Unit 1 Globalisation

Learning Objectives To understand the meaning of globalisation and the factors contributing to it To analyse the role played by multinationals in the global business environment To evaluate the impact of multinational companies on the host country To explain what regional trading blocs are and their impact on a business of a country that is a member of a regional economic group / bloc

Globalisation Globalisation: the ongoing social, economic, and political process that deepens and broadens the relationships and inter- dependencies amongst nations—their people, their firms, their organizations, and their governments International business facilitates the globalization process

International Busines International business: all commercial transactions between parties in two or more countries – Private firms are profit-oriented – Government organizations may or may not be profit-oriented The international business environment is more complex and diverse than the domestic business environment

Key terms Globalisation The growing trend towards worldwide markets in products, capital and labour, unrestricted by barriers Globalisation The growing trend towards worldwide markets in products, capital and labour, unrestricted by barriers Multinational Companies Business organisations that have their headquarters in one country, but operations in other countries Multinational Companies Business organisations that have their headquarters in one country, but operations in other countries Free International Trade International trade that is allowed to take place without restrictions Free International Trade International trade that is allowed to take place without restrictions Tariff Tax imposed on an imported product Tariff Tax imposed on an imported product Quota A physical limit placed on the quantity of imports of certain products Quota A physical limit placed on the quantity of imports of certain products

International Business Strategic alliance: a collaborative arrangement of critical importance to one or more of the alliance partners Multinational enterprise [MNE]: a firm that takes a global approach to its foreign markets and production Multinational corporation [MNC] and transnational company [TNC] may be used in this same context

The Forces Behind Globalisation Increased expansion and technological improvements in transportation and communications networks Liberalisation of cross-border trade and resource movements Development of services that support international business activities Growing consumer demand for foreign products Increased global competition Changing political and economic situations Expanded cross-national treaties and agreements

Globalisation Not a new process but has accelerated in recent years because of: – Liberalisation of international trade – Technological process – Deregulation – Cultural awareness and recognition – Language

Multinational Businesses More than just importers and exporters Produce goods and services in more than one country Why become a MNC? Closer to main markets Lower costs of production Lower labour rates Cheaper rent and site costs Government grants and tax incentives More than just importers and exporters Produce goods and services in more than one country Why become a MNC? Closer to main markets Lower costs of production Lower labour rates Cheaper rent and site costs Government grants and tax incentives

Reasons That Firms Engage in International Business To expand sales Volkswagen [Germany] Ericsson [Sweden] Michelin [France] Nestlé [Switzerland] IBM [USA] Seagram [Canada] Sony [Japan]

To acquire resources Products, components, services Foreign capital Technologies Information To minimize risk Take advantage of business cycle differences amongst countries Diversify suppliers across countries Counter competitors’ advantages

Evaluation of MNC’s on ‘host’ countries Benefits Investment will bring in foreign currency Employment opportunities Local firms forced to focus on quality Tax revenues to the Government Management expertise will improve Total output of the economy will increase and this will raise Gross Domestic Product (GDP) Drawbacks Exploitation of the local workforce Pollution Local competing firms may be squeezed out of the market Imposing western culture E.G. McDonalds Profits may be sent back to head office in home country Extensive depletion of natural resources

The Criticisms of Globalization Threats to national sovereignty Negative costs of economic growth Increasing income inequality Antiglobalisation forces may use both peaceful and violent means to stop or slow the globalization process. Offshoring (the transferring of production to foreign sites) is particularly controversial.

International Business Managers Must understand the relevance of: – Domestic and international law – Political science – Sociology – Psychology – Economics – Geography Must be knowledgeable about the competitive dimensions of the international business environment

Globalisation and the growth in international trade World Trade Organisation (WTO) – Negotiates regular reductions in world trade barriers – Contributed to rapid growth of world GDP

Regional Trade Blocs – Trading agreements Four types – Free Trade Areas Exist where countries agree to trade with each other with no tariffs, quotas or other restrictions – Customs Unions Free trade areas but each country sets the same level of restrictions (common external barriers) on imports from non-member countries – Common Markets Extended version of custom union. E.G. European Union – Economic & Monetary Unions Attempt to create many of the economic conditions that exist within just one country. Common currency.

Regional Trade Blocs Trade BlocBenefitsDrawbacks Free Trade Area Access to larger markets Increased EoS Increased competition Customs Union Can compete on equal basis No advantages gained from cheaper imports Common Market Common regulations Able to attract labour and capital from other member states Increased cost and bureaucracy May lose quality labour and capital to other member states Economic & Monetary Union No exchange rate risks / costs May be greater exchange and interest rate stability Able to compare costs and prices Same conditions presume same economical conditions in each country

Implications/Conclusions Managing an international business differs from managing a domestic business because: – countries and cultures are different – international business operations are more complex than domestic operations – A company’s own competitive strategy influences how and where it can best operate – From one country to another, a company’s relative competitiveness will vary because of the differences in the local and foreign competitors that are present