What is Globalisation?

 Globalisation is the process by which the world is becoming

increasingly interconnected as a result of massively increased trade and
cultural exchange.

 Globalisation has increased the production of goods and services. The

biggest companies are no longer national firms but multinational
corporations with subsidiaries in many countries.

 Globalisation tends to erode national boundaries and integrate

national economies, cultures, technologies, and governance, leading to
complex relations of mutual interdependence

 Globalisation has been taking place for hundreds of years, but has
speeded up enormously over the last half-century.
The Growing Relevance of Globalisation
 According to Peter Drucker in his Management challenges for the 21st
Century:
“All institutions have to make global competitiveness a strategic goal. No
institution, whether a business, a university or a hospital, can hope to survive,
let alone to succeed, unless it measures up to the standards set by the leaders
in the field, any place in the world.”

 According to Charles Mitchell:

“Globalisation, for better or worse, has changed the way the world does
business.. it is all but unstoppable. The challenge that individuals and
businesses face is learning how to live with it, manage it and take advantage
of the benefits it offers.”

Globalisation is often a must because “ a company that fails to go global is in

the danger of loosing its domestic business to competitors with lower costs,
greater experience, better products and in a nutshell, more value for the
customer.”
Results of Globalisation
Globalisation has resulted in:
 Increased international trade.
 A company operating in more than one country.
 Greater dependence on the global economy.
 Free movement of capital, goods, and services
 Recognition of companies such as McDonalds and Starbucks in LEDCs
BOEING 787
Special Problems in International Business
What makes International business strategy different from the domestic
is the differences in the business environment. The important special
problems in international business are as follows-
 Political and legal differences.
 Cultural differences
 Economic differences
 Differences in the currency unit
 Differences in the language
 Differences in the marketing infrastructure
 Trade and investment restrictions
 High cost of Distance.
 Differences in business practices.
Why Firms Go International?
The factors which motivate or provoke firms to go international may be
broadly divided into two groups , viz. pull factors and push factors.
 The Pull factors, most of which are proactive reasons, are those forces
of attraction which pull the business to the foreign markets. In other
words, companies are motivated to internationalise because of the
attractiveness of foreign markets. Such attractions include, broadly the
relative profitability and growth prospects.

 The push factors, refers to the compulsions of the domestic market

such as saturation of the market, which prompt companies to
Internationalise. Most of the push factors are reactive reasons.
Why Firms Go International?
 Profit Advantage
 Growth Opportunities
 Domestic Market Constraints
 Competition
 Government Policies and regulations
 Spin offs of International Business
 Strategic Vision
Stages in the Evolution of Companies

Purely domestic Company

Domestic company with some

foreign business(Indirect/direct
export)

International Company

Multinational/Global Company
Drivers of Globalisation
There are number of forces which induce and propel globalisation.
 Liberalisation
 MNCs
 Technology
 Transportation and communication revolutions.
 Product development costs and efforts
 Quality and cost
 Rising aspirations and wants
 Rising research and development cost.
 Competition
 World economic trends
 Regional integration
 Leverages
 Economies of scale
Strategic Decisions in International Business
Company Company
Objectives International Resources
Business Decision
Market Environme-
Potential Market Selection ntal Factors
Decision

Entry and
Operating
Decision
Promotion Product
Marketing Mix
Decision
Distribution Price
International
Organisation and
HR decisions
International Business Decisions
 International Business Decision
 Market Selection Decision
 Entry and Operating Decision
 Market Mix Decisions
 International Organisation Decision
The 9 strategic Window
International Trading Environment
The international trading environment encompasses important factors such
as the trade strategy, trade barriers, trade agreements, trading blocs, cartels
and multinational trade negotiations.
Trade strategy i.e. government’s approach towards imports vis-à-vis industries
in the economic development strategy, in an international business
environment of substantial significance. There are two important alternative
trade strategies:
 Outward Oriented Trade strategy.
 Inward Oriented Trade Strategy.
An outward oriented or outward looking strategy is one in which trade and
industrial policies do not discriminate between production for the domestic
market and exports, nor between purchase of domestic goods and foreign
goods.
An inward oriented or inward looking strategy is characterised by a bias of
trade and industrial policies in favor of domestic production as against
foreign trade. As import substitution is the key element of the inward
oriented strategy, it is often described as the import substitution strategy.
Free Trade
Free Trade Agreements involve cooperation between at least two
countries to reduce trade barriers – import quotas and tariffs – and to
increase trade of goods and services with each other. If people are also free
to move between the countries, in addition to FTA, it would also be
considered an open border. It can be considered the second stage
of economic integration. The important arguments in favor of free trade
are as follows-
1) Leads to most economic utilisation of the productive resources.
2) Division of labor occurs on an international scale leading to greater
specialisation and efficiency.
3) Due to intense competition, the inefficient producers are compelled
to improve or quit.
4) It helps to break domestic monopolies and free the consumers from
exploitation.
5) Benefits consumers by enabling them to obtain goods from cheapest
source. Free trade makes available large varieties of goods.
6) No Scope for corruption.
Trade Blocs
 A trade bloc is a type of intergovernmental agreement, often part of a
regional intergovernmental organization, where regional barriers
to trade, (tariffs and non-tariff barriers) are reduced or eliminated
among the participating states.

 The formation of a trade bloc is achieved by granting preferential

treatment to member nations as opposed to non-members.

 There are four major trade blocs in current times that have the
reputation and will to make a significant impact on international
business process.
ASEAN
 Association of Southeast Asian Nations (ASEAN) was established on
August 8, 1967, in Bangkok (Thailand).
 Members − The member states are Brunei Darussalam, Cambodia,
Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand,
and Vietnam.
 Goals − The goals of ASEAN are to
(a) accelerate economic growth, social progress, and cultural
development in the region and
(b) promote regional peace and stability and adhere to United Nations
Charter.
 ASEAN Economic Community (AEC) − The AEC is aiming to
transform ASEAN into a single entity and a production powerhouse
that is highly competitive and fully compatible with the global
economy.
European Union(EU)
 The European Union (EU) was founded in 1951 by six neighboring
states as the European Coal and Steel Community (ECSC). Over time,
it became the European Economic Community (EEC), then the
European Community (EC), and was ultimately transformed into the
European Union (EU). EU is the single regional bloc with the largest
number of member states (28).
 Members − Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech
Republic, Denmark, Estonia, Finland, France, Germany, Greece,
Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Poland,
Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and The
Netherlands.
 Goal of EU − To construct a regional free-trade association of states
through the union of political, economic, and executive connections.
MERCOSUR
 Mercado Comun del Cono Sur (MERCOSUR) was established on 26
March 1991 with the Treaty of Assunción. The major languages spoken
in this region are Spanish and Portugese.
 Members − Argentina, Brazil, Paraguay, Uruguay, and Venezuela.
Bolivia is undergoing the process of becoming a full member. Associate
members include Chile, Colombia, Ecuador, Guyana, Peru, and
Suriname. There are associate members who can do preferential trade
but not allowed to have tariff benefits like the registered members.

 Goals − Accelerate sustained economic development based on social

justice, environmental protection, and reduction of poverty
NAFTA

 The North American Free Trade Agreement (NAFTA) was signed on 1

January 1994.

 Members − Canada, Mexico, and the United States of America.

 Goals − The goals of NAFTA are to

(a) eliminate trade barriers among its member states,
(b) promote an environment for free trade,
(c) increase investment opportunities, and
(d) protect intellectual property rights.
WHAT IS A PREFERENTIAL TARIFF
DUTY RATE?
A preferential tariff duty rate is a rate of duty that is lower than the
normal tariff duty rate in the Tariff of a country. A preferential duty
rate can be applied to certain goods from certain specified
countries and groups of countries. This is done to accord with trade
agreements that one country has entered into.

Applying a preferential tariff duty rate to goods is referred to as

giving those goods ‘preferential tariff treatment’ or ‘preference’. The
requirements that determine whether particular goods are eligible
for preferential tariff treatment upon entry into one country
depend on the terms of the relevant trade agreement or preference
scheme.
Protectionism
 Policy of protecting domestic industries against foreign competition by
means of tariffs, subsidies, import quotas, or other handicaps placed on
imports. The chief protectionist measures, government-levied tariffs,
raise the price of imported articles, making them less attractive to
consumers than cheaper domestic products. Import quotas, which
limit the quantities of goods that can be imported, are another
protectionist device.
Countries may impose tariffs on goods because:
 Infant industry argument – protect new industries
 Diversify the economy – help develop new industries to give more
diversity to economy
 Raise revenue
 Protect certain key industries from international competition to try
and safeguard jobs.
 Protect domestic jobs which are threatened by rise of imports.
Methods of Protectionism
 Tariffs –A tariff is a tax on foreign goods upon importation. Tariff rates
vary according to the type of goods imported. Import tariffs will
increase the cost to importers, and increase the price of imported
goods in the local markets, thus lowering the quantity of goods
imported. Two kinds of tariffs exist—specific tariffs, which are levied
as a fixed charge, and ad valorem tariffs, which are calculated as a
percentage of the value. Many governments still charge ad valorem
tariffs as a way to regulate imports and raise revenues for their coffers.

 Quotas – An import quota is a type of protectionist that sets a

physical limit on the quantity of a good that can be imported into a
country in a given period of time. This leads to a reduction in the
quantity imported and therefore increases the market price of
imported goods. Quotas, like other trade restrictions, are used to
benefit the producers of a good in a domestic economy .
Methods of Protectionism
 Embargoes – An embargo is the prohibition of commerce and trade
with a certain country, in order to isolate it and to put its government
into a difficult internal situation, given that the effects of the embargo
are often able to make its economy suffer from the initiative.

 Subsidies – Government subsidies (in the form of lump-sum

payments or cheap loans) are sometimes given to local firms that
cannot compete well against foreign imports. These subsidies are
purported to "protect" local jobs, and to help local firms adjust to the
world markets.
 Administrative barriers – Countries are sometimes accused of using
their various administrative rules (eg. regarding food safety,
environmental standards, electrical safety, etc.) as a way to introduce
barriers to imports Making it more difficult to trade, e.g. imposing
minimum environmental standards.
Examples and Types of Protectionism
In recent decades, average tariff rates have fallen, as we have come closer
to free trade. However, there are still many protectionist measures, with
tariffs on specific goods. These are a few modern day examples of
protectionism.
 EU Common Agricultural Policy (CAP). Despite reforms and some
reduction in tariff rates, the EU still impose substantial tariff rates on
many agricultural markets. The aim is to increase prices for domestic
European farmers in order to increase their income.

 Tariffs on imports of Chinese tyres into US. The US imposed tariffs

of 35% on imports of tyres from China. This tariff was upheld by WTO
(FT).
 Argentina food tariffs. Argentina has increased imports duties on
100 products, including over a dozen agricultural goods under the
Mercosur Common External Tariff (CET). (Agra.net). In this example,
continued……
Examples and Types of Protectionism
tariffs on the import of milk powder were increased to 9% after record
levels of imports and fears Argentinian farmers would suffer falling
incomes. (Argentinian milk powder tariffs).

 Escalated tariffs. This occurs when higher tariffs are placed on

processed food. This creates a disincentive for countries to process and
add value to the raw commodity. For example, a WTO report found
that the average EU tariff on primary food products (in 2008) was 9.9%
but for processed food products it was more than twice as high, at
19.4%. This is for the EU’s MFN (most favoured nation) (Protectionist
measures).
Illegal Subsidies
Another form of protectionism occurs when a country gives a subsidy or
support to a domestic export industry. This gives the exporters an unfair
advantage in the world market.
 Subsidy of European airlines. For example, European airlines have
been criticised for receiving ‘unfair’ support from their government.

 China subsidies for its car industry. In 2012, the US filed a

complaint that China has given excess subsidies to its car industry
giving unfair competitive advantage.

 Calls for tariffs on imports of solar panels from China. (China

Daily)
Anti-Dumping Tariffs
Dumping’ occurs when firms sell goods below a ‘fair market
price’ e.g. below cost, because of excess supply. This can flood
a domestic market with cheap imports and make it difficult
for domestic firms to stay in business. In this case, countries
may justify tariffs on the grounds they are preventing this
damaging effect of dumping.
Tariffs are justified by the WTO, if you can prove dumping is
occurring.
 China tariffs on imports of stainless steel tubes from
EU and Japan. Tariffs vary between 9% and 14% (BBC
Link).
Other Ways of Non Tariff Barriers
In addition to import tariff barriers, an international firms
faces a number of bureaucratic and legal issues in the target
countries which hinders smooth flow of trade. Such barriers
are generally employed to block market entry and often
criticized as they lack transparency.

 Import Licensing Procedures

 Voluntary Export Restrictions.
 Pre-shipment Inspection
 Rules of Origin
IMF
 The International Monetary Fund (IMF) is an organization of
186 countries, working to foster global monetary cooperation,
secure financial stability, facilitate international trade, promote
high employment and sustainable economic growth, and reduce
poverty around the world.

 The IMF works to foster global growth and economic stability. It

provides policy advice and financing to members in economic
difficulties and also works with developing nations to help them
achieve macroeconomic stability and reduce poverty.

 The IMF tracks global economic trends and performance, alerts

its member countries when it sees problems on the horizon,
provides a forum for policy dialogue, and passes on know-how to
governments on how to tackle economic difficulties.
GATT
 General Agreement on Tariffs and Trade (GATT), set of
multilateral trade agreements aimed at the abolition of quotas
and the reduction of tariff duties among the contracting nations.

 It subsequently proved to be the most effective instrument of

world trade liberalization, playing a major role in the massive
expansion of world trade in the second half of the 20th century.

 Later, GATT was replaced by the World Trade Organization

(WTO) in 1995, 125 nations were signatories to its agreements,
which had become a code of conduct governing 90 percent of
world trade.
GATT Major Principles
GATT’s major principle was trade without discrimination. The
participating nations opened the markets impartially to every other
member. According to GATT, once a nation and its largest trade allies had
agreed to reduce a tariff, that reduction automatically became applicable
to all other GATT members.
 GATT preferred protection through tariffs and by leveraging on it,
GATT systematically tried to eliminate the import quotas or other
quantitative trade restrictions.
 GATT also had homogenous customs regulations and the obligation
of the participating nations in negotiating for tariff reductions on any
other nation’s request.
 The escape clause was also in place for contracting nations to modify
the agreements when their domestic producers suffered excessive
losses due to the trade concessions.
WTO
 World Trade Organization (WTO), international
organization established to supervise and liberalize world trade. The
WTO is the successor to the General Agreement on Tariffs and
Trade (GATT), which was created in 1947 in the expectation that it
would soon be replaced by a specialized agency of the United
Nations (UN) to be called the International Trade Organization (ITO).
Although the ITO never materialized, the GATT proved remarkably
successful in liberalizing world trade over the next five decades.

 Assignment-Visit Website
World Bank
 The World Bank is a vital source of financial and technical
assistance to developing countries around the world.

 World Bank is not a bank in the ordinary sense but a unique

partnership to reduce poverty and support development.

 It comprises of two institutions managed by 188 member

countries: the International Bank for Reconstruction and
Development (IBRD) and the International Development
Association (IDA).

 The IBRD aims to reduce poverty in middle-income and

creditworthy poorer countries, while IDA focuses exclusively on
the world’s poorest countries. These institutions are part of a
larger body known as the World Bank Group.