Chapter 1 Globalization Managing Organizations in a Global Economy: An Intercultural Perspective First Edition John Saee Copyright  by South-Western, a division of Thomson Learning. All rights reserved.

The Nature of International Business Management: Globalization and Its Impact on Management in a Global Economy

FWhat is international business? International business is the business whose activities involve crossing the national border.

International Business Activities International trade: exporting and importing Merchandise exports and imports Commodities exports and imports Service exports and imports

Foreign Investment International investments take place when residents of one country supply capital to residents of another country.

Portfolio Investment Investors are not concerned with controlling the firm. Foreign financial assets (stocks and bonds) are purchased to obtain return on investment.

Foreign Direct Investment FDI is the purchase of sufficient stock in a foreign firm to obtain significant management control.

FInternational trade/globalization is not a recent phenomenon.

Why trade between nations?

International Trade Theories FTheory of Absolute Advantage (Adam Smith)

International Trade Theories FTheory of Comparative Advantage (Ricardo) FFactor Proportions Trade Theory (Hecksher-Ohlin Theory) FInternational Product Life Cycle (Vernon)

International Trade Theories FPorter’s Competitive Advantage of Nations FTheory of International Investment

Why Companies Go Global FWhy Enter Foreign Markets? The reasons for going abroad are the desire to increase profits and sales and to protect them from competition.

Why Companies Go Global  Increase profits and sales by entering new markets: Emerging new markets Creation of large new markets due to economic integration Faster-growing foreign markets

Why Companies Go Global FObtain greater profits Less competition Reduced cost of R&D per unit of product Lower manufacturing costs FProtect markets, profits, and sales Protect domestic market Protect foreign markets

Why Companies Go Global FGuaranteed supply of raw materials FAcquire technology and management know-how FGeographic diversification FSatisfy management’s desire for expansion

The Modern Market Place FForeign Trade Volume According to the statistics released by the World Trade Organization and the United Nations, the volume of world trade has grown consistently faster than the volume of world output since 1950.

FTrade in goods and services is approaching $8 trillion. With world GDP $30 trillion, one quarter of everything produced in the world is exported. Leading exporters and importers in merchandise trade. Leading exporters and importers in services. Australia’s international trade.

FDirection of Trade: Developed nations trade primarily with other developed nations and so do the developing nations. Trends: developed countries, especially USA and Japan, increasingly trade with developing nations; developing nations increasingly trade with each other.

FForeign Direct Investment Volume According to the United Nations data, between 1984 and 1996 the average yearly outflow of FDI from all countries increased by 830% to U.S. $349 billion. This compares with a 92% expansion in world trade and a 27% expansion in world output over the same period (Hill 1999).

FDirection Industrialized nations invest primarily in other industrialized nations just as they trade more with them.

FThe Role of MNCs in the World Economy There are transnational corporations with around 700,000 foreign affiliates in the world today (UNCTAD 2000). The global 500 list by Fortune. The national composition of the largest multinationals.

FLess than 30 countries in the world have GDP exceeding total revenues of General Motors.

FThe importance of international business has changed dramatically over time. Foreign trade and foreign direct investments have experienced explosive growth. Large MNCs play increasingly important roles in the world economy. National economies are becoming more and more interdependent.

FChanges in the world environment: Shrinkage of time and space due to increased application of technology. Institutional developments and arrangements. Economic integration. Unification and socialization of the global community.

Globalization of the World Economy What is Globalization? Sociologists’ definition: Globalization is a concept which is describing the ever-intensifying networks of cross-border human interaction (Hoogvelt 1997).

FEconomists’ definitions: Globalization is a drive toward the “commercial integration of world economies” (Drago et al. 1992, p.192).

FCauses of market and industry globalization: (1) Technological forces Industrialization Transportation Information and communication Increased role of technology

Globalization as a move away from “an economic system in which national barriers are district entities, isolated from each other by trade barriers and barriers of distance, time, and culture and toward a system in which national markets are merging into one huge global marketplace” (Hill 1999, p.5).

(2) Social forces Consumerism. Convergence in consumers’ tastes. Education and training. (3) Political and legal forces Reduced barriers to trade. Increased protection of the intellectual property. Reduction of the government interference in the economy and privatization.

(4) Economic forces Increased competition, trade, incomes. Instututional developments and arrangments.

Globalization FThe globalization debate: prosperity or impoverishment? FIs the shift toward a more integrated and interdependent global economy a good thing?

Challenges of Managing Organizations within the Global Marketplace **