Globalization and International Business Exploring Management Chapter 17 Globalization and International Business

Chapter 17 How does globalization affect international business? What are global corporations and how do they work? There is no doubt that globalization is here to stay. However, success is not easily accomplished. There is a lot to learn about doing business internationally.

17.1 Globalization Globalization involves the growing interdependence of the world’s economies Globalization creates a variety of international business opportunities International business is done by global sourcing, import/export, licensing and franchising Internal business is done by joint ventures and wholly owned subsidiaries International business is complicated by different legal and political systems

GLOBALIZATION World Economies Global economy Resources, markets and competition are worldwide in scope Globalization Process of growing interdependence of global economies Many factors including economical communication and transportation have fueled globalization.

GLOBALIZATION World Economies Insourcing Domestic jobs are created by foreign employers Outsourcing Jobs are shifted to foreign locations to take advantage of lower wages, infrastructure, educated workforce or government support Globalization creates jobs, but not always the same types of jobs than those lost.

GLOBALIZATION International Opportunities International Business Conducts transaction across international boundaries Reasons to “go international” Profits Customers Suppliers Capital Labor Risk Most reasons for pursuing international business are economic.

GLOBALIZATION International Opportunities Market Entry Strategies Global Sourcing materials, components or services are purchased worldwide Exporting selling locally made products in foreign markets Importing buying foreign-made products and selling them in domestic markets Licensing foreign firm pays for rights to make or sell another company’s products Franchising foreign firm buys rights to another’s name and operating method in its home country These market entry strategies are “entry level” ways to expand globally. Licensing and franchising represent low cost / low risk methods of entering international markets, but partners must be chosen carefully.

GLOBALIZATION International Opportunities Direct Investment Strategies Joint Venture co-ownership arrangement in which the foreign and local business jointly operate the new business Global Strategic Alliance Cooperative partnership to achieve task that would be difficult for partners alone Foreign Subsidiary operation completely owned and controlled by a foreign firm Greenfield Venture subsidiary established after firm has experience in joint ventures All of these require substantial investments in capital and time. Joint ventures and strategic alliances are the most risky because you do not have complete control. Foreign subsidiaries require large investments and may not be allowed depending on the country.

GLOBALIZATION Legal and Political Issues International business is complicated by different legal and political systems Health and safety Equal employment Sexual harassment Incorporation and ownership Foreign currency exchange Intellectual property Any venture into international business requires homework. The cost of complying with local laws and regulations will add to the cost of doing business.

GLOBALIZATION Legal and Political Issues Tariffs Taxes placed on imports Protectionism Tariffs, subsidies and other tactics that give advantages to domestic producers Tariffs make imported goods more expensive relative to domestic goods. Subsidies are provided to domestic producers to cut their cost of production and enable them to gain a price advantage over imported goods or when being exported to other countries. Many economists feel that if all countries dropped both tariffs and subsidies, we would all be better off, but that’s hard to negotiate.

GLOBALIZATION Legal and Political Issues World Trade Organization Global institution to promote free trade and open markets around the world Membership of around 153 countries Most Favored Nation status www.wto.org The WTO also negotiates trade restrictions. The WTO has been the target of numerous protests in the U.S. because of the loss of jobs caused by outsourcing labor to foreign countries.

Global corporations or MNCs do substantial business in many countries The actions of global corporations can be controversial at home and abroad Managers of global corporations face a variety of ethical challenges

17.2 CONTINUED Global Corporations Planning and controlling are complicated in global corporations Organizing can be difficult in global corporations Leading is challenging in global corporations

GLOBAL CORPORATIONS Global Corporations Global corporations and also known as Multinational corporations (MNC) Extensive foreign operations in more than one country Transnational corporations Operate without one national home Fortune magazine has a “Global 500” that ranks the largest multinational corporations. The top ten are 1. Royal Dutch Shell, 2. Exxon Mobil, 3. Wal-Mart, 4. BP, 5. Chevron, 6. Total SA, 7. Conoco Phillips, 8. ING Group, 9. SinoPec, 10. Toyota. If you were counting, 7 out of the top 10 are oil companies.

GLOBAL CORPORATIONS Issues The list of complaints is valid but can be avoided with advanced planning and reasonable agreements between the parties.

GLOBAL CORPORATIONS Ethical Challenges Corruption Illegal practices Foreign Corrupt Practices Act U.S. legal standards apply to companies when operating in foreign countries Prevents Bribes, gifts to foreign officials in return for business favors Chapter three outlines the ethical views that must be considered when doing business in a culture with different values.

GLOBAL CORPORATIONS Ethical Challenges Sweatshops Employees work long hours in poor or unsafe conditions Child labor Full-time employment of children It is sometimes difficult to understand the reasons for sweatshops and child labor when you are a developed prosperous nation like the U.S. What may be unethical in one country may be acceptable in another depending on cultural and economic conditions. While an eleven-year-old working full time in the U.S. is unconscionable and illegal, it may be necessary to keep his family fed in a developing country.

GLOBAL CORPORATIONS Planning and Controlling Challenges Currency Risk Scenario 1: Weak dollar .75 Euros = 1 $US Take home revenue = $133,00 Scenario 2: Strong dollar 1.25 Euros = 1 $US Take home revenue = $80,000 To complicate the situation, the exchange rate between two countries is always changing. Thus, what looks like a profit today can be a loss tomorrow when the transaction actually takes place.

GLOBAL CORPORATIONS Planning and Controlling Challenges Political risk Risk of loss because of political instability in foreign country Political risk analysis Forecasts how political events may impact foreign investments Currency risk Possible loss because of fluctuating exchange rates Companies have lost their entire investment in a country when governments have nationalized industries. Consultants can help investors find stable governments to do business with.

GLOBAL CORPORATIONS Organizing Challenges Organizational structures can get so complicated that even the employees have trouble understanding them. Many MNCs are a combination of these two.

GLOBAL CORPORATIONS Leading Challenges Global managers Competent in working in different cultures Cultural sensitivity, a sense of humor and a bit of humility are important factors for expatriates.