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Chapter 1: Globalization and International Business Pages 1 - 23 ● ●

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The conduct of a company’s international operations depends on two factors; its objectives  and the means by which it intends to achieve them. Its operations affect, and are affected by two sets of factors; physical/social  and competitive.

Globalization: the widening  and deepening  of interdependent relationships  among people from different nations. ○ The elimination of barriers to international movements of goods, services, capital, technology, and people that influence the integration of world economies. ○ Enables us to get more variety, better quality and lower prices. International Business consists of all commercial transactions between two or more countries, Global connections between supplies and markets result from the activities of International Business (IB), which are all commercial transactions that take place among countries like; ○ Sales ○ Investments ○ Transportation

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Private companies do so for profit , Governments undertake them for profit  and/or other reasons. Managers in almost any company need to consider; ○ 1.) Where you can obtain the best inputs at the best possible price for your production ○ 2.) Where you can best sell the product or service you’ve put together from those inputs.

Environment/Operations Relationship ● When a company operates internationally, it engages in modes  of business, such as exporting and importing, which differ from those it uses domestically. ● Physical, institutional, and competitive conditions differ across countries and affect optimum ways to conduct business. ○ International companies have more diverse and complex operating environments than purely domestic ones. Studying IB is important because: ● Most companies are either international or compete with international companies ● Modes of operation may differ from those used domestically ● It helps managers decide where to find resources and where to sell their products ● The best way of business may differ by country ● An understanding helps you make better career decisions and what governmental policies to support Making Non Business Decisions ● Companies’ international operations and their governmental regulations affect overall national conditions like; ○ Economic growth ○ Consumer Process ○ National Security ○ Success of individual industries and firms

Forces Driving Globalization and IB ● ● ● ● ●

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*A country’s interdependence must be measured indirectly. When national boundaries shift, domestic business transactions can become international ones (and vice versa). Economic interdependence has been increasing since the min-twentieth century. A quarter of world production is sold outside its country of origin In periods of rapid economic growth world trade grows more rapidly than production, in recessionary periods, global trade and investment shrink even more than the global economy Only about 15% of the value of U.S. consumption comes from other countries

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The principal source of capital in most countries is domestic rather than international

Noneconomic Aspects of Globalization ● ● ●

Size of Countries : s maller countries tend to be more globalized than larger ones, their smaller land masses and populations permit a lower variety of production Per Capita Income: C  ountries with higher per capita incomes tend to be more globalized because their citizens can afford better foreign products, travel, and communications. Variance among Globalization Aspects :  Although a country may rank as highly globalized in one dimension, it may be low on another.

Factors in Increased Globalization: 1. Rise in and Application of Technology 2. Liberalization of Cross-Border Trade and Resource Movements 3. Development of services that support IB 4. Growth of Consumer Pressures 5. Increase in Global Competition 6. Changes in Political Situations and Government Policies 7. Expansion of Cross-National Cooperation

1. Rise In and Application of Technology: a. More than half the scientists who have ever lived are alive today i. Population growth ii. Rising Productivity - less time to produce the same thing iii. More people to develop  new products because fewer people are necessary to produce  them. b. People can buy more  while working the same number of hours. c. The entry of new products into the market creates a need for other complementary products  (cases/apps for smartphones) i. Accelerating the need for scientists and engineers d. Technological innovation takes so many financial and intellectual resources that companies from different countries must cooperate to take on portions of development e. When new products are developed, optimum scale size of production rarely corresponds to the market demand in a single country. Companies are then promoted to sell both domestically and internationally in order to spread (fixed developmental and production) costs over more units of production. f. Advances in Communications and Transportation  allow us to discover, desire and demand goods and services from abroad.

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Costs of these strides have risen more slowly than costs in general this increasing affordability Innovation in transportation mean more companies can compete for sales to a given market Improved communication/transportation enhance a manager’s ability to oversee foreign operations (visiting facilities/communicating to managers therein)

2. Liberalization of Cross-Border Trade and Resource Movements a. To protect its own industries, every country restricts the entry and exit of goods/services and resources (workers, capital, tools, etc.) needed to produce them. i. This sets limits on IB activities and because regulations can change at any time contributes to uncertainty. ii. Governments have reduced restrictions because: 1. Their citizens want a greater variety of goods/services at lower prices 2. Competition spurs domestic producers to become more efficient 3. They hope to induce countries to lower their barriers in turn 3. Development of Services that Support IB a. Companies/governments have developed services to facilitate global commerce i. Example: Because of bank credit agreements, clearing arrangements that convert one currency to another and insurance that covers risks such as nonpayment and damage en route - producers can be paid relatively easy for their sales abroad. 4. Growth in Consumer Pressures a. More consumers know today about products and services available to them in other countries, can afford to buy them, and want better quality, and lower prices offered by access to them. i. Demand is spread unevenly because of uneven affluence within and among countries from year-to-year. ii. Consumer pressure has spurred companies to spend more on research and development (R&D) worldwide for innovations and products. iii. Consumers are better at searching the web for lower priced items abroad (like prescriptions). 5. Increase in Global Competition a. Persuades companies to buy or sell abroad i. A firm may seek to introduce products into markets where competitors are already gaining sales or seek supplies where competitors are getting cheaper/more attractive products ii. Global-Born Companies  start out with a global focus because of their founder’s international experience and because advances in

communication give them a good idea of the location for global markets and supplies. 6. Changes in Political Situations and Government Policies a. Political changes sometimes open new frontiers b. Government support programs (improving airport/seaport facilities) foster efficiencies for delivering goods internationally. i. Provide a new array of services to help domestic companies sell abroad 1. Collecting info about foreign markets 2. Furnishing contacts with potential buyers 3. Offering insurance against nonpayment in the home-country currency 7. Expansion of Cross-National Cooperation a. Governments have realized that their own interests can be addressed through international means of treaties, agreements, and consultation. i. 1.) To gain reciprocal advantages: 1. Companies lobby their governments to act on their behalf. 2. Gov’s join international organizations/sign treaties/agreements with other gov’ for a variety of commercial activities. ii. 2.) To  attack problems jointly that one country acting alone cannot solve: 1. Coordinate activities among mutual borders by building highways/railroads/hydroelectric dams 2. Cooperate to solve problems they can’t/won’t solve; because of resources or willingness to pay 3. One country's policies may affect those of another iii. 3.) To  deal with areas of concern that lie outside the territory of any nation: 1. Three global areas belong to no single country: a. The non coastal areas of the oceans  (fishing agreements/mineral resources/piracy of ships) b. Outer Space  (commercial satellites) c. Antarctic ( minerals/abundant sea life/tourists/limit commercial exploitation/continent’s development)

Criticisms of Globalization ●

Antiglobalization f orces regularly protest international conferences and governmental policies; ○ 1.) Threats to National Security ○ 2.) Environmental Stress ○ 3.) Growing Income Inequality and Personal Stress

Threats to National Security:

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“Think globally, act locally” Some worry that the proliferation of international agreements  will diminish a nation’s sovereignty. Sovereignty: a nation’s freedom to “act locally” and without externally imposed restrictions. The question of ‘Local Objectives and Policies’ ○ Critics argue that these priorities (worker protection/environmental practices) are undermined by opening borders to trade. ■ Can’t compete with countries that have less rigorous rules - may need to forgo their labor/environment priorities The question of ‘Small Economies’ Over Dependence’ ○ Critics complain that economically small countries depend too much on larger ones for supplies and sales ■ Vulnerable to foreign mandates ■ Poor countries’ have inadequate administrative capacity to deal with globalization ■ Large internal corporations counter the small economies’ best interests by favoring their home countries’ political and economic interests. The question of ‘Cultural Homogeneity’ ○ Critics say globalization homogenizes merchandise, production methods, social structures, and even language - undermining the cultural foundation of sovereignty. ○ Countries have difficulty maintaining traditional ways of life that unify and differentiate them

Environmental Stress ● Growth in production/international travel consumes more nonrenewable natural resources and increases environmental damage -despoliation through toxic runoff/air pollution/deforestation ● Buying from more distant locations increases transportation which increases their carbon footprint. ○ Carbon Footprint:  Total set of greenhouse gases emitted, ● The argument for  ‘Global Growth and Global Cooperation’ ○ Fosters superior and uniform environmental standards by promoting global competition that encourages companies to seek resource-saving and eco-friendly technologies ○ The positive effects of pursuing global  interests may conflict with national interests. Growing Income Inequality and Personal Stress ● We generally don’t find our economic status satisfactory unless we’re doing better and keeping up with others.

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Globalization has created access to a greater supply of low-cost labor and developed competition that leads to winners and losers. “Superstar System” Greater access to low-cost labor in poor countries has reduced the real wage growth of labor in rich countries. Personal stress from real and potential loss of relative and social positions.

Offshoring Pros: ●

Offshoring: the dependence on production in a foreign country, usually by shifting from a domestic source ○ If offshoring succeeds in reducing costs, it’s good. ■ Clothing companies locate offshore to have work done by cheaper sewing machine operators ○ If you can cut your costs, you can cut your prices or improve your product ○ Complaint: too many domestic jobs end up abroad ○ Cost savings generate growth; growth creates more (high-value)  jobs (at home) ■ Performed by people like managers/researchers who draw high salaries; demand for qualified people goes up ■ Results in a higher percentage of white-collar/professional employees in the workforce (high-income p  eople, employed as a result of sending low-income  jobs to countries with lower labor costs) ○ Offshoring is a natural extension of outsourcing :  the process of companies’ contracting work to other companies so they can concentrate on what they do best ■ Makes companies more efficient ○ *about 47% of employment is at risk from computerization ○ Shifting jobs is commonplace, and shifting because of outsourcing is no different than any other reason. ○ There aren’t enough unemployed people abroad who have the needed skills and who will work at a sufficiently low cost ■ As production increases in outsourced facilities abroad, wage rates go up ○ Some firms are bringing operations back  from abroad, known as reshoring or rightshoring. ■ Because of miscalculated offshore advantages, poor quality, consumer pressure, concerns about competitive security, and advantages of locating production near technical development. ○ Offshoring works when you cut operating costs effectively.

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Good for only a few  people but not for the most . Lower production costs have resulted in higher compensation for already high-paid managers

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Percentage of national income going to labor has gone down while the percentage of national income going to profits and upper-level employees. Through replacing jobs by offshoring you exchange good  jobs for bad  ones. Offshoring diverts companies’ attention from from taking steps to finding innovative means of more efficient production, such as productivity-enhancing technologies. ○ Could cut costs, increase production, maintain jobs that are going abroad and permit incomes of workers to rise. Multinational Enterprises (MNEs) If salaries creep up where companies are offshoring, the company's move on to even cheaper places to get the job done. In a dynamic economy, people have to change jobs more often than they would in a stagnant economy In countries like the U.S. workers aren’t equipped to handle the pace of change when it means that jobs can be exported faster than the average worker can retrain for different skills.

Why Companies Engage in International Business Major IB operating objectives; 1.) Sales Expansion 2.) Resource Acquisition 3.) Risk Reduction ● Sales Expansion: ○ A company’s sales depend on consumer’s demand ○ Higher sales create value, but only if the costs of making the additional sales don’t increase disproportionately ○ Additional sales from abroad may enable a company to reduce its per-unit costs by covering its fixed costs (like research costs) over a large number of consumers. ○ *Pursuing international sales usually increases the potential sales and potential profits ● Resource Acquisition: ○ Producers/distributors seek out products, services, resources, and components from foreign countries - sometimes because domestic supplies are inadequate or to look for anything that will create a competitive advantage. ■ Acquiring any resource that cuts costs ○ Gain competitive advantage through improving quality or differentiating products from competitors - potentially increasing market shares and profits ○ Many companies establish foreign research and development facilities to tap additional scientific resources ○ By operating abroad companies gain diversity among employees which can bring them new perspectives

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*Foreign locations may bring companies lower costs, new/better products, and additional operating knowledge. Risk Reduction ○ Selling in companies with different timing of business cycles  can decrease swings in sales and profits . ■ Example: increasing sales stability through operations in countries that enter and recover from recessions at even slightly  different times. ○ By obtaining supplies of products/components both domestically and internationally companies may be able to soften  the impact of price swings or shortages in any one country. ○ Go international for defensive  reasons. ■ Counter competitors’ advantages in foreign markets that might hurt them elsewhere ■ Example: by operating in Japan, P&G delayed potential japanese rival’s foreign expansion by slowing their amassment of the resources needed to enter into into other international markets. ○ *International operations may reduce operating risk by smoothing sales/profits and preventing competitors from gaining advantage.

International Business Operating Modes When pursuing IN, an organization must decide on suitable modes of operations ; ● Merchandise Exports and Imports: ○ Exporting/Importing are the most popular IB modes (especially among smaller companies) ○ These are tangible  products -goods- that are respectively sent out  of and brought into  a country. ○ Because we can actually see  these goods, they are sometimes called visible exports/imports. ■ For most countries, the export/import of goods are the major source of international revenues and expenditures. ● Service Exports and Imports: ○ The terms export/import often apply to merchandise . ○ For non-merchandise international earnings,  the terms are service exports and imports and are referred to as i nvisibles . ■ The provider/receiver of a payment makes a service export . ■ The recipient/payer makes a service import . ● Services constitute the fastest growth sector in international trade and take many forms: ○ Tourism/Transportation ○ Service Performance ○ Asset Use Tourism and Transportation:

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U.S. citizens take Korean Air for an airplane ride to Korea, their tickets and travel expenses are service exports for Korea, and service imports for the United States Service Performance: ● Some services such as banking, insurance, rental, engineering, and management net companies earnings in the form of fees : payments for the performance of those services. ● On an international level, for example, companies receive fees for engineering services rendered in turnkey operations : construction projects performed under contract and transferred to owners when they’re operational. ● Companies also receive fees from management contracts : arrangements in which they provide personnel to perform management functions for another. ○ Ex: Disney’s management of theme parks in France/Japan Asset Use: ● Companies receive royalties f rom licensing agreements,  whereby they allow others to use some assets (trademarks/patents/copyrights/expertise). ● Receive royalties from franchising : a contract in which a company assists another on a continuous basis and allows use of its trademark. *Service exports and imports are international non product sales and purchases. They include travel, transportation, banking, insurance and the use of assets such as trademarks, patents, and copyrights. They are very important for some countries. ●

Investments: ○ Dividends and interest from foreign investments are also service exports and imports because they represent the use of assets (capital). ■ Foreign investment means ownership of foreign property in exchange for a financial return (interest/dividends). Takes two forms: ● Direct Investment: In Foreign Direct Investment (FDI) the investor takes a controlling interests in a foreign company. If a foreign investor holds a minority stake and the remaining ownership is widely dispersed, no other owner can counter the investor’s decisions. ○ Joint Venture : when two or more companies share ownership of an FDI ● Portfolio Invest...