2. Chapter 2 International Business: The New Realities, 3rd Edition by
Cavusgil, Knight and Riesenberger

3. International Business: The New Realities
Learning Objectives
Why globalization is not new
Market globalization: An organizing framework
Dimensions of market globalization
Drivers of market globalization
Technological advances
Societal consequences of market globalization
Firm-level consequences of market globalization: Internationalization of the firm’s value chain
International Business: The New Realities

4. Overview on the Globalization of Markets
Globalization and technological advances have altered the international business landscape more than any other trends.
In this class, globalization refers to the interconnectedness of national economies and the growing interdependence of buyers, producers, suppliers, and governments, around the world.
Globalization allows firms to view the world as one large marketplace for goods, services, capital, labor, and knowledge.
Globalization of markets refers to the gradual integration and growing interdependence of national economies. Globalization allows firms to view the world as an integrated marketplace that includes buyers, producers, suppliers, and governments in different countries. Market globalization is manifested by the production and marketing of branded products and services worldwide. Declining trade barriers and the ease with which international business transactions take place due to the Internet and other technologies are contributing to a gradual integration of most national economies into a unified global marketplace.
International Business: The New Realities

5. Phases of Globalization
Phase 1: 1830 to late 1800s Aided by railroads and ocean transport; The rise of manufacturing and trading companies
Phase 2: 1900 to Fueled by electricity and steel; early MNEs
Phase 3: 1948 to 1970s GATT, post-war era; reduction of trade barriers worldwide; rise of global capital markets
Phase 4: 1980 to present Fueled by Internet and other technologies; rapid liberalization in emerging markets.
The first phase of globalization began about 1830 and peaked around International business became widespread due to the growth of railroads, efficient ocean transport, and the rise of large manufacturing and trading firms. Invention of the telegraph and telephone in the late 1800s facilitated information flows between and within nations and greatly aided early efforts to manage companies’ supply chains.
The second phase of globalization began around 1900 and was associated with the rise of electricity and steel production. This phase reached its height just before the Great Depression, a worldwide economic downturn that began in In 1900, Western Europe was the most industrialized world region. Europe’s colonization of countries in Asia, Africa, and the Middle East led to establishment of some of the earliest subsidiaries of multinational enterprises (MNEs). European companies such as BASF, Nestlé, Shell, Siemens, and British Petroleum had established foreign manufacturing plants by In the years before World War I (pre-1914), many firms were already operating globally. The Italian manufacturer Fiat supplied vehicles to nations on both sides of the war.
The third phase of globalization began after WorldWar II. At war’s end in 1945, substantial pent-up demand existed for consumer products, as well as for input goods to rebuild Europe and Japan. The United States was least harmed by the war and became the world’s dominant economy. Substantial government aid helped stimulate economic activity in Europe. The pre-war years had been characterized by high tariffs and strict controls on currency and capital movements. After the war, leading industrialized countries, including Australia, Britain, and the United States, sought to reduce international trade barriers. transport, and the rise of large manufacturing and trading firms. Invention of the telegraph and telephone in the late 1800s facilitated information flows between and within nations and greatly aided early efforts to manage companies’ supply chains.
The fourth phase of globalization began in the early 1980s, which saw enormous growth in cross-border trade and investment. The phase was triggered by the development of personal computers, the Internet, and Web browsers; the collapse of the Soviet Union and ensuing market liberalization in Central and Eastern Europe; and industrialization and modernization in East Asian economies, including China.
International Business: The New Realities

6. International Business: The New Realities
The Death of Distance
International Business: The New Realities

7. The Drivers of Market Globalization
1. Drivers of Market Globalization • Worldwide reduction of barriers to trade and investment • Market liberalization and adoption of free markets • Industrialization, economic development, and modernization • Integration of world financial markets • Advances in technology
The exhibit presents an organizing framework for examining market globalization. The exhibit makes a distinction between: (1) drivers or causes of globalization; (2) dimensions or manifestations of globalization; (3a) societal consequences of globalization; and (3b) firm level consequences of globalization. In the exhibit, the double arrows illustrate the interactive nature of the relationship between market globalization and its consequences. As market globalization intensifies, individual firms respond to the challenges and new advantages that it brings. However, keep in mind that firms do not expand abroad solely as a reaction to market globalization. They also internationalize proactively, in order to pursue new markets, find lower-cost inputs, or obtain other advantages. Often, adverse conditions in the home market, such as regulation or declining industry sales, push firms to boldly venture abroad. Firms that do so tend to be more successful in global competition than those that engage in international business as a reactive move.

8. The Drivers and Dimensions of Market Globalization
1. Drivers of Market Globalization • Worldwide reduction of barriers to trade and investment • Worldwide reduction of barriers to trade and investment • Industrialization, economic development, and modernization • Integration of world financial markets • Advances in technology
2. Dimensions of Market Globalization • Integration and interdependence of national economies
• Rise of regional economic integration blocs
• Growth of global investment and financial flows
• Convergence of buyer lifestyles and preferences
• Globalization of production activities
• Globalization of services

9. The Drivers, Dimensions, and Consequences of Market Globalization
1. Drivers of Market Globalization • Worldwide reduction of barriers to trade and investment • Worldwide reduction of barriers to trade and investment • Industrialization, economic development, and modernization • Integration of world financial markets • Advances in technology
2. Dimensions of Market Globalization • Integration and interdependence of national economies
• Rise of regional economic integration blocs
• Growth of global investment and financial flows
• Convergence of buyer lifestyles and preferences
• Globalization of production activities
• Globalization of services
3a. Societal Consequences of Market Globalization • Contagion: Rapid spread of financial or monetary crises from one country to another
• Loss of national sovereignty
• Offshoring and the flight of jobs
• Effect on the poor
• Effect on the natural environment
• Effect on national culture

10. The Drivers, Dimensions, and Consequences of Market Globalization
1. Drivers of Market Globalization • Worldwide reduction of barriers to trade and investment • Transition to market-based economies and adoption of free trade in China, former Soviet Union countries, and elsewhere • Industrialization, economic development, and modernization • Integration of world financial markets • Advances in technology
2. Dimensions of Market Globalization • Integration and interdependence of national economies
• Rise of regional economic integration blocs
• Growth of global investment and financial flows
• Convergence of buyer lifestyles and preferences
• Globalization of production activities
• Globalization of services
3a. Societal Consequences of Market Globalization
• Contagion: Rapid spread of financial or monetary crises from one country to another • Loss of national sovereignty
• Offshoring and the flight of jobs
• Effect on the poor
• Effect on the natural environment
• Effect on national culture
3b. Firm-level Consequences of Market Globalization: Internationalization of the Firm’s Value Chain • Countless new business opportunities for internationalizing firms
• New risks and intense rivalry from foreign competitors
• More demanding buyers who source from suppliers worldwide
• Greater emphasis on proactive internationalization
• Internationalization of firm’s value chain

11. Dimensions of Market Globalization
Integration and interdependence of national economies. Results from firms’ collective international activities. Governments contribute by lowering trade and investment barriers.
Rise of regional economic integration blocs. Free trade areas are formed by two or more countries to reduce or eliminate barriers to trade and investment, such as the EU, NAFTA, and MERCOSUR.
Integration and interdependence of national economies. Internationally active firms devise multicountry operations through trade, investment, geographic dispersal of company resources, and integration and coordination of value-chain activities. A value chain is the sequence of value-adding activities performed by the firm in the course of developing, producing, marketing, and servicing a product. The aggregate activities of such firms give rise to economic integration. Governments have facilitated this integration by lowering barriers to international trade and investment, harmonizing their monetary and fiscal policies within regional economic integration blocs (also known as trade blocs), and developing supranational institutions—the World Bank, International Monetary Fund, World Trade Organization, and others—that seek further reductions in trade and investment barriers.
Rise of regional economic integration blocs. Closely related to the first trend is the emergence since the 1950s of regional economic integration blocs. Examples include the North American Free Trade Agreement area (NAFTA), the Asia Pacific Economic Cooperation zone (APEC), and Mercosur in Latin America. These blocs consist of groups of countries within which trade and investment flows are facilitated through reduced trade and investment barriers. In more advanced arrangements, such as the “common market,” barriers to the cross-border flow of factors of production (mostly labor and capital) are removed. For example, the European Union ( in addition to adopting free trade among its member countries, is harmonizing fiscal and monetary policies and adopting common business regulations.
International Business: The New Realities

12. Dimensions of Market Globalization (cont’d)
Growth of global investment and financial flows. Associated with rapid growth in foreign direct investment (FDI), currency trading, and global capital markets.
Convergence of buyer lifestyles and preferences. Facilitated by global media, which emphasize lifestyles found in the U.S., Europe, or elsewhere. Firms market standardized products.
Growth of global investment and financial flows. In the process of conducting international transactions, firms and governments buy and sell large volumes of national currencies (such as dollars, euros, and yen). The free movement of capital around the world—the globalization of capital— extends economic activities across the globe and is fostering interconnectedness among world economies. Commercial and investment banking is a global industry. The bond market has gained worldwide scope, with foreign bonds representing amajor source of debt financing for governments and firms. Information and communications networks facilitate heavy volumes of financial transactions every day, integrating national markets. Nevertheless, widespread integration can have negative effects. For example, when the United States experienced a banking crisis in 2008, the crisis quickly spread to Europe, Japan, and emerging markets, triggering a global recession.
Convergence of consumer lifestyles and preferences. Around the world, consumers spend their money and time in increasingly similar ways. Lifestyles and preferences are converging. Shoppers in Tokyo, New York, and Paris demand similar household goods, clothing, automobiles, and electronics. Teenagers everywhere are attracted to iPods, Levi’s jeans, and BlackBerry cell phones. Major brands have gained a global following, encouraged by greater international travel, movies, global media, and the Internet, which expose people to products, services, and living patterns from around the world. Movies such as The Lord of the Rings and Slumdog Millionaire receive much attention from a global audience. Convergence of preferences is also occurring in industrial markets, where professional buyers source raw materials, parts, and components that are increasingly standardized—that is, very similar in design and structure. Yet, even as converging tastes facilitate the marketing of highly standardized products and services to buyers worldwide, they also promote the loss of traditional lifestyles and values in individual countries.
International Business: The New Realities

13. Dimensions of Market Globalization (cont’d)
Globalization of production. To cut costs, firms manufacture in low labor-cost locations such as Mexico and Eastern Europe. Firms also source services from abroad.
Globalization of services. Banking, hospitality, retailing, and other service industries are rapidly internationalizing. Firms outsource business processes and other services in the value chain to vendors overseas. And, in a new trend, many people go abroad to take advantage of low-cost services.
Globalization of production. Intense global competition is forcing firms to reduce their costs of production and marketing. Companies strive to drive down prices through economies of scale, by standardizing what they sell, and by shifting manufacturing and procurement to foreign locations with inexpensive labor. For example, companies in the auto and textile industries have relocated their manufacturing to low labor-cost locations such as China, Mexico, and Eastern Europe.
Globalization of services. The services sector is undergoing widespread internationalization. First, banking, hospitality, retailing, and other service industries are rapidly expanding abroad. The real estate firm REMAX has established more than 5,000 offices in over fifty countries. Second, as noted in the opening vignette, firms increasingly outsource business processes and other services in the value chain to vendors located abroad. Finally, in a relatively new trend, many people go abroad to take advantage of low-cost services. For example, many U.S. consumers regularly travel to India, Latin America, and other international destinations to undergo medical procedures like cataract and knee surgeries. Several U.S. health insurance companies view international “medical tourism” as a means to reduce costs.
International Business: The New Realities

14. Drivers of Market Globalization
Worldwide reduction of barriers to trade and investment. Over time, national governments have greatly reduced trade and investment barriers. The trend is partly facilitated by the World Trade Organization (WTO), an organization of some 150 member nations.
Market liberalization and adoption of free markets. The launch of free market reforms in China and the former Soviet Union marked the opening of roughly 1/3 of the world to freer trade.
Worldwide reduction of barriers to trade and investment. The tendency of national governments to reduce trade and investment barriers has accelerated global economic integration. For example, tariffs on the import of automobiles, industrial machinery, and countless other products have declined nearly to zero in many countries, encouraging freer international exchange of goods and services. Falling trade barriers are facilitated by the WTO. After joining the WTO in 2001, China made its market more accessible to foreign firms. Reduction of trade barriers is also associated with the emergence of regional economic integration blocs, a key dimension of market globalization.
Market liberalization and adoption of free markets. Built in 1961, the Berlin Wall separated the communist East Berlin from the democratic West Berlin. The collapse of the Soviet Union’s economy in 1989, demolition of the Berlin Wall that same year, and China’s free-market reforms all signaled the end of the 50-year Cold War and smoothed the integration of former command economies into the global economy. Numerous East Asian economies, stretching from South Korea to Malaysia and Indonesia, had already embarked on ambitious market-based reforms. India joined the trend in These events opened roughly one-third of the world to freer international trade and investment. China, India, and Eastern Europe have become some of the most cost-effective locations for producing goods and services worldwide. Privatization of previously state-owned industries in these countries has encouraged economic efficiency and attracted massive foreign capital into their national economies.
International Business: The New Realities

15. Drivers of Market Globalization (cont’d)
Industrialization, economic development, and modernization. These trends transformed many developing economies from producers of low-value to higher-value goods, such as electronics and computers.
Simultaneously, rising living standards have made such countries more attractive as target markets for sales and investment.
Industrialization, economic development, and modernization. Industrialization implies that emerging markets—rapidly developing economies in Asia, Latin America, and Eastern Europe—are moving from being low value-adding commodity producers, dependent on low-cost labor, to sophisticated competitive producers and exporters of premium products such as electronics, computers, and aircraft.13 For example, Brazil is now a leading producer of private aircraft, and the Czech Republic excels in the manufacture of automobiles. As highlighted in the opening vignette, India has become a leading supplier of computer software. Economic development is enhancing standards of living and discretionary income in emerging markets.
International Business: The New Realities

16. Gross National Income in U. S
Gross National Income in U.S. Dollars SOURCE: World Bank (2008) World Bank Development Indicator database. Numbers are based on the Atlas Methodology of the World Bank, a three-year average of the official exchange rate, adjusted for inflation.
Perhaps the most important measure of economic development is Gross National Income (GNI) per head. The exhibit maps the levels of GNI worldwide. The exhibit reveals that Africa is home to the lowest-income countries, along with India and a few other countries in Asia and Nicaragua. These areas are also characterized by low levels of market globalization. The adoption of modern technologies, improvement of living standards, and adoption of modern legal and banking practices are increasing the attractiveness of emerging markets as investment targets and facilitating the spread of ideas, products, and services across the globe.

18. Drivers of Market Globalization (cont’d)
Integration of world financial markets. Enables firms to raise capital, borrow funds, and engage in foreign currency transactions wherever they go. Banks now provide a range of services that facilitate global transactions.
Advances in technology. Reduces the cost of doing business internationally, by allowing firms to interact cheaply with suppliers, distributors, and customers worldwide. Facilitates the internationalization of companies, including countless small firms.
Integration of world financial markets. Integration of world financial markets makes it possible for internationally active firms to raise capital, borrow funds, and engage in foreign currency transactions. Financial services firms follow their customers to foreign markets. Cross-border transactions are made easier partly as a result of the ease with which funds can be transferred between buyers and sellers, through a network of international commercial banks. For example, as an individual you can transfer funds to a friend in another country using the SWIFT network. Connecting more than 7,800 financial institutions in some 200 countries, the network facilitates global financial transactions. The globalization of finance contributes to firms’ abilities to develop and operate world-scale production and marketing operations. It enables companies to pay suppliers and collect payments from customers worldwide.
Ongoing advances in information, manufacturing, and transportation technologies, as well as the emergence of the Internet, have facilitated rapid and early internationalization of countless firms, such as Neogen ( .com). The firm’s founders developed diagnostic kits to test for food safety. Compared to test kits available from other firms, Neogen’s products were more accurate, more efficient, and easier to use. As word spread about the superiority of its products, Neogen was able to internationalize quickly and acquired a worldwide clientele. Farmers use Neogen test kits to test for pesticide residue; veterinarians use them for pharmaceuticals, vaccines, and topicals; government agencies use them to test for E. coli. Today, Neogen is a highly successful international firm. Modern technology is promoting a higher level of international business activity than ever before. For example, many companies in software, gaming, and entertainment maintain a presence only on the Web.
International Business: The New Realities

19. Information and Communications Technology (ICT)
Profound advances have occurred in computers, digital technologies, telephony, and the Internet.
MNEs leverage ICTs to optimize their performance, managing operations around the world.
ICTs opened the global marketplace to firms that historically lacked the resources to internationalize.
Technology greatly eases management of international operations. Now firms interact more efficiently with foreign partners and value-chain members than ever before. They transmit all kinds of data, information, and vital communications that help ensure the smooth running of their operations worldwide. They use information technology to improve the productivity of their operations, which provides substantial competitive advantages. For example, information technology allows firms to more efficiently adapt products for international markets or produce goods in smaller lots to target international niche markets. In addition, technological advances have made international operations affordable for all types of firms, explaining why so many SMEs have internationalized during the past two decades.
Managers use the latest technologies to manage international operations: iPads that combine laptop functionality with smartphone convenience; BlackBerry phones with crossnational Wi-Fi capability that can take phone calls from anywhere on Earth; iPods for listening to audio books or mini Sony Playstations for that ride home on the train after work. Technological advances have spurred the development of new products and services that appeal to a global audience. Leading examples include the Wii and iPhone. Emerging markets and developing economies also benefit from technological advances, partly due to technological leapfrogging. For example, Hungary and Poland went directly from old-style analog telecommunications (with rotary dial telephones) to cell phone technology, bypassing much of the early digital technology (push-button telephones) that characterized advanced economy telephone systems. China and India are the new beachheads for technological advances. India has become a focus of global Internet- and knowledge-based industries. Top management at Intel and Motorola, two leading technology companies, agree that China is the place to be when it comes to technological progress. Both firms generate substantial sales there. Management predicts double-digit increases in demand for technology products in China far into the future. Intel’s CEO commented, “I come back from visiting China and feel as if I’ve visited the fountain of youth of computing.”
International Business: The New Realities

20. Declining Cost of Global Communication and Growing Number of Internet Users
In order to support economic development, countries need modern infrastructure in communications, such as reliable telephone systems. Recently, the cell phone has become the most transformative technology for developing economies. Compared to landline-based telephony, mobile phone infrastructure is inexpensive and relatively easy to install. Africa is benefiting from a rapid increase in mobile telephone ownership. The continent has the fastest growth rate of cellular subscribers in the world. For example, in six years, Nigeria increased its telecom infrastructure from just 500,000 phone lines to more than 30 million cellular subscribers. One consequence has been a dramatic rise in productivity and commerce, which helps improve living standards. Among other advantages, the mobile telephone saves wasted trips, provides access to banking services, supplies information about crop prices, and facilitates communication between suppliers and customers. The rapid penetration of cell phones into Africa helps account for much of the continent’s economic growth in recent years.

21. ICTs Role in Globalization
Increasing availability of cell phones in Africa has helped spur economic growth there. Some farmers use cell phones to monitor crop prices in various local markets where they can sell their harvests.

22. Manufacturing and Transportation Technologies
Revolutionary developments permit manufacturing that is low-scale and low cost, via computer-aided-design of products (CAD), robotics, and IT-managed production lines.
In transportation, key advances include fuel-efficient jumbo jets, giant ocean-going freighters, and containerized shipping. The cost of international transportation has declined substantially, spurring rapid growth in global trade.
Collectively, technological advances have greatly reduced the costs of doing business internationally.
Computer-aided design (CAD) of products, robotics, and production lines managed and monitored by microprocessor-based controls are transforming manufacturing, mainly by reducing the costs of production. Firms can make products cost effectively even in short production runs. These developments benefit international business by allowing firms to more efficiently adapt products to individual foreign markets, profitably target small national markets, and compete more effectively with foreign competitors that already have cost advantages.
Beginning in the 1960s, technological advances led to the development of fuel-efficient jumbo jets, giant oceangoing freighters, and containerized shipping, often through the use of high-tech composites and smaller components that are less bulky and lightweight. In the 20-year period through 2008, the number of container-carrying ships quadrupled to over 4,000 vessels.
Increasing availability of cell phones in Africa has helped spur economic growth there. Some farmers use cell phones to monitor crop prices in various local markets where they can sell their harvests.
Containers are the big boxes, usually 40 feet long (about 12 meters), loaded on top of ships, trucks, and rail cars that carry the world’s cargo. Today, the typical ocean-going container ship holds more than 2,300 containers, double the average of the 1980s. As a result, the cost of transportation, as a proportion of the value of products shipped internationally, has declined dramatically. Lower freight costs have spurred rapid growth in cross-border trade. Technological advances have also reduced the costs of international travel. Until 1960, it was common to travel by ship. With the development of air travel, managers quickly travel the world.
International Business: The New Realities

23. Societal Consequences of Market Globalization
Contagion: Rapid Spread of Monetary or Financial Crises. Beginning in late 2008, the world economy experienced a severe financial crisis and global recession, the worst in decades. The crisis emerged when pricing bubbles occurred in housing and commodities markets worldwide. As bubbles in real estate markets burst, home values crashed and many homeowners could not repay their debts. Meanwhile, thousands of mortgages had been securitized, and their values plunged or became uncertain.
Contagion: Rapid Spread of Monetary or Financial Crises Beginning in late 2008, the world economy experienced a severe financial crisis and global recession, the worst in decades.19 The crisis was precipitated by pricing bubbles (excessively high prices) in housing and commodities markets around the world. For example, by mid-2008, oil prices climbed to an all-time high of nearly $150 a barrel, and gasoline prices reached record levels in many countries. High commodity prices resulted partly from rising demand, especially in emerging markets such as China and India. As bubbles in real estate markets burst, home values crashed, leaving owners with mortgage debts greater than the value of their homes. Many homeowners found themselves unable to repay their debts, a situation that worsened as people lost jobs or experienced pay cuts. Meanwhile, thousands of mortgages had been securitized—that is, sold as investment vehicles on stock markets worldwide. As the value of these securities plunged or became uncertain, the stock markets crashed.
A recession occurs when a national economy undergoes a prolonged period of negative growth. GDP growth in advanced, developing, and emerging economies varies over time. It declined substantially in recent years, due to the global recession and the financial crisis. However, even following deep recessions, the global economy has always returned to net GDP growth.
The crisis began in the United States and, like a contagious disease, spread around the world. In international economics, contagion refers to the tendency for a financial or monetary crisis in one country to spread rapidly to other countries, due to the ongoing integration of national economies.
International Business: The New Realities

24. Societal Consequences of Market Globalization (cont’d)
Loss of National Sovereignty. MNE activities can interfere with governments’ ability to control of their own economies and social-political systems. Some firms are bigger than the economies of many nations (e.g., Wal-Mart, Shell).
Sovereignty, the ability of a nation to govern its own affairs, is a fundamental principle that underlies global relations. One country’s laws cannot be applied or enforced in another country. Globalization can threaten national sovereignty in various ways. MNE activities can interfere with the sovereign ability of governments to control their own economies, social structures, and political systems.
Some corporations are bigger than the economies of many nations. Indeed, Walmart’s internal economy—its total revenues—is larger than the GDPof most of the world’s nations, including Israel, Greece, and Poland.
Large multinationals can exert considerable influence on governments through lobbying or campaign contributions. They often lobby their government for, say, devaluation of the home currency, which gives them greater price competitiveness in export markets. MNEs influence the legislative process and extract special favors from government agencies.
International Business: The New Realities

25. Societal Consequences of Globalization (cont’d)
Loss of National Sovereignty. MNE activities can interfere with governments’ ability to control of their own economies and social-political systems. Some firms are bigger than the economies of many nations (e.g., Wal-Mart, Shell).
However, some argue that global competition in the context of global free trade makes MNEs less powerful (e.g., the US auto industry declined as foreign rivals from Japan and Europe entered the US market. Some day, Wal-Mart may be overtaken by a giant Chinese retailer).
But even the largest firms are constrained by market forces. In countries with many competing firms, one company cannot force customers to buy its products or force suppliers to supply it with raw materials and inputs. The resources that customers and suppliers control are the result of free choices made in the marketplace. Company performance depends on the firm’s skill at winning customers, working with suppliers, and dealing with competitors. Corporate dominance of individual markets is rare. In reality, market forces generally dominate companies. Gradual integration of the global economy and increased global competition, combined with privatization of industries in various nations, are making some companies less powerful within their national markets. For example, Ford, Chrysler, and GM once dominated the U.S. auto market. Today there are many more firms, including Toyota, Honda, Hyundai, Nissan, and BMW. In annual sales, Toyota now leads the U.S. market, and home-country market shares of domestic U.S. automakers have tumbled.
Today, globalization and the spread of financial crises compel governments to pursue sound economic policies and managers to manage their firms more effectively. To minimize globalization’s harm and reap its benefits, governments should strive for open and liberalized economic regimes. Specifically, governments should ensure the freedom to enter and compete in markets, protect private and intellectual property, enforce the rule of law, and support voluntary exchange through markets rather than through political processes. Banks and financial institutions should be regulated appropriately. Transparency in the affairs of business and regulatory agencies is critical. One example is the Sarbanes-Oxley Act, which the U.S. Congress passed in It addresses the flaws in financial reporting practices that became apparent following corporate and accounting scandals in such firms as Enron, Tyco International, and WorldCom. It introduced new and enhanced standards for all U.S. public company boards, management, and public accounting firms.
International Business: The New Realities

26. Societal Consequences of Globalization (cont’d)
Offshoring and the Flight of Jobs. Jobs are lost as firms shift production of goods and services abroad, in order to cut costs and obtain other advantages. Firms benefit, communities and industries are disrupted.
Effect on the Poor. In poor countries, while globalization usually creates jobs and raises wages, it also tends to disrupt local job markets. MNEs may pay low wages, and many exploit workers or employ child labor. Globalization’s benefits are not evenly distributed.
Globalization has created countless new jobs and opportunities around the world, but it has also cost many people their jobs. Ford, General Motors, and Volkswagen have all transferred thousands of jobs from their factories in Germany to countries in Eastern Europe. General Motors and Ford have also laid off thousands of workers in the United States, partly the result of competitive pressures posed by carmakers from Europe, Japan, and South Korea.
Offshoring is the relocation of manufacturing and other value-chain activities to cost-effective locations abroad. Ernst & Young relocated much of its accounting support work to the Philippines. Massachusetts General Hospital has its CT scans and X-rays interpreted by radiologists in India. Many IT support services for customers in Germany are based in the Czech Republic and Romania. Offshoring has caused job losses in many mature economies.
High-profile plant closures and relocation of manufacturing have received much media attention in recent years. For example, Electrolux, the Swedish manufacturer of home appliances, recently moved its Greenville, Michigan, refrigerator plant to Mexico. Closure of the plant, which once provided 2,700 jobs, devastated the small Michigan community. Management shifted production to Mexico despite repeated appeals by the local community, the labor union, and the state of Michigan.
MNEs are often criticized for paying low wages, exploiting workers, and employing child labor. Child labor is troubling since it denies children an education. The International Labor Organization ( reported in 2010 there are approximately 153 million children aged 5–14 at work around the world. Nike was criticized for paying low wages to shoe factory workers in Asia, some of whom work in sweatshop conditions. Critics complained that while founder Phil Knight is a billionaire and Nike shoes sell for $100 or more, Nike’s suppliers pay their workers only a few dollars per day.
Labor exploitation and sweatshop conditions are major concerns in many developing economies. Nevertheless, consideration must be given to the other choices available to people in those countries. A low-paying job is usually better than no job at all. Studies suggest that banning products made using child labor may produce unintended negative consequences such as reduced living standards. Legislation passed to reduce child labor in the formal economic sector (the sector regulated and monitored by public authorities) may have little effect on jobs in the informal economic sector, sometimes called the underground economy. In the face of persistent poverty, abolishing formal sector jobs does not ensure that children leave the workforce and go to school.
Example
Many people in India are losing jobs as the hand-woven textiles industry is being gradually automated.

27. Effect on the Poor
Media attention and consumer concern are helping wages and sweatshop conditions to slowly improve in developing economies, such as those in Central America.

28. Example: Nike’s Foreign Factories
Nike has 100s of factories in Asia, Latin America, and elsewhere
Nike has been criticized for paying low wages and operating sweatshop conditions.
Labor exploitation and sweatshop conditions are genuine concerns in many developing economies.
International Business: The New Realities

29. Example: Nike’s Foreign Factories
Nike has 100s of factories in Asia, Latin America, and elsewhere
Nike has been criticized for paying low wages and operating sweatshop conditions.
Labor exploitation and sweatshop conditions are genuine concerns in many developing economies.
However, consideration must be given to the other choices available to people in those countries.
Nike and numerous other MNEs are making efforts to improve working conditions in their foreign plants.
International Business: The New Realities

30. Growth of World GDP, Average Annual Percent Change, 2000–2009 SOURCE: International Monetary Fund, World Economic Outlook Database
In many developing countries, work conditions tend to improve over time. The growth of the footwear industry in Vietnam translated into a five-fold increase in wages. While still low by advanced economy standards, increasingly higher wages are improving the lives of millions of workers and their families. For most countries, globalization tends to support a growing economy. The exhibit shows the GDP growth rate worldwide from 2000 to Note that most nations generally experienced positive growth. However, the recent global financial crisis has dealt a setback, as numerous countries slipped into recession. As shown in the map, the world’s fastest-growing large economies are China and India. Chile, Ireland, and Vietnam have also been on the fast growth track. Former Soviet Union countries in Eastern Europe faltered in the 1990s as they transitioned to market-based economic systems. Most African countries continue to suffer low or negative GDP growth and alarming poverty, which worsened during the recent global recession.

32. Societal Consequences of Globalization (cont’d)
Effect on the Natural Environment. Globalization harms the environment by promoting industrialization and other activities that generate pollution, habitat destruction, and other environmental harm. E.g., as China and India industrialize, air and water pollution have become major hazards.
Globalization can harm the environment by promoting increased manufacturing and economic activity that results in pollution, habitat destruction, and deterioration of the ozone layer. For example, economic development in China is attracting much inward FDI and stimulating the growth of numerous industries. However, the construction of factories, infrastructure, and modern housing can spoil previously pristine environments. In Eastern China, growing industrial demand for electricity led to construction of the Three Gorges Dam, which flooded agricultural lands and permanently altered the natural landscape.

33. Societal Consequences of Globalization (cont’d)
Effect on the Natural Environment. Globalization harms the environment by promoting industrialization and other activities that generate pollution, habitat destruction, and other environmental harm. E.g., as China and India industrialize, air and water pollution have become major environmental hazards.
However, as nations develop their economies, they tend to pass laws that protect the environment. E.g., this happened in Japan from the 1960s to the 1980s. In Mexico, the government is gradually adopting policies to protect the air, water, etc.
While it is generally true that globalization-induced industrialization produces considerable environmental harm, this effect tends to decline over time. The evidence suggests that environmental destruction diminishes as economies develop, at least in the long run. As globalization stimulates rising living standards, people focus increasingly on improving their environment. Over time, governments pass legislation that promotes improved environmental conditions. For example, Japan endured polluted rivers and smoggy cities in the early decades of its economic development following World War II. But as their economy grew, the Japanese passed tough environmental standards to restore natural environments.
Evolving company values and concern for corporate reputations also lead firms to reduce or eliminate practices that harm the environment. For example, in Mexico, big U.S. automakers like Ford and GM have gradually improved their environmental standards. Benetton in Italy (clothing), Alcan in Canada (aluminum), and Kirin in Japan (beverages) are examples of firms that embrace practices that protect the environment, often at the expense of profits. The Conservation Coffee Alliance, a consortium of companies, has committed approximately $2 million to environmentally friendly coffee cultivation in Central America, Peru, and Colombia.
International Business: The New Realities

34. Societal Consequences of Globalization (cont’d)
Effect on National Culture. Globalization opens the door to foreign firms, global brands, unfamiliar products, and new values. Increasingly, consumers buy similar products, modeled according to Western countries, especially the US. In this way, traditional norms, values, and behaviors may homogenize over time. National identity may be lost to ‘global’ culture.
Globalization exerts strong pressures on national culture. Market liberalization leaves the door open to foreign companies, global brands, unfamiliar products, and new values. Consumers increasingly wear similar clothing, drive similar cars, watch the same movies, and listen to the same recording stars. Advertising leads to the emergence of societal values modeled on Western countries, especially the United States. Hollywood dominates the global entertainment industry. In this way, globalization can alter people’s norms, values, and behaviors, which may tend to homogenize over time. Critics call these trends the “McDonaldization” or the “Coca-Colonization” of the world. To combat such trends, governments try to block cultural imperialism and prevent the erosion of local traditions. In Canada, France, and Germany, the public sector attempts to prevent U.S. ideals from diluting local traditions. Hollywood, McDonald’s, and Disneyland are seen as Trojan horses that permanently alter food preferences, lifestyles, and other aspects of traditional life. For better or worse, however, such trends are probably inevitable in a globalizing world. Information and communications technologies speed the homogenization of world cultures. People worldwide are exposed to movies, television, the Internet, and other information sources that promote lifestyles of people in the United States and other advanced economies. Appetites grow for Western products and services, which are seen to signal higher living standards. For example, despite low per-capita income, many Chinese buy consumer electronics such as cell phones and TV sets. Global media have a pervasive effect on local culture, gradually shifting it toward a universal norm.
At the same time, the flow of cultural influence often goes both ways. Advanced Fresh Concepts is a Japanese food company that is transforming fast food by selling sushi and other Japanese favorites in supermarkets throughout the United States. It sells some $250 million worth of sushi to U.S. buyers every year. As the influence of the Chinese economy grows over time, Western countries will likely adopt cultural norms from China as well. Chinese restaurants and some Chinese traditions are already a way of life in much of the world outside China.
International Business: The New Realities

35. Global Financial Crisis of 2008-2010
Contagion. The rapid spread of a financial or monetary crisis from one country to another, as seen during the global financial crisis of
The financial crisis originated with ‘pricing bubbles’ in housing and commodities markets.
Thousands of mortgages had been ‘securitized’ -- sold as investments on stock markets worldwide. As they lost value, stock markets declined substantially.
World economies experienced recession -- negative growth.
Beginning in late 2008, the world economy experienced a severe financial crisis and global recession, the worst in decades. The crisis was precipitated by pricing bubbles (excessively high prices) in housing and commodities markets around the world. For example, by mid-2008, oil prices climbed to an all-time high of nearly $150 a barrel, and gasoline prices reached record levels in many countries. High commodity prices resulted partly from rising demand, especially in emerging markets such as China and India. As bubbles in real estate markets burst, home values crashed, leaving owners with mortgage debts greater than the value of their homes. Many homeowners found themselves unable to repay their debts, a situation that worsened as people lost jobs or experienced pay cuts. Meanwhile, thousands of mortgages had been securitized—that is, sold as investment vehicles on stock markets worldwide. As the value of these securities plunged or became uncertain, the stock markets crashed.
International Business: The New Realities

36. Percent Change in Annual GDP Growth
A recession occurs when a national economy undergoes a prolonged period of negative growth. The exhibit shows how GDP growth in advanced, developing, and emerging economies varies over time. It declined substantially in recent years, due to the global recession and the financial crisis. However, one lesson of the exhibit is that, even following deep recessions, the global economy has always returned to net GDP growth.

37. Global Financial Crisis (cont’d)
China and other emerging markets continued to grow, albeit at a slower rate.
Crisis began in the US and, like a contagion, spread worldwide. Contagion spreads relatively easily today because of globalization.
An important cause of the crisis was inadequate regulation of mortgage markets and banking sectors in the US and elsewhere, which highlights the importance of a strong legal and regulatory framework for national economic well being.
The global financial crisis began in the United States and, like a contagious disease, spread around the world. In international economics, contagion refers to the tendency for a financial or monetary crisis in one country to spread rapidly to other countries, due to the ongoing integration of national economies. The origins of the global financial crisis include the “easy money” policy followed by the U.S. Federal Reserve Bank throughout most of the 2000s. By charging very low interest rates to banks, the Federal Reserve enabled them to make loans that injected billions of dollars into the U.S. economy. Experts also point to China’s rapid economic growth and high savings rate, which have endowed the country with an enormous pool of funds. The Chinese used the funds to buy U.S. Treasury bonds (nearly $800 billion in 2009), in effect, making huge loans to the United States. The savings glut in China, other emerging markets, and the oil-producing countries further contributed to low interest rates in the United States and elsewhere, which facilitated additional borrowing. These trends set the stage for widespread borrowing by consumers to purchase homes and durable goods, which led to an unsustainable overheating of the U.S. economy. Another cause of the financial crisis was inadequate regulation of mortgage markets and the banking sector in the United States. As we will see later in this class, having a strong legal and regulatory framework is critical to national economic well-being.
International Business: The New Realities

38. Global Financial Crisis (cont’d)
Worldwide, many people fell into severe poverty, partly because developing economies depend on exports to, and direct investments from, the advanced economies, which were in recession.
Central bankers and finance ministers struggled to keep up with rapidly evolving events.
Governments pumped huge sums of money into national economies, to stimulate economic activity.
Regulation of economic activity is increasing as governments address the crisis.
The financial crisis raised questions about the merits of globalization. Modern technology facilitated the integration of national economies and banking systems. As a result, although the crisis began in the United States, it quickly spread to other countries. Consumer confidence also dwindled, triggering substantial declines in spending on cars, consumer electronics, home appliances, luxury goods, gasoline, bank loans, and new homes. Decreased spending, in turn, has been a drag on global commerce. Trade has especially slowed or flattened in consumer durables, energy, financial services, new construction, and related industries. In 2009–2010, global growth declined sharply to levels not seen since World War II.
Canada and Mexico slipped into recession partly due to their heavy reliance on trade and investment with the United States. Hong Kong, Japan, Iceland, New Zealand, Singapore, Turkey, the United States, and most countries in the European Union all experienced significant recessions. Of the largest world economies, only China’s continued to grow at a fast rate, over 6 percent per year. While advanced economies were particularly affected, emerging markets and developing economies have been more resilient than in previous global downturns, although growth in these countries has slowed considerably. Living standards have been severely affected, and millions of people worldwide have fallen into severe poverty. This occurred largely because developing economies depend on exports to, and direct investments from, the advanced economies that have all been hurt by the crisis.
Meanwhile, central bankers and finance ministers have struggled to keep up with rapidly evolving events. To stimulate economic activity, governments worldwide pumped hundreds of billions of dollars into their national economies. When financial markets are unchecked or unregulated, crises spread quickly and take on global scale. Governments are intervening in national economies, with some taking ownership stakes in private-sector firms.
International Business: The New Realities

39. Globalization, Economic Freedom, and National Prosperity
Economic freedom is the extent of government interference in business, strictness of the nation’s regulatory environment, and the ease with which economic activity can be carried out.
National prosperity is strongly associated with…
-- participation in international trade and investment;
-- the nation’s level of economic freedom.
Thus, nations should emphasize economic freedom, and participating in international trade and investment.
Governments are responsible for ensuring the fruits of economic progress are shared fairly. Developing countries can undertake proactive measures to reduce poverty. They can improve conditions for investment and saving, liberalize markets and promote trade and investment, build strong institutions that ensure good governance, and invest in education and training to promote productivity and encourage upward mobility for workers. Advanced economies can help reduce global poverty by making their markets more accessible to low-income countries; providing debt relief to heavily indebted nations; and facilitating the flow of technology, private capital, and direct investment into poor countries.
In the same month that German carmaker BMW launched a new factory in South Carolina, Jackson Mills, an aging textile plant a few miles away, closed its doors and shed thousands of workers. Globalization created a new reality for both these firms. By establishing operations in the United States, BMW found it could manufacture cars cost-effectively while more readily accessing the huge U.S. market. In the process, BMW created thousands of high-paying, better-quality jobs for U.S. workers. Simultaneously, Jackson Mills had discovered it could source textiles of comparable quality more cost-effectively from suppliers in Asia. Globalization drove these firms to relocate key value-adding activities to the most advantageous locations around the world.
International Business: The New Realities

40. Relationship Between Globalization and Growth in Per Capita GDP (in the ten years thru 2002)

42. Company Internationalization and the Value Chain
The most significant implication of market globalization for companies is that a purely domestic focus is no longer viable in most cases.
Market globalization compels firms to internationalize their value chain, and access the benefits of international business.
Value chain: The sequence of value-adding activities performed by the firm in the process of developing, producing, and marketing a product or a service.
Globalization allows the firm to internationalize its value chain, leading to various advantages.
The globalization of markets has opened up countless new business opportunities for internationalizing firms. At the same time, globalization means that firms must accommodate new risks and intense rivalry from foreign competitors. Globalization results in more demanding buyers who shop for the best deals worldwide. A purely domestic focus is no longer viable for firms in most industries. Managers should replace parochial attitudes with a more cosmopolitan orientation. Internationalization may take the form of global sourcing, exporting, or investment in key markets abroad. Proactive firms seek a simultaneous presence in major trading regions, especially Asia, Europe, and North America. The most direct implication of market globalization is on the firm’s value chain. Market globalization compels firms to organize their sourcing, manufacturing, marketing, and other value-adding activities on a global scale. In a typical value chain, the firm conducts research and product development (R&D), purchases production inputs, and assembles or manufactures a product or service. Next, the firm performs marketing activities such as pricing, promotion, and selling, followed by distribution of the product in targeted markets and after-sales service. The value-chain concept is useful in international business because it helps clarify what activities are performed where in the world. For instance, exporting firms perform most “upstream” value-chain activities (R&D and production) in the home market and most “downstream” activities (marketing and after-sales service) abroad. Each value-adding activity in the firm’s value chain is subject to internationalization; that is, it can be performed abroad instead of at home.
International Business: The New Realities

43. Internationalization of the Firm’s Value Chain
The Exhibit portrays a value chain in a typical international firm. As the example in the exhibit suggests, companies have considerable latitude regarding where in the world they locate or configure key value-adding activities. The most typical reasons for locating value-chain activities in particular countries are to reduce the costs of R&D and production or to gain closer access to customers. Through offshoring, the firm relocates a major value-chain activity by establishing a factory or other subsidiary abroad. A related trend is global outsourcing, in which the firm delegates performance of a value-adding activity to an external supplier or contractor located abroad.

44. Internationalization of the Firm’s Value Chain

45. Internationalization of the Firm’s Value Chain

46. Internationalization of the Firm’s Value Chain

47. Internationalization of the Firm’s Value Chain

48. Internationalization of the Firm’s Value Chain

49. Internationalization of the Firm’s Value Chain

50. Internationalization of the Firm’s Value Chain
The truly international firm configures its sourcing, manufacturing, marketing, and other value-adding activities on a global scale.
Rationale:
cost savings
increase efficiency, productivity, and flexibility of value chain activities
access customers, inputs, labor, or technology
benefit from foreign partner capabilities.
International Business: The New Realities