Globalizing Business

1

Chapter 1Globalizing

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LEARNING OUTCOMES

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1 Explain the concepts of international business and global business

2 Give three reasons why it is important to study global business

3 Articulate the fundamental question that the study of global business seeks to answer and two perspectives from which to answer it

4 Identify three ways of understanding what globalization is

5 Appreciate the size of the global economy and the strengths of multinationals

Learning Outcomes

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Global Business Concepts

• Global business: Business around the globe• International business

• Firms engaging in international economic activities

• The action of doing business abroad• Multinational enterprise (MNE): Firms

engaging in foreign direct investment and operating in multiple countries

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Global Business Concepts (continued 1)

• Foreign direct investment (FDI): Investment in, controlling, and managing value-added activities in other countries

• Emerging economies: Developing countries• Also known as emerging markets• 48% of world trade• 60% of FDI inflow• 40% of FDI outflow• 50% of the Global GDP

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Global Business Concepts (continued 2)

• Gross domestic product (GDP): Sum of value added by resident firms, households, and governments operating in an economy

• Purchasing power parity (PPP): Conversion determining the equivalent amount of goods and services different currencies can purchase

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Global Business Concepts (continued 3)

• BRIC: Acronym for the emerging economies of Brazil, Russia, India, and China• BRICS: Addition of South Africa

• Triad: Developed economies of North America, Western Europe, and Japan

• Base of the pyramid (BoP): Vast majority of humanity who make less than $2000 a year

7

Exhibit

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1.1 The Global Economic Pyramid

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Reasons to Study Global Business

• Prerequisite to join top ranks of large firms• Expatriate manager: Manager who works

outside his or her native country- International premium: Significant pay raise

commanded when working overseas

9

Exhibit

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1.2 Why Study Global Business?

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Fundamental Question

• What determines the success and failure of firms around the globe?

• Unified framework• Study of global business is interdisciplinary

11

Exhibit

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1.4 A Unified Framework for Global Business

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Institution-Based View

• Suggests that firm performance is determined by institutional frameworks governing firm behavior worldwide• Institution: Formal and informal rules of the

game• Institutional framework: Formal and

informal institutions that govern individual and firm behavior

• Deals with external environment

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Resource-Based View

• Suggests that firm performance is determined by its internal resources and capabilities

• Deals with firm’s internal resources• Liability of foreignness: Inherent

disadvantage that foreign firms experience in host countries because of nonnative status

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Resource-Based View (continued)

• Firm’s resources and capabilities can offset the disadvantage

• Firms must have valuable and unique firm-specific resources• Not shared by competitors in the same

environment

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Globalization

• Close integration of countries and peoples of the world

• Advantages• Higher economic growth and standards of living• Increase in technology sharing• Extensive cultural integration

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Globalization (continued)

• Disadvantages• Undermining of wages in rich countries• Exploiting workers in poor countries• Gives too much power to MNEs• Destroys the environment• Promotes inequality

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Views on Globalization

• Novel force spread across the world• Result of technological innovation and Western

ideology- Focuses on exploitation and domination

through MNEs• Existed since the beginning of human

history• Historical evolution

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Pendulum View of Globalization

• Integration of countries and people across the world• Brought about by the:

- Reduction of the costs of transportation and communication

- Breaking down of barriers to the flows of goods, services, capital, knowledge, and people

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Pendulum View of Globalization (continued 1)

• Rapid growth of globalization led to:• Inaccurate historical view that globalization is

new• Fear of loss of jobs in developed economies• Report of MNEs destroying local companies,

cultures, and values in emerging economies

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Pendulum View of Globalization (continued 2)

• Great Recession reminds all firms of the importance of:• Risk management: Identification and

assessment of risks - Preparation to minimize the impact of high-

risk, unfortunate events• Scenario planning: Technique to prepare

and plan for multiple scenarios

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Semiglobalization

• Perspective that suggests that barriers to market integration at borders are high• Not high enough for complete insulation

between countries

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Semiglobalization (continued)

• Types of globalization• Total isolation - Suggests localization

- Strategy that treats each country as a unique market

- Expensive• Total globalization - Lead to standardization

- Strategy of treating the entire world as one market

23

Exhibit

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1.5 Top Ten Largest Firms in the World (Measured by Sales)

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Debate: Ethical Dilemma

• Opponents of globalization• Nongovernmental organizations (NGOs):

Organizations not affiliated with governments• Firms view NGOs as partners• Current business school students exhibit

values and beliefs that favor globalization

25

Exhibit

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1.6 Views on Globalization

KEY TERMS

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• International business (IB)

• Multinational enterprise (MNE)

• Foreign direct investment (FDI)

• Global business• Emerging economy

(emerging market)• Gross domestic

product (GDP)

• Purchasing power parity (PPP)

• BRIC• BRICS• Triad• Base of the pyramid

(BoP)• Expatriate manager• International

premium

Key Terms

KEY TERMS

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• Institution-based view

• Institution• Institutional

framework• Resource-based view• Liability of

foreignness

• Globalization• Risk management• Scenario planning• Semiglobalization• Nongovernmental

organization (NGO)

Key Terms (Continued)

SUMMARY

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• International business • Business or firm that engages in international

economic activities• Action of doing business abroad

• Global business helps advance one’s employability and career in the global economy• Helps prepare for possible expatriate

assignments • Offers stronger competence

Summary

SUMMARY

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• Perspectives in global business• Institution-based view• Resource-based view

• Globalization is the close integration of countries and peoples of the world

• There is an increase in the number of MNEs originating from developing countries

Summary (Continued 1)

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