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 7 - 2

7 - 3 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

7 - 4 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

7 - 5 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

7 - 6 Top 10 Non-Financial Transnational Corporations Figure 7.1

7 - 7 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

7 - 8 Export of Services in Millions of U.S. $, 1990 and 2004 Figure 7.2

7 - 9 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

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

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

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

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

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

Benefits and Costs of Globalization Figure 7.3

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

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

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

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

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

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?

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)

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

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

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

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

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

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

Distinctive Attributes of the Three Major Sectors Figure 7.4