication
Advances in communications, information
technology, and manufacturing processes have
created new foreign markets and helped firm
internationalized. While technology can make life
easier for international business in certain respects, it
also can increase complexity in other areas and help
accelerate how quickly new crises hit companies –
challenges that management must grapple with.
Key Challenges Facing International Business

Technological Sophistication
The key for international management is take
advantage of technology while creating operational
resilience and agility in the company to respond to
the changes in the environment.
 We see the result of
embracing globalization in
this photo skyscrapers in
the Lujiazui Financial and
Trade Zone of Pudong New
Area in Shanghai, China.
After years of expansion,
Shaghai has emerged as a
key city for companies
entering China’s market
place. China developed
Pudong and reinvigorate
Shanghai as an international
trade and financial center.
Pudong is now a modern,
cosmopolitan district.
https://en.wikipedia.org/wiki/Shanghai
Key Challenges Facing International Business
International Volatility

A very challenging area of volatility of international

management is currency fluctuation. National
currencies can move up or down in ways that
dramatically impact businesses – and often very
quickly.
Volatile currency fluctuations underscore the impact
of rapidly shifting business conditions as well as the
use of technology by sophisticated investors. Sudden
currency updrafts can make a firm’s exports more
expensive overnight, increasing the pressures to
reduce cost.
Key Challenges Facing International Business

International Workforce Challenges

Offshoring – refers to the process of sending jobs
overseas and is not limited to big multinationals.

Reason for Offshoring:

1. The chase for cheap labor
2. Education quality and location factors (e.g. Political
stability)
Key Challenges Facing International Business

Reshoring –
when firms that offshored skilled
manufacturing jobs or knowledge workers (such as
software designers and programmers) have pulled
back to their home countries, the process is known
as reshoring.
Key Challenges Facing International Business

Workforce Quality and Competitiveness

The common bottom line for international
firms everywhere is that they need employees who
can handle increasingly complex work. The best
workforce usually win (and keeps) their job in
process.
Key Challenges Facing International Business

Increasing Work Diversity

Workforce competitiveness aside, globalization
is also bringing people from diverse cultures and
backgrounds together.
Many American and European companies
aggressively recruits foreign immigrants, especially
for job requiring specific technical skills.
Demographic shifts within a nation are having similar
impact. A diverse workforce can help firms better
serve their increasingly diverse customer base.
 “Individual pain is
worth the collective
gain”