International Strategy – Lecture Notes
Lecture 1
Learning objectives
- 1-1 Understand what is meant by the term globalization
- 1-2 Recognize the main drivers of globalization
- Describe the changing nature of the global economy
- Managing international business differs from managing purely domestic business
- Countries are different
- Range of problems is wider and problems more complex
- Must find ways to work within limits imposed by government
What is globalization?
- “global interconnectedness”
- “interdependent”
- “a spatial extension of human activities across cultures, economies and political
systems”
- New concept, but old phenomenon
Globalization “waves”
- A transcontinental spread of religions. “world religions”
During 400-1000 AC
- European colonization of the Americas
1500-1700
- “Creation of the British and French Empires”
Basically 19th century
Colonization of Asia and Africaq
Created the 19th century world of developed and underdeveloped countries
- Continuation with the revolutions in communication and transport (telephone,
telegraph, steamships > internet etc.)
What is globalization?
- Business side: Trade, capital, technology (knowledge)
- General terms: people, culture, environment
- The transition of China into an economic superpower
Ex. Largest (second largest) economy
Ex. Largest exporter of goods
Ex. Largest automobile market
The globalization of markets
- Refers to the merging of historically distinct and separate national markets into one
huge global marketplace
- Falling barriers to cross-border trade and investment
- Global tastes
- Competitors may not change among nations
Apple vs. Samsung [global competitors]
, - Benefits small and large companies
33% of the value of exports of US manufactured goods comes from SMEs
- Significant differences between national markets
- Products that serve universal needs are global: oil
The globalization of production
- Sourcing goods to take advantage of differences in cost and quality of factors of
production
Factors of production include labor, energy, land, capital
- Early outsourcing was confined to manufacturing
Modern communications technology has advanced outsourcing today for service
activities
‘Mistaken’ global assumptions
- “business is business everywhere the language of business is English”
- “they are eager to adopt our way of doing things”
- “our corporate culture is the same everywhere”
- “travel, reduction of trade blocks, and the global media are creating a single global
culture”
The emergence (opkomst) of global institutions
- Impediments (belemmeringen) prevent optimal dispersion (spreiding) of activities:
Formal and informal barriers to trade
Barriers to foreign direct investment
Transportation costs
Political and economic risk
Challenge of coordinating globally dispersed supply chain
- Institutions needed to help manage, regulate, and ‘police’ the global marketplace
General Agreement on Tariffs and Trade (GATT)
World Trade Organization (WTO)
International Monetary Fund (IMF)
The World Bank
The United Nations
Group of 20 (G20)
“Standards” (ISO)
Drivers of globalization
- International trade: when a firm exports goods or services to consumers in another
country
- Foreign Direct Investment (FDI): when a firm invests resources in business activities
outside its home-country
- GATT, WTO etc. lowered the barriers to trade
- Role of Technological Change:
The lowering of trade barriers made globalization of markets and production a
theoretical possibility. Technological change has made it a tangible reality
o Communications
Development of the ‘microprocessor’ – single most important
innovation since World War II
‘Moore’s Law’ predicts that the power of microprocessor technology
doubles and its cost of production falls in half every 18 months
2
, o The Internet
More than half of the world’s population uses the internet
Global e-commerce sales over $2.5 trillion
The internet acts as an equalizer
o Transportation Technology
Commercial jets, ‘superfreighters’, and ‘containerization’ have all
“shrunk the globe”
o Implications for the Globalization of Production
Locating production in geographically separate locations has become
more economical
o Implications for the Globalization of Markets
Cultural distance has been reduced and has brought some
convergence of consumer tastes and preferences
Changing Demographics of the Global Eco.
- The Changing World Output and World Trade Picture
o As barriers to the free flow of goods and services fell, non-U.S. firms
increasingly invested across national borders
Desire to disperse production activities to optimal locations and to
build a direct presence in major foreign markets
- The Changing Foreign Direct Investment Picture
o This reflects the faster economic growth of several other economies,
particularly China
China and BRIC (brazilie/rusland/india/china) countries growing more
rapidly
Ex. China has 5x the outward stock of FDI as a percentage of GDP
between 2005 and 2020
US has merely increased a few percent
Outward stock of foreign direct investment (FDI)= the total
cumulative value of foreign investments by firms domiciled in
nations outside of that nation’s borders = “de totale cumulatieve
waarde van buitenlandse investeringen door bedrijven die gevestigd in zijn
in landen buiten de landsgrenzen”
“Developing nations” may account for more than 60% of the world
economic activity by 2030
- The Changing Nature of the Multinational Enterprise
o Multinational enterprise (MNE) is any business that has productive activities
in two or more countries
o Non-U.S. Multinationals (Forbes annual ranking)
In 2003, 38.8% of the world’s 2000 largest multinationals were U.S.
firms
By 2019, 28.8% percent of the top 2000 global firms were U.S.
multinationals, a drop of 201 firms
See slide 35, lecture 1
o The Rise of Mini-Multinationals
The growth in the number of medium- and small-sized businesses
The internet is lowering barriers that smaller firms faced in
international trade
3
, - The Changing World Order
o Former communist countries present export and investment opportunities
Signs of growing unrest and commitment to market-based economic
systems cannot be assumed
Risks of doing business in these countries are high
o China moving to industrial superpower
o In Latin America debt and inflation are down, more private investors,
expanding economies
- Global Economy of the 21st Century
o Barriers to the free flow of goods, services, and capital have been coming
down
o Strengthened by the widespread adoption of liberal economic policies by
countries that had opposed them
o Globalization is not inevitable:
Countries may pull back
Risks are high
The Globalization Debate
- Anti-globalization Protests
o Began with 1999 protests at WTO meeting in Seattle
o Protestors now typically show up at major meetings of global institutions
o Protestors believe globalization causes detrimental effects on living
standards, wage rates, and the environment
Theory and evidence suggests these fears may be exaggerated
o Globalization, jobs, and income
Negative: falling trade barriers allow firms to move manufacturing
activites to countries where wage rates are much lower
Positive: benefits outweigh the costs
- Globalization, labor policies, and the Environment
o Critics argue:
Labor and environmental regulations increase manufacturing costs
Lack of regulation can lead to abuse
Firms move production to nations that do not have regulations
o Supporters argue:
Tougher environmental regulations and stricter labor standards go
hand in hand with economic progress
Free trade leads to less labor exploitation and less pollution
- Globalization and national sovereignty
o Critics argue:
Shift of power away from national governments towards
supranational organizations
WTO, EU, United Nations
o Supporters argue:
The power of supranational organizations is limited to what nation-
states collectively agree to grant
These organizations exist to serve the collective interests of member
states
4
Lecture 1
Learning objectives
- 1-1 Understand what is meant by the term globalization
- 1-2 Recognize the main drivers of globalization
- Describe the changing nature of the global economy
- Managing international business differs from managing purely domestic business
- Countries are different
- Range of problems is wider and problems more complex
- Must find ways to work within limits imposed by government
What is globalization?
- “global interconnectedness”
- “interdependent”
- “a spatial extension of human activities across cultures, economies and political
systems”
- New concept, but old phenomenon
Globalization “waves”
- A transcontinental spread of religions. “world religions”
During 400-1000 AC
- European colonization of the Americas
1500-1700
- “Creation of the British and French Empires”
Basically 19th century
Colonization of Asia and Africaq
Created the 19th century world of developed and underdeveloped countries
- Continuation with the revolutions in communication and transport (telephone,
telegraph, steamships > internet etc.)
What is globalization?
- Business side: Trade, capital, technology (knowledge)
- General terms: people, culture, environment
- The transition of China into an economic superpower
Ex. Largest (second largest) economy
Ex. Largest exporter of goods
Ex. Largest automobile market
The globalization of markets
- Refers to the merging of historically distinct and separate national markets into one
huge global marketplace
- Falling barriers to cross-border trade and investment
- Global tastes
- Competitors may not change among nations
Apple vs. Samsung [global competitors]
, - Benefits small and large companies
33% of the value of exports of US manufactured goods comes from SMEs
- Significant differences between national markets
- Products that serve universal needs are global: oil
The globalization of production
- Sourcing goods to take advantage of differences in cost and quality of factors of
production
Factors of production include labor, energy, land, capital
- Early outsourcing was confined to manufacturing
Modern communications technology has advanced outsourcing today for service
activities
‘Mistaken’ global assumptions
- “business is business everywhere the language of business is English”
- “they are eager to adopt our way of doing things”
- “our corporate culture is the same everywhere”
- “travel, reduction of trade blocks, and the global media are creating a single global
culture”
The emergence (opkomst) of global institutions
- Impediments (belemmeringen) prevent optimal dispersion (spreiding) of activities:
Formal and informal barriers to trade
Barriers to foreign direct investment
Transportation costs
Political and economic risk
Challenge of coordinating globally dispersed supply chain
- Institutions needed to help manage, regulate, and ‘police’ the global marketplace
General Agreement on Tariffs and Trade (GATT)
World Trade Organization (WTO)
International Monetary Fund (IMF)
The World Bank
The United Nations
Group of 20 (G20)
“Standards” (ISO)
Drivers of globalization
- International trade: when a firm exports goods or services to consumers in another
country
- Foreign Direct Investment (FDI): when a firm invests resources in business activities
outside its home-country
- GATT, WTO etc. lowered the barriers to trade
- Role of Technological Change:
The lowering of trade barriers made globalization of markets and production a
theoretical possibility. Technological change has made it a tangible reality
o Communications
Development of the ‘microprocessor’ – single most important
innovation since World War II
‘Moore’s Law’ predicts that the power of microprocessor technology
doubles and its cost of production falls in half every 18 months
2
, o The Internet
More than half of the world’s population uses the internet
Global e-commerce sales over $2.5 trillion
The internet acts as an equalizer
o Transportation Technology
Commercial jets, ‘superfreighters’, and ‘containerization’ have all
“shrunk the globe”
o Implications for the Globalization of Production
Locating production in geographically separate locations has become
more economical
o Implications for the Globalization of Markets
Cultural distance has been reduced and has brought some
convergence of consumer tastes and preferences
Changing Demographics of the Global Eco.
- The Changing World Output and World Trade Picture
o As barriers to the free flow of goods and services fell, non-U.S. firms
increasingly invested across national borders
Desire to disperse production activities to optimal locations and to
build a direct presence in major foreign markets
- The Changing Foreign Direct Investment Picture
o This reflects the faster economic growth of several other economies,
particularly China
China and BRIC (brazilie/rusland/india/china) countries growing more
rapidly
Ex. China has 5x the outward stock of FDI as a percentage of GDP
between 2005 and 2020
US has merely increased a few percent
Outward stock of foreign direct investment (FDI)= the total
cumulative value of foreign investments by firms domiciled in
nations outside of that nation’s borders = “de totale cumulatieve
waarde van buitenlandse investeringen door bedrijven die gevestigd in zijn
in landen buiten de landsgrenzen”
“Developing nations” may account for more than 60% of the world
economic activity by 2030
- The Changing Nature of the Multinational Enterprise
o Multinational enterprise (MNE) is any business that has productive activities
in two or more countries
o Non-U.S. Multinationals (Forbes annual ranking)
In 2003, 38.8% of the world’s 2000 largest multinationals were U.S.
firms
By 2019, 28.8% percent of the top 2000 global firms were U.S.
multinationals, a drop of 201 firms
See slide 35, lecture 1
o The Rise of Mini-Multinationals
The growth in the number of medium- and small-sized businesses
The internet is lowering barriers that smaller firms faced in
international trade
3
, - The Changing World Order
o Former communist countries present export and investment opportunities
Signs of growing unrest and commitment to market-based economic
systems cannot be assumed
Risks of doing business in these countries are high
o China moving to industrial superpower
o In Latin America debt and inflation are down, more private investors,
expanding economies
- Global Economy of the 21st Century
o Barriers to the free flow of goods, services, and capital have been coming
down
o Strengthened by the widespread adoption of liberal economic policies by
countries that had opposed them
o Globalization is not inevitable:
Countries may pull back
Risks are high
The Globalization Debate
- Anti-globalization Protests
o Began with 1999 protests at WTO meeting in Seattle
o Protestors now typically show up at major meetings of global institutions
o Protestors believe globalization causes detrimental effects on living
standards, wage rates, and the environment
Theory and evidence suggests these fears may be exaggerated
o Globalization, jobs, and income
Negative: falling trade barriers allow firms to move manufacturing
activites to countries where wage rates are much lower
Positive: benefits outweigh the costs
- Globalization, labor policies, and the Environment
o Critics argue:
Labor and environmental regulations increase manufacturing costs
Lack of regulation can lead to abuse
Firms move production to nations that do not have regulations
o Supporters argue:
Tougher environmental regulations and stricter labor standards go
hand in hand with economic progress
Free trade leads to less labor exploitation and less pollution
- Globalization and national sovereignty
o Critics argue:
Shift of power away from national governments towards
supranational organizations
WTO, EU, United Nations
o Supporters argue:
The power of supranational organizations is limited to what nation-
states collectively agree to grant
These organizations exist to serve the collective interests of member
states
4
