Understanding Globalization

In this lesson, you’re expected to learn about:
– drivers of globalization
– implications of globalization
– managing an international business in the global marketplace

What is Globalization?

Globalization refers to the shift toward a more integrated and interdependent world economy.

It is a process of interaction and integration among the people, companies, and governments of different nations – a process driven by international trade and investment and aided by technology.

This process has effects on the environment, on culture, on political systems, on economic development and prosperity, and on human physical well-being in societies around the world.

Globalization has several facets, including the globalization of markets and the globalization of production.

1) Globalization of Markets

The globalization of markets refers to the merging of historically distinct and separate national markets into one huge global marketplace. Falling barriers to cross-border trade have made it easier to sell internationally.

It has been argued for some time that the tastes and preferences of consumers in different nations are beginning to converge on some global norm, thereby helping to create a global market.

Consumer products such as Citigroup credit cards, Coca-Cola soft drinks, Sony PlayStation video games, McDonald’s hamburgers, Starbucks coffee, and IKEA furniture are frequently cited as typical examples of this trend.

Firms such as these are more than just benefactors of this trend; they are also facilitators of it. By offering the same basic product worldwide, they help to create a global market.

However, as we will see later, significant differences still exist among national markets along many relevant dimensions, including consumer tastes and preferences, distribution channels, culturally embedded value systems, business systems, and legal regulations. 

These differences frequently require companies to customize marketing strategies, product features, and operating practices to best match conditions in a particular country.

2) 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 (such as labor, energy, land, and capital).

By doing this, companies hope to lower their overall cost structure or improve the quality or functionality of their product offering, thereby allowing them to compete more effectively.

Let’s look at at an example to understand globalization of production. 

Consider Boeing’s 777, a commercial jet airliner. Eight Japanese suppliers make parts for the fuselage, doors, and wings; a supplier in Singapore makes the doors for the nose landing gear; three suppliers in Italy manufacture wing flaps; and so on.

In total, about 30% of the 777, by value, is built by foreign companies. For its 787 airliner, Boeing pushed this trend even further; 65% of the total value of the aircraft is outsourced to foreign companies.

 

Part of Boeing’s rationale for outsourcing so much production to foreign suppliers is that these suppliers are the best in the world at their particular activity.

A global web of suppliers yields a better final product, which enhances the chances of Boeing winning a greater share of total orders for aircraft than its global rival Airbus. Boeing also outsources some production to foreign countries to increase the chance that it will win significant orders from airlines based in that country.

[Optional] Costs and Benefits of Globalization
Two macro factors underlie the trend toward greater globalization:

The first is the decline in barriers to the free flow of goods, services, and capital that has occurred since the end of World War II.

The second factor is technological change, particularly the dramatic developments in recent decades in communication, information processing, and transportation technologies.

1) Declining Trade and Investment Barriers   

During the 1920s and 30s, many of the world’s nation-states erected formidable barriers to international trade and foreign direct investment.

International trade occurs when a firm exports goods or services to consumers in another country.

Foreign direct investment (FDI) occurs when a firm invests resources in business activities outside its home country.

Many of the barriers to international trade took the form of high tariffs on imports of manufactured goods. The typical aim of such tariffs was to protect domestic industries from foreign competition.

One consequence, however, was retaliatory trade policies, with countries progressively raising trade barriers against each other. Ultimately, this depressed world demand and contributed to the Great Depression of the 1930s.

Having learned from this experience, the advanced industrial nations of the West committed themselves after World War II to removing barriers to the free flow of goods, services, and capital between nations. This goal was enshrined in the General Agreement on Tariffs and Trade (GATT). Under the umbrella of GATT, negotiations among member states worked to lower barriers to the free flow of goods and services.

Evidence also suggests that foreign direct investment is playing an increasing role in the global economy as firms increase their cross-border investments.

The average yearly outflow of FDI increased from $25 billion in 1975 to a record $1.8 trillion in 2007. However, FDI outflows did contract to $1.1 trillion in 2009 and 2010 in the wake of the global financial crisis, although they were forecasted to recover in 2011.

2) The Role of Technological Change   

The lowering of trade barriers made globalization of markets and production a theoretical possibility. Technological change has made it a tangible reality.

Since the 1940s, the world has seen major advances in communication, information processing, and transportation technology, including the explosive emergence of the internet. Telecommunications has creating a global audience while transportation has created a global village.

Implications for the Globalization of Production 

As transportation costs associated with the globalization of production have declined, dispersal of production to geographically separate locations became more economical.

As a result of the technological innovations discussed above, the real costs of information processing and communication have fallen dramatically in the past two decades.

These developments make it possible for a firm to create and then manage a globally dispersed production system, further facilitating the globalization of production. A worldwide communications network has become essential for many international businesses.

Implications for the Globalization of Markets

In addition to the globalization of production, technological innovations have facilitated the globalization of markets. Low-cost global communications networks are helping to create electronic global marketplaces. Also, low-cost transportation has made it more economical to ship products around the world, thereby helping to create global markets.

For example, due to the tumbling costs of shipping goods by air, roses grown in Ecuador can be cut and two days later sold in New York. This has given rise to an industry in Ecuador that did not exist 20 years ago and now supplies a global market for roses.

In addition, low-cost jet travel has resulted in the mass movement of people between countries. This has reduced the cultural distance between countries and is bringing about some convergence of consumer tastes and preferences. At the same time, global communication networks and global media are creating a worldwide culture.

In any society, the media are primary conveyors of culture; as global media develop, we must expect the evolution of something akin to a global culture. A logical result of this evolution is the emergence of global markets for consumer products. It is now as easy to find a McDonald’s restaurant in Tokyo as it is in New York, to buy an iPhone in Rio as it is in Berlin, and to buy Gap jeans in Paris as it is in San Francisco.

Despite these trends, we must be careful not to overemphasize their importance. While modern communication and transportation technologies are ushering in the “global village”,significant national differences remain in culture, consumer preferences, and business practices. A firm that ignores differences between countries does so at its own peril.

What is an International Business?

An international business is any firm that engages in international trade or investment. A firm does not have to become a multinational enterprise, investing directly in operations in other countries, to engage in international business, although multinational enterprises are international businesses. All a firm has to do is export or import products from other countries.

As the world shifts toward a truly integrated global economy, more firms, both large and small, are becoming international businesses.

What does this shift toward a global economy mean for managers within an international business? 

[Optional] 11 Challenges of International Business in 2017
Differences between Countries

As their organizations increasingly engage in cross-border trade and investment, managers need to recognize that the task of managing an international business differs from that of managing a purely domestic business in many ways.

At the most fundamental level, the differences arise from the simple fact that countries are different. Countries differ in their cultures, political systems, economic systems, legal systems, and levels of economic development. Despite all the talk about the emerging global village, and the trend toward globalization of markets and production, many of these differences are very significant.

Differences between countries require that an international business vary its practices country by country. 

Marketing a product in Brazil may require a different approach from marketing the product in Germany; managing U.S. workers might require different skills than managing Japanese workers; maintaining close relations with the government may be important in Mexico and irrelevant in Great Britain; the business strategy pursued in Canada might not work in South Korea; and so on.

Managers in an international business must not only be sensitive to these differences, but they must also adopt the appropriate policies and strategies for coping with them.

Managing an International Business

In addition to the problems that arise from the differences between countries, a manager in an international business is confronted with a range of other issues that the manager in a domestic business never confronts.

– The managers of an international business must decide where in the world to site production activities to minimize costs and to maximize value added.
– They must decide whether it is ethical to adhere to the lower labor and environmental standards found in many less developed nations.
– Then they must decide how best to coordinate and control globally dispersed production activities.

– They must choose the appropriate mode for entering a particular foreign country. Is it best to export its product to the foreign country? Should the firm allow a local company to produce its product under license in that country? Should the firm enter into a joint venture with a local firm to produce its product in that country? Or should the firm set up a wholly owned subsidiary to serve the market in that country?

As we shall see, the choice of entry mode is critical because it has major implications for the long-term health of the firm.

Conclusion

Managing an international business is different from managing a purely domestic business for at least four reasons:

1) Countries are different in several ways.

2) The range of problems confronted by a manager in an international business is wider and the problems themselves more complex than those confronted by a manager in a domestic business.

3) An international business must find ways to work within the limits imposed by government intervention in the international trade and investment system.

4) International transactions involve converting money into different currencies.

[Optional] 4 Barriers To Your Brand’s Global Reach
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