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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
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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
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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
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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.
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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.
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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
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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.
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