978-0134200057 Chapter 1 Lecture Notes

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PART ONE

BACKGROUND FOR INTERNATIONAL BUSINESS

Chapter 1

GLOBALIZATION AND INTERNATIONAL BUSINESS

OBJECTIVES

1-1 Relate globalization and international business (IB) to each other and

explain why their study is important

1-2 Grasp the forces driving globalization and IB

1-3 Discuss the major criticisms of globalization

1-4 Assess the major reasons companies seek to create value by engaging

in IB

1-5 De)ne and illustrate the different operating modes for companies to

accomplish their international objectives

1-6 Recognize why national difference in companies’ external environments

affect how they may best improve their IB performance

CHAPTER OVERVIEW

Globalization has become a major socioeconomic force and topic of debate in the twenty-first

century. Chapter One examines the forces that are driving this phenomenon, as well as the

often-passionate criticisms of the process. It reviews the objectives that firms pursue when

they engage in international business activities and describes the various modes of entry that

may be used. It also notes the terminology that has come into existence as new types of

organizations have evolved. The chapter concludes with a discussion of the conditions in a

company’s external environment that may affect its international operations.

CHAPTER OUTLINE

OPENING CASE: THE GLOBALIZED BUSINESS OF SPORTS [see Map 1.1]

Although not everyone agrees that the unbridled globalization of professional sports is all for

the good, the process and possibilities are definitely far reaching. Today’s satellite television

broadcasts enable fans to watch top players and teams in nearly any sport from almost

anywhere on earth. Professional teams scour the world to find and develop the most talented

athletes, and players forsake home country allegiances in their pursuit of the world’s highest

salaries. Further, the more people that tournaments can attract through attendance and

television, the more money that sponsors and advertisers are willing to pay—and the greater the

likelihood that those sponsors and advertisers will have business operations that span the globe.

In addition, sports and nonsports companies alike pay famous athletes and teams generous sums

to endorse their products. Successful teams have opened shops both domestically and

internationally to sell souvenirs bearing their logos and may make more money on merchandise

than from TV rights and sponsorships combined. Most recently, as teams and leagues have

begun to seek income opportunities outside their home countries, foreign investors have

acquired a U.S. baseball team; another group of foreign investors acquired controlling interest

in a British soccer (football) team, and the National Football League (NFL) of the United States

underwrites flag football games in Chinese schools and is playing some regular season NFL

games in Europe. Map 1.1 outlines national sports in a variety of countries and can be used to

discuss how culture impacts globalization.

I. INTRODUCTION

As people, firms, and other organizations have expanded their access to resources, goods,

services, and markets across wider geographical areas, they have also become more deeply

affected (positively and negatively) by conditions outside their home countries.

Globalization is the widening and deepening of interdependent relationships among

people from different nations.

II. WHY STUDY ABOUT GLOBALIZATION, IB AND THEIR RELATIONSHIP

A. How Does IB Fit In?

International business consists of all commercial transactions between two or

more countries. Global events and competition affect almost all firms—large or small.

However, the international environment is more complex and diverse than a firm’s domestic

environment. [see Fig. 1.1]

IB Relation to Globalization: The global connections between supplies and markets

result from the activities of IB, which are all commercial transactions (including sales,

investments, and transportation) that take place among countries. Private companies undertake

such transactions for profit; governments may undertake them either for profit or for other

reasons.

B. The Study of IB

Not only do companies sell output and secure supplies and resources

abroad, they compete against products, services, and companies from

foreign countries. Thus, most managers need to take into account IB when

setting their operating strategies and practices.

1. Understanding the Environment/Operations Relationship

International companies have more diverse and complex operating

environments than purely domestic ones.

2. Making Nonbusiness Decisions

A better understanding of IB will help you make more informed decisions,

such as where to work and what governmental policies to support.

III. THE FORCES DRIVING GLOBALIZATION AND IB

Globalization is a difficult concept to measure. Currently, about a quarter of world production is

sold outside of its country of origin, restrictions on imports continue to decline, the foreign

ownership of assets as a percent of world production continues to increase, and world trade

continues to grow more rapidly than world production. Recessionary contraction in recent years

has at least temporarily reversed this trend. That said, on a value basis, only a few countries

(mainly very small nations) either sell more than half of their production abroad or source more

than half of their consumption from foreign countries. Further, the principal source of capital in

almost all nations is

domestic rather than international. Granted, these measurements address only economic aspects

of globalization. Various studies have made more comprehensive comparisons by including, say,

people-to-people contacts through travel and communications, technological interchanges,

government-to-government

relationships, and acceptance and adaptation of attributes from foreign cultures

such as words from other languages. The studies’ results have several commonalities: (1) smaller

countries tend to be more globalized than larger ones, mainly

because their smaller land masses and populations permit a lower variety of production, (2)

countries with higher per capita incomes tend to be more globalized than those with lower ones

because their citizens can better afford foreign products, travel, and communications and (3)

although a country may rank as highly globalized on one dimension, it may be low on another,

such as the United States being high on technological scales but low on economic ones. .

A. Factors in Increased Globalization

There are seven factors that are often cited as having contributed to the increased growth in

globalization.

1. Rise in and Application of Technology

Advances in communications and transportation have significantly increased the

effectiveness and efficiency of international business operations. Today, a much larger portion

of the population is involved in the development of new products, than just the production of

products.

2. Liberalization of Cross-Border Trade and Resource Movement

Over time most governments have lowered restrictions on trade and foreign investment in

response to the expressed desires of their citizens and producers. The primary motives for

this change include giving citizens greater consumer choice and lower prices, international

competition making domestic producers more efficient, and the hope that liberalization will

cause other countries to also lower trade barriers.

3. Development of Services That Support International Business

Services provided by government, banks, transportation companies, and other businesses

greatly facilitate the conduct and reduce the risks of doing business internationally.

4. Growth of Consumer Pressures

Because of innovations in transportation and communications technology, consumers are well

informed about and often able to access foreign products. Thus competitors the world over

have been forced to respond to consumers’ demand for increasingly higher quality and more

cost-competitive offerings. Consumer pressure has also spurred companies to spend more on

research and development (R&D) and to search worldwide for innovations and products they

can sell to ever-more-demanding consumers.

5. Increased Global Competition

The pressures of increased foreign competition often persuade firms to expand internationally

in order to gain access to foreign opportunities and to improve their overall operational

flexibility and competitiveness. How companies become global players can be discussed

using the terms born-global companies and clustering.

6. Changes in Political Situations and Government Policies

Today, only a few countries are heavily isolated economically or do business almost

entirely within a political bloc. In fact, political changes sometimes open new frontiers, such

as diplomatic relations between the United States and Cuba. In addition, the improvements in

national infrastructure and the provision of trade-related services by governments the world

over have further led to substantial increases in foreign trade and investment levels.

7. Expansion of Cross-National Cooperation

Governments have increasingly entered into cross-national treaties and agreements in order

to gain reciprocal advantages for their own firms, to jointly attack problems that one country

cannot solve alone, and to deal with areas of concern that lie outside the territory of all

countries.

IV. THE CRITICISMS OF GLOBALIZATION

Antiglobalization forces have protested both peacefully and violently as they press for legislation

and other means to stop or slow the globalization process. Issues of threats to national

sovereignty, environmental stress, and growing income inequality and personal stress are

addressed.

A. Threats to National Sovereignty

Many citizens fear that a country’s participation in multilateral agreements will diminish its

sovereignty and freedom from external control and curtail its ability to act in its own best

interests. In particular, people in small countries worry that dependence on larger countries

for sales and/or supplies, as well as the presence of large international firms, will make them

vulnerable to the demands of parties against which they are essentially powerless. In

addition, people the world over are concerned that globalization will bring the

homogenization of products and traditional ways of life—including language and social

structure.

B. Environmental Stress

Much critique of globalization revolves around the economic growth it brings. One argument

is that growth in both production and international travel consumes more nonrenewable

natural resources and increases environmental damage. However, other factions assert that

globalization is positive for conserving natural resources and maintaining an environmentally

sound planet. The positive effects of pursuing global interests may, nevertheless, conflict with

national interests.

C. Growing Income Inequality and Personal Stress

By various measurements, income inequality, with some notable exceptions, has been

growing both among and within many countries. Although globalization has brought

unprecedented opportunities for firms to profit by gaining more sales and cheaper or better

supplies, critics argue that profits have gone disproportionately to the top executives rather

than to the rank and file. Thus, even if the overall global gains from globalization are

positive, there remains a continuing challenge to bring about the positive gains in ways that

minimize costs to the losers. It is easy to think about the impacts of globalization at a macro

level, but individuals are impacted very specifically, causing stress and insecurity.

POINT—COUNTERPOINT: Is Offshoring Good Strategy?

POINT: Offshoring is good because it reduces costs. Although a firm may temporarily need fewer

workers in its home country, eventually domestic employment (particularly high-value jobs) will

increase because of the firm’s growth. In addition, offshoring not only contributes to the economic

growth of less-developed countries, but it increases their need and ability to import products from

developed countries and thus indirectly contributes to the growth of all nations. There is also a natural

extension from outsourcing to offshoring. Some industries and companies have actually seen some

reversal of the outsourcing trend.

COUNTERPOINT: Only a few people benefit from offshoring. Cheaper labor inputs have not resulted

in cheaper prices for consumers. Further, firms that grow as a result of offshoring do so at the expense

of their competitors; thus, there is no real economic growth. Displaced workers are forced to take jobs

with fewer, if any, benefits and lower pay, while multinationals take advantage of their foreign

workers, who are powerless. While a few countries are growing economically, world poverty levels

have increased significantly in recent decades.

V. WHY COMPANIES ENGAGE IN INTERNATIONAL BUSINESS

When engaging in international business, a firm should consider its mission, its objectives, and its

possible strategies. Primary objectives would include the following:

A. Expanding Sales

Companies may increase the potential market for their sales by pursuing international

consumer and industrial markets.

B. Acquiring Resources

Foreign-sourced products, services, resources, and components can make a firm more

competitive both at home and abroad.

A. Reducing Risk

Firms seek foreign markets in order to minimize cyclical effects on sales and profits.

Defensively, they may also wish to counter the potential advantages that competitors might

gain from participating in foreign market opportunities.

VI. INTERNATIONAL BUSINESS OPERATING MODES

A firm can engage in international business through various operating modes, [see Fig. 1.1]

including exporting and importing merchandise and services (see Chapters 7 and 8 regarding

international trade) and licensing and foreign direct investment (see Chapter 15 regarding direct

investment and collaborative strategies), joint ventures, and management contracts. The firm or

individual exporting merchandise or a service will receive international earnings while the firm or

individual importing merchandise or a service will make an international payment.

A. Merchandise Exports and Imports

Merchandise exports consist of tangible (visible) products, i.e., goods that are sent to a

foreign country for use or resale. Merchandise imports consist of tangible products, i.e.,

goods brought into a country for use or resale.

B. Service Exports and Imports

Service exports and imports represent intangible (invisible), i.e., non-merchandise products.

1. Tourism and Transportation. When an American flies to Paris on Air France

and stays in a French-owned hotel, payments made to the airline and the hotel represent

service export earnings (income) for France and service import payments (expenses) for

the United States.

2. Service Performance. Some services, such as banking, insurance, rental,

engineering, turnkey operations (construction, performed under contract, of facilities

that are transferred to the owner when they are ready for operation), and management

contracts (arrangements in which one firm provides personnel to perform management

functions for another), net companies export earnings in the form of fees paid by a

foreign client.

3. Asset Use. Firms may receive export earnings, i.e., royalties, by allowing foreign

clients to use their assets (trademarks, patents, copyrights, and other expertise).

Licensing agreements are contracts that represent a transaction in which a licensor sells

the rights to the use of its intellectual property to a licensee in exchange for a fee or

royalty. Franchising is a special form of licensing in which the franchisee is granted

additional control over the operation in exchange for the provision of additional support

and services by the franchisor.

A. Investments

Foreign investment consists of the ownership of foreign property for the purpose of realizing

a financial gain via profits, growth, dividends, and/or interest.

1. Direct Investment. Foreign direct investment (FDI) occurs when an investor gains

a controlling interest in a foreign operation. A joint venture represents a direct

investment in which two or more parties share ownership of an FDI.

2. Portfolio Investment. Portfolio investment is a noncontrolling interest in a venture

made in the form of either debt or equity. Often, firms use portfolio investment as part

of their short-term financial strategy.

B. Types of International Organizations

There are numerous forms of collaborative arrangements through which companies work

together internationally, such as joint ventures, licensing agreements, management

contracts, minority ownership, and long-term contractual arrangements. A strategic alliance

is more narrowly defined to indicate that the agreement is of critical importance to the

competitive viability of one or more of the partners. The multinational enterprise (MNE) is

a firm that takes a global approach to foreign markets and production, i.e., it is willing to

consider markets and production sites anywhere in the world. The terms multinational

corporation (MNC) and transnational company (TNC) may also be used in this context.

VII. WHY DO COMPANIES’ EXTERNAL ENVIRONMENTS AFFECT HOW THEY MAY BEST

OPERATE ABROAD?

Smart companies develop the means to implement international strategies by examining the

following conditions abroad that can affect their success:

Physical factors (such as geography or demography)

Institutional factors (such as culture, politics, law, and economy)

Competitive factors (such as the number and strength of suppliers, customers, and rival

firms)

A. Physical Factors

1. Geographic Influences. The uneven distribution of resources results

in different opportunities being located in different parts of the world. In

addition, geographic barriers affect transportation, communications, and

distribution channels within a country. Managers who are knowledgeable about

geography are in a position to better determine the location, quantity, quality, and

availability of the world’s natural resources and conditions.

2. Demographic Influences. Countries’ populations differ in many ways, such as

density, education, age distribution, and life expectancy. These differences impact

IB operations, such as market demand and workforce availability.

B. Institutional Factors

1. Political Policies. A nation’s political policies influence how and if IB takes

place because of the influence of government leaders over the process.

2. Legal Policies. While every nation has its own body of business law, agreements

between/amongst nations determine international law. Domestic business law may

include regulations on home-country firms in both home and host countries regarding

such matters as taxation, employment, and foreign exchange transactions. International

law—in the form of legal agreements between countries—determines how earnings are

taxed by all jurisdictions. Also, the ways in which laws are enforced also affect a firm’s

foreign operations

4. Behavioral Factors. By studying the disciplines of anthropology, psychology, and

sociology, managers can better understand the interpersonal norms of people in foreign

countries and the reasons why operating procedures may need to be adjusted in foreign

locales.

5. Economic Forces. Among other things, economics explains why countries exchange

goods and services, why capital and people travel among countries in the course of

business, and why one country’s currency has a certain value compared to another. It

also provides the analytical tools to determine the impact of foreign operations on home

and host countries, as well as the effect of a country’s economic policies and conditions

upon domestic and foreign firms.

C. The Competitive Environment

In addition to its physical and social environments, every globally active company operates

within a competitive environment. Companies’ competitive situations

may differ by their relative size in different countries, the competitors they face by

country, and the resources they can commit internationally. A firm’s competitive strategy for

products will usually involve competing on the basis of cost or differentiation. Other

competitive factors are a company’s size and resources compared to those of its competitors.

Finally, market success, whether domestic or foreign,

often depends on the strength of competition and whether it is international or local. [See Fig.

1.1]

LOOKING TO THE FUTURE: Three Major Scenarios on Globalization’s Future

By envisioning different ways in which the future may evolve, a company can be better prepared to

develop the facilities and people needed to succeed in an uncertain environment. At this time, there is

much discussion about the following three viewpoints.

The first view, that further globalization is inevitable, is based largely on the premise that

technical advances in transportation and communications are pervasive, that consumers demand the

best products for the best prices regardless of their country of origin, and that MNEs are so powerful

they can pressure governments to further reduce restrictions on trade and investment. If this is true,

then the challenge is to determine what to make of globalization with respect to the distribution of its

costs and benefits.

The second view, that international business will grow primarily along regional rather than global

lines, is premised on studies that show that almost all firms that consider themselves global conduct a

dominant portion of the business in their home and neighboring countries. It may be possible, however,

that regionalization is a transitional step on the route to globalization.

The third view, that forces opposing globalization will greatly slow its growth, is not to be

dismissed. Historically, pressure groups have often been successful in obstructing policies and

activities that threatened their own well being. In addition, recent anti-globalization interests have

successfully promoted a variety of causes in numerous countries that span the globe. The impact of

other uncertainties also impacts the future of globalization. Some examples of these uncertainties

include the impact of oil prices on global transportation, the general economic recession, and concerns

about product safety. Whether institutions and people can work together to effectively manage the

complexities of today’s interconnected world remains to be seen.

CLOSING CASE: Carnival Cruise Lines

Although sea voyages have held an aura of mystique for centuries, only in recent decades have the

general masses been able to experience open seas and exotic ports of call as a purely recreational

activity. Cruises, i.e., sea voyages for pleasure, offer passengers the convenience of an assigned cabin

as they sail along a fixed itinerary that concludes at their original point of sea embarkation. Almost

everything about the entire cruise industry is international, from the routes traveled to the use of flags

of convenience to the locations of shipyards to the staffing of vessels. By far the largest cruise

competitor is Carnival Corp., which owns a number of different lines that it calls brands. Because

Carnival operates globally, it can treat the entire world as a source of both customers and supplies. At

the same time, its widespread operations also leave Carnival vulnerable to political upheavals, health

crises, economic recessions, and natural disasters. Still, in all, the future outlook both for the industry

and for Carnival is bright as more people the world over choose a holiday cruise.