CHAPTER 1. GLOBALIZATION
CHAPTER 1. GLOBALIZATION
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As individuals and organizations have expanded their operations across wider geographical areas, global events and competition are affecting almost all firms—large or small. Currently, over 20 percent of world production is sold outside of its country of origin, restrictions on imports continue to decline, the foreign ownership of assets as a percent of world production continues to increase, and world trade continues to grow more rapidly than world production.
Globalization refers to the broadening set of interdependent relationships among people from different nations. International business involves all commercial transactions, including sales, investments, and transportation—private and governmental—between parties of two or more countries.
II. THE FORCES DRIVING GLOBALIZATION
Several factors contribute to the trend toward increased globalization:
1. Increase in and Expansion of Technology:
Vast improvements in transportation and communications technology—including the Internet—have significantly increased the effectiveness and efficiency of international business operations.
2. Liberalization of Cross-Border Trade and Resource Movement
Over time, most governments have been lowering restrictions on trade and foreign investments. It is believed that international competition makes domestic producers more efficient, and gives citizens greater consumer choices and lower prices.
3. Development of Services That Support International Business
Services provided by national and multinational institutions greatly facilitate the conduct and reduce the risks of doing business internationally.
4. Growing Consumer Pressures
Because of innovations in transportation and communications technology, consumers are well-informed about and often able to access foreign products. This has forced competitors to respond to the needs of consumers from all over the world
5. Increased Global Competition
The pressures of increased foreign competition often persuade firms to expand internationally in order to gain access to foreign opportunities and to improve their overall operational flexibility and competitiveness.
6. Changing Political Situations
The transformation of the political and economic policies of Eastern Europe and East Asia (China and Vietnam in particular) has led to vast increases in trade between these countries and the rest of the world.
7. Expanded Cross-National Cooperation
Governments have increasingly entered into cross-national treaties and agreements in order to gain reciprocal advantages for their own firms, to jointly address problems that one country cannot solve alone, and to deal with areas of concern that lie outside the territory of all countries.
III. PROBLEMS WITH GLOBALIZATION
Anti-globalization forces have protested both peacefully and violently as they press for legislation and other means to stop or slow the globalization process. The issues of concern include:
A. Threats to National Sovereignty
Many citizens fear that a country’s participation in multilateral agreements will diminish its sovereignty and freedom from external control and curtail its ability to act in its own best interests. In particular, people in small countries worry that dependence on larger countries for sales and/or supplies, as well as the presence of large international firms, will make them vulnerable to the demands of parties against which they are essentially powerless.
B. Economic Growth and Environmental Stress
Clearly, economic growth can result in both positive and negative consequences, including damage to society and the environment. Unless the positive consequences of globalization keep pace with the negative costs of economic growth, the sustainability of economic improvement on a worldwide basis will be problematic.
C. Growing Income Inequality and Personal Stress
Offshoring (the process of shifting domestic production to a foreign country in order to serve the home market at a reduced cost), speeds up the process of altering the relative economic discrepancies between the two countries involved. In particular, offshoring results in domestic job loss. Although globalization has positive impacts at a macro level, job loss in advanced countries is causing stress and insecurity.
IV. WHY COMPANIES ENGAGE IN INTERNATIONAL BUSINESS
There are several reasons why companies engage in international business:
D. Expanding Sales
Companies may increase the potential market for their sales by pursuing international consumer and industrial markets.
B. Acquiring Resources
Foreign-sourced products, services, resources, and components can make a firm more competitive both at home and abroad.
E. Minimizing Risk
Firms seek foreign markets in order to minimize cyclical effects on sales and profits. Defensively, they may also wish to counter the potential advantages that competitors might gain from participating in foreign market opportunities.
V. MODES OF OPERATION IN INTERNATIONAL BUSINESS
A firm can engage in international business through various operating modes:
F. Merchandise Exports and Imports
Merchandise exports consist of tangible (visible) products, i.e., goods that are sent to a foreign country for use or resale. Merchandise imports consist of tangible products, i.e., goods brought into a country for use or resale.
B. Service Exports and Imports
Service exports and imports represent intangible (invisible), i.e., non-merchandise products. Among these services are tourism and transportation. For example, when an American flies to Paris on Air France and stays in a French-owned hotel, payments made to the airline and the hotel represent service export earnings (income) for France and service import payments (expenses) for the United States.
Foreign investment consists of the ownership of foreign property in order to realize a financial gain via profits, growth, dividends, and/or interest. There are two types of foreign investments. The first type, foreign direct investment (FDI) occurs when an investor gains a controlling interest in a foreign operation. The second type, portfolio investment, occurs when an investor gains a non-controlling interest in a venture to achieve a short-term financial gain.
H. Types of International Organizations
There are types of international organizations. The type that is most used is the multinational enterprise (MNE), whereby a firm takes a global approach to foreign markets and production, i.e., it is willing to consider markets and production sites anywhere in the world. The multinational enterprise is also known as multinational corporation (MNC). Other types include collaborative arrangements (companies work together internationally) such as minority ownership, joint ventures, licensing agreements, management contracts, or other long-term contractual arrangements.
VI. Globalization: Three views
By envisioning different ways in which the future may evolve, a company can be better prepared to develop the facilities and people needed to succeed in an uncertain environment. At this time, there is much discussion about the following three viewpoints.
The first view, that further globalization is inevitable, is based largely upon the premise that technical advances in transportation and communications are pervasive, that consumers demand the best products for the best prices regardless of their country of origin, and that MNEs are so powerful they can pressure governments to further reduce restrictions on trade and investment. If this is true, then the challenge is to determine what to make of globalization with respect to the distribution of its costs and benefits.
The second view, that international business will grow primarily along regional rather than global lines, is premised on studies which show that almost all firms that consider themselves global conduct a dominant portion of the business in their home and neighboring countries. It may be possible however, that regionalization is a transitional step on the route to globalization.
The third view, that forces opposing globalization will greatly slow its growth, is not to be dismissed. Historically, pressure groups have often been successful in obstructing policies and activities that threatened their own well-being. In addition, recent anti-globalization interests have successfully promoted a variety of causes in numerous countries that span the globe. The impact of other uncertainties also impacts the future of globalization. Some examples of these uncertainties include the impact of oil prices on global transportation, the general economic recession and concerns about product safety. Whether institutions and people can work together to effectively manage the complexities of today’s interconnected world remains to be seen.
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