Gbm unit-01 (gobalization)

07/06/10 1

By :

Prof. Amit Kumar

07/06/10 2

“A student pursuing management education from IILM-

Graduate School of Management, for example may find

himself or herself placed in a firm located in a totally

different country. Knowledge about international

business keeps the youngster mentally prepared to

accept assignment in an alien environment. Forewarning

is definitely forearming, for the fresh management

graduate”.

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Importance of this course

Global Business Management

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Course: International Business Management

1. Globalization

2. Global Trade & Theory

3. Global Technological Environment

4. Global Economic Environment

5. Global Political-Legal Environment

6. Foreign Direct Investments

7. Regional Economic Integration

8. Strategy and Structure of International Business

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Global Business Management

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Global Business Management Globalization

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Contents

• What is Globalization?• Globalization of Markets

• Phases of Market Globalization• Drivers of Market Globalization• Internationalization of Firm’s Value Chain

• Globalization of Production• Emergence of Global Economy• Ripple Effect of Globalization• Routes of Globalization• Case-Study: ‘Arrow & Apparel Industry’• Presentation: Latest Global Happenings (See Name-Lists)• Case-Study: ‘Going Global and Taking Charges-The Road

Ahead for Indian Manager’

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What is Globalization?

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• Globalization is synonymously used with international business.

• People often use the term ‘global village’.

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A fundamental shift is occurring in the world economy.

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NationalEconomy

IntegratedGlobal

Economy

A Shift From


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Characteristics of National Economy:

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NationalEconomy

• Self –contained entities• Isolated from each other

• By barriers to cross-border trade & investment

• By distance, time-zones and languages

• By national differences in government regulation. Culture and business system


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Characteristics of Global Economy:

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GlobalEconomy

• Barriers to cross-border trade & investment declining

• Perceived distance is shrinking due to advance in transportation & telecommunication technology

• Material culture is starting all over world.


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In their own way, globalization and technological advances are resulting in the ‘death of distance’.

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Death of Distance

In this timePeriod……

Fastest transportationwas via……..

At a speed of….

1500 to 1840s

1850 to 1900

Early 1900sto Today

Human-powered ships &horse-drawn carriages

10 miles per hour

SteamshipsSteam Locomotive Trains

36 miles per hour65 miles per hour

Motor VehiclesPropeller airplaneJet aircraft

75 miles per hour300-400 miles per hour500-700 miles per hour


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A fundamental shift is occurring in the world economy.

Process by which this shift occurs is commonly referred as Globalization.

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NationalEconomy

IntegratedGlobal

Economy

A Shift From


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In this integrated, interdependent economy, an American might drive to work in a car designed in Germany that was assembled in Mexico by DaimlerChrysler from components made in the United States and Japan that were fabricated from Korean steel and Malaysian rubber. She may filled the car with gasoline at a BP service station by British multinational. The gasoline could have been made from oil pumped out of a well off the coast of Africa by a French oil company that transported in to the US in a ship owned by a Greek shipping line. While driving to work, she might talk to her stockbroker on a Nokia cell phone that was designed in Finland and so on…………………………..

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Effect of Globalization


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Globalization refers to the shift towards a more integrated and interdependent world economy.


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Facets of Globalization

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Globalization has several facets, including Globalization of Markets & Globalization of Production.

Globalization Of

Markets

Globalization Of

Production


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The Globalization of markets refers to the merging of historically distinct and separate national markets into

one huge global marketplace.

The falling barriers to cross-border trade have made it easies to sell internationally.

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Globalization of Markets


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Consumer products such as Citigroup credit cards, Coca-Cola soft drinks, Sony Play station video

games, McDonald’s Hamburgers and Starbucks coffee…….by offering the same product worldwide,

these companies help to create a global market.

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Most global markets currently are not markets for consumer products- where national differences in

tastes and preferences are still often important enough to act as a brake on globalization- but

markets for industrial goods and materials that serve a universal need the world over.

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These include the markets for commodities such as aluminum, oil and wheat; market for industrial

products such as microprocessor, DRAM, commercial a jet airlines; market for computer

software and market for financial assets from U.S Treasury bills to Eurobonds and Futures on the Nikki

index.

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In many global markets, the same firms frequently

confront each other as competitors in nation after nation.

Coca-Cola’s Rivalry with PepsiCo

Ford’s Rivalry with Toyota

Boeing’s Rivalry with Airbus

Caterpillar’s Rivalry with Komatsu

Sony, Nintendo and Microsoft

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Phases of Market Globalization

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Since the 1800, we can identify four distinct phases in the evolution of market globalization.

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Phase of Period Triggers Key Characteristics Globalization

First Phase

1830 to late

1900s, Peaking in 1880

Introductionof railroads

& ocean transport

Rise of manufacturing: cross-border trade of

commodities, Largely by trading companies


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In first phase, Invention of the telegraph and telephone in the late 1800s facilitated

information flows between and within nations, greatly efforts to manage

companies’ supply chain.

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Second Phase

1900 to1930s

Rise of Electricityand steel production

Emergence & dominance of early MNEs (primarily

European & North American) in

manufacturing, extractive and agricultural industries


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Second phase reached its height just before the Great Depression, a worldwide economic downturn that began in 1929. Europe’s

colonization of countries in Asia, Africa and Middle East led to the establishment of some of the earliest subsidiaries of multinational

firms like BASF, BP, Nestle, Shell & Siemens.

In the years before WW-I (pre-1914), many firms were already operating globally. The Italian

manufacturer Fiat supplied vehicles to nations on both sides of the war.

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ThirdPhase

1930 to1970s

Formation of GATT;

conclusionof WW-II; MarshallPlan to

reconstruct Europe

Western countries to gradually reduce barriers to trade; rise of MNCs, cross-

border trade of branded products & flow of money

paralleling the development of global capital markets


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Third phase began after WW-II. At the war’s end, in 1945, substantial pent-up demand existed for consumer products, as well as input goods to rebuild Europe and Japan. The US was least harmed by war and became the world’s dominant economy.

Several industrialized countries including GB, Australia & US, sought to reduce barriers. The result of this effort was

the GATT formation in 1947.

In 1960s, recovered from WW-II, MNEs in Europe & Japan began to challenge the global dominance of US MNEs.

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Fourth Phase

1980s to

present

Radical advances in information, communication, manufacturing; privatization of

MNEs and economic reforms emerging country

Unprecedented rate of growth in global trade of products, services and

capital; focus on emerging markets for export, FDI and

sourcing activities; participation in international

business of SMEs


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Fourth phase is the current phase of globalization. The 1980s witnessed huge increase in FDI, specially in capital

and technology intensive sectors.

Mergers of major firms, GM acquired Saab in Sweden, Ford acquire Mazda in Japan and Daimler Benz bought Chrysler

in the United States.

Multinational firms began to seek cost advantages by locating factories in developing countries with low labor

costs.

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Drivers of Market Globalization

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“The term ‘drivers’ refers to the global forces that have

fueled the process of globalization. These global

factors have acted as catalyst that have contributed to

the growth of international business”.

• Declining Trade and Investment Barriers

• Technological Change

• Emergence of Global Institutions

• Integration of World Financial Markets


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1. Declining Trade and Investment Barriers• After Independence in 1947, India adhered to socialist

policies…as the "License Raj"; …slow growth rate was named the "Hindu rate of growth".

• The economic liberalization in India-1991, refers to ongoing reforms in India. In 1991, the government of P. V. Narasimha Rao and his finance minister Manmohan Singh started breakthrough reforms (proposed LPG).

Declining trade and investment barriers (by government) have vastly contributed to globalization.

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2. Technological Change • Most powerful instrument that triggered globalization

is technology. Technology is expanding, especially in:

Microprocessors and Telecommunication Internet and World Wide Web Transportation Technology

Thus we find that telecommunications is creating a global audience and transport is creating a global village.

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2. Technological Change (cont’)

Microprocessors and Telecommunication• Single most important innovation of this century has

been the microchip enabling the explosive growth of high-power, low-cost computing, enabling huge amounts of information to be processes by individual and firms.

• This has been accompanied by developments in satellite, optical fiber and wireless technologies resulting in communication revolution.

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Internet and World Wide Web• In 1990 there were less than 1 million users of internet.

The number had gone up to 655 million by 2002 and 1.12 billion users by 2005.

• The internet and world wide web are the information backbone of the global economy.

• The value of web-based transaction rose to $657 billion in 2000 from virtually nothing in 1994, to $6.8 trillion by 2004. These transactions include both business to business and B2C or e-commerce.

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Transportation Technology• Several major innovation in transportation technology

since World War-II, are development of commercial jet aircraft and super-freighter, and

• Introduction of containerization, which simplifies transshipment from one mode of transport to another and lowering the cost of shipping goods over long distances.

• There has also been an increase in the share of cargo traveling by air as a result of improvements in air travel.

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3. Emergence of Global Institutions • Trading block, WTO seeks to promote international

business by removing trade and investment barriers.• The United Nations, along with its associated financial

institutions (World Bank, IMF), is committed to preserving world peace through international cooperation and collective security.

• Regional trading blocks (EU, NAFTA, ASEAN) are adding to the pace of globalization.

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4. Integration of World Financial Markets

• Integration of world financial markets makes it possible for internationally active firms to raise capitals, borrow funds and engage in foreign currency transactions.

• Financial services firms follow their customers to foreign markets. Funds can be transferred between buyers and suppliers, through a network of international commercial banks i.e. SWIFT.

.

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4. Integration of World Financial Markets

Connecting 9,700 financial institutions in some 209 countries, SWIFT facilitates the exchange of financial

transaction. Globalization of finance contributes to firms’ ability to develop and operate world-scale production

and marketing operations.

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Each value-adding activity is subject to internationalization; that is, it can be performed abroad instead of at home.

The most typical reasons for locating value-chain activities in particular countries are to reduce the costs of R&D and

production or to gain closer access to customers.

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Internationalization of Firm’s Value ChainStages in the Firm’s Value Chain

R&D Procurement(Sourcing)

Manufacturing Marketing Distribution Sales &Services


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The pharmaceutical firm Pfizer conducts R&D in Singapore, Japan and other countries to gain access to scientific talent

or collaborate with local partner firms.

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Office furniture manufacturer Steelcase sources low-cost parts from suppliers in China and Mexico.

Dell has business processes such as data entry, call centers and payroll processing performed in India.

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Genzyme Crop. Does much of the manufacturing and testing of its surgical and diagnostic products in Germany,

Switzerland and the UK.

Renault produces cars via low-cost factories in eastern Europe.

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BMW and Honda locate marketing subsidiaries in the US to more effectively target their vehicles to the huge US market.

Carrefour and Barclays Bank establish worldwide networks of stores and offices to be near their customers.

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Wolverine World Wide, marketers of popular shoe brands ( e.g. Hush Puppies, Bates), contracts with independent

retail stores abroad to reach its customers.

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Direct sales company such as Amway and Avon employ their own independent sales office in China, Mexico and

elsewhere, in order to reach end-users.

Toyota maintains sales & customer service operations abroad in order to meet customer requirements more

effectively.

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GOP refers to the sourcing of goods & services from locations around the globe to take advantage of national differences in the cost and quality of factor of production (such as labor, energy, land and capital).

By doing this, companies hope to lower their overall cost structure and improve the quality or functionality of their product offerings, thereby allowing them to compete more effectively.

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Globalization of Production


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Consider the Boeing Company’s commercial jet airlines, the 777. Eight Japanese suppliers make parts of the fuselage, doors and wings; a supplier in Singapore makes the doors for the nose landing gear; three suppliers in Italy manufacture wing flaps; and so on.

In total, some 30% of the 777, by value, is built by foreign companies/ suppliers who are best in the world at their

particular activity. For the next jet airlines 787, Boeing is pushing this trend even further, with some 65% of the total

value to be outsourced.

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Outsourcing of production also increase the chance that it will win orders from airlines based in that country than its global rival,

Airbus Industry.

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Another, Consider the IBM ThinkPad X31 laptop computer. This product was designed in the US by IBM engineers because IBM believed that was the best location in the world to do basic design work. The case, keyboard, and hard drive were made in Thailand; the display screen and memory were made in South Korea; built-in wireless card was made in Malaysia; and microprocessor in the US.

In each case, these components were manufactured in the optimal location given an assessment of production costs

and transportation costs. These components were shipped to Mexico, where the product was assembled, before being

shipped to US for final sale.

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Ripple Effects of GlobalizationEffects of globalization are varied, ranging from cultural degradation to the fear of loss of sovereignty. We focus on the effects of internationalizationon management, Jobs, wages, child labor, women and lastly, developing countries.

GLOBALIZATION

JobsDevelopingCountries

Women at theWorkplace

Management

WagesChildLabor

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Routes of Globalization

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Routes of Globalization The usual routes of globalizations are exports and imports, use of assets, performance of services……..

Presence in Foreign Markets

Fo

reign

In

vestmen

t

High

High

Low

Low

Exports & Imports

Tourism &Transportation

Use of Assets

Performance of

Services

Direct Investment

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Exports and Imports

• Exports & Imports do not take place only in tangible goods, but also include services such as those provided by international airlines, hotels, cruise etc.

Export of Goods & Services as a percentage of GDP

Country % of GDP

Netherlands 74.7Germany 38.5Canada 37.1France 27.9UK 24.2Brazil 17.7India 16.6Japan 14.3US 9.8

Source: World Development Report, 2008

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Tourism & Transportation

• Tourism & Transportation are the routes of globalization for such industries as shipping, airlines, hotel and travel agency.

• Some countries, Greece and Thailand for example, depend on international tourism and transportation for employment, profit and foreign exchange earnings.

• Similarly, in recent years the US has earned more from foreign tourism than from its exports of agricultural goods.

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Use of Assets

Licensing & Franchising are the modes which facilitate companies to allow

others to use their assets.

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Use of Assets (Licensing)

• Under a License Agreement, one firm permits another to use its intellectual property for compensation called royalty, as it happened between Arrow Company and Arvind Clothing Ltd.

• The firm that makes the offer is the licensor and the recipient firm is act as the licensee. The property licensed generally includes such assets as patent, trademarks, copyrights, trade-secrets, technical know-how, business skills.

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Use of Assets (Licensing)

Few disadvantages of licensing are:• Possible loss of quality control• Risk of technology being stolen• Licensing fees are likely to be lower than FDI

profits.• Possible loss of opportunity to enter the

licensee’s market with FDI later.

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Use of Assets (Franchising)

• Franchising which involves the granting of right by a parent company (franchiser) to another (franchisee) to do business in a prescribed manner.

• This right can take the form of selling the franchiser’s products, using its name, production and marketing techniques or using its general business approach.

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• Franchising is adaptable to the international arena, and with some minor adjustments for the local market, it can result in a highly profitable business.

• In fast foods- McDonald’s, In Hotel business-Le Meridian, and others like Midas, GE and Coca-Cola.

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• Franchising agreement typically involves the payment of a fee upfront and then a percentage on sales.

• In return, the franchiser provides assistance, and in some instances, may require the purchase of goods or supplies to ensure the same quality of goods and services worldwide.

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Performance of Services (Turnkey Operations)

• International businesses earn money in the form of fees for service rendered. This is true in banking, insurance, rentals, engineering, management services.

• Turnkey Operations are typical modes for earning such fees. Here, the company contracts with a foreign entity to design and build an entire operations. On completion, the operation is handed over to the owner who can use the facilities straightway.

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Performance of Services (Turnkey Operations)

• The Italian company, Fiat, for example constructed a complete automobile plant in the Russia under this type of agreement.

• Tata Consulting engineers, India, are specialists in executing turnkey projects. like, 3*60 MW hydro-electric project in Iran,180 room hotel project in Yemen etc.

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Performance of Services( Management Contracts)

• Companies also earn fees through management contracts - arrangements in which one firm contracts with a foreign corporation or government to manage an entire project or undertaking for a specific period.

• Most management contracts provide for training of local personnel who will eventually take over the management responsibilities.

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Performance of Services( Management Contracts)

• An example, Disney receives management fees from managing theme parks in France & Japan.

• For a ten-year period(1969-79), Citibank had lent its managerial expertise to Grindlays Bank.

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Direct Investment (Joint Venture)

• A direct investment is one that allows the investor a controlling interest in a foreign company. FDI may take the form of a joint venture or a wholly owned subsidiary.

• Joint Venture is a shared ownership in a foreign business. Generally, the venture is 50-50 ownership in which there are two parties, each of which holds a 50 % ownership stake and contributes a team of managers to share operating control.

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Direct Investment (Joint Venture)

• Fuji-Xerox is one of the most enduring and successful joint ventures between two companies of different countries.

• There are 868 Indian joint ventures abroad, out of which 286 are in operations. Joint venture works well if an international business finds a right local partner.

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Direct Investment (Joint Venture: Advantages)

• A local partner can provide competent management to the venture.

• If the host country requires local participation in the equity, wholly owned subsidiary will not help.

• The local partner understand the culture of the local market. An international business takes years to acquire such knowledge if it enters a foreign market through wholly owned subsidiary.

• Sometimes, another name for joint venture is being used as strategic alliances.

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Direct Investment (Joint Venture: Disadvantages)

• A foreign firm’s apprehension about a local partner’s interference in managerial decisions and actions.

• Likely increase in political risk, if a wrong partner is selected.

• Transfer pricing on products or components bought from or sold to related companies triggers conflict.

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Direct Investment (Wholly Owned Subsidiary)

• A wholly owned subsidiary can be set up in a foreign market in either of two ways.

• The subsidiary that is established starting from the ground up is called Greenfield investment.

• Compared to Greenfield investment, a cross-border Acquisition has a number of benefits. Acquisition is quicker than establishing a firm. Second, it takes less time to gain a presence.

In a wholly owned subsidiary, the company owns

100 % of the equity.

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http://trak.in/tags/business/2010/12/24/top-10-ma-mergers-acquistions-2010/

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Portfolio Investment

• Portfolio investment represents a non-controlling interest, return-motivated interest in a company, or a loan to another company.

• Purchase of debt securities, bonds, interest-bearing bank accounts and the like are typical examples of portfolio investment. They do not offer voting rights or any form of control over a firm.

• Foreign portfolio investments are important for most international businesses. They use such investments primarily for short-term financial gains.

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Discussion Questions

1.Discussion on latest “ Dragon Multinational, Micro-

multinational, The Born Global, Global Niche Players”.

2. Trace the evolution of international business.

3.“The study of international business is fine if you are going

to work in an MNC, but it has no relevance for individuals

who are going to work in small firms”. Evaluate the

statement.

4.What do you believe makes foreign business activities

more complex than purely domestic ones?

Evolution of International Business

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Discuss Critically:

“In one sense, international marketing does not differ from domestic marketing; international marketing

involves the same basic marketing tools, concepts, techniques and know-how. Differences arise in terms of

the applications of these fundamental domestic marketing practices to international markets which are characterized by complex environmental differences,

enhanced risks and operational complexities”.

Question- Class Test

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