International

Business 7e

by Charles W.L. Hill

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 1

Globalization
1. What Is Globalization?
 Globalization is the process of interaction and mixing of the
people, organizations and governments of different nations with
each other’s. It is a shift toward a more integrated and
interdependent world economy. Globalization is not a new concept
but it appear in the dictionary in 1951. In ancient times,
traders traveled large distances to buy rare products such as salt,
date, silk, gold and then sell in their home countries. The Industrial
Revolution of the 19th century brought advances in
communication and transportation that have removed borders and
increased cross-border trade. In the last few decades, globalization
has occurred at fast speed and the term is commonly used in
business. Simply it is the interaction of people & govt of different
nations.
Public policy and technology are the two main factors behind the
current globalization boom.
The Broader Meaning of Globalization
Cont..

 Globalization is also a social, cultural, political and legal

phenomenon. In social terms, it represents greater
interconnectivity of global populations. Culturally, globalization
represents the exchange of ideas and values among cultures and
even a trend toward the development of a single world
culture. Politically, globalization has shifted the political activities
of countries to the global level through intergovernmental
organizations such as the United Nations and the 
World Trade Organization. With regard to law, globalization has
altered how international law is created and enforced. For instance
there is anti-dumping law for the world.
 2. Two Sides of Globalization

Globalization has two sides:

1) The globalization of markets
2) The globalization of production
The globalization of markets refers to the merging of historically
distinct and separate national markets into one huge global market
place.
In many industries, it is no longer meaningful to talk about the
“German market” or the “American market”
Instead, there is only one global market
The Globalization Of Markets

Falling trade barriers make it easier to sell

internationally
The tastes and preferences of consumers are
converging on some global norm
Firms help create the global market by offering
the same basic products worldwide
The Globalization Of Production

The globalization of production refers to the sourcing of goods

and services from locations around the globe to take advantage of
national differences in the cost and quality of factors of production
like land, labor, and capital

Companies compete more effectively by lowering their overall

cost structure or improving the quality or functionality of their
product offering
 3. Good Sides of Globalization
 Globalization lets countries do what they can do best. If, for example, you buy
cheap steel from another country you don’t have to make your own steel. You
can focus on agriculture or other things.
 Globalization gives you a larger market. You can sell more goods and make more
money. You can create more jobs.
 Consumers also get benefit from globalization. Products become cheaper and you
can get new goods more quickly.
 Gains from the sharing of ideas / skills / technologies across national borders
 Competitive pressures of globalization may prompt improved governance and
better labor protection.
4. Bad sides of globalization

 Globalization causes unemployment in industrialized

countries because firms move their factories to places
where they can get cheaper workers.
 Inequality: Globalization has been linked to rising
inequalities in income and wealth. Rich countries
becomes richest and poor become poorest.
 Inflation: Strong demand for food and energy has
caused a steep rise in commodity prices. Food price
inflation has placed millions of the world’s poorest
people at great risk.
5.What is Emerging Global Economy or
Market?
 An emerging market economy (EME) is defined as an economy
with low to middle per capita income. . It means average
income earned per person in a given area. The term was coined
in 1981 by Antoine.  The per capita income of Pakistan is $1641
 Emerging markets, also known as emerging economies or
developing countries. These are nations that are investing more
in productive capacity and are moving away from their
traditional economies that have depend on agriculture and the
export of raw materials. Leaders of developing countries want to
create a better quality of life for their people. Therefore, they are
rapidly industrializing and adopting a free market or mixed
economy.
 Five Characteristics of Emerging Markets

 1. Lower Per Capita Income: First, they have a lower-than-average per

capita income. The World Bank defines developing countries as those with
either low or lower middle per capita income of $4,000.
 2.Rapid Growth: The second feature is the rapid growth. To remain in
power, and to help their people, leaders of emerging markets are willing to
undertake the rapid change to a more industrialized economy. In 2015, the
economic growth of most developed countries, such as the United States,
Germany, the United Kingdom and Japan, was between less than 3 percent.
Growth in Egypt, Turkey, and the United Arab Emirates was 4 percent or
more. China and India both saw their economies growth around 7 percent.
 3. Rapid social Change: change leads to the third
characteristics, high instability. That can come from three factors: natural
disasters, external price shocks, and domestic policy instability.
 4. Local and foreign Investment: local & foreign investor are attracted.
 5. High Return: If successful, the rapid growth and investment can also
lead to the fifth characteristics, higher-than-average return for investors.
The Emergence Of Global
Institutions

Institutions are needed to:

Help to manage and regulate the global marketplace
promote the establishment of multinational treaties to rule the
global business system
 The Emergence Of Global
Institutions
Institutions created over the past half century include:
1. World Bank, conceived in 1944 at the Bretton Woods
Monetary Conference in Bretton Woods. The headquarters
is in Washington. To pursue capital project, it offer loan to
poor nations.
2. International Monetary Fund (IMF), Came into existence on 27
December 1945 & signed by 29 countries. The IMF was
established to maintain order in the international monetary
system & to promote economic development.
3. General Agreement on Tariffs and Trade (GATT), Established
on 1 January 1948, signed by 23 nations
United Nations (UN), Established on 24 October 1945, by
51 nations to promote international cooperation, there are
now 193. it maintain international peace and security,
develop friendly relations among nations, solving
international problems and in promoting respect for human
rights
The Emergence Of Global
Institutions

4. World Trade Organization (WTO), established on1 January 1995 &

signed by 123 nations, regulating the world trading system and making
sure that nation-states adhere/ follow to the rules laid down in trade treaties
signed by WTO members. In 2007 the 150 nations that accounted for 97%
of world trade were WTO members. The WTO promotes lower barriers to
trade and investment.
Drivers Of Globalization

Two macro factors underlie the trend toward greater globalization:

the decline in barriers to the free flow of goods, services, and
capital that has occurred since the end of World War II
technological change
The Changing Demographics
Of The Global Economy

There has been a drastic change in the demographics of the

world economy in the last 30 years

Four trends are important:

the Changing World Output and World Trade Picture
the Changing Foreign Direct Investment Picture
the Changing Nature of the Multinational Enterprise
the Changing World Order
The Changing World Output
And World Trade Picture

In 1960, the United States accounted for over 40% of world
economic activity
By 2006, the United States accounted for less than 20% of world
economic activity
A similar trend occurred in other developed countries
The share of world output accounted for by developing nations is
rising and is expected to account for more than 60% of world
economic activity by 2020
The Changing Foreign Direct
Investment Picture

In the 1960s, U.S. firms accounted for about two-thirds of

worldwide FDI flows
Today, the United States accounts for less than one-fifth of
worldwide FDI flows
Other developed countries have followed a similar pattern
In contrast, the share of FDI accounted for by developing
countries has risen from less than 2% in 1980 to almost 12% in
2005
Developing countries, especially China, have also become
popular destinations for FDI
 The Changing Nature Of
The Multinational Enterprise
A multinational enterprise (MNE) is any business that has
productive activities in two or more countries. Such companies
have offices and factories in different countries and usually have a
centralized head office where they coordinate global management
Many multinationals are based in developed nations. MNCs
provides products at lower price & increase purchasing power of
consumer. There are four categories of multinational corporations:
(1) a multinational, decentralized corporation with strong home
country presence, (2) a global, centralized corporation that
acquires cost advantage through centralized production wherever
cheaper resources are available, (3) an international company that
builds on the parent corporation's technology or R&D, or (4) a
transnational enterprise that combines the previous three
approaches.
Since the 1960s, there has been a rise in non-U.S. multinationals,
and a growth of mini-multinationals
The Changing World Order

Many former Communist nations in Europe and Asia are now

committed to democratic politics and free market economies and
so, create new opportunities for international businesses
China and Latin America are also moving toward greater free
market reforms.
There are total 33 countries in Latin America  included Brazil,
Chili, Colombia, Argentina, Mexico etc.
The Global Economy Of
The Twenty-first Century

The world is moving toward a more global economic system, but

globalization is not predictable.
Globalization also brings risks like the financial crisis that swept
through South East Asia in the late 1990s
Managing In The Global
Marketplace

Managing an international business differs from managing a

domestic business because:
countries are different
the range of problems confronted in an international business is
wider and the problems more complex than those in a domestic
business
firms have to find ways to work within the limits imposed by
government intervention in the international trade and investment
system
international transactions involve converting money into
different currencies