1 Globalization Welcome to Chapter 1, Globalization. Copyright © 2014 Pearson Education, Inc.

Chapter Objectives Identify the types of companies that participate in international business Describe the process of globalization and how it affects markets and production Describe the two forces causing globalization to increase Summarize the evidence for each main argument in the globalization debate Describe the global business environment and identify its four main elements In this chapter, you will come to understand the scope of international business. You will also: Acquaint yourself with the types of companies active in international business. Learn about globalization, how it alters marketing and production activities, and the forces causing it to expand. Look inside the debate between the supporters of and opponents to globalization. Explore a model of the global business environment.

Apple User-Centered Design Outsource Production Markets Globally Global Brand Strategy With a focus on beauty and simplicity, Apple has pioneered what is called “user-centered design” for its iPhones, iPads and other items. The global nature of production today allows Apple to outsource production to firms in China. And, thanks to the presence of global markets, Apple sells its finished products worldwide with little or no modification. This approach reduces Apple’s production and marketing costs while supporting its global brand strategy. 1 - 3 3

International Business We experience international transactions daily Imports/exports reach us even in remote areas Technology and e-business promote trade Global talent contributes to efficiency/competitiveness Globalization reshapes our cultures and systems of politics, laws, and economics; affects standards of living; and alters global trade and investment patterns. We experience the results of international business transactions every day, regardless of how remote our location may be. Technology and e-business greatly facilitate these international business transactions. And by tapping a global pool of talent, companies are able to increase their efficiency and competitiveness.

Business that has direct investments abroad in multiple countries Key Players Business that has direct investments abroad in multiple countries Small companies and individuals becoming increasingly active in international trade and investment Adopts a global perspective and engages in international business from or near its inception Multinational Corporation Small Businesses and Entrepreneurs Born Global Firm Multinational corporations generate significant jobs, investment, and tax revenue for the nations they enter. Some multinational companies have more employees than the smallest nations have citizens. Small businesses and entrepreneurs are exporting earlier and quickly growing international. Many small companies reach global customers solely through the Internet. Born global firms often become internationally competitive in less than three years’ time. Born global firms tend to have innovative cultures and knowledge-based organizational capabilities.

Global Firms vs. Nations Comparing revenue of the world's 10 most global firms to the gross domestic product of nations This graphic illustrates the relative power of the world’s largest multinational corporations. If Walmart were a country, it would rank in third place behind Norway in terms of economic power. Source: Based on data obtained from “Fortune Global 500: The World’s Largest Corporations,” Fortune, July 23, 2012, pp. F1–F7; World Bank data set available at data.worldbank.org.

Globalization of production Trend toward greater economic, cultural, political and technological interdependence among national institutions and economies Globalization of markets Convergence in buyer preferences in markets around the world Globalization of production Dispersal of production activities worldwide to minimize costs or maximize quality Globalization is the trend toward greater economic, cultural, political and technological interdependence among national institutions and economies. It is marked by “denationalization,” which is NOT the same as “internationalization.” Globalization of markets refers to convergence in buyer preferences in markets around the world. Globalization of production is the dispersal of production activities worldwide to minimize costs or maximize quality.

Benefits of Global Markets Levels income stream Reduces marketing costs Creates new market opportunities The benefits of global markets include: Reduced marketing costs due to standardized marketing activities. New market opportunities abroad if the home market is small or saturated. More level income streams for a business selling global seasonal products. Yet, companies must tailor products to local markets when conditions demand product changes.

Global Sustainability: Three Markets, Three Strategies Developed markets 1 billion people Emerging markets 2 billion people Traditional markets 4 billion people The world’s 7 billion people live in three types of markets, yet all require companies to act in a sustainable manner: Developed markets are solidly middle class and people can consume almost any product desired. In this market, a firm may use the latest technologies to develop sustainable products in a sustainable manner. Emerging markets are racing to catch up to rich nations and are overloading infrastructures. Here, resource constraints can force companies to develop highly efficient production methods that are therefore sustainable. Traditional markets have mostly rural populations for whom poverty and corruption prevail. In these markets, sustainability means teaching safe farming practices, environmental stewardship, and disease awareness. 1 - 9

Benefits of Global Production Production inputs Lower-cost labor Technical expertise The benefits of global production include: Access to lower-cost workers to help cut overall production costs. Access to technical expertise otherwise unobtainable. Access to production inputs unavailable or more costly at home.

Labor and Resources Today, companies can access workers and resources in favorable business climates almost anywhere in the world. A global electronics company can outsource production to an Indonesian supplier. And Volkswagen can produce automobiles in Brazil, some of which are exported to other markets. Companies can access workers and resources in favorable business climates almost anywhere in the world 1 - 11 11

Discussion Question What benefits might companies obtain from the globalization of markets and the globalization of production? What benefits might companies obtain from the globalization of markets and the globalization of production?

Answer to Discussion Question Global markets can reduce marketing costs, create new market opportunities abroad, and level income streams. Global production can allow access to lower-cost workers, technical expertise, and production inputs. Answer: Global markets can reduce marketing costs, create new market opportunities abroad, and level income streams. Global production can allow access to lower-cost workers, technical expertise, and production inputs.

Globalization Drivers (1) Falling Barriers Regional trade agreements GATT WTO Remove barriers to trade and investment One driver of globalization is falling barriers to trade and investment. The General Agreement on Tariffs and Trade (or GATT) promoted free trade by reducing tariffs and nontariff barriers. A revision of that Agreement lowered tariffs and subsidies for agricultural products, protected intellectual property rights, and created the World Trade Organization. World Trade Organization goals include helping the free flow of trade, negotiating the further opening of markets, and settling trade disputes among member nations. Regional trade agreements involve smaller groups of nations outside the framework of the World Trade Organization that are integrating their economies.

Trade Exceeds Output Global and regional trade agreements are increasing global trade and cross-border investing. Growth in global trade is occurring so rapidly that it is exceeding the pace of growth in world output.

Globalization Drivers (2) Technological Innovation Email and videoconferencing Internet, intranets, and extranets Transportation advancements A second driver of globalization is technology—which makes it easier, faster, and less costly to move data, goods, and equipment around the world. E-mail and videoconferencing speed up information flows and improve coordination and control tasks across borders. The Internet and a company’s intranets and extranets provide several key benefits: The Internet helps sharpen forecasting, lower inventories and costs, and improve communication with distant managers. Intranets give employees access to company information from distant locations while on business travel. Extranets give customers and suppliers access to a company’s database to place orders or restock inventories electronically and automatically. Advancements in transportation technologies (such as global positioning satellite, or GPS) make global shipping more efficient and dependable. Better coordination and control Improved communications and management More efficient, dependable shipping

Measuring Globalization The globalization index ranks nations on their levels of economic, social, and political globalization. Richest nations are the most global, with most in Europe. The least global nations are found in Africa, East Asia, South Asia, Latin America, and the Middle East.

Globalization Then and Now Highly mobile labor market Fear of jobs moving abroad A first age of globalization extended from the mid-1800s to the 1920s. Back then, like today, migration levels reached record highs, workers feared cheaper labor abroad, and trade and capital flowed freely. But a backlash to globalization in the early 1930s led to high tariffs and other barriers. The geographic divide between East and West became an ideological divide between communism and capitalism. Free-flowing capital and trade Backlash among the disaffected

From Anarchy to Debate Rage Reason Violence Legitimacy Carnage The globalization debate a decade ago was characterized by rage and violent protests. Today, the tone of the debate is more civil and reasoned to the benefit of all parties involved. Carnage Civility Exclusion Debate

Discussion Question __________ is the value of all goods and services produced by a country’s domestic and international activities over a one-year period. a. Gross Domestic Product b. Gross National Product c. GNP Per Capita __________ is the value of all goods and services produced by a country’s domestic and international activities over a one-year period. a. Gross Domestic Product b. Gross National Product c. GNP Per Capita

Answer to Discussion Question __________ is the value of all goods and services produced by a country’s domestic and international activities over a one-year period. a. Gross Domestic Product b. Gross National Product c. GNP Per Capita The correct answer is b. Gross National Product

Jobs and Wages Opponents Supporters Eliminates jobs in developed nations Lowers wages in Exploits workers in developing nations Increases wealth and efficiency everywhere Generates labor market flexibility in developed countries Advances economies of developing nations On the debate over jobs and wages, globalization opponents argue that it: Eliminates jobs in developed nations as good-paying manufacturing jobs go abroad to developing countries. Lowers wages in developed nations because jobs that replace lost manufacturing jobs often pay less. Exploits low-wage workers in developing nations who work servicing Western consumers. Supporters of globalization disagree, saying that it: Increases wealth and efficiency in all nations as firms grow more efficient and pass savings on to consumers. Generates labor market flexibility in developed nations that allows an economy to rapidly deploy labor where it is needed. Advances developing economies by injecting capital that creates higher-paying jobs that, in turn, raises living standards.

Salaries of IT Workers To support their position that globalization raises living standards in emerging markets, advocates point to anecdotal evidence like that shown in this figure. By taking advantage of globalization and outsourcing jobs to lower-wage countries, businesses are helping form a solid, middle class in many emerging markets. Source: Based on data obtained from the International Average Salary Income Database (www.worldsalaries.org). 1 - 23 23

Labor, Environment, & Markets Opponents Supporters Globalization lowers labor standards Weakens protection of the environment Exploits workers in poor nations Investment raises labor standards Open economies most environment friendly Companies concerned for future markets On the debate over labor standards: Globalization opponents claim that it lowers labor standards and reduces labor’s bargaining power. Supporters say investments in developing nations’ export processing zones show that the reverse is true—that it raises labor standards. On the debate over environmental protection: Globalization opponents say it weakens environmental protections as countries compete for investment by reducing environmental protection laws. Supporters show evidence that pollution-intensive firms invest in countries with stricter, not weaker, environmental standards. Also, closed economies, not the most global ones, are history’s worst polluters. On the debate over future markets: Globalization opponents claim that international firms pay local production workers the lowest possible wage and export finished goods back to the home country. Supporters note that firms want to build local markets in developing nations and not simply exploit foreign workers and create local animosity.

Manager’s Briefcase: The Keys to Global Success Communicate effectively Know the customer Emphasize global awareness Market effectively Monitor global markets Several pointers can help managers succeed in unfamiliar markets: Grow competent in a culture to better navigate business relationships. Understand how to customize products to meet the needs of international customers. Integrate foreign markets into business strategy and product design from the outset. Match quality products with top-notch marketing to avoid obscurity and blunders. Monitor business environments for political, legal, and socioeconomic changes.

Income Inequality debate Inequality within Nations Income Inequality debate Rich get richer in wealthy nations? or Poor get richer in developing nations? On the debate over inequality within nations: Globalization critics claim that income disparity in rich nations increases as firms move factory jobs to poor nations. Supporters of globalization say that, although the evidence is mixed, poor people in developing nations seem to benefit most from an open economy.

Inequality between Nations Gap widens between rich and poor nations? or Poor trading nations grow faster than rich ones? On the debate over inequality between nations: Globalization opponents say that it widens the gap in average incomes between rich and poor nations. Supporters cite evidence that open nations benefit from trade while closed ones do not.

Income Inequality debate Global Inequality Income Inequality debate Gap between rich and poor greater everywhere? or Inequality has fallen but extent unknown? On the debate over global inequality: Globalization opponents say that it widens income inequality between all people of the world. Supporters point to studies showing that global inequality has fallen in recent decades, although the extent of the decline is uncertain.

Discussion Question What does the evidence suggest for each branch of the debate on globalization and income inequality? What does the evidence suggest for each branch of the debate on globalization and income inequality?

Answer to Discussion Question Inequality within nations: Studies suggest that developing nations boost incomes of their poor by integrating them into the global economy. Inequality between nations: Nations open to trade and investment seem to grow faster than wealthy nations, while sheltered economies grow worse off. Global inequality: Global poverty has fallen in recent decades but experts disagree on the extent of the drop. Answer: On the debate over inequality within nations, studies suggest that developing nations can boost incomes of their poorest members of society by integrating them into the global economy. On the debate over inequality between nations, nations more open to trade and investment seem to grow faster than wealthy nations, while sheltered economies grow worse off. On the debate over global inequality, it is generally agreed that global poverty has fallen in recent decades, though there is disagreement on the extent of the drop.

Impact on Culture Opponents Supporters Destroys cultural diversity Homogenizes our world Bankrupts local small businesses Supporters Specialize and trade to obtain other goods Import cultural goods from other nations Protect deeper moral and cultural norms On the debate over globalization’s impact on culture: Globalization critics say that it: Homogenizes our world, destroys cultural diversity, and lets multinational companies wipe out small local businesses. Supporters say globalization lets nations: Specialize and trade for goods they do not produce, import other peoples’ cultural goods, and still protect their deeper moral and cultural norms.

Culture Matters: The Culture Debate Material Desire Artistic Influence Western Values Here are just a few additional arguments regarding culture and globalization: Critics say that global marketing promotes material desires in developing nations. But globalization supporters argue that poor nations have a strong artistic influence on rich nations. Critics also say that local values and traditions are being replaced by “Western” values. But supporters say that globalization fosters tolerance and diversity and is a force for good. In conclusion, although globalization may cause consumer purchases to converge, deeper aspects of culture remain steadfast. A Force for Good Deeper Values

National Sovereignty Opponents Supporters Supranational institutions reduce autonomy of national, regional, and local governments Supporters Globalization has benefited societies by helping to spread democracy worldwide On the debate over national sovereignty: Globalization opponents argue that: Supranational institutions with international goals and appointed officials undermine national sovereignty and democracy. They also say that elected officials undercut democracy and local and regional authority with ‘inter-national’ agreements on behalf of their citizens. Supporters of globalization note that: It has helped spread democracy worldwide—for example, there are a larger number of democratic nations than ever before. They add that some losses of sovereignty have had positive social impacts—such as in human rights, workers’ rights, and discrimination.

Global Business Environment International business is special because it occurs within a dynamic, integrated system that weaves together four distinct elements. Globalization is transforming our societies and commercial activities and increasing competition everywhere. Each national business environment consists of unique cultural, political, legal, and economic characteristics that force companies to adapt products and practices as needed. Events in the international business environment have a strong influence on how business is conducted, so firms must closely monitor events. The context of international firm management means that the duties of international managers can differ greatly from those of primarily domestic managers.

Discussion Question The textbook you are using in this course describes a model of international business as occurring within a dynamic and integrated system called the __________. a. Cultural Business Model b. Globalization Environment c. Global Business Environment The textbook you are using in this course describes a model of international business as occurring within a dynamic and integrated system called the __________. a. Cultural Business Model b. Globalization Environment c. Global Business Environment

Answer to Discussion Question The textbook you are using in this course describes a model of international business as occurring within a dynamic and integrated system called the __________. a. Cultural Business Model b. Globalization Environment c. Global Business Environment The correct answer is c. Global Business Environment

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