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Chapter 7
The Challenges of Globalization
McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, All Rights Reserved.
Ch. 7 Key Learning Objectives
Defining globalization, and classifying the major ways in which companies enter the global marketplace
Recognizing the major drivers of the globalization process and the international financial and trade institutions that have shaped this process in recent decades
Analyzing the benefits and costs of the globalization of business
Identifying the major types of political and economic systems in which companies operate across the world, and the special challenges posed by doing business in diverse settings
Examining the major codes of conduct governing the social and ethical behavior of transnational corporations
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Introduction to Globalization
Refers to the increasing movement of goods, services, and capital across national borders
Is considered a process—an ongoing series of interrelated events International trade and financial flows integrate the world economy,
leading to the spread of technology, culture, and politics
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Entering the Global Marketplace
Develop global market channels First build a successful business in their home country, then
export products or services to buyers in other countries
Establish global operations Locate manufacturing plants or service operations in other
countries as a way to cut costs; work may also be subcontracted
Develop global supply chains Purchase raw materials, components, or other supplies from
sellers in other countries
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Transnational Corporations (TNC’s) Defined by the United Nations as firms that control assets
abroad 70,000 TNCs operate in the modern global economy They, in turn, have 700,000 affiliates (suppliers, subcontractors,
retailers they have some business relationship with)
Most global commerce is carried out by a small number of powerful firms Next slide lists top 10 non-financial transnational corporations,
ranked in order of the value of the foreign assets they control
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Top 10 Non-Financial Transnational
Corporations Figure 7.1
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Acceleration of Globalization The world’s economy is becoming increasingly
integrated Higher share of output is being exported across national
borders One-quarter of all goods and services produced worldwide is
sold to other nations, rather than domestically This is almost double the percentage of 1960
Shown on next slide, much of this growth has been in the service sector
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Export of Services in Millions of U.S. $, 1990 and 2004
Figure 7.2
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The Acceleration of Globalization Due to following factors
Technological innovation Improved transportation systems The rise of major transnational corporations
• Bigger, well-capitalized, firms are better equipped to conduct business across national boundaries than smaller firms
Social and political reforms • Rise of Pacific Rim growth economies, collapse of former
Central and Eastern European communist countries have opened new regions to world trade
Rise of international financial and trade institutions that stabilize currencies and promote free trade
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International Financial and Trade Institutions World Bank, IMF and WTO are the three institutions
that set the rules by which international commerce is transacted
No business can operate across national boundaries without complying with rules set by World Trade Organization (WTO)
Many businesses in developing countries are dependent on World Bank and International Monetary Fund (IMF) loans to survive
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The World Bank Established in 1944 Provides economic development loans to its member
nations Funds used mainly for roads, dams, power plants,
pipelines, and other infrastructure projects Funding provided by member countries and
international capital markets Negotiates “structural adjustment plans” with countries
it loans to Applies conditions on these countries Conditions are considered by critics to lead to unfair burden
on developing countries
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International Monetary Fund
“Sister” organization to World Bank, created at same time
Purpose is to make currency exchange easier for member countries so that they can participate in global trade
Lends foreign exchange to member countries Also imposes conditions on governments that receive
its loans Has begun to offer debt relief to some nations
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World Trade Organization Founded in 1995, successor to GATT (General
Agreement on Tariffs and Trade) International body that establishes the ground rules
for trade among nations Its major objective is to promote free trade; attempts
to eliminate barriers to trade (e.g. quotas, duties and tariffs)
Conducts “rounds” of negotiations on various topics “Most favored nation” rule means members countries
cannot discriminate against foreign products for any reason
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The Benefits and Costs of Globalization
Globalization is very controversial
Some see it as beneficial, others do not
Next slide summarizes major points on both sides of the debate
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Benefits and Costs of GlobalizationFigure 7.3
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Comparative Political and Economic Systems
Nations differ greatly in their political, social and economic systems
First important dimension to consider is how power is exercised and degree of democratic rights
Past century has been marked by spread of democratic rights to many nations for the first time
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Comparative Political Systems Democracy
Refers broadly to the presence of political freedom Four defining features of democracy (according to
the U.N.) Fair elections An independent media Separation of powers among the executive, legislative, and
judicial branches of government An open society where citizens have the right to form their
own independent organizations to pursue social, religious, and cultural goals
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Comparative Political Systems Military dictatorships
Repressive regimes ruled by dictators who exercise total power through control of the armed forces Examples include Myanmar (Burma), Belarus
Some countries have reverted to authoritarian rule after a period of democracy Example - Pakistan
Rights of citizens to organize for cultural or religious freedoms is restricted in others Examples include Iran, Saudi Arabia
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Comparative Political Systems Degree to which human rights are protected differs
greatly among nations Several international codes of human rights exist
Most important one is United Nations Universal Declaration of Human Rights of 1948
Over half world has adopted these human rights covenants
Still, many violations of human rights still occur: Recent genocides in Rwanda, Sudan Systems where minority groups and indigenous peoples lack
basic human rights, example of Nepal
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Comparative Economic Systems Free enterprise systems
Based on the principle of voluntary association and exchange
Members of society satisfy most of their economic needs through voluntary market transactions
Central state control Economic power is concentrated in the hands of government
officials and political authorities The central government owns the property that is used to
produce goods and services
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Challenges of Global Diversity
Diversity and complexity of systems that transnational corporations face creates challenges, for example If a company does business in a nation that does not grant
women equal rights, should that company hire and promote women at work, even if it violates local laws and customs?
Should a company enter into a business venture with a government-owned enterprise if that government has a reputation for violating its citizens’ human rights?
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Challenges of Global Diversity
Notion of constructive engagement By operating with strong moral principles, transnational
corporations can be a force for positive change in nations where they operate
In some circumstances this is not possible due to extreme conditions, provoking dilemma At what point do violations of political, human, and economic
rights become so extreme that a company cannot morally justify doing business in that country? (relevant question for Shell in Nigeria case)
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Global Codes of Corporate Conduct
The United Nations Global Compact Initiated by Kofi Annan in 2000 A values-based platform designed to promote institutional
learning Corporations are invited to voluntarily endorse core
principles covering labor, human rights, and environmental standards
As of 2006, over 2000 companies had endorsed the principles
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Global Codes of Corporate Conduct
The OECD Guidelines for Multinational Enterprises Code of conduct for corporations developed by member
nations of the OECD The guidelines are voluntary, address employment relations,
information disclosure, environmental stewardship, consumer interests, and the management of technology
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Global Codes of Corporate Conduct The Global Sullivan Principles
The objectives are to support economic, social, and political justice by companies where they do business
Calls on companies to support human rights and to encourage equal opportunity at all levels of employment
The Caux Principles Emphasizes working for the common good and respect for
human rights
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Collaborative Partnerships for Global Problem-Solving
Emerging trend for development of collaborative, multisector partnerships focused on particular social issues or global problems
Involves 3 sectors Business Government Civil society
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Collaborative Partnerships for Global Problem-Solving Civil society
Comprises nonprofit, educational, religious, community, family, and interest-group organizations
Largely represented by nongovernmental organizations (NGOs)
• Concerned with such issues as environmental risk, labor practices, workers’ rights, community development, and human rights
• Has been tremendous growth in NGO’s: from 1,000 in 1996 to over 3,000 in 2006
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Collaborative Partnerships for Global Problem-Solving Collaborative partnerships across all 3 sectors can
draw on unique capabilities of each, as well as overcome particular weaknesses Attributes of each shown on next slides
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Distinctive Attributes of the Three Major Sectors
Figure 7.4