Globalization As An Important Trend

• Executive summary
• Macroeconomic condition
• Financial system
• Political and cultural environment
• Special legal and business issues
• Overall recommendation and risk assessment for making business investments into this country

The following organizations gather and publish data relevant to your course project. Use these resources for research. You will find links to these resources in the Webliography.

• United Nations
• International Trade Center
• World Bank
• International Monetary Fund
• European Union
• Asian Development Bank
• Central Intelligence Agency
• Trade Information Center
• Japanese External Trade Organization
• Ernst & Young
• Lexis-Nexis
• DIALOG
• Dow Jones

Your course project tasks are:

• M1: Assignment 3, Task 1: Review of Web resources and available information; selection of the country for the course project
• M2: Reminder: Macroeconomic characteristics of the selected country and comparison with the U.S., with statistical data
• M4: Reminder: Financial system characteristics of the selected country and comparison with the U.S., with statistical data
• M5: Reminder: Cultural and political characteristics of the selected country and comparison with the U.S., with statistical data
• M6: Reminder: Add a discussion of special legal and business issues; first draft of the paper for facilitator feedback
• M8: Assignment 1, Final Paper: Complete paper finalized for grading
• M8: Assignment 2, Presentation: Presentation of highlights of the final paper1 Globalization

   A LOOK AT THIS CHAPTER

  This chapter defines the scope of international business and introduces us to some of its most important topics. We begin by presenting globalization—describing its influence on markets and production and the forces behind its growth. Each main argument in the debate over globalization is also analyzed in detail. We then identify the key players in international business today. This chapter closes with a model that depicts international business as occurring within an integrated global business environment.

   A LOOK AHEAD

  Part 2, encompassing Chapters 2, 3, and 4, introduces us to different national business environments. Chapter 2 describes important cultural differences among nations. Chapter 3 examines different political and legal systems. Chapter 4 presents the world’s various economic systems and issues surrounding economic development.

  YouTube’s Global Impact

  San mateo, California — YouTube (www.youtube.com) is the world’s most popular service for sharing video clips through Web sites, mobile devices, blogs, and e-mail. YouTube officially launched in December 2005, and less than a year later was purchased by Google for $1.65 billion! YouTube’s spectacular success illustrates the opportunities that globalization creates for entrepreneurs.

  Pictured at right in Paris, France, YouTube founders Chad Hurley and Steve Chen introduce national versions of their service. YouTube localizes its service for 19 nations to capitalize on exploding global demand for user-created video content. “This is just the beginning,” says Chen. “If we had the resources, we would be launching in 140 countries.”

   

  Source: © Christoph Dernback/dpa/CORBIS. All Rights Reserved.

  Most people visit YouTube’s Web site to catch up on current events and find videos about their hobbies and interests. Wannabe pop stars and filmmakers also share their creative efforts with the world by uploading them to YouTube. And by creating CitizenNews (www.youtube.com/citizennews), YouTube has given a voice to citizen journalists and Vloggers (video bloggers) who report firsthand accounts of events where they live—whether their home is in Indiana or India.

  Freedom sparks the creativity of artists and journalists, but it also draws the attention of heavy-handed governments. Nations that have at times blocked access to YouTube include China, Iran, Pakistan, Tunisia, and Turkey. YouTube and local providers of similar services must then employ their entrepreneurial creativity to overcome this government censorship.

  As you read this chapter, consider how globalization is reshaping our personal lives and altering the activities of international companies. Also please visit this book’s YouTube channel (www.youtube.com/myibvideos) to watch specially selected videos on international business topics.1

  Globalization is reshaping our lives and leading us into uncharted territory. As new technologies drive down the cost of global communication and travel, we are increasingly exposed to the traits and practices of other cultures. As countries reduce barriers to trade and investment, globalization forces their industries to grow more competitive if they are to survive. And as multinationals from advanced countries and emerging markets seek out customers, competition intensifies on a global scale. These new realities of international business are altering our cultures and transforming the way companies do business.

  International Business Involves Us All

  The dynamic nature of international business affects each of us personally. In our daily communications we encounter terms such as outsourcing, innovation, emerging markets, competitive advantage, and social responsibility. And each of us experiences the result of dozens of international transactions every day.

  The General Electric alarm clock/radio (www.ge.com) that woke you was likely made in China. The breaking news buzzing in your ears was produced by Britain’s BBC radio (www.bbc.co.uk). You slip on your Adidas sandals (www.adidas.com) made in Indonesia, Abercrombie & Fitch T-shirt (www.abercrombie.com) made in the Northern Mariana Islands, and American Eagle jeans (www.ae.com) made in Mexico. You pull the charger off your Nokia phone (www.nokia.com), which was designed in Finland and manufactured in the United States with parts from Taiwan, and head out the door. You hop into your Toyota (www.toyota.com) that was made in Kentucky, and pop in a CD performed by the English band Coldplay (www.coldplay.com). You swing by the local Starbucks (www.starbucks.com) to charge your own batteries with coffee brewed from a blend of beans harvested in Colombia and Ethiopia. Your day is just one hour old but in a way you’ve already taken a virtual round-the-world trip. A quick glance at the “Made in” tags on your jacket, backpack, watch, wallet, or other items with you right now will demonstrate the pervasiveness of international business transactions.

  International business is any commercial transaction that crosses the borders of two or more nations. You don’t have to set foot outside a small town to find evidence of international business. No matter where you live, you’ll be surrounded by imports —goods and services purchased abroad and brought into a country. Your counterparts around the world will undoubtedly spend some part of their day using your nation’s exports —goods and services sold abroad and sent out of a country. The total value of goods and services exported by all nations each year is a staggering $14,950,150,000,000 (nearly $15 trillion). That is nearly 40 times the annual revenue of the world’s largest company, Wal-Mart Stores (www.walmart.com).2

  international business

  Commercial transaction that crosses the borders of two or more nations.

  imports

  Goods and services purchased abroad and brought into a country.

  exports

  Goods and services sold abroad and sent out of a country.

  Technology Makes It Possible

  Technology is perhaps the most remarkable facilitator of societal and commercial changes today. Consumers use technology to reach out to the world on the Internet—gathering and sending information and purchasing all kinds of goods and services. Companies use technology to acquire materials and products from distant lands and to sell goods and services abroad.

  When businesses or consumers use technology to conduct transactions, they engage in e-business (e-commerce) —the use of computer networks to purchase, sell, or exchange products, service customers, and collaborate with partners. E-business is making it easier for companies to make their products abroad, not simply import and export finished goods.

  e-business (e-commerce)

  Use of computer networks to purchase, sell, or exchange products, service customers, and collaborate with partners.

  Consider how Hewlett-Packard (HP) (www.hp.com) designed and built a computer server for small businesses. Once HP identified the need for a new low-cost computer server, it seized the rewards of globalization. HP dispersed the design and production of its ProLiant ML150 server throughout a specialized manufacturing system across five Pacific Rim nations and India (see Figure 1.1). This helped the company minimize labor costs, taxes, and shipping delays yet maximize productivity when designing, building, and distributing its new product. Companies use such innovative production and distribution techniques to squeeze inefficiencies out of their international operations and boost their competitiveness.

  FIGURE 1.1 Global Production of an HP Server

  

  Source: Rebecca Buckman, “H-P Outsourcing: Beyond China,” Wall Street Journal, (www.wsj.com), February 23, 2004.

  Global Talent Makes It Happen

  Media companies today commonly engage in a practice best described as a global relay race. Fox and NBC Universal created Hulu (www.hulu.com) as a cool venue for fans to watch TV shows online. Hulu employs two technical teams—one in the United States and one in China—to manage its Web site. Members of the team in Santa Monica, California, work late into the night detailing code specifications that it sends to the team in Beijing, China. The Chinese team then writes the code and sends it back to Santa Monica before the U.S. team gets to work in the morning.3

  Some innovative companies use online competitions to tap global talent. InnoCentive (www.innocentive.com) connects companies and institutions seeking solutions to difficult problems using a global network of more than 145,000 creative thinkers. These engineers, scientists, inventors, and businesspeople with expertise in life sciences, engineering, chemistry, math, computer science, and entrepreneurship compete to solve some of the world’s toughest problems in return for significant financial awards. InnoCentive is open to anyone, is available in seven languages, and pays cash awards that range from as little as $2,000 to as much as $1,000,000.4

  This chapter begins by presenting globalization—we describe its powerful influence on markets and production and explain the forces behind its rapid expansion. Following coverage of each main point in the debate over globalization, we examine the key players in international business. We then explain why international business is special by presenting the dynamic, integrated global business environment. Finally, the appendix at the end of this chapter contains a world atlas to be used as a primer for this chapter’s discussion and as a reference throughout the remainder of the book.

  Quick Study

  1. Define the term international business and explain how it affects each of us.

  2. What do we mean by the terms imports and exports ?

  3. Explain how e-business (e-commerce) is affecting international business.

  Globalization

  Although nations historically retained absolute control over the products, people, and capital crossing their borders, economies are becoming increasingly intertwined. Globalization is the trend toward greater economic, cultural, political, and technological interdependence among national institutions and economies. Globalization is a trend characterized by denationalization (national boundaries becoming less relevant) and is different from internationalization (entities cooperating across national boundaries). The greater interdependence that globalization is causing means an increasingly freer flow of goods, services, money, people, and ideas across national borders.

  globalization

  Trend toward greater economic, cultural, political, and technological interdependence among national institutions and economies.

  As its definition implies, globalization involves much more than the expansion of trade and investment among nations. Globalization embraces concepts and theories from political science, sociology, anthropology, and philosophy as well as economics. As such, it is not a term exclusively reserved for multinational corporations and international financial institutions. Nor is globalization the exclusive domain of those with only altruistic or moral intentions. In fact, globalization has been described as going “well beyond the links that bind corporations, traders, financiers, and central bankers. It provides a conduit not only for ideas but also for processes of coordination and cooperation used by terrorists, politicians, religious leaders, anti-globalization activists, and bureaucrats alike.”5

  For our purposes, this discussion focuses on the business implications of globalization. Two areas of business in which globalization is having profound effects are the globalization of markets and production.

  Globalization of Markets

  Globalization of markets refers to convergence in buyer preferences in markets around the world. This trend is occurring in many product categories, including consumer goods, industrial products, and business services. Clothing retailer L.L. Bean (www.llbean.com), shoe producer Nike (www.nike.com), and electronics maker Sony (www.sony.com) are just a few companies that sell global products —products marketed in all countries essentially without any changes. Global products and global competition characterize many industries and markets, including semiconductors (Intel, Philips), aircraft (Airbus, Boeing), construction equipment (Caterpillar, Mitsubishi), autos (Honda, Volkswagen), financial services (Citicorp, HSBC), air travel (Lufthansa, Singapore Airlines), accounting services (Ernst & Young, KPMG), consumer goods (Procter & Gamble, Unilever), and fast food (KFC, McDonald’s). The globalization of markets is important to international business because of the benefits it offers companies. Let’s now look briefly at each of these benefits.

  Reduces Marketing Costs

  Companies that sell global products can reduce costs by standardizing certain marketing activities. A company selling a global consumer good, such as shampoo, can make an identical product for the global market and then simply design different packaging to account for the language spoken in each market. Companies can achieve further cost savings by keeping an ad’s visual component the same for all markets, but dubbing TV ads and translating print ads into local languages.

  Creates New Market Opportunities

  A company that sells a global product can explore opportunities abroad if the home market is small or becomes saturated. For example, China holds enormous potential for e-business with more than 240 million Internet users, but this represents just 18 percent of China’s total population. By comparison, around 153 million people are online in the United States, about 70 percent of the population. So, the battle for market share in the Middle Kingdom is raging between the top two online search engines—Google (www.google.cn) and Yahoo! (www.cn.yahoo.com).6 Seeking sales growth abroad can be absolutely essential for an entrepreneur or small company that sells a global product but has a limited home market.

  

  An employee demonstrates the latest iPhone at a T-Mobile phone store in Cologne, Germany. The iPhone by Apple (www.apple.com) is a hugely successful global product that excites style-lovers the world over. The iPhone combines a music and video player, cell phone, and Web browser into a single handset. Apple standardized the iPhone to reduce production and marketing costs and to support the creation of a powerful global brand.

  Source: © Nvennenbernd/epa/CORBIS. All Rights Reserved.

  Levels Uneven Income Streams

  A company that sells a product with universal, but seasonal, appeal can use international sales to level its income stream. By supplementing domestic sales with international sales, the company can reduce or eliminate wide variations in sales between seasons and steady its cash flow. For example, a firm that produces suntan and sunblock lotions can match product distribution with the summer seasons in the northern and southern hemispheres in alternating fashion—thereby steadying its income from these global, yet highly seasonal, products.

  Yet Local Needs Are Important

  Despite the potential benefits of global markets, managers must constantly monitor the match between the firm’s products and markets to not overlook the needs of buyers. The benefit of serving customers with an adapted product may outweigh the benefit of a standardized one. For instance, soft drinks, fast food, and other consumer goods are global products that continue to penetrate markets around the world. But sometimes these products require small modifications to better suit local tastes. In southern Japan, Coca-Cola (www.cocacola.com) sweetens its traditional formula to compete with sweeter-tasting Pepsi (www.pepsi.com). In India, where cows are sacred and the consumption of beef is taboo, McDonald’s (www.mcdonalds.com) markets the “Maharaja Mac”—two all-mutton patties on a sesame-seed bun with all the usual toppings.

  Globalization of Production

  Many production activities are also becoming global. Globalization of production refers to the dispersal of production activities to locations that help a company achieve its cost-minimization or quality-maximization objectives for a good or service. This includes the sourcing of key production inputs (such as raw materials or products for assembly) as well as the international outsourcing of services. Let’s now explore the benefits companies obtain from the globalization of production.

  Access Lower-Cost Workers

  Global production activities allow companies to reduce overall production costs through access to low-cost labor. For decades, companies located their factories in low-wage nations to churn out all kinds of goods, including toys, small appliances, inexpensive electronics, and textiles. Yet whereas moving production to low-cost locales traditionally meant production of goods almost exclusively, it increasingly applies to the production of services such as accounting and research. Although most services must be produced where they are consumed, some services can be performed at remote locations where labor costs are lower. Many European and U.S. businesses have moved their customer service and other nonessential operations to places as far away as India to slash costs by as much as 60 percent.

  Access Technical Expertise

  Companies also produce goods and services abroad to benefit from technical know-how. Film Roman (www.filmroman.com) produces the TV series, The Simpsons, but it provides key poses and step-by-step frame directions to AKOM Production Company (www.akomkorea.com) in Seoul, South Korea. AKOM then fills in the remaining poses and links them into an animated whole. But there are bumps along the way, says animation director Mark Kirkland. In one middle-of-the-night phone call, Kirkland was explaining to the Koreans how to draw a shooting gun. “They don’t allow guns in Korea; it’s against the law,” says Kirkland. “So they were calling me [asking]: ‘How does a gun work?’” Kirkland and others put up with such cultural differences and phone calls at odd hours to tap a highly qualified pool of South Korean animators.7

  Access Production Inputs

  Globalization of production allows companies to access resources that are unavailable or more costly at home. The quest for natural resources draws many companies into international markets. Japan, for example, is a small, densely populated island nation with very few natural resources of its own—especially forests. But Japan’s largest paper company, Nippon Seishi, does more than simply import wood pulp. The company owns huge forests and corresponding processing facilities in Australia, Canada, and the United States. This gives the firm not only access to an essential resource, but control over earlier stages in the papermaking process. As a result, the company is guaranteed a steady flow of its key ingredient (wood pulp) that is less subject to swings in prices and supply associated with buying pulp on the open market. Likewise, to access cheaper energy resources used in manufacturing, a variety of Japanese firms are relocating production to China, Mexico, and Vietnam where energy costs are lower.

  Despite its benefits, globalization also creates new risks and accentuates old ones for companies. To read about several key risks that globalization heightens and how companies can better manage them, see this chapter’s Global Challenges feature titled, “Investing in Security Pays Dividends.”

  Quick Study

  1. Define globalization . How does denationalization differ from internationalization?

  2. List each benefit a company might obtain from the globalization of markets.

  3. How might a company benefit from the globalization of production?

  Forces Driving Globalization

  Two main forces underlie the globalization of markets and production: falling barriers to trade and investment and technological innovation. These two features, more than anything else, are increasing competition among nations by leveling the global business playing field; what author Thomas Friedman refers to in his book titled, The World Is Flat.8 Greater competition is simultaneously driving companies worldwide into more direct confrontation and cooperation. Local industries once isolated by time and distance are increasingly accessible to large international companies based many thousands of miles away. Some small and medium sized local firms are compelled to cooperate with one another or with larger international firms to remain competitive. Other local businesses revitalize themselves in a bold attempt to survive the competitive onslaught. And on a global scale, consolidation is occurring in many industries as former competitors link-up to challenge others on a worldwide basis. Let’s now explore in greater detail the pivotal roles of the two forces driving globalization.

  GLOBAL CHALLENGES: Investing in Security Pays Dividends

  The globalization of markets and production creates new challenges for companies around the world. As well as the need to secure lengthier supply lines and distribution channels, companies must pay increased attention to their facilities, information systems, and reputations.

  ■ A Simple Plan. Careful planning and a vulnerability assessment of facilities (around $12,000 for a midsized company; $1 million for a large firm) can be well worth the cost. For example, Wall Street firms with well-executed disaster plans had their employees working from hotel rooms, rented offices, and their homes the day after terrorists attacked New York City on September 11, 2001.