Globalization andInternational Linkages

Chapter 1

Course Outline

The GlobalEnvironmentof Business

Culturein GlobalBusiness

GlobalStrategic

Management

OrganizationalBehavior andGlobal Human

ResourcesManagement

The Global Environment of Business

• Chapter 1: Globalization and international linkages

• Chapter 2: The political, legal, and technological environment of business

• Chapter 3: Ethics and social responsibility

Questions on “Emerging Giants”(pages 1 – 4) – we will discuss on Jan. 22

• What is the main point of this article?• How do the emerging corporate giants differ from those

of earlier decades?• How has each of the following firms responded to the

“emerging giants”?– Deere– Whirlpool– Cisco– Nortel Networks

Chapter 1 Outline

• International business and management• Globalization

– Outsourcing and offshoring– Advantages and disadvantages– The World Trade Organization– Regional trade blocs– The shifting balance of economic power

Chapter 1 Outline (2)

• Economic systems• Regional economic issues

– Japan– China– Other economies in East Asia– India– Russia– South America– Africa

International Management

• The process of – applying management concepts and

techniques in a multinational environment and

– adapting management practices to different economic, political, and cultural environments

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

1-8

International Business ActivityExporting and Importing

• Exporting: selling products made in one’s own country for use or resale in other countries

• Importing: buying products made in other countries for use or resale in one’s own country

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International Business Activity (2)International Investments

• Foreign direct investment: the investor has control, or shares control, in the management of the asset – Home country: the country in which the parent company's

headquarters is located– Host country: any other country in which the company does

business

• Portfolio investment: the purchase of financial assets, such as stocks and bonds, issued by companies outside your own country

Firms Involved in International Business

• Multinational corporations (MNC's)– Operations in more than one country– International sales– Nationality mix of managers and owners

• Small and medium-sized enterprises (SME's)

McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies, Inc. All rights reserved.

Globalization of Business

• Globalization of business functions– Marketing– Manufacturing and service operations– Finance– Purchasing and supplier networks– Business process outsourcing: call centers,

technical service, financial research

• Global business environment with global competition

Outsourcing and Offshoring

• Outsourcing is contracting to buy goods or services that your company produced in the past. When the work is done outside your own country, offshore outsourcing occurs.

• Offshoring means performing business activities outside the country where the resulting goods or services are sold.

Claims Made by Supporters of Globalization in Developed Countries

• Increases corporate profits and shareholder value

• Attracts foreign investment• Opens foreign markets to exports and

investment– U. S. has a positive balance of trade in services– U.S. farmers are efficient and can compete in

world markets• Creates global markets for technology

Claims Made by Supporters of Globalization in Developed Countries (2)

• Provides access to raw materials• Reduces costs• Creates some high-wage jobs• Reduces prices for consumers• Gives consumers more product choices• As developing countries become more

prosperous, they will buy more goods and services from developed countries

Claims Made by Opponents of Globalization in Developed Countries

• In its present form, free trade is not fair trade – "playing field" is not level.

• Eliminates low-wage jobs• Some high-wage jobs are now being

outsourced to low-wage countries• Reduces wages or slows wage growth• Creates trade deficits

Claims Made by Supporters of Globalization in Developing Countries

• Attracts foreign investment• Provides access to prosperous markets• Creates jobs• Makes technology and "know how" available• Often increases wages• Provides access to new products

Claims Made by Opponents of Globalization in Developing Countries

• Most benefits go to politicians, rich people, and foreign corporations

• Loss of natural resources• Foreign companies have too much power in

the local economy• Local firms find it hard to compete• Farmers cannot compete with foreign

agribusiness companies

Claims Made by Opponents of Globalization in Developing Countries (2)

• Environmental damage• Health and safety issues• Increased use of child labor• Loss of local culture, languages, and

traditional ways of life

Trade Definitions

• A tariff is a tax on an imported good.• A subsidy is a government payment to

producers of certain products.– Farm products are often subsidized.

World Trade Organization (WTO)

• 153 member countries– Russia is not a member.

• Oversees regulations for– international trade in goods and services– international investment– protection of intellectual property– settling trade and investment disputes between

countries

World Trade Organization (2)

• Developing countries can charge higher tariffs and impose more restrictions on investment than developed countries

• Developing countries want the WTO to change its rules so that they will be more competitive in the global economy.– The biggest issue is subsidies that developed

countries pay to their own farmers to encourage crop production.

North American Free Trade Agreement (NAFTA)

• Free trade agreement among Canada, United States, and Mexico– Free trade agreement means that there are no tariffs on

goods traded among member countries– This provision applies only to goods that were produced in

one of the 3 countries

• Most restrictions on foreign investment among the 3 countries have been abolished.

• Firms in member countries can compete for government contracts.

NAFTA (2)

• Financial services firms can do business in all 3 countries.

• There is a dispute resolution procedure.• Each country agreed to enforce its own laws

related to– Environmental protection– Child labor– Minimum wages– Workplace safety

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Free Trade Agreements in Central and South America and the Caribbean

Other Free Trade Areasin the Americas

• Mercosur – includes Brazil, the largest economy in South America

• The Andean Community• The Caribbean Community (CARICOM)• Central American Common Market • Tariffs are imposed on U. S. goods exported to

Mercosur, the Andean Community, and CARICOM

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Other Free Trade Areasin the Americas (2)

• ALADI is a free trade area among– Mercosur– The Andean Community– Mexico, Chile, and Cuba

• CAFTA-DR is a free trade agreement among the United States, the Central American Common Market, and the Dominican Republic

• A proposed Free Trade Area of the Americas has made little progress

European Union (EU) Before 2004 Enlargement

Countries that joinedthe EU in 2007• Bulgaria• Romania

Candidates forEU Membership• Croatia• Macedonia• Turkey

EU after 2004 Enlargement

The European Union (EU)

• Almost 500 million people• 27 member countries• 2006 Gross Domestic Product (GDP) was

about 13.5 trillion dollars – Slightly higher than U. S. GDP

• 16 EU members use the euro currency– The European Central Bank manages the euro

currency (similar to the Federal Reserve Bank in the United States)

The European Union A Single Market

• Free trade in goods and services among member countries

• Common tariffs on goods imported from outside the EU

• Common (minimum) product standards - CE mark is required to sell many goods

• Business is subject to many regulations• The EU Commission settles trade disputes

among EU members.

Rights of EU Citizens

• EU citizens have a right to live and work in any EU country

• These rights take effect 7 years after a country joins the EU– 2011 for countries that joined in 2004– 2014 for Bulgaria and Romania

• Individual countries can choose to grant residency and work rights sooner.

The Shifting Balanceof World Economic Power

• For about 20 years, 55 – 60% of global imports and exports have come from four areas: the United States, the EU, Japan, and China

• The BRIC countries – Brazil, Russia, India, and China – are expected to be among the fastest growing economies for the next 20 – 40 years

• China, India, Brazil, and several Arab countries are increasing their foreign direct investment.

Economic Systems

• Market economy• Command economy• Mixed economy

The Asian Economic Model

• Originated in Japan, copied by others– Government targeted industries for growth– Industry restructuring, led by government.

• Loans and subsidies• Tax breaks

– Cooperative research and development.– Protect the home market, and export aggressively

• Also called export-led development

Japan Today

• 127 million people• Second largest economy in the world• Parliamentary democracy• Major investor in the U.S., Europe, and Asia

Japan Today (2)

• Keiretsus – networks of companies under common ownership. – Usually includes a bank and a trading company. – Long-term supplier relationships

• South Korean chaebols have a similar structure.• Japanese consumers have high quality standards and

often prefer Japanese products.

China

• Ruled by the Chinese Communist party.• Mixed economy: 65% private, 35% government-owned. • GDP growth of 11.4% in 2007. • Average growth rate of 10% for the last ten years.• Fastest growing economy in the world.

China (2)

• Most growth has come from exports.– Global economic crisis has drastically reduced

exports.• China is attempting to diversify into other areas, such as

software development.• Wages are now higher than in Malaysia and Indonesia

Political Environment in China

• Growing conflict between the government and the people

– Protests against local officials for corruption, endangering people, neglecting people's health needs, and poor management

• Central government is determined to remain in control

– Internet portals are required to enforce government censorship of Web sites.

The Chinese Market

• 1.3 billion people, ethnically diverse – largest population in the world

• A middle class is developing in the cities and new economic zones, where private businesses are encouraged.

• Most rural people are still poor.• Good market research is essential. Chinese customers

do not always want the same products as Americans or Europeans.

Other Economies in East Asia

• The "Four Tigers"– South Korea– Hong Kong– Taiwan– Singapore

• Emerging economies– Malaysia– Indonesia– Thailand– Vietnam

Hong Kong

• A special autonomous region of China– The head of Hong Kong's government is appointed by

China– Members of the legislature are elected.– Hong Kong makes most decisions about its internal

affairs.• Market economy with many business links to China• Most manufacturing has been transferred to China

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India

• 1.15 billion people.• Average GDP growth rate of 7% per year for the past 10

years.• High tariffs and government regulations limit foreign

access to India's markets.• Growing manufacturing sector.• Software development and business process

outsourcing are also growing rapidly.• One national language (Hindi), 22 regional languages• About half of India's people are still too poor to buy most

consumer goods.

Russia

• 141 million people, many ethnic minorities• Russia has large oil reserves and the world's

largest reserve of natural gas.• Average economic growth of 7% per year for

nine years.• Growing demand for consumer goods and

services. • Falling oil and gas prices are hurting Russia's

economy.

Russia (2)

• Corruption and organized crime are serious problems.– A 2007 survey of international business executives

ranked Russia among the top 20% in terms of corruption.

• The government is re-taking control of energy companies. It has also taken control of some heavy industry and agriculture.

• The law and the court system do not protect private property or the individual rights.

Recent Political Eventsin South America

• Privatization occurs when government-owned businesses are sold to private owners.

• Most government-owned businesses in South America were privatized in the 1980's.

• In the 1990’s, nearly all South American countries had democratically elected governments and market economies.– In several South American countries, poor and

indigenous people did not believe that they had benefited from this system.

Recent Political Eventsin South America (2)

• In recent years, Socialist governments have been elected in Venezuela, Bolivia, Ecuador, Paraguay, and Brazil.

• Most have focused on increased government ownership of business.

• Seizing land from wealthy land owners and giving it to poor people has been proposed in Ecuador.

• Brazil has taken a different path.

Brazil

• 192 million people, ethnically diverse• Ninth largest economy in the world• For the past 5 years, inflation and government

spending have been tightly controlled.• Government programs to reduce poverty

– Small monthly welfare payments to meet basic needs

– A micro-finance program makes loans to help poor people start their own businesses

• Economic growth has averaged 5% per year.

Africa• Diverse countries• South Africa is the largest economy and is a

democracy• Many authoritarian governments• Ethnic strife• Considerable natural resources in some countries• Most exports are agricultural products and natural

resources• Poverty, starvation, illiteracy, corruption, disease,

overcrowding are among many social problems that reduce economic growth.