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Fourth Edition

International

Business

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CHAPTER 1

Globalization

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The Global Retail MarketDevelopment Drivers

Decline in cross-border

investmentbarriers.Saturationand slow growthinlocalmarkets.Carrefour beganthe expansionfollowed by Tescoand Wal-Mart.Retailersbelieved theywouldbenefit from economiesof scalefrom globalbuying power.These retailersheld strongdomestic market positions.

Top 25 Retailers

MarketShare

%

2000 2009

16

40

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But, It Isnt Easy

National differences in tastes and preferences.

Redu

ces opportu

nity for scale economies.Difficulty in establishing common retail model.Impacts:

Labor costs.

Desirable locations.Sophistication of local supply base.

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GlobalizationTrade and investmentbarriers are disappearing.

Perceived distances areshrinking due to advances intransportation andtelecommunications.

Material culture is beginningto look similar.

National economies merginginto an interdependent globaleconomic system.

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Globalization: Pros& Cons

Pros

Increased revenueopportunity through global

sales.

Reduced costs byproducing in low costcountries.

Cons

Different nations =different problems.

Similarities betweennations may be superficial.

Global planning may beeasy, but global executionis not.

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What is Globalization?

The shift toward amore integrated andinterdependent world

economy.

Markets

Production

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Globalization of Markets

Merging of historically distinct and separate nationalmarkets into one huge global marketplace.

Facilitated by offering standardized products:

CiticorpCoca-Cola

Sony PlayStation

McDonalds

Does not have to be a big company to participate:Over 200,00 U.S. companies with less than 100employees had foreign sales in 2000.

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The Largest Global Markets

NotConsumer

Goods

NotConsumer

Goods

Industrial Goods andMaterials

Commodities such asaluminum, oil and wheat.

Industrial products such asmicroprocessors, aircraft.

Financial assets such asU.S. Treasury bills and

Eurobonds.

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Globalization of ProductionThe sourcing of goods andservices from locations aroundthe globe to take advantage ofnational differences in the costand quality of factors ofproduction (labor,energy, land andcapital).

Companies hope to lower theiroverall cost structure and/or

improve the quality orfunctionality of their product

offering - increasing theircompetitiveness.

Global Products

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Macro Factors

Decline in TradeB

arriers Globalization

TechnologicalChange

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International Trade:When a firm exports goodsor services to consumers in another country.

Foreign Direct Investment:When a firm investsresources in business activities outside its home

country.

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General Agreement on Tariffs and Trade

Member states (140) in eight negotiating roundsworked to lower barriers to the free flow ofgoods and services.

In the most recent round, the Uruguay Round,nations agreed to enhanced patent, copyright and

trademark protections and established theWorld Trade Organization.

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Average Tariff Rates on ManufacturedProducts as Percent of Value

1913 1950 1990 2000

France 21% 18% 5.9% 3.9%

Germany 20 26 5.9 3.9Italy 18 25 5.9 3.9Japan 30 5.3 3.9Holland 5 11 5.9 3.9Sweden 20 9 4.4 3.9Britain 23 5.9 3.9U.S.A. 44 14 4.8 3.9

Table 1.1

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Fewer FDI Restrictions

Between 1991 and 2000of the 1,121 changes worldwide in laws

governing FDI, 95% created a morefavorable investment environment.

During 2000, 69 countries made 150changes to FDI regulations, 147 or 98%

were more favorable to investment.

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The Growth ofWorld Trade and

Output

0

500

1000

1500

2000

2500

1950 1960 1970 1980 1990 2000

Trade

Output

GDP

Trade

Figure 1.1

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The Role of Technological Change

Microprocessors andTelecommunications

The Internet andWorldWideWeb

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Worldwide E-Commerce Growth

Forecast

0

1000

2000

3000

4000

50006000

7000

8000

2000 2001 2002 2003 2004

Restof WorldLatin America

W.Europe

Asia Pacific

North America

Figure 1.2

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The Shrinking Globe1500-1840

1850-1930

1950s

1960s

Best average speed ofhorse-drawn coaches and

sailing ships, 10mph.

Steam locomotives average 65mph.Steamships average 36mph.

Propeller aircraft300-400 mph.

Jet passenger aircraft500-700mph.

Figure 1.2

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Implications for Production and

Market Globalization

Production

dispersed toeconomicallocations due totransportation

and communicationadvances.

New markets

opened throughWWW.Jet aircraft movepeople and goods.

Global media creating

a worldwide culture.

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The Changing Paradigm of the GlobalEconomy

Old:U.S. dominance of the world economy and world trade.

U.S. dominance in world FDI.

U.S. firms dominance of international business.

of the world economies (Communist dominated) were off-

limits to western businesses.

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COUNTRY SHARE OFWORLD OUTPUT1963

SHARE OFWORLD OUTPUT

2000

SHARE OFWORLD EXPORTS

2000

United States 40.3% 27% 12.3%

Japan 5.5 14.2 7.54

Germany 9.7 (W.Ger.) 7.3 8.7

France 6.3 5.2 4.7

United

Kingdom

6.5 4.1 3.7

Italy 3.4 4.1 3.7

Canada 3.0 2.0 4.4

China NA 3.2 3.92

South Korea NA 1.4 2.7

The Changing Pattern ofWorld Output andTrade

Table 1.2

Output measured by GNP.

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Percentage Share of Total FDI Stock, 1980-2000

05

10

15

20

2530

35

40

45

U.S.A. Japan France Dev.

Countries

1980

1990

2000

U.

K.

Germany

Netherlands

Figure 1.4

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FDI Inflows, 1988-2000($ Billions)

0

200

400

600

800

1000

Developed Countries

Developing Countries

United States

China

Figure 1.5

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The National Composition of the Largest

Multinationals

1973 1990 1997 2000

U.S.A. 48.5%

31.5%

32.4%

26%

Japan 3.5 12 15.7 17

U.K. 18.8 6.8 6.6 8

France 7.3 10.4 9.8 13

Germany 8.1 .9 12.7 12Table 1.3

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The ChangingWorld OrderThe fall of Communism in Eastern Europe and theformer Soviet Union.

Czechoslovakia has divided itself into two states.Yugoslavia has divided into 5 (often warring) successorstates.

Pro-democracy movement (suppressed) in China.

Latin America has seen both democracy and freemarket reforms.

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The Global Economy of the 21st

Century

1. Will economic andpolitical reforms hold?

2. Economic problems areno longer isolated andcan become global.

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Globalization

Jobs and IncomeFirms move jobs to low costcountries.

Countries specialize inefficiently produced goodsand import those they cannot efficiently produce.

Increases income in lessdeveloped countries.

May lead to incomeinequality.

Labor Policies and theEnvironment

Firms move to countrieswith weak laws.

Economic progress leads tostronger laws.By creating wealth andincentives for technologyimprovements, world will bebetter.

Tie strong laws tointernational agreements.Firms are not amoral.

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Environmental Performance and Income

Figure 1.6

5.0

5.5

6.0

6.5

7.0

6 7 8 9 10 11

Ethiopia

BhutanTanzania Bangladesh

MalawiNigeriaKenya Egypt

IndiaChina

Thailand

Tunisia

Korea

S.AfricaTrinidad

BulgariaIreland

Finland

Jamaica

Germany

Netherlands

Income IndexEnviron

mentalPerfor

manceIndex

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Globalization and National Sovereignty

Under the new system, many decisions that affect billions ofpeople are no longer made by local and national governmentsbut instead, if challenged by any WTO member nation, wouldbe deferred to a group of unelected bureaucrats sittingbehind closed doors in Geneva. The bureaucrats can decidewhether or not people in California can prevent the destructionof the last virgin forests or determine if carcinogenic pesticidescan be banned from their foods; or whether European countries

have the right to ban dangerous biotech hormones in meatAt risk is the very basis of democracy and accountable decisionmaking. Ralph Nader.

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Globalization and National Sovereignty

WTOEU

UN

WTO Founded 1994

140 members

Police GATT trading system

Supranational organizationsare limited to powers grantedby member countries and servethe collective interests of itsmembers.Power is derived fromthe organizations ability to swaymembers to action.

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Globalization and theW

orlds PoorCritics argue that globalization has not helped poor.

1870: per capita income of 17 richest nations was2.4x that of all other countries.

1990: it was 4.5x larger.Other factors may have influenced the gap.Totalitarian governments.Economic policies that destroyed wealth creation.Little protection of property rights.Expanding populations.War.

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Managing in the Global Marketplace

An International Business is any firm that engages ininternational trade or investment.

Managing an international business is differentthan managing a domestic business:

1. Countries are different.2. Problems are more complex.3. Must work within government

regulations.4. Currency conversion presentsunique problems.