Globalization and International Business

CHAPTER ONE
Globalization and International Business

OBJECTIVES

• To define globalization and international business and show how they affect each other
• To understand why companies engage in international business and why international business growth has accelerated
• To discuss globalization’s future and the major criticisms of globalization
• To become familiar with different ways in which a company can accomplish its global objectives
• To apply social science disciplines to understanding the differences between international and domestic business

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 ways in which international business differs from domestic business.

CHAPTER OUTLINE

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 refers to the broadening set of interdependent relationships among people from different parts of a world that happens to be divided into nations.
What is International Business?
International business involves all commercial transactions, including sales, investments, and transportation—private and governmental—between parties of 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.]

THE FORCES DRIVING GLOBALIZATION
Globalization is a difficult concept to measure. Currently, over 20 percent 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 still domestic. Following are seven interrelated factors that have contributed to the spiraling growth in globalization. A.T. Kearney - Foreign Policy Globalization Index
Economic- International trade and investment
Technological- Internet connectivity
Personal contact- International travel and tourism, international telephone traffic, and personal transfers of funds abroad
Political- Participation in international organizations and government money transfers
Factors in Increased Globalization There are seven factors that are often cited as having contributed to the increased growth in globalization.
Increase in and Expansion of Technology
Vast improvements in transportation and communications technology—including the development of the Internet—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.
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. 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.
Growing 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.
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.
Changing Political Situations
The transformation of the political and economic policies of Eastern Europe, Vietnam, and China has led to vast increases in trade between those countries and the rest of the world. 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.
Expanded 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. Often, such cooperation occurs within the framework of international organizations such as the International Bank for Reconstruction and Development (World Bank).

III. WHAT’S WRONG WITH 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, increasing income inequality and personal stress, and growth and environmental stress are addressed in the Point—Counterpoint sections found throughout the text.
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.
Economic Growth and Environmental Stress
Clearly, economic growth can result in both positive and negative consequences, including damage to society and the environment. While globalization can, in fact, support the sustenance of natural resources and the maintenance of an environmentally sound planet, unless the positive consequences of globalization keep pace with the negative costs of economic growth, the sustainability of economic improvement on a worldwide basis will, at best, be problematic.
Growing Income Inequality and Personal Stress
Offshoring, the process of shifting domestic production to a foreign country for the purpose of serving the home market at a reduced cost, speeds up the process of altering the relative economic discrepancies between the two countries involved. 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.

IV. 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:
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.
Minimizing 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.

V. MODES OF OPERATION IN INTERNATIONAL BUSINESS
A firm can engage in international business through various operating modes, [See Fig. 1.1] including exporting and importing merchandise and services (see Chapters 6 and 7 regarding international trade) and licensing and foreign direct investment (see Chapter 14 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.
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.
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.
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.
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.
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.
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.
Types of International Organizations
There are numerous forms of collaborative arrangements through which companies work together internationally, such as minority ownership, joint ventures, licensing agreements, management contracts, or other 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.

VI. WHY INTERNATIONAL BUSINESS DIFFERS FROM DOMESTIC BUSINESS
External environments that affect the ways in which firms operate internationally include physical, societal, and competitive factors. In fact, the amount of adjustment required in foreign operations is largely influenced by the extent to which the home and host country environments resemble one another. [See Fig. 1.1]
Physical and Social 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. Finally, the probability of natural disasters and adverse climatic conditions make it riskier to invest and operate in some countries than others. 2. Political Policies. Politics often determine where and how international business takes place because of the influence of government leaders over the process.
3. 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 may also determine how and whether firms can operate in certain locales. [Note: while most countries have laws that recognize and protect intellectual property rights, many do little to enforce them.]
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.
The Competitive Environment
The global competitive environment varies both by industry and by country. Likewise, a company’s competitive situation may differ in terms of its relative strength and in terms of which competitors it faces from one country to another. Thus, a firm’s competitive strategy directly influences how and where it can operate most effectively. A firm’s competitive strategy for products will usually involve competing on the basis of price or differentiation. Differentiation strategies can be based on a brand image or a unique characteristic. Company resources and experience influence choice of strategy, and competitors faced in each market may alter overall global strategy. [See Fig. 1.1.]

LOOKING TO THE FUTURE: Three Ways of Looking at Globalization

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 upon 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 which 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.