international business - globlisation

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TUNIT I

INTERNATIONAL BUSINESS AND GLOBALECONOMY

Learning Outcomes:

• To make you understand as a student of internationalbusiness management what is the subject all about.

• To know the concepts involved in international business andglobalization.

• To understand how does globalization effects the workingof the economy of a country.

Objective of the lesson:After studying this lesson, you should understand:• The meaning of international trade and globalization.• Why is it important to study international business?• What are the basic criteria’s involved in international

business?

IntroductionA fundamental shift is occurring in the world economy. We aremoving rapidly away from a world in which national economieswere relatively self-contained entities, iso-lated from each otherby barriers to cross-border trade and investment; by distance,time zones, and language; and by national differences ingovernment regulation, cul-ture, and business systems. And weare moving toward a world in which barriers to cross-bordertrade and investment are tumbling; perceived distance isshrinking due to advances in transportation and telecommuni-cations technology; material culture is starting to look similarthe world over; and national economies are merging into an in-terdependent global economic system. The process by whichthis is occurring is com-monly referred to as globalization.In this interdependent global economy, an American mightdrive to work in a car designed in Germany that was assembledin Mexico by DaimlerChrysler from compo-nents made in theUnited States and Japan that were fabricated from Korean steeland Malaysian rubber. She may have filled the car with gasolineat a service station owned by a British multinational companythat changed its name from British Petroleum to BP to hide itsnational origins. The gasoline could have been made from oilpumped out of a well off the coast of Africa by a French oilcompany that transported it to the United States in a shipowned by a Greek shipping line. While driving to work, theAmerican might talk to her stockbroker on a Nokia cell phonethat was designed in Finland and assembled in Texas using chipsets produced in Taiwan that were designed by Indian engineersworking at a firm in San Diego, California, called Qualcomm.She could tell the stockbroker to purchase shares in DeutscheTelekom, a German telecommunications firm transformedfrom a former state-owned monopoly into a global companyby an energetic Israeli CEO. She may turn on the car radio,which was made in Malaysia by a Japanese firm, to- hear apopular hip-hop song composed by a Swede and sung by agroup of Danes in English who signed a record contract with a

French music company to promote their record in America. Thedriver might pull into a drive-through coffee stall run by aKorean immigrant and order “single-tall-non-fat latte” andchocolate-covered biscotti. The coffee beans come from Braziland the chocolate from Peru, while the biscotti was made locallyusing an old Italian recipe. After the song ends, a news an-nouncer might inform the American listener thatanti-globalization protests at a meeting of heads of state inGenoa, Italy, have turned vio-lent. One protester has beenkilled. The announcer then turns to the next item, a story abouthow an economic slowdown in America has sent Japan’s Nikkeistock market index to 16-year lows.This is the world we live in. It is a world where the volume ofgoods, services, and investment crossing national borders hasexpanded faster than world output every year for the past twodecades. It is a world where more than $1.2 billion in foreignexchange transactions are made every day. It is a world in whichinternational institutions such as the World Trade Organizationand gatherings of leaders from the world’s most, pow-erfuleconomies have called for even lower barriers to cross-bordertrade and invest-ment. It is a world where the symbols ofmaterial and popular culture are increasingly global: from Coca-Cola and McDonald’s to Sony PlayStations, Nokia cell phones,MTV shows, and Disney films. It is a world in which productsare made from inputs that come from all over the world. It is aworld in which an economic crisis in Asia can cause a recessionin the United States, and a slowdown in the United States re-allydid help drive Japan’s Nikkei index in 2001 to lows not seensince 1985. It is also a world in which a vigorous and vocalminority is protesting against globalization, which they blamefor a list of ills, from unemployment in developed nations toenvi-ronmental degradation and the Americanization ofpopular culture. And yes, these protests really have turnedviolent.For businesses, this is in many ways the best of times. Global-ization has increased the opportunities for a firm to expand itsrevenues by selling around the world and re-duce its costs byproducing in nations where key inputs are cheap. Since thecollapse of communism at the end of the 1980s, the pendulumof public policy in nation after nation has swung toward thefree market end of the economic spectrum. Regulatory andadministrative barriers to doing business in foreign nationshave come down, while those nations have often transformedtheir economies, privatizing state-owned enterprises,deregulating markets, increasing competition, and welcominginvestment by foreign businesses. This has allowed businessesboth large and small, from both ad-vanced nations anddeveloped nations, to expand internationally.The globa1.retailing industry, profiled in the opening case, issomething of a late mover in this development. Some indus-tries, such as commercial jet aircraft, automo-biles, petroleum,

LESSON 1INTRODUCTION TO INTERNATIONAL

TRADE AND GLOBALIZATION

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semi-conductor chips, and computers, have been global fordecades. Retailing has been primarily local in orientation, but ina testament to the scope and I pace of globalization, this too isnow changing. Falling barriers to cross-border invest-ment havemade this possible. Rapid economic growth in developingnations and mar-ket saturation at home- has made globaliza-tion a strategic imperative for established retailers seeking togrow their business. Many, such as Wal-Mart and Tesco, feel thatthey must move aggressively now lest they lose the initiative toearly movers like Car-refour. They see their strategic advantage interms of building a global brand, realizing economies of scale,and leveraging skills across national borders. In this, they are nodifferent from companies in other industries that have alreadygone global.At the same time, going global is not without problems. Thistoo was evident in the opening case. The grand strategic visionof retailers such as Wal-Mart and Carrefour has often run upagainst the hard reality that for all the superficial similarities inma-terial and popular culture and in business systems, doingbusiness in foreign nation still has unique challenges. Becauseof different tastes and preferences, what sells in Britain may notsell in Thailand, operating systems that give a retailer a competi-tive advantage in America may be difficult to implement inMexico, and a brand that means something in Kansas maymean little in Indonesia.The tension evident in the opening case between the economicopportunities associated with going global and the uniquechallenge associated with doing business across borders is animportant one in international business. To begin with,however, we need to take a closer look at the process ofglobalization. We need to understand what is driving thisprocess, appreciate how it is changing the face of internationalbusinesses, and better comprehend why globalization hasbecome a flash point for debate, demonstration, and conflictover the future direction of our civilization.

What is globalization?Globalization refers to the shift toward a more integrated andinterdependent. World economy. Globalization has two maincomponents; the globaliza-tion of markets and the globaliza-tion of production.

The Globalization of MarketsThe globalization of markets refers to the merging of histori-cally distinct and national markets into one huge globalmarketplace. Falling barriers to cross-border trade have made iteasier to sell internationally. It has been argued for some timethat the tastes and preferences of consumers in differentnations are beginning to converge on some global norm,thereby helping to create a global market. Consumer productsuch as Citicorp credit cards, Coca-Cola soft drinks, SonyPlayStation, and McDonald’s hamburgers are frequently held,up as prototypical examples of this trend. Firms such asCiticorp, Coca-Cola, McDonald’s, and Sony are more than justbenefactors of this trend; they are also facilitators of it. Byoffering a standardized product worldwide they help to create aglobal market.

A company does not have to be the size of these multinationalgiants to facilitate, and benefit from, the globalization ofmarkets. In the United States, more than 200,000 smallbusinesses with fewer than 100 employees registered foreignsales in 2000. Typical of these is Hytech, a New York-basedmanufacturer of solar panels that generates 40,percent of its $3million in annual sales from exports to five countries, or B&SAircraft Alloys, another New York company whose exportsaccount for 40 percent of its $8 million annual revenues.Despite the global prevalence of Citicorp credit cards andMcDonald’s hamburgers it is important not to push too far theview that national markets are giving way to the global marketvery significant differences still exist between national marketsalong many relevant dimensions, including consumer taste andpreferences, distribution channels, culturally embedded valuesystems, and the like. These differences frequently require thatmarketing strategies, product features; and operating practices becustomized to best match conditions in a country. For example, automobile companies will promote different carmodels depending on a range of factors such as local fuel costs,income levels, traffic congestion, and cultural values. Similarly, aswe saw in the opening case, global retailers may still need to varytheir product mix from country to country depending on localtastes and preferences.The most global markets currently are not markets for con-sumer products-where national differences in tastes andpreferences are still often important enough to act as a brake onglobalization-but markets for industrial goods and materialsthat serve a universal need the world over. These include themarkets for commodities such as alu-minum, oil, and wheat;the markets for industrial products such as microprocessors,DRAMs (computer memory chips), and commercial jet aircraft;the markets for com-puter software; and the markets forfinancial, assets from U.S. Treasury bills to eu-robonds andfutures on the Nikkei index or the Mexican peso.In many global markets, the same firms frequently confronteach other as competi-tors in nation after nation. Coca-Co la’srivalry with Pepsi is a global one, as are the ri-valries betweenFord and Toyota, Boeing and Airbus, Caterpillar and Komatsu,and Nintendo and Sega. If one firm moves into a nation that isnot currently served by its rivals, those rivals are sure to followto prevent their Competitor from gaining an ad-vantage. Theopening case revealed that retailers such as Wal-Mart, Carrefour,and Tesco are starting to engage in a global rivalry. As firmsfollow each other around the world, they bring with them manyof the assets that served them well in other national markets-including their products, operating strategies, marketingstrategies, and brand names-creating some homogeneity acrossmarkets. Thus, greater uniformity replaces diversity. Due to suchdevelopments, in an increasing number of industries it is nolonger meaningful to talk about “the German market,” “theAmerican market,” “the Brazilian market,” or “the Japanesemarket”; for many firms there is only the global market.

The Globalization of ProductionThe globalization of production refers to the sourcing ofgoods and services from loca-tions around the globe to takeadvantage of national differences in the cost and qual-ity of


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Tfactors of production (such as labor, energy, land, and capital).By doing this, companies hope to lower their overall coststructure and/or improve the quality or functionality of theirproduct offering, thereby allowing them to compete more effec-tively. Consider the Boeing Company’s latest commercial jetairliner, the 777. The 777 contains 132,500 major componentparts that are produced around the world by 545 suppliers.Eight Japanese suppliers make parts for the fuselage, doors,and wings; a sup-plier in Singapore makes the doors for thenose landing gear; three suppliers in Italy manufacture wingflaps; and so on. Part of Boeing’s rationale for outsourcing somuch production to foreign suppliers is that these suppliers arethe best in the world at performing their particular activity. Aglobal web of suppliers yields a better final product, whichenhances the chances of Boeing winning a greater share of totalorders for aircraft than its global rival, Airbus Industrie. Boeingalso outsourcers some production to foreign Countries toincrease the chance that it will win significant orders from air-liners based in that country.The global dispersal of productive activities is not limited togiants such as Boeing. Many much smaller firms are also gettinginto the act. Consider Swan Optical, a U.S. -based manufacturerand distributor of eyewear. With annual sales revenues of $20mil-lion to $30 million, Swan, is hardly a giant, yet Swanmanufactures its eyewear in low-cost factories in Hong Kongand China that it jointly owns with a Hong Kong- basedpartner. Swan also has a minority stake in eyewear designhouses in Japan, France, and Italy. The company has dispersedits manufacturing and design processes to different locationsaround the world to take advantage of favorable skill bases andcost structures. Foreign investments in Hong Kong and thenChina have helped swan lower its cost structure, while invest-ments in Japan, France, and Italy have helped it producedesigner eyewear for which it can charge a premium price. Bydispersing its manufacturing and design activities, Swanestablished a competitive advantage for it-self in the globalmarketplace for eyewear, just as Boeing has tried to do bydispersing some of its activities to other countries.Robert Reich, the former secretary of labor in the Clintonadministration, has ar-gued that as a consequence of the trendexemplified by Boeing and Swan Optical, in many industries itis becoming irrelevant to talk about American products,Japanese products, German products, or Korean products.Increasingly, according to Reich, outsourcing of productiveactivities to different suppliers results in the creation productsthat are global in nature; that is, “global products.” But as withthe globalization of markets, one must be careful not to pushthe globalization of production too far substantial impedi-ments still make it difficult firms to achieve the optimaldispersion of their productive activities to locations around theglobe. These impediments include formal and informal barriersto trade tween countries, barriers to foreign direct investment,transportation costs, and issues associated with economic andpolitical risk.Nevertheless, we are traveling down the road toward a futurecharacterized by increased globalization of markets andproduction. Modern firms are important actors in this drama,

by their very actions fostering increased globalization. Thesefirms, however, are merely responding in an efficient manner tochanging conditions in their erating environment-as well theyshould. In the next section, we look at the main drivers ofglobalization.

Drivers of GlobalizationTwo macro factors seem to underlie the trend toward greaterglobalization. The first is the decline in barriers to the free flowof goods, services, and capital that has oc-curred since the endof World War II. The second factor is technological change, par-ticularly the dramatic developments in recent years incommunication, information processing, and transportationtechnologies.

Declining Trade and Investment BarriersDuring the 1920s and 30s, many of the nation-states of theworld erected formidable barriers to international trade andforeign direct investment. International trade oc-curs when afirm exports goods or services to consumers in another country.Foreign direct investment occurs when a firm invests resourcesin business activities outside its home country. Many of thebarriers to international trade took the form of high tar-iffs onimports of manufactured goods. The typical aim of such tariffswas to protect domestic industries from foreign competition.One consequence, however, was “beg-gar thy neighbor”retaliatory trade policies with countries progressively raisingtrade barriers against each other. Ultimately, this depressedworld demand and contributed to the Great Depression of the1930s.Having learned from this experience, the advanced industrialnations of the West committed themselves after World War IIto removing barriers to the free flow of goods, services, andcapital between nations. This goal was enshrined in the treatyknown as the General Agreement on Tariffs and Trade (GATT).Under the umbrella of GATT, eight rounds of negotiationsamong member states, which now number more than 140,have worked to lower barriers to the free flow of goods andservices. The most recent round of negotiations, known as theUruguay Round, was completed in December 1993. TheUruguay Round further reduced trade barriers; extended GATTto cover services as well as manufactured goods; providedenhanced protection for patents, trademarks, and copyrights;and established the World Trade Organization (WTO) to policethe international trading system. Table 1.1 summarizes theimpact of GATT agreements on average tariff rates formanufactured goods. As can be seen; average tariff rates havefallen significantly since 1950 and now stand at 3.9 percent.Discussions aimed at launching a new round of cuts in barriersto cross-border trade and investment were scheduled to beginin LATE 2001. If and when the round begins, the likely focuswill be services and agricultural products, where tariffs stillremain high. The average agricultural tariff rates are still around40 percent, and rich nations spend some $300 billion a year insubsidies to support their farm sectors.


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Table 1.1Average Tariff Rates on Manufactured

Products as percent of Value

1 9 1 3 1 9 5 0 1 9 9 0 2 0 0 0 F r a n c e 2 1 % 1 8 % 5 . 9 % 3 . 9 % G e r m a n y 2 0 2 6 5 . 9 3 . 9 I ta ly 1 8 2 5 5 . 9 3 . 9 J a p a n 3 0 - 5 . 3 3 . 9 H o l l a n d 5 1 1 5 . 9 3 . 9 S w e d e n 2 0 9 4 . 4 3 . 9 B r i t a i n - 2 3 5 . 9 3 . 9 U n i t e d S t a t e s 4 4 1 4 4 . 8 3 . 9

In addition to reducing trade barriers, many countries have alsobeen progressively removing restrictions to foreign directinvestment (FDI). Between 1991 and 2000, of the 1,121changes worldwide in the laws governing foreign directinvestment, 95 per-cent created a more favorable environmentfor FDI, according to the United Nations. During 2000 alone,69 countries made 150 changes to regulations governing foreigndi-rect investment, of which 147 (or 98 percent) were more”favorable to foreign in-vestors. A dramatic increase in thenumber of bilateral investment treaties designed to protect andpromote investment, between two countries also reflectsgovernments desire to facilitate FDI. As of 2000, there were1,856 such treaties in the world involv-ing over 160 countries, a10-fold increase from the 181n-eaties that existed in 1980.Such trends facilitate both the globalization of markets and theglobalization of pro-duction. The lowering of barriers tointernational trade enables firms to view the world, rather than asingle country, as their market. The lowering of trade andinvestment bar-riers also allows firms to base production at theoptimal location for that activity, serv-ing the world marketfrom that location. Thus, a firm might design a product ill onecountry, produce component parts in two other countries,assemble the product in yet another country, and then exportthe finished product around the world. The lowering of tradebarriers has facilitated the globalization of production. Ac-cording to data from we World Trade Organization, the volumeof world trade has grown consistently faster than the volumeof world output since 1950. From, 1950 to 2000, world tradeexpanded almost 20-fold, far out stripping world output,which grew by six and half times. As suggested by Figure 1.1,the growth in world trade seems to have accelerated in recentyears. In 2000, the last year for which full data are avail-able, itincreased by a strong 12.5 percent. The global economicslowdown that oc-curred in 2001, along with the-economicaftermath of the September 11th terrorist attacks on the UnitedStates, indicate that 2001 may be the first year in almost twodecades during which the volume of world trade contracted. Ifhistory is any guide, however, any such contraction will bemodest and short lived. -The data summarized in Figure 1.1 imply two things. First,more firms -are doing what Boeing does with the 777: dispers-ing parts of their overall production process to differentlocations around the globe to drive down production costs andincrease product quality. Second, the economies of the world’s

nation-states are becoming more intertwined. As trade expands,nations are becoming increasingly dependent on each other fatimportant goods and services.The evidence also suggests that foreign direct investment isplaying an increasing role in the global economy as firmsranging in size from Boeing to Swan Optical in-crease theircross-border investments. The average yearly outflow of FDIincreased from about $25 billion in 1975 to a record $1.3 trillionin2000. The flow of FDI not only accelerated over the lastquarter century, but it also has accelerated faster than the growthin world trade. For example, between 1990 and 2000, the totalflow of FDI from all countries increased about fivefold, whileworld trade grew by some 82 percent and world output by 23percent. As a result of the strong FDI flow, by 2000 the globalstock of FDI exceeded $6 trillion. In total, by 2000, 60,000parent companies had 820,000 affiliates in foreign markets thatthe collectively produced an estimated $14 tril-lion in globalsales, nearly twice as high as the value of global exports.The globalization of markets and production arid the resultinggrowth of world trade, foreign direct investment, and importsall imply that firms are finding their home markets under attackfrom foreign competitors. This is true in Japan, where U.S.companies such as Kodak, Procter & Gamble, and Merrill Lynchare expanding their presence. It is true in the United States,where Japanese automobile firms have taken market share awayfrom General Motors and Ford. And it is true, in Europe,where the once dominant Dutch company Philips has seen itsmarket share in the consumer electronics industry taken byJapan’s JVC, Matsushita, and Sony. The bot-tom line is that thegrowing integration of the world economy into a single, hugemarketplace is increasing the intensity of competition in a rangeof manufacturing -and service industries.

Figure 1.1The Growth of world Trade and World Output

Having said all this, declining trade barriers can’t be taken forgranted demands for “protection” from foreign competitors arestill often heard in countries around the world, including theUnited States. Al-though a return to the restrictive trade policiesof the 1920s and 30s is unlikely, it is’ not clear whether thepolitical majority in the industrialized world favors further re-ductions in trade barriers. If trade barriers decline no further, atleast for the time be-ing, a temporary limit may have beenreached in the globalization of both markets and production.

The Role of Technological ChangeThe lowering of trade barriers made globalization of marketsand production a theo-retical possibility. Technological change


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Thas made it a tangible reality. Since the end of World War II, theworld has seen major advances in communication, informationprocessing, and transportation technology, including theexplosive emergence of the Internet and World Wide Web. Inthe words of Renato Ruggiero, director general of the WorldTrade Organization, Telecommunications is creating a globalaudience. Transport is creating a global village. From BuenosAires to Boston to Beijing, ordinary people are watching MTVthey’re wearing Levi’s Jeans, and they’re-listening to SonyWalkmans as they commute to work.

Microprocessors and TelecommunicationsPerhaps the single most important innovation has beendevelopment of the microprocessor, which enabled theexplosive growth of high-power, low-cost computing, vastlyincreasing the amount of information that can be processed byindividuals and firms. The microprocessor also underlies manyrecent advances in telecommunications technology. Over thepast 30 years, global communications have been revolu-tionizedby developments in satellite, optical fiber, and wireless technolo-gies, and now the Internet and the World Wide Web. Thesetechnologies rely on the microproces-sor to encode, transmit,and decode the vast amount of information that flows alongthese electronic highways. The cost of microprocessors contin-ues to fall, while their power increases (a phenomenon knownas Moore’s Law, which predicts that the power of microproces-sor technology doubles and its cost of production falls in halfevery 18 months). As this happens, the costs of global commu-nications are plummeting, which lowers the costs ofcoordinating and controlling a global organization. Thus,between 1930 and 1990, the cost of a three-minute phone callbetween New York and London fell from $244.65 to $3.32.

The Internet and World Wide WebThe phenomenal recent, growth of the Internet and theassociated World Wide Web (which utilizes the Internet tocommunicate between World Wide Web sites) is the latestexpression of this development. In 1990, fewer than 1 millionusers were connected to the Internet. By 1995 the figure hadrisen to 50 million. In 2001 it grew to 490 million. By the year2005, forecasts suggest that the Internet may have over1.12billion users, or about 18 percent of the world’s popula-tion. In July 1993, some 1.8 million-host computers wereconnected to the Internet (host computers host the Web pagesof local users). By January 2001, the number of host computershad increased to109 million and the number is still growingrapidly. In the United States, where In-ternet usage is mostadvanced, 58 percent of the population had Internet access athome by July 2001. the rate of growth in Internet adoption isnow slowing markedly in the United States as the marketbecomes more saturated. The increase in total Internet usage isalso slowing. However, most-observers believe that this is dueto the dominance of slow connections to the Internet (tele-phone lines) and they believe that once high-speed connectionsbecome more widely available (such as cable modems that cantransmit data 1,000 times faster-than a slow telephone line witha conventional modem), we will see a sharp upswing in thevolume of traffic on the Web.

The Internet and World Wide Web (WWW) promise todevelop into the infor-mation backbone of tomorrow’s globaleconomy. According to Forrester Research, the value of Web-based transactions hit $657 billion in 2000, from virtuallynothing in 1994, and could grow, to $6.8 trillion by 2004, withthe United States accounting for 47 percent of all Web-basedtransactions (see Figure 1.2). Many of these transactions are notbusiness-to-consumer transactions (e-commerce), but business-to-business (or e-business) transactions. The greatest currentpotential of the Web seems to be in the business-to-businessarena.Included in the expanding volume of Web-based traffic is agrowing percentage of cross-border trade. Viewed globally, theWeb is emerging as an equalizer. It rolls back some of theconstraints of location, scale, and time zones. The Web allowsbusinesses, both small and large, to expand their globalpresence at a lower cost than ever before. One example is a smallCalifornia-based start-up, Cardiac Science, which makes defib-rillators and heart monitors. In 1996, Cardiac Science was itchingto break into inter-national markets but had little idea of howto establish an international presence. By1998, the company wasselling to customers in 46 countries and foreign sales accountedfor 85 percent of its $1.2 million revenues. Although some ofthis business was developed through conventional exportchannels, a growing percentage of it came from “hits” to thecompany’s website, which, according to the company’s CEO,“attracts in-ternational business people like bees to honey.Similarly, 10 years ago no one would have through that a smallBritish company based in Stafford would have been able tobuild a global market for its products by utilizing the Internet,but that is exactly what Bridgewater Pottery has done.Bridgewater has traditionally sold premium pottery throughexclusive distribution channels, but the company found itdifficult and labori-ous to identify new retail outlets. Sinceestablishing an Internet presence in 1997, Bridgewater hasconducted a significant amount of business with consumers inother countries who could not be reached through existingchannels of distribution or could not be reached cost effectively.The Web makes it much easier for buyers and sellers to findeach other, wherever they may be located and whatever theirsize.


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Figure 1.2Worldwide E-Commerce Growth Forecast

Figure 1.3The Shrinking Globe

1500-1840

Best average speed of horse-drawn coachesand sailing ships, 10 mph.

1850-1930

Steam locomotives average 65 mph.Steamships average 36 mph.

1950s

Propeller aircraft300-400 mph.

1960s

Jet passenger aircraft500-700 mph.

The Web makes it much easier for buyers and sellers to findeach other, wherever they may be located and whatever theirsize.

Transportation TechnologyIn addition to developments in communication technology,several major innovations in transportation technology haveoccurred since World War II. In economic terms, the mostimportant are probably the development of commercial jetaircraft and su-perfreighters and the introduction of container-ization, which simplifies transshipment from one mode oftransport to another. The advent of commercial jet travel, by re-ducing the time needed to get from one location to another, haseffectively shrunk the globe (see Figure 1.3). In terms of traveltime, New York is now “closer” to Tokyo than it was toPhiladelphia in the Colonial days.Containerization has revolutionized the transportationbusiness, significantly low-ering the costs of shipping goodsover long distances. Before the advent of container-ization,moving goods from one mode of transport to another wasvery labor intensive, lengthy, and costly. It could take days andseveral hundred longshoremen to unload a ship and reloadgoods onto trucks and trains. With the advent of widespreadcontainerization in the 1970s and 1980s, the whole process canbe executed by a handful of longshoremen in a couple of days.Since 1980, the world’s containership fleet has more thanquadrupled, reflecting in part the growing volume of interna-tional trade -and in part the switch to this mode oftransportation. As a result of the efficiency gains -associatedwith containerization, transportation costs have plummeted,making it -much more economical to ship goods around theglobe, there by helping to drive the globalization of marketsand production. Between 1920 and 1990 the average oceanfreight and port charges per ton of U.S. export and importcargo fell from $95 to $29 (in 1990 dollars). The cost ofshipping freight per ton-mile on railroads in the United States


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Tfell from 3.04 cents in 1985 to 2.3 cents in 2000, largely as aresult of efficiency gains from the widespread use of containers.An increased share of cargo now goes by air. Between 1930 and1990, average air transportation revenue per passenger mile fellfrom $0.68 to $0.11.

Implications for the Globalization of ProductionAs transportation costs associated with the globalization ofproduction declined, dispersal of production to geographicallydispersed locations became more economical. As a result of thetechnological innovations discussed above, the real costs ofinformation processing and communication have fallendramatically in the past two decades. These developments makeit possible for a firm to create and then manage a globallydispersed production system, further facilitating the globaliza-tion of production.A worldwide communications network has become essentialfor many international businesses. For example, Hewlett-Packard uses satellite communications and informationprocessing technologies to link its worldwide operations.Hewlett Packard’s product development teams consist ofindividuals based in different coun-tries (e.g., Japan, the UnitedStates, Great Britain, and Germany). When developing newproducts, these individuals use videoconferencing to “meet” ona weekly basis. They also communicate with each other daily viatelephone, electronic mail, and fax. Communication technolo-gies have enabled Hewlett-Packard to integrate its globaldispersed operations and to reduce the time needed fordeveloping new products (for details see the ManagementFocus about Radha Basu, a global manager in the informationage).The development of commercial jet aircraft has also helped knittogether the worldwide operations of many internationalbusinesses. Using jet travel, an America manager need spend aday at most traveling to her firm’s European or Asian opera-tions. This enables her to oversee a globally dispersedproduction system.

Implications for the Globalization of MarketsIn addition to the globalization of production, technologicalinnovations have also facilitated the globalization of markets.As noted above, low-cost transportation has made it moreeconomical to ship products around the world, thereby helpingto create global markets. Low-cost global communicationsnetworks such as the World Wide Web are helping to createelectronic global marketplaces. In addition, low-cost jet travelhas resulted in the mass movement of people betweencountries. This has reduced the cultural distance betweencountries and is bringing about some converge of consumertastes and preferences. At the same time, global communicationnetworks and global media are creating a worldwide culture. U.S.television networks such as CNN, MTV, and HBO are nowreceived in many countries, and Hollywood films shown theworld over. In any society, the media are primary conveyors ofculture; as global media develop, we must expect the evolutionof something akin to a global culture. A logical result of thisevolution is the emergence of global markets for consumerproducts. The first signs of this are already apparent. It is nowas easy to find a Mc Donald’s restaurant in Tokyo as it is in New

York, to buy a Sony Walkman in Rio as it is in Berlin, and tobuy Levi’s jeans in Paris as it is in San Francisco. The accompany-ing Management Focus, “Homer Simpson-A Global Brand,”illustrates the power of the media to create global marketopportunities.Despite these trends, we must be careful not to overemphasizetheir importance. While modern communication and transpor-tation technologies are, ushering in the “global village,” verysignificant national differences remain in culture, consumer pref-erences, and business practices. A firm that ignores differencesbetween countries does so at its peril.

Case study

Radha Basu-A Global Manager in the Information AgeIn the era of globalization, corporations in-creasingly hire thebest talent they can find, no matter what the nationality orgender. Radha Basu is a good example of the emerging class ofinternationally mobile global managers who are equally at homein different cultures and have to manage across borders on aday-to-day basis, aided by modern communications andtransportation technology. Radha was born in Madra insouthern India in 1953. Raised as a Hindu, she was neverthelessedu-cated by Irish nuns in a Catholic school. Radha was astrong math student and gained entry to an Indian uni-versityto study engineering. She graduated with honors and wonadmission to the University of Southern Cali-fornia to dograduate work in computer science. Later she went to work forHewlett-Packard where she gained her first internationalexperience as a manager in Germany. That was followed by astint in India, but she is now back in the United States workingfor Hewlett- Packard and is a naturalized American citizen.Radha’s job spans the world. She manages teams of softwareengineers spread across 15 time zones in Cali-fornia, Colorado,England, Germany, Switzerland, India, Japan, and Australia.These teams must work together on collaborative efforts,presenting Radha with a daunt-ing management challenge. Ageneration ago, such a task would have been nearly impossible,but thanks to advances in communications, computing, and airtravel, collaboration between such far-flung co-workers is in-tense and intimate. Radha logs more than 100,000 air miles ayear keeping projects on track, and she commu-nicates regularlywith colleagues at distant locations us-ing videoconferencingand teleconferencing. She exchanges scores of e-mails a day andsends si-multaneous voice-mail messages to many of the 1,000people in her division.Impromptu conversations are the staple of her life. She may beawakened at 6 A.M. by a phone call from her Swiss team, whichneeds approval to sign a contract to sell soft-ware to a majorcustomer, and spend the next hour refining her team’s prom-ises to the customer while eating breakfast and driving to work.Like all of her meetings, this one will be held in English, thelanguage of international business. The widespread use ofEnglish is a definite plus, but it can cause confusion too,masking differences in style, practices, and interpretations. Thesame words in the same language don’t necessarily mean thesame things to people of different nationalities. Radha says sheonce told some German engineers that they should do


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something and was puzzled when they didn’t. She discoveredthat to a German, should means that he has the option of notdoing it, and the Germans elected to take this option. Nowwhen Radha wants something done, she uses the word must, aword that conveys the imperative to her German colleagues.Source: Adapted from G. Pascal Zachary, “The Global Me,”Public Affairs, 2000, pp. 51-55.

The Changing Demographics of the Global EconomyHand in hand with the trend toward globalization has been afairly dramatic change in the demographics of the globaleconomy over the past 30 years. As late as the 1960s, fourstylized facts described the demographics of the globaleconomy. The first was U.S. dominance in the world economyand world trade picture. The second was U.S. dominance inworld foreign direct investment. Related to this, the third factwas the dominance of large, multinational U.S. firms on theinternational business scene. The fourth was that roughly halfthe globe-the centrally planned economies of the Com-munistworld-was off-limits to Western international businesses. Aswill be explained below, all four of these qualities either havechanged or are now changing rapidly.

Case study

Homer Simpson—A Global Brand!If a poll were held to identify the world’s fa-vorite dysfunctionalfamily, the Simpsons would probably win hands down. TheFox Broadcasting Company production that doc-uments thelife and times of homer and his irreverent clan is the mostdecorated and longest running animated TV show in history.Some 60 million viewers in more than 70 countries tune in towatch the weekly antics of the Simpsons. The show seems tohave universal appeal; with the audience split 50/50 betweenadults and children, and with audience ratings running high incountries as diverse as Spain and Japan. Time magazine named“The Simpsons the 20th century’s best TV show, and the chairof the philosophy department at the University of Manitobawrote an article claiming “The Simpsons” is the deep-est showon television.Whatever the sources of the show’s appeal, there is no questionthat Homer and his family have be-come a powerful globalbrand. Not only do fox and its parent News Corporationbenefit from the huge syndication rights of the show, but theyalso have made a significant sum from licensing the charac-ters.Since the inception of the show in 1990, “The Simpsons” hasgenerated more than $1 billion in retail sales from tie-inmerchandise, much of it outside he United States. In 2000,about 50 large brand and marketing partners around the worldused the Simpsons to sell everything from toilet paper inGermany, Kit Kat bars and potato chips in the United King-dom, EI Cortes Bart Simpson dolls in Spain, and Intelmi-croprocessors in the United States. Clinton Cards, a Britishgreeting card retailer, used Father’s Day in 2000 as the perfectopportunity to find the British father whose behavior mostresembles that of Homer Simpson. The competition was rolledout across all of the company’s 692 stores and sup-ported byTV advertising.

So what’s next for the Simpsons? Fox has been careful tomanage the licensing deals so that Homer and clan don’t sufferfrom overexposure or aren’t used in inappropriate ways.According to Matt Groen-ing, the show’s creator, “ ‘TheSimpsons’ is a commer-cial enterprise and we embrace thecapitalistic nature of this project What we try to do with ‘TheSimpsons’ is not do a label slap-that is, we don’t just slap theirdrawings on the side of a product We try to make each itemwitty, and sometimes we comment on the ab-surdity of thehem itself.” In short, Fox tries to make sure that “TheSimpsons” characters are used in a way that is consistent withthe irreverent nature of the show itself. “If we didn’t do this,”notes a Fox spokesman, “we would lose credibility with thefans, and we have to make sure that doesn’t happen.”Source: D. Finnigan, “Homer Improvement,” Brandweek.November 27, 2000,pp. 22-25; and “The Simpsons-Picking aWinner,” Marketing, June 29, 2000, pp. 28-29.

The Changing World Output and World TradePictureIn the early 1960s, the United States was still by far the world’sdominant industrial power. In 1963, for example, the UnitedState accounted for 40.3 percent of world output. By 2000, theUnited States accounted for 27 percent of world output, still byfar the world’s largest industrial power but down significantly inrelative size since the 1960s (see Table 1.2). Nor was the UnitedStates the only developed nation to see its relative standing slip.The same occurred to Germany, France, and the United King-dom, all nations that were among the first to industrialize. Thisdecline in the U.S. po-sition was not an absolute decline, sincethe U.S. economy grew at a robust average annual rate of over 3percent from 1963 to 2000 (the economies of Germany, France,and the United Kingdom also grew over this time period).Rather, it was a relative de-cline, reflecting the faster economicgrowth of several other economies, particularly in Asia. Forexample, as can be seen from Table 1.2, from 1963 to 2000,Japan’s share of world output increased from 5.5 percent to14.2 percent. Other countries that markedly increased their shareof world output included China, Thailand, Malaysia, Taiwan,and South Korea. By virtue of its huge population and rapidindustrialization, China is emerging as a potential economiccolossus. .By the end of the 1980s, the U.S. position as the world’s leadingexporter was threatened. Over the past 30 years, U.S. dominancein export markets has waned as Japan, Germany, and a numberof newly industrialized countries such as South Korea andChina have taken a larger share of world exports. During the1960s, the United States routinely accounted for 20 percent ofworld exports of manufactured goods. But as Table 1.2 shows,the U.S. share of world exports of manufactured goods hadslipped to 12.3 percent by 2000. Despite the fall, the UnitedStates still remained the world’s largest exporter, ahead ofGermany and Japan.In 1997 and 1998 the dynamic economies of the Asian Pacificregion were hit by a serious financial crisis that threatened toslow their economic growth rates for several years. Despite this,their powerful growth may continue over the long run, as willthat of several other important emerging economies in Latin


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TAmerica (e.g., Brazil) and Eastern Europe (e.g., Poland). Thus, afurther relative decline in the share of world output and worldexports accounted for by the United States and other long-established developed nations seems likely. By itself, this is nota bad thing. The relative decline of the United States reflects thegrowing economic development and industrialization of theworld economy, as opposed to any absolute decline in thehealth of the U.S. economy, which entered the new millenniumstronger than ever.If we look 20 years into the future, most forecasts now predict arapid rise in the share of world output accounted for bydeveloping nations such as China, India, In-donesia, Thailand,South Korea, and Brazil, and a commensurate decline in theshare enjoyed by rich industrialized countries such as GreatBritain, Germany, Japan, and the United States. The WorldBank, for example, has estimated that if current trends con-tinue, by 2020 the Chinese economy could be larger than that ofthe United States, while the economy of India will approachthat of Germany.

Table 1.2The Changing Pattern of World Output and Trade

Share of World Share of World Share of World Country Output, 1963t Output, 2000 Exports, 2000 United States 40.3% 27.0% 12.3 % Japan 5.5 14.2 7.54 Germany 9.7 7.3 8.7 France 6.3 5.2 4.7 United Kingdom 6.5 4,1 4.4 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 World Bank also estimates that today’s developing nationsmay account for over 60 percent of world economic activity by2020, while today’s rich nations, which currently account forover-55 percent of world economic activity, may account foronly about 38 percent by 2020. Forecasts are not always correct,but these suggest that a shift in the eco-nomic geography of theworld is now under way, although the magnitude of that shiftis still not totally evident. For international businesses, theimplications of this chang-ing economic geography are clear:many of tomorrow’s economic opportunities may be found inthe developing nations of the world, and many of tomorrow’smost capable competitors will probably also emerge from theseregions.

Figure 1.4 Percentage Share of Total FDI Stock, 1980-2000

The Changing Foreign Direct Investment PictureReflecting the dominance of the United States in the globaleconomy, U.S. firms accounted for 66.3 percent of worldwideforeign direct investment flows in the 1960s. British firms weresecond, accounting for 10.5 percent, while Japanese firms were adistant eighth, with only 2 percent. The dominance of U.S.firms was so great that book were written about the economicthreat posed to Europe by U.S. corporations. Several Europeangovernments, most notably that of France, talked of limitinginward in vestment by U.S. firms.

However, as the barriers to the free flow of goods, services, andcapital fell, and as other countries increased their shares ofworld output, non-U.S. firms increasingly began to invest acrossnational borders. The motivation for much of this foreigndirect investment by non-U.S. firms was the desire to disperseproduction activities to opti-mal locations and to build a directpresence in major foreign markets. Thus, beginning in the1970s, European and Japanese firms began to shift labor-intensive manufactur-ing operations from their home marketsto developing nations where labor costs were lower. Inaddition, many Japanese firms invested in North America andEurope--often as a hedge against unfavorable currency move-ments and the possible imposition of trade barriers. Forexample, Toyota, the Japanese automobile company, rapidly in-creased its investment in automobile production facilities in theUnited States and Great Britain during the late 1980s and early1990s. Toyota executives believed that an increasingly strongJapanese yen would price Japanese automobile exports out offoreign markets; therefore, production in the most importantforeign markets, as op-posed to exports from Japan, madesense. Toyota also undertook these investments to head offgrowing political pressures in the United States and Europe torestrict Japa-nese automobile exports into those markets.Figure 1.5FDI Inflows, 1988-2000 (in $ billions)One consequence of these developments is illustrated in Figure1.4, which shows how the stock of foreign direct investment bythe world’s six most important national sources-the UnitedStates, United Kingdom, Japan, ‘Germany, France, and theNetherlands-changed between 1980 and 1999. (The stock offoreign direct invest-ment refers to the total cumulative value offoreign investments.) Figure 1.4 also shows the stock accountedfor by firms from developing economies. The share of the totalstock accounted for by U.S. firms declined substantially fromabout 42 percent in 1980 to 24 percent in 1999. Meanwhile, theshares accounted for by Japan, France, other developed nations,


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and the world’s developing nations increased markedly. The risein the share for developing nations reflects a growing trend forfirms from these countries, such as South Korea, to investoutside their borders. In 1999 firms based in develop-ingnations accounted for 9.9 percent of the stock of foreign directinvestment, up from only 3.1 percent in1980.Figure 1.5 illustrates two other important trends-the continuedrapid growth in cross-border flows of foreign direct investmentand the emerging importance of de-veloping nations as thedestination of foreign direct investment. Throughout the1990s, the amount of investment directed at both developedand developing nations increased dramatically, a trend thatreflects the increasing internationalization of busi-ness corpora-tions. Until 1998, developing nations were taking an increasinglylarge percentage share of this flow. This trend changed between1998 and 2000, primarily due to the lingering effects of the 1997Asian economic crisis and the resulting slump in economicactivity in the region. Despite this slump, China retained itsimportance as the leading destination for foreign direct invest-ment among developing economies, with about $40 billion inforeign investment flowing into this economy every year sincethe mid-1990s. In the long run, the flow of money into thedeveloping world will probably reaccelerate, reflecting theeconomic opportunities in many of these nations.

The Changing Nature of the Multinational EnterpriseA multinational enterprise is any business that has productiveactivities in two or more countries. Since the 1960s, there havebeen two notable trends in the demographics of the multina-tional enterprise: (1) the rise of non-U.S.mulitinationals,particularly Japanese multinationals, and (2) the growth ofmini-multinationals.

Non-U.S. multinationalsIn the 1960s, global business activity was dominated by largeU.S. multinationals corporations. With U.S. firms accountingfor about two-thirds of foreign direct investment during the1960s, one would expect most multinationals to be U.S.enterprises. According to the data summarized in the table 1.3,in 1973, 48.5 percent of the world’s 260 largest multinationalswere U.S. firms. The second largest source country was theUnited Kingdom, with 18.8 percent of the largest multination-als. Japan accounted for only 3.5 percent of the largestmultinationals at the time. The large number of U.S. multina-tionals reflected U.S. economic dominance in the three decadesafter World War II, while the large number of British multina-tionals reflected that country’s industrial dominance in the earlydecades of the 20th century.By 1999, however, things had shifted significantly. U.S. firmsaccounted for 26 percent of the world’s 100 largest multination-als, followed by Japan with 17 percent. France was third with 13

1973 1990 1997 2000 United S tates 48.5% 31.5% 32.4% 26% Table 1.3 The national Japan 3.5 12 15.7 17 Composition of The Largest United Kingdom 18.8 16.8 6.6 8 Multinationals France 7.3 10.4 9.8 13 Germany 8.1 8.9 12.7 12

percent. Although the 1973 data summarize in the Table 1.3 arenot strictly comparable with the data for the 1990s, theyillustrate the trend. (The 1973 figures are based on the largest260 firms, whereas the figure for the 1990s are based on thelargest 100 multinationals.) The globalization of the worldeconomy together with Japan’s rise to the top rank of economicpowers has resulted in the global marketplace.According to United Nations data, the ranks of the world’slargest 100 multinationals are still dominated by firms fromdeveloped economies. However, for the first time three firmsfrom developing economies entered the UN’s list of the 100largest multinationals. They were Hutchison Whampoa ofHong Kong, China, which ranked 48 in terms of foreign assets,Petroleos de Venezuela of Venezuela, which ranked 84,andCemex of Mexico, which came in at 100. However, if we look atsmaller firms, it is evident that there has been growth in thenumber of multinationals from developed economies. At theof the 1990s, the largest 50 multinationals from developingeconomies had foreign sales of $ 103 billion out of the totalsales of $453 billion and employed 483,129 people outside ofthere home country. Some 22 percent of these companies camefrom Hong Kong, 16.7 percent from Korea, 8.8 percent fromChina, and 7.6 percent from Brazil. Looking to the future, wecan reasonable expect growth of new multinational enterprisesfrom the world’s developing nations.

The Rise of Mini-MultinationalsAnother trend in international business has been the growth ofmedium-sized and small multinationals (mini-multinationals).When people think of international business, they tend tothink of firms such as Exxon, General Motors, Ford, Fuji,Kodak, Matsushita, Procter &Gamble, Sony, and Unilever-large,complex multinational corporations with operations that spanthe globe. Although it is certainly true that most internationaltrade and investment is still conducted by large firms, it is alsotrue that many medium-sized and small businesses arebecoming increasingly involved in international trade andinvestment. We have already discussed several examples in thischapter-Swan optical, Bridgewater Pottery, and Cardiac Science-and we have noted how the rise of the Internet is lowering thebarriers that small firms in building international sales.For another example, consider Lubricating System, of Kent,Washington. Lubricating systems, which manufactures lubricat-ing fluids for machine tools, employs 25 people and generatessales of $6.5 million. It’s hardly a large, complex multinational,yet more than $2 million of the company’s sales are generatedby exports to a score of countries from Japan to Israel and theUnited Arab Emirates. Lubricating systems also has set up ajoint venture whit a German company to serve the Europeanmarket consider also Lixi, Inc., a small U.S. manufacturer ofindustrial X-ray equipment: 70 percent of Lixi, $4.5million inrevenues comes from export to Japan. Or take G. W. Barth, amanufacturer of cocoa-bean roasting, machinery based inLudwigsburg, Germany. Employing just 65 people, this smallcompanies international business is conducted not just by largefirms but also by medium-sized and small enterprises.


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TThe Changing World OrderBetween 1989 and 1991 a series of remarkable democraticrevolutions swept the communist world. In country aftercountry throughout Eastern Europe and eventually in theSoviet Union itself, communist governments collapsed like theshells of rotten eggs. The Soviet Union is now history, havingbeen replaced by 15 independent republics. Czechoslovakia hasdivided itself into two states, while Yugoslavia has dissolvedinto a bloody civil war among its five successor states.Many of the former Communist nations of Europe and Asiaseem to share a commitment to democratic politics and freemarket economics. If this continues, the opportunities forinternational businesses may be enormous. For the best part ofhalf a century, these countries were essentially closed to Westerninternational businesses. Now they present a host of exportand investment opportunities. Just how this will play out overthe next 10 to 20 years is difficult to say. The economies ofmost of the former communist states are in very poor condi-tion, and their continued commitment to democracy and freemarket economics cannot be taken for granted. Disturbing singsof growing unrest and totalitarian tendencies continue to beseen in many Eastern European states. Thus, the risk involvedin doing business in such countries are very high, but then, somay be the returns.In addition to these changes, more quite revolutions have beenoccurring in China and Latin America. Their implications forinternational businesses may be just as profound as the collapseof communism in Eastern Europe. China suppressed its ownprodemocracy movement in the bloody Tiananmen Squaremassacre of 1989. Despite this, China continues to moveprogressively toward greater free market reforms. If what isoccurring in China continues for two more decades, China maymove from Third World to industrial superpower status evenmore rapidly than Japan did. If China’s gross domestic product(GDP) per capita grows by an average of 6 percent to 7 percent,which is slower than the 8 percent growth rate achieved duringthe last decade, then by 2020 this nation of 1.273 billion peoplecould boast an average income per capita of about $13,000,roughly equivalent to that of Spain’s today.The potential consequences for western international businessare enormous. On the one hand, with 1.2 billion people, Chinarepresents a huge and largely untapped market. Reflecting this,between 1983 and 2000, annual foreign direct investment inChina increased from less than $2 billion to $40 billion. On theother hand, China’s new firms are proving to be very competi-tors, and they could take global market share away from westernand Japanese enterprises. Thus the changes in China are creatingboth opportunities and threats for established internationalbusinesses.As for Latin America, both democracy and free market reformsalso have taken hold. For decades, most Latin America countrieswere ruled by dictators, many of whom seemed to view westerninternational businesses as instruments of imperialist domina-tion. Accordingly, they restricted direct investment by foreignfirms. In addition, the poorly managed economies of LatinAmerica were characterized by low growth, high debt, andhyperinflation-all of which discouraged investment by interna-

tional businesses. Now much of this seems to be changing.Throughout most of Latin America, debt and inflation aredown, governments are selling state-owned enterprises toprivate investors, foreign investment is welcomed, and theregion’s economies are growing rapidly. These changes haveincreased the attractiveness of Latin America, both as a marketfor export and as a site for foreign direct investment. At thesame time, given the long history of economic mismanagementin Latin America, there is no guarantee that these favorabletrends will continue. As in the case of Eastern Europe,substantial opportunities are accompanied by substantial risk.

The Global Economy of the 21st CenturyThe last quarter of century has seen rapid changes in the globaleconomy. Barriers to the free flow of goods, services, and capitalhave been coming down. The volume of cross-border tradeand investment has been growing more rapidly than globaloutput, indicating that national economies are becoming moreclosely integrated into a sin-gle, interdependent, global eco-nomic system. As their economies advance, more na-tions arejoining the ranks of the developed world. A generation ago,South Korea and Taiwan were viewed as second-tier developingnations. Now they boast large economies, and their firms aremajor players in many global industries from ship-building andsteel to electronics and chemicals. The move toward a globaleconomy has been further strengthened by the widespreadadoption of liberal economic, policies by countries that for twogenerations or more were firmly opposed to them. Thus, fol-lowing the normative prescriptions of liberal economicideology, in country after country we are seeing state-ownedbusinesses privatized, widespread deregulation, markets beingopened to more competition, and-increased commitment toremoving barriers to cross-border trade and investment. Thissuggests that over the next few decades, countries such as theCzech Republic, Poland, Brazil, China, and South Africa maybuild powerful market-oriented economies. In short, currenttrends indicate that the world is moving rapidly toward aneconomic system that is more favor-able for the practice ofinternational business.On the other hand, it is always hazardous to take establishedtrends and use them to predict the future. The world may bemoving toward a more global economic sys-tem, but globaliza-tion is not inevitable. Countries may pull back from the recentcom-mitment to liberal economic ideology if their experiencesdo not match their expectations. There are signs, for example,of a retreat from liberal economic ideology in Russia. Russia hasexperienced considerable economic pain as it tries to shift from acentrally planned economy to a market economy. If Russia’shesitation were to become more permanent and widespread,the liberal vision of a more prosperous global econ-omy basedon free market principles might not come to pass as quickly asmany hope. Clearly, this would be a tougher world for interna-tional businesses to compete in.Moreover, greater globalization brings with it risks of its own.This was starkly demonstrated in 1997 and1998 when a financialcrisis in Thailand spread first to other East Asian nations andthen in 1998.to Russia and Brazil Ultimately the crisis threat-ened to plunge the economies of the developed world,


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including the United States, into a recession. For now it issimply worth noting that even from a purely economicperspective, globalization is not all good. The opportu-nitiesfor doing business in a global economy may be significantlyenhanced, but as we saw in 1997-98, the risks associated withglobal financial contagion are also greater. Still, there are ways forfirms to exploit the opportuni-ties associated with globaliza-tion, while at the same time reducing the risks throughappropriate hedging strategies.

Globalization, Jobs, and IncomeOne concern frequently voiced by opponents of globalization isthat falling barriers to international trade destroy, manufacturingjobs in wealthy advanced economies such as the United Statesand the United Kingdom. The critics argue that falling tradebarriers allow firms to move their manufacturing activities tocountries where wage rates are much lower D.L. Bartlett and J. B.Steele, two journalists for the Philadelphia Inquirer who havegained notoriety for their attacks on free trade, cite the case ofHarwood Industries, a U.S. clothing manufacturer that dosedits U .S. opera-tions, where it paid workers $9 per hour, andshifted manufacturing to Honduras, where textile workersreceive 48 cents per hour. Because of moves like this, argueBartlett and Steele, the wage rates of poorer Americans havefallen significantly over the last quarter of a century.Supporters of globalization reply that critics such as Bartlett andSteele miss the es-sential point about free trade—the benefitsoutweigh the costs. They argue that free trade will result incountries specializing in the production’ of those goods andservices that they can produce most efficiently, while importinggoods that they cannot produce as efficiently. When a countryembraces free trade, there is always some dislocation -lost textilejobs at Harwood Industries, for example—but the wholeeconomy is bet-ter off as a result. According to this view, itmakes little sense for the United States to produce textiles athome when they can be produced at a lower cost in Hondurasor China (which, unlike Honduras, is a major source of U.S.textile imports). Importing, textiles from China leads to lowerprices for clothes in the United States, which en-ables consum-ers to spend more of their money on other items. At the sametime, the increased income generated in China from textileexports increases income levels in that country, which helps theChinese to purchase more products produced in the UnitedStates, such as Boeing jets, Intel-based computers, Microsoftsoftware, and Mo-torola cellular telephones. In this manner,supporters of globalization argue that free trade benefits allcountries that adhere to a free trade regime.Supporters of globalization do concede that the wage rateenjoyed by unskilled workers in many advanced economies mayhave declined in recent years. For exam-ple, data for theOrganization for Economic Cooperation and Developmentsuggest that since 1980 the lowest 10 percent of Americanworkers have seen a drop in their real wages (adjusted forinflation) of about 20 percent, while the top 10 percent haveenjoyed a real pay increase of around 10 percent. In the samevein, a Federal Reserve study found that in the seven yearspreceding 1996, the earnings of the best paid 10 percent of U.S.workers rose in real terms by 0.6 percent annually while the

earnings of the 10 percent at the bottom of the heap fell by 8percent. In some areas, the fall was much greater. Similar trendscan be seen in many other countries.However, while globalization critics argue that the decline inunskilled wage rates is due to the migration of low-wagemanufacturing jobs offshore and a corresponding reduction indemand for unskilled workers, supporters of globalization seea more com-plex picture. They maintain that the declining realwage rates of unskilled workers owes far more to a technology-induced shift within advanced economies away from jobs wherethe only qualification was a willingness to turn up for, workevery day and toward jobs that require significant education andskills. They point out that many ad-vanced economies report ashortage of highly skilled workers and an excess supply ofunskilled workers. Thus, growing income inequality is a resultof the wages for skilled workers being bid up by the labormarket, and the wages for unskilled workers being discounted.If one agrees with this logic, a solution to the problem ofdeclining in-comes is to be found not in limiting free trade andglobalization, but in increasing so-ciety’s investment in educa-tion to reduce the supply of unskilled workers.Research also suggests that the evidence of growing incomeinequality may be sus-pect. Robert Lerman of the UrbanInstitute believes that the finding of inequality is based oninappropriate calculations of wage rates. Reviewing the datausing a differ-ent methodology, Lerman has found that farfrom income inequality increasing, an in-dex of wage rateinequality for all workers actually fell by 5.5 percent between1987 and 1994. If future research supports this finding, theargument that globalization leads to growing income inequalitymay lose much of its punch. During the last few years of the1990s, the income of the worst paid 10 percent of the popula-tion actually rose twice as fast as that of the average worker,suggesting that the high employment levels of these years havetriggered a rise in the income of the lowest paid.

Globalization, Labor Policies, and the EnvironmentA second source of concern is that free trade encourages firmsfrom advanced nations to move manufacturing facilities to lessdeveloped countries that lack adequate regu-lations to protectlabor and the environment from abuse by the unscrupulous.Glob-alization critics often argue that adhering to labor andenvironmental regulations significantly increases the costs ofmanufacturing enterprises and puts them at a com-petitivedisadvantage in the global marketplace vis-a-vis firms based indeveloping na-tions that do not have to comply with suchregulations. Firms deal with this cost disadvantage, the-theorygoes, by moving their production facilities to nations that donot have such burdensome regulations or that fail to enforcethe regulations they have.If this is the case, one might expect free trade to lead to anincrease in pollution and result in firms from advanced nationsexploiting the labor of less developed na-tions. This argumentwas used repeatedly by those who opposed the 1994 forma-tion of the North American Free Trade Agreement (NAFTA)between Canada,

Figure 1.6


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TEnvironmental performance and income

Mexico, and the United States. They painted a picture of U.S.manufacturing firms moving to Mexico in droves so that theywould be free to pollute the environment, employ child labor,and ignore workplace safety and health issues, all in the name ofhigher profits.Mexico, and the United States. They painted a picture of U.S.manufacturing firms moving to Mexico in droves so that theywould be free to pollute the environment, employ child labor,and ignore workplace safety and health issues, all in the name ofhigher profits.Supporters of free trade and greater globalization expressserious doubts about this scenario. They point out that tougherenvironmental regulations and stricter labor standards go handin hand with economic progress. In general, as countries getricher, they enact tougher environmental and labor regulations.Because free trade enables developing countries to increase theireconomic growth rates and become richer, this should lead totougher environmental and labor laws. In this view, the crit-icsof free trade have got it backward-free trade does not lead tomore pollution and labor exploitation, it leads to less. Bycreating wealth and incentives for enterprises to producetechnological innovations, the free market system and free tradecould make it easier for the world to cope with problems ofpollution and population growth. In-deed, while pollutionlevels are rising in the world’s poorer countries, they have beenfalling in developed nations. In the United States, for example,the concentration of carbon monoxide and sulphur dioxidepollutants in the atmosphere decreased by 60 percent between1978 and 1997,while lead concentrations decreased by 98 percent-and these reductions have occurred against a background ofsustained economic ex-pansion. Drawn from a study under-taken for the Organization for Economic Cooperation andDevelopment, Figure 1.6 shows there is a clear positiverelationship between the income levels in a country and theenvironmental performance of that country as measured byvarious indicators.Supporters of free trade also point out that it is possible to tiefree trade agreements to the implementation of tougherenvironmental and labor laws in less developed countries.NAFTA, for example, was passed only after side agreementshad been ne-gotiated that committed Mexico to tougherenforcement of environmental protection regulations. Thus,supporters of free trade argue that factories based in Mexico arenow cleaner than they would have been without the passage ofNAFTA.

They also argue that business firms are not the amoral organiza-tions that critics sug-gest. While there may be a few rottenapples, most business enterprises are staffed by managers whoare committed to behave in an ethical manner and would beunlikely to move production offshore just so they could pumpmore pollution into the atmo-sphere or exploit labor. Further-more, the relationship between pollution, labor ex-ploitation,and production costs may not be that suggested by critics. Ingeneral, a well-treated labor force is productive, and it isproductivity rather than base wage rates that often has thegreatest influence on costs. The vision of greedy managers whoshift production to low-wage countries to exploit their laborforce may be misplaced.

Globalization and National SovereigntyAnother concern voiced by critics of globalization is that today’sincreasingly interde-pendent global economy shifts economicpower away from national governments and toward suprana-tional organizations such as the World Trade Organization, theEuro-pean Union, and the United Nations. As perceived bycritics, unelected bureaucrats now impose policies on thedemocratically elected governments of nation-states, therebyundermining the sovereignty of those states and limiting thenation-state’s ability to control its own destiny.The World Trade Organization (WTO) is a favorite target ofthose who attack the headlong rush toward a global economy.The WTO was founded in 1994 to po-lice the world tradingsystem established by the General Agreement on Tariffs andTrade. The WTO arbitrates trade disputes between the 140 orso states that are sig-natories to the GATT. The arbitrationpanel can issue a ruling instructing a mem-ber state to changetrade policies that violate GATT regulations. If the violatorrefuses to comply with the ruling, the WTO allows other statesto impose appropri-ate trade sanctions on the transgressor. As aresult, according to one prominent critic, U.S. environmentalistand consumer rights advocate Ralph Nader:Under the new system, many decisions that affect billions ofpeople are no longer made by local or national governments butinstead, if challenged by any WTO member nation, would bedeferred to a group of unelected bureaucrats sitting behindclosed doors in Geneva (which is where the headquarters of theWTO are located). The bureaucrats can decide whether or notpeople in California can prevent the destruction of the lastvirgin forests or determine if carcinogenic pesticides can bebanned from their foods; or whether European countries havethe right to ban dangerous biotech hormones in meat . . . Atrisk is the very basis of democracy and accountable decisionmaking.In contrast to Nader’s rhetoric, many economists and politiciansmaintain that the power of supranational organizations such asthe WTO is limited to that which nation-states collectively agreeto grant. They argue that bodies such as the United Nations andthe WTO exist to serve the collective interests of memberstates, not to subvert those interests. Supporters of suprana-tional organizations point out that the power of these bodiesrests largely on their ability to persuade member states to followa certain action. If these bodies fail to serve the collective


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interests of member states, those states will withdraw theirsupport and the supranational organization will quicklycollapse. In this view, real power still resides with individualnation-states, not supranational organizations

Managing in the Global MarketplaceAn international business is any firm that engages in interna-tional trade or investment. A firm does not have to become amultinational enterprise, investing di-rectly in operations inother countries, to engage in international business, althoughmultinational enterprises are international businesses. All a firmhas to do is export or import products from other countries.As the world shifts toward a truly integrated global economy,more firms, both large and small, are becoming internationalbusi-ness. What does this shift toward a global economy meanfor managers within an international business?As their organizations increasingly engage in cross-border tradeand investment, it means managers need to recognize that thetask of managing an international business differs from that ofmanaging a purely domestic business in many ways. At themost fundamental level, the differences arise from the simplefact that countries are different Countries differ in their cultures,political systems, economic systems, legal systems and levels ofeconomic development. Despite all the talk about the emergingglobal village, and despite the trend toward globalization ofmarkets and production,Differences between countries require that an internationalbusiness vary its practices country by country. Marketing aproduct in Brazil may require a different approach than market-ing the product in Germany; managing U.S. workers mightrequire different skills than managing Japanese workers;maintaining close relations with a particular level of governmentmay be very important in Mexico and irrelevant in Great Britain;the business strategy pursued in Canada might not work inSouth Korea; and so on. Managers in an international businessmust not only be sensitive to these differences, but tlley mustalso adopt the appropriate policies and strategies for copingwith them.A further way in which international business differs fromdomestic business is the greater complexity of managing aninternational business. In addition to the prob-lems that arisefrom the differences between countries, a manager in aninternational business is confronted with a range of otherissues that the manager in a domestic business never confronts.An international business must decide where in the world tosite its production activities to minimize costs and to maximizevalue added. Then it must decide how best to coordinate andcontrol its globally dispersed production activities (which, as weshall see later in the book, is not a trivial problem). An in-ternational business also must decide which foreign markets toenter and which to avoid. It also must choose the appropriatemode for entering a particular foreign country. Is it best toexport its product to the foreign country? Should the firm allowa local company to produce its product under license in thatcountry? Should the firm enter into a joint venture with a localfirm to produce its product in that country? Or should the firmset up a wholly owned subsidiary to serve the market in thatcountry? As we shall see, the choice of entry mode is critical

because it has major implications for the long-term health ofthe firm.Conducting business transactions across national bordersrequires understanding the rules governing the internationaltrading and investment system. Managers in an internationalbusiness must also deal with government restrictions oninternational trade and investment. They must find ways towork within the limits imposed by spe-cific governmentalinterventions. Nominally committed to free trade, they oftenintervene to regulate cross-border trade and investment.Managers within international businesses must de-velopstrategies and policies for dealing with such interventions.Cross-border transactions also require that money be convertedfrom the firm’s home currency into a foreign currency and viceversa. Since currency exchange rates vary in response to changing-economic conditions, an international business must developpolicies for dealing with exchange rate movements. A firm thatadopts a wrong policy can lose large amounts of money, while afirm that adopts the right policy can increase the profitability ofits international transactions.In sum, managing an international business is different frommanaging a purely do-mestic business for at least four reasons:(1) countries are different, (2) the rangeof problems con-fronted by a manager in an international business is wider, andthe prob-lems themselves more complex than those confrontedby a manager in a domestic business, (3) an internationalbusiness must find ways to work within the limits im-posed bygovernment intervention in the international trade andinvestment system, and (4) international transactions involveconverting money into different currencies.

Activity (Questions):-

Q1) Comment on changing demographics of the globaleconomy?

Q2) How has global economy of the 21st century effected theworld trade picture, foreign direct investment, and jobs andincome in the world? comment .

Q3) How does one manage himself in the global market place,discuss in brief ?

international business - globlisation

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