MNI 3701 GLOBAL BUSINESS ENVIRONMENT
What is Globalisation?
Shift toward a more integrated and interdependent world economy
Includes globalisation of markets
Types of Globalisation?
Globalisation of Markets
o Merging of historically distinct markets into one global market
Globalisation of products
o Sourcing of goods and services from locations around the globe to take
advantage of location specific advantages
o Cheaper labour, energy, land and capital
Drivers of Globalisation?
Changes in political environment
o Creation of global economic/trade regulatory bodies
o Collapse of communism
Changes in Technological environment
o Email and video conferencing
o The internet
o Company intranets and extranets
o Advances in transportation technology
Evolution of Globalisation
7 Phases:
1. International inquiries
Company receives inquiry about one of its products directly from a foreign
business person/ independent domestic exporter and importer
2. Export Manager
Company’s exports expand
3. Export department and direct overseas sales
Full-fledged export department established at same level as domestic sales
department as company has difficulty coping with upward surge in sales
4. Overseas branches and subsidiaries
Further growth requires establishment of sales branches abroad to handle
sales and promotions – sales branch manager responsible to home office;
branch sells directly to intermediaries in foreign markets
5. Overseas assembly
Assembly occurs overseas (cheaper shipping costs, lower tariffs, cheaper
labour)
6. Overseas manufacturing
Establishment of production in host country
Three methods:
o Contract manufacturing:
foreign producer produces and sells the company’s product,
but the company continues to promote and distribute it
o Licensing:
foreign company pays a royalty to international company for
patents, trademarks, trade secrets
o Investment in manufacturing:
after establishment in host country, company has a total
business to manage
7. Integration of overseas subsidiaries
Foreign subsidiaries lose autonomy once parent company decides to
integrate into one multinational enterprise
Market entry modes
Exporting
Manufacturing firms in particular often begin their international expansion by
exporting and only later switch to another more appropriate entry mode
Indirect exporting:
o Firm is in the hands of a domestic export agent and has little/ no control over
the process
Direct exporting:
o Firm is in control of exporting process and gains exporting experience through
this involvement
o Firm has no control over what happens in foreign market
Advantages:
o Cost avoidance of setting up manufacturing facilities in another country
o Increased production in the home country results in higher domestic
employment
o export sales generate valuable foreign currency
o low risk market-entry mode
o little/ no capital requirements
Disadvantages:
o High transportation costs
o Trade barriers to imports in the foreign country
o Problems with foreign marketing agents
Turnkey projects
Generally found in engineering and processing industries and allow firms to transfer
their know-how to countries that may restrict FDI
Contractors design, construct and commission large industrial and infrastructure–
related projects
Agreements normally include training of staff for the project. On a specified date, the
“key” is handed over to the client, which then ends the contractors involvement in the
project
Advantages:
o Less risky than conventional FDI especially in politically unstable countries
o Substantial income may be earned; valuable foreign exchange for the home
country
Disadvantages:
o Limited duration with no permanent market presence
o Firm may create a future competitor
Licensing
Licensor grants the rights to intangible property to the licensee (foreign licensed firm)
Advantages:
o Licensee pays a license fee or royalty to the licensor and bears all the costs
and risks of opening foreign markets
o No capital investment in facilities or operations is required by the licensor
Disadvantages:
o Licensor has no control over the licensee to promote and market its products
o Global co-ordination of activities is difficult
o Risk of losing technological know-how to the licensee, thus creating a
potential future rival
Franchising
Somewhat similar to licensing; does involve longer term commitments
Advantages:
o Low development costs
o Franchisee bears the risks of opening up a foreign market
Disadvantages:
o Maintenance of standards and quality control of distant foreign franchise
operations difficult
o Global strategic co-ordination is often difficult
Strategic alliances
Collaborative agreements between two firms, often in the same industry but not
necessarily in the same country, working towards a common purpose
In many countries, because of political considerations this and joint ventures are the
only feasible entry mode
Advantages:
o Allow firms to benefit from a local partners knowledge of country conditions
o Allow alliance partners to share risks and costs associated with R&D,
including new product development
Disadvantages:
o Firms may relinquish control over its technology
o May not have sufficient control over its subsidiaries which operate under the
alliance agreement
o Incompatible management styles, organisational cultures and control systems
may lead to conflicts
