Unit 1: Introduction to Globalization and International Business

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Introduction to Globalization
The History of Globalization
Introduction to International Business
Beliefs which Shape International Business
Foreign Markets Entry Modes
Future Trends in Globalization
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Table of Contents

After you have read this chapter you
should able to:
 Understand what is meant by the term globalization
 Describe the history of globalization, its key motivators
and positive impact of globalization
 Recognize the main drivers and additional drivers of
globalization
 Explain what is meant by international business
 Identifying the different beliefs which shape
international business and their pros and cons
 Compare and contrast the different modes that firms
use to enter foreign market with their pros and cons
 Analyze and discuss future trends of globalization
LEARNINGOBJECTIVES

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Introduction to GlobalizationA

In today’s Integrating Global Economy
Practical Example:
A Nepalese business teacher might drive to work in a car designed in
Japan, yet assembled in Thailand from components manufactured in
Japan Thailand, and China that were fabricated from Korean steel and
Malaysian rubber. He may have filled the gasoline tank with gasoline 95
Vpower at a Shell service station owned by a Royal Dutch Shell
company. While driving to work, the Nepalese man might have listened
to English songs in 95.5 Thai FM stations from the car radio, which he
noted was made in Malaysia by a Japanese firm. At that moment he
may have received a phone call from his Thai girlfriend. He may have
pulled out his iPhone which was made in China, although designed by
Apple in California. He may have used the English language to exchange
information. His students might have from different countries to pursue
higher education at Bangkok.

 It a world in which people are very aware of the symbols, logos,
trademarks , and brand names of multinational companies such as
Coca-Cola , Starbucks, Sony, SAMSUNG, Apples, MTV shows, Marvel
films, IKEA stores, louis Vuitton so on…..(impossible to name
all,,,,,so many popular brands)
 It is a world in which products are made from inputs that come from
all over the world.
 It is a world in which a financial crisis in China can trigger a global
economic recession.
 It is a world in which a coronavirus(covid19) outbreak in China to
wreak havoc across the entire planet, and take hundreds of
thousands of lives.
This is the world in which we live.
“We occupy an Integrated World “

What is Globalization?
Definition 1:
One good definition is offered by
the Carnegie Endowment on its
website Globalization 101.org:
“Globalization is a process of
interaction and integration among
the people, companies, and
governments of different nations,
a process driven by international
trade and investment and aided by
information technology.”

Definition 2:
Globalization is far more wide
reaching than International
Business which is still ongoing
process that has been integrating
and converging of economic,
financial, cultural and political
systems across the world through
the enormous reduction of barriers
to the flow of goods and services,
capital, technology and people
across the borders.
Written by Arjun Paudel
What is Globalization?

Causes of Globalization
These drivers are speeding up the process of integrating the economies
of the world for free trade and economic policies to integrate the world
into the global village

 Political Instability in home country
 As more and more nations are joining
international organizations such as the WTO,
many trade barriers are coming down with
liberalized trading rules and deregulated
markets lead to lowered tariffs and allowed
foreign direct investments in almost all over
the world without excessive external
government intervention
Political driver

 As people’s taste and preferences for goods
and services converge, companies are seeing a
demand for their products in different parts of
the global marketplace.
 As domestic markets become more and more
saturated, the opportunities for growth are
limited and global expanding is a way most
organizations choose to overcome this
situation.
.
Market driver

 Sourcing efficiency and costs vary from
country to country and global firms can take
advantage of this fact.
 Other cost drivers to globalization are the
opportunity to build global scale economies
and the high product development costs
nowadays.
Cost driver

 With the global market, global inter-firm
competition increases and organizations
are forced to “play” international.
 Strong interdependences among countries
and high two-way trades and FDI actions
also support this driver.
Competitive driver

Other recent driver of Globalisation:
1. Improved Communications
 The development of communication
technologies such as internet, email , social
media platform and mobile phones have been
vital to the growth of globalisation because they
help MNCs to operate throughout the world.
 The development of satellite TV channels such
as BBC and CNN have also provided worldwide
marketing avenues for the concept and
products of globalisation.

2. Improved Transport
 Advancements in the transportation
industry have made it possible to send
materials overseas faster, cheaper and in
greater volume.
 As a result, more and more businesses are
finding it convenient to have multiple
locations worldwide serving different
purposes in the production process.

3. Free Trade Agreements
 MNCs and rich capitalist countries have
always promoted global free trade as a way
of increasing their own wealth and
influence.
 International organisations such as the
World Trade Organisation and the IMF also
promote free trade.

 Modern communication technologies
allow vast amounts of capital to flow
freely and instantly throughout the
world.
 The equivalent of up to $US1.3 trillion
is traded each day through
international stock exchanges in cities
such as New York, London and Tokyo.
4. Global banking

Reasons For Globalization
Firm operate internationally for a number of reasons:
 They may be seeking to secure better sources of raw materials
& energy.
 They may want to obtain access to low cost factors of
production such as labour.
 They may be attracted to certain countries because of
subsidies those countries provide.
 They may be seeking new markets for their products.
 Domestic markets may no longer be able to absorb
production at minimum efficient scale.

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The History of Globalization

 In this age, wide spread
development took place in
the field of infrastructure
and connectivity. This led to
more interaction between
the nations and sharing of
ideas, culture and tradition
took place.
 According to most
researchers, it is the modern
age which led to the origin of
globalization.

 However, there are some researchers
who point out that the origins of the
history of globalization can be traced
back to the ancient civilizations.
 This Global phenomenon is inherent to
human nature because human societies
have sought distant places to settle,
produce and exchange goods enabled by
improvements in technology and
transportations.
 Explorers like Columbus
and Vasco Da Gama
sailed through the
oceans in search of new
countries and establish
trade links with them or
to make other countries
their colonies.

 Globalization is not a
new concept.
 As more and more people
started traveling to various
countries across the world,
it led to more communication
between people and
intermingling of languages.

 The popularity of the trade relations led to the development
of various trade routes like Silk Road across central Asia that
connected china and Europe during the Middle Ages.

Globalization in the pre modern periods
 The industrial revolution in the 19th
century was one of the major periods
in the history of globalization.
 Due to the industrial revolution, there
was a significant increase in the
quantity and quality of the products.
 Due to better products and
colonization, lots of countries
across the world became the
consumers of the European
market.
 This led to higher exports and
better trade and business
relations.

Globalization in the modern era
 Globalization, in the modern sense of the term,
came into existence after the Second World War
in the mid 1940s.
 The United States led efforts to revive
international trade and investment under
negotiated ground rules, starting a second wave
of globalization, which remains ongoing up to
now.
 One of the main factors for this was the plan by
the world leaders to break down the borders for
fostering trade relations between nations.
 As a result, many countries started having their
own economic systems and established trade
relations with the rest of the world

Globalization often leads to or promotes free trade, the exchange of goods
among nations without trade barriers such as tariffs. This can lead to
consumers purchasing higher-quality goods at lower prices.
• Many of these
groups work to
promote, regulate
free trade
• 1947, General
Agreement on Tariffs
and Trade (GATT)
• Worked to limit trade
barriers, settle
disputes
International Trade
Organizations
• 1995, GATT replaced
by World Trade
Organization (WTO)
• Monitors national
trade policies
GATT and WTO
• Regional trade blocs
promote free trade,
deal with economic
issues of neighboring
nations
• EU
• NAFTA
• ASEAN
• CER
Regional Trade
Global Trade

 Formed in 1957 as EEC (European
Economic Community) among 6
countries in Western Europe (France,
West Germany, Italy, Belgium, the
Netherlands and Luxembourg).
 Has added 19 members since:
– UK, Ireland, & Denmark (1973)
– Greece (1981)
– Spain & Portugal (1986)
– Austria, Finland, & Sweden (1995)
– Cyprus, Czech Republic, Estonia,
Hungary,
Latvia, Lithuania, Malta, Poland,
Slovakia & Slovenia (2004)
– By 2015, 28 members are circulating
goods, services, capital and people
freely among its members states

European Union
 EU population is over 500 million people.
 EU countries as a group are largest exporter and importer in
the world.
 EU was first called European Common Market, then the
European Economic Community (1957), and now the
European Union (1993).
 Theoretically, EU is a sort of united states of Europe.

North American
Free Trade Agreement
 NAFTA consists of the U.S., Canada, and Mexico came into
effect in January 1, 1994
 Their combined GDPs make NAFTA the world’s biggest free
trade area.
 Also includes agreements on environmental, labor, and
intellectual property rights issues

Issues
 Standards of living (i.e., GDP per
capita) are different among the
three countries.
 Lower wages in Mexico (one-
tenth of U.S. and Canada wages)
may lead to a loss in U.S.
manufacturing jobs.

The Australia-New Zealand closer
Economic Relations Agreement (CER)
 CER consists of Australia and New Zealand came into effect in,
1983
 It’s aim was to facilitate freer trade between these two
countries
 Also includes agreements on environmental, labor, and
intellectual property rights issues

The Association of Southeast
Asian Nations
 ASEAN consists of Thailand, Malaysia,
the Philippines, Singapore, Brunei,
Vietnam, Myanmar(Burma), Laos, and
Cambodia
 was founded in 1967 to promote
security, socio-cultural and economic
integration
 Also aims to promote lawful social
progress and stability within the
region

Other Regional Trade Blocs
Copyright © 2002 Pearson Education, Inc.

Regional Trade Blocs (cont.)
Copyright © 2002 Pearson Education, Inc.

 The establishment of the
United Nations Organization
(UNO) was also a major step
in this regard.

 Another milestone in
the history of
globalization is the
creation of the World
Trade Organization
which led to the growth
of a uniform platform to
settle trade and
commercial disputes.

INTERNATIONAL ORGANIZATION
 General agreement on Tariff and trade (GATT) :
an international organization formed to reduce or eliminate
tariff and other barrier to international trade
 International Monetary Fund (IMF) :
an international financial organization that lend money to
countries in conducting international trade

INTERNATIONAL ORGANIZATION
 World Bank :
an international financial organization that lend money to
underdeveloped and developing countries for development
 Economic Communities :
the creation of common economic policies
– World Trade Organization (WTO)
– European Community (EC)
– North American Free Trade Agreement (NAFTA)
– Asian Free Trade Agreement (AFTA)

 Promotion of free commerce and
trade
 Abolition of various double taxes,
tariffs, and capital controls
 Reduction of transport cost and
development of infrastructure
 Creation of global corporations
 Blend of culture and tradition
across the countries
Positive impact of Globalization

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Introduction to International Business

What is International Business?
Resources: Raw materials, and capital
Goods: Semi-finished or finished
Services: Accounting, legal, banking, insurance,
healthcare, education, tourism, consultancy, etc..
Knowledge and skills: Technology, innovations, various
skills, IPRs, brand names, etc.
Information flows: Databases and networks
Business activities that involves the transfer of resources,
goods, services, knowledge, skills, or information across
national boundaries/borders

Participants in International Business
Parties involved in International Business
Individuals (individual investors, tourists, employees, students,
etc.)
Companies (private or public)
Government (central bank, government institutions etc.)
Among these companies are the dominant players in
International Business

 IB is a mechanism to bring
globalization.
 Hard to imagine now a world
without international business.
 Everything that is consumed,
everything that is produced and
every financial activity engaged
in is affected by international
business activity
What is International Business?

Motivation to Do I B
1. Proactive:
 to increase profit
 to take advantage of product life cycle
 to achieve Economies of scale
2. Reactive:
 Competitive pressures
 Overproduction and excess capacity
 Declining domestic sales
 saturated domestic markets

 Achieve higher rate of profits
 Expanding the production capacity beyond the demand of the
domestic country
 Availability of technology and managerial competence
 Cost of manpower, transportation & Nearness to R/M
 Market share
Need for I B

 Products and Services should meet to foreign market
 Price adjustments by considering the cost of foreign trade,
such as transportation, taxes, exchange rate
 Distribution system through existing transportation
system, suppliers and stores
 Promotion should be modified based on different
languages, law, and culture from country to country
Adopting to Customers Needs

Advantages
• Faster growth
• Access to cheaper inputs
• Increased quality and
efficiency
• New market opportunities
• Diversification
Disadvantages
• Increased costs
• Foreign regulations and
standards
• Delays in payments
• Complex organizational
structure
International Business

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Beliefs which Shape International BusinessD

IB APPROACHES:
Beliefs which Shape Internationalization

I B APPROACHES
1. Ethnocentric approach
2. Polycentric approach
3. Regiocentric approach
4. Geocentric approach
Four different international development strategies
that management can put into practice when a
business became international

Management orientation :
Home country orientation
Perception about market :
Domestic market is superior
Focuses on similarities
between home and foreign
market
Marketing strategy :
Extension of domestic strategy
to foreign market
Companies basic objective:
Profitability
Type of governance :Top-down
Culture : Home country
Technology : Mass production
HRM practices : Overseas
operations are managed by
people from home country
Managerial :
Manager/MNC rely on values
&interests of parent company
in formulating and
implementing strategic plan
ETHNOCENTRIC

The home country is perceived as superior
The parent country culture, work approaches, management
style, decision making and key personnel dominate.
Overseas expansion is planned in the home country by the
international division of the company
Example:
Nissan in 1st years exported cars in US markets, sold cars without
change
Characteristics

Effective control over the subsidiary.
Better transfer of technical know-how.
Effective coordination and communication between the host
and the parent company.
No cost & efforts needed for adaptation/localization
Advantages

Difficulty in guiding employees living far away from the parent
country.
Missed out the opportunity to hire the best personnel from the
host country.
The failure rate is very high
Disadvantages

Host country orientation
Each national market is
distinctive
Focuses on differences between
home country & foreign country
Localization / adaptation
Companies basic objective :
Public acceptance
Type of governance: Bottom-up
Culture: Host country
Technology : Batch production
HRM practices :
Local nationals are used in key
management positions
Managerial :
MNC tailor strategic plan to
meet the need of local culture
POLYCENTRIC

Each country is perceived as unique
Operations are decentralized
Subsidiaries are established in overseas markets
Each subsidiary develops its own unique business and marketing
strategies
Examples :
McD (no beef burgers in India)
Swiss company Nestle(products sold in Europe and Asia different )
Characteristics

 Adaptation to market characteristics help in better
understanding of local needs which will lead to better
exploitation of market potentials
 Better productivity due to better knowledge about the host
market.
 The career opportunities for the nationals of the host
country increases.
Advantages

The lack of effective communication between the staff
members of both the host and the parent company, due to
the language barrier and different thinking processes as a
consequence conflict may arise.
Difficult to exercise control over the subsidiary.
Lack of knowledge about the market conditions of the host
country.
Disadvantages

Regional orientation
Markets can be differentiated
on the basis of common
regional characteristics
Trade- off between
standardization & localization
Both profitability & public
acceptance
Type of governance :
Mutually negotiated between
region & its subsidiaries
Culture: Regional
Technology :
Flexible manufacturing
HRM practices :
Regional people are developed
for key managerial positions
anywhere in region
Managerial :
MNC uses a strategy that
addresses both local & regional
needs
REGIOCENTRIC

Different regions are viewed as different markets
Strategy, organization and marketing activities are
organized at a regional level
Divisions are created and staffed on a regional basis
Example:
southern Thailand curry is more spicy herbs than central
Thailand curry
Characteristics

Culture fit, i.e. the managers from the same region as that of the
host country may not encounter any problem with respect to the
culture and the language followed there.
Less cost is incurred in hiring the natives of the regional base.
better influence the decision of managers at headquarters with
respect to the entire region.
Advantages

The managers in different regions may not understand the
viewpoint of the managers employed at the headquarters.
The manager selected from a particular region may lack the
international experience.
The regional managers may only focus on accomplishing the
regional targets and may oversee the impact on the firm as a
whole.
Disadvantages

Global orientation
Entire world is a single market
that can be effectively tapped
by standardized marketing
strategy
Global standardization
Both profitability & public
acceptance
Type of governance :
Mutually negotiated at all level of
organization
Culture: Global
Technology :
Flexible manufacturing
HRM practices :
Best people anywhere in the
world are developed for key
managerial positions everywhere
in the world
Managerial :
MNC constructs its strategic plan
with a global view of operations
GEOCENTRIC

The world is perceived as a single market
A standardized marketing mix is developed
The management team includes the best people for given
roles, no matter where they come from
The subsidiaries are connected by a coordinated plan that
allows for local needs and actions in the context of overall
organizational performance
Example would be Coca-cola adopted this strategy by selling its
popular soft drink with the same content, packaging, branding
& advertisement themes worldwide
Characteristics

Economies of large scale production
The expertise of each manager can be used for the
accomplishment of MNC’s objective as a whole.
Reduction in resentment, i.e. the sense of unfair treatment
reduces.
Shared learning, the employees, will learn from each other’s
experiences.
Advantages

The cost of training, compensation, and relocation of an
employee is too high.
Highly centralized control of staffing is required.
Proper scrutiny is required by the HR to select the most suitable
person for the job, which could be time-consuming.
Uniform /standard marketing mix not guarantees for sure
success in every situation
Disadvantages

L’ORÉAL Starbucks Whirlpool Corporation
Shangri-La Hotels Coca-Cola Procter & Gamble
Toyota McDonalds Unilever
Work in groups of four.
Conduct research about the companies below to answer the
following questions:
Which belief does each company follow?
Provide examples which illustrate this belief.
Why do you think they follow this particular belief?
Then compare your answers with another group.

L’ORÉAL Starbucks Whirlpool Corporation
ethnocentric geocentric regiocentric
Shangri-La Hotels Coca-Cola Procter & Gamble
regiocentric Geocentric ethnocentric
Toyota McDonalds Unilever
polycentric geocentric polycentric
Answer:

What are multinational corporations
and what do they do?
 A multinational corporation (MNC) is a company which
conducts business in more than one foreign country.
 A common MNC model is to put the executive headquarters
in the home country, and production facilities in one or more
other countries.
 MNCs embrace globalization and have a large amount of
equity (capital) invested in host countries.

Task
In groups, brainstorm advantages and disadvantages that
MNCs can have on the host country.
Can you think of any advantages or disadvantages?

Employment in the local area should increase due to local
Employment recruitment.
The domestic government should see increases in tax revenue
Tax Revenue resulting from taxes paid by the MNC.
Adv. The technology and production methods brought by the MNC
Technology
Transfer to the host country will be learned and beneficial to the
workers and other local firms.
Having the MNC produce goods/services in the domestic
Product
Selection country will allow the local consumers a wider choice of
goods/services.
Answer:

Disadv.
Environment
al Impact
The MNC will most likely want relaxed regulations towards
their processes which might be damaging to the
environment.
Natural
Resources
Some MNCs will enter the host country to gain access to
natural resources with detrimental short-term effects for
the
host country.
Competition Entrance of MNCs to the host countries market will cause
increased competition whereby the MNCs might have a
head start because of their vast resources and personnel.
Cultural and
Social
impact
Some MNCs have been known to enter the host country
and dilute local customs and traditional cultures.

profit-taking
restrictions
limited
technology
transfer
foreign
exchange
controls
overpriced
resources
interference in
local
government
failure to
uphold
contracts
disrespect for
local
customs
domination of
the
local economy
Task
Below is a list of complaints; some are expressed by MNCs and
others are expressed by host countries. Sort them onto the
correct side of the scale.
Can you think of any other complaints?

Answer:
Common MNC complaints Common host country
complaints
• profit-taking restrictions
• failure to uphold contracts
• foreign exchange controls
• overpriced resources
• interference in local
government
• limited technology transfer
• disrespect for local customs
• domination of the local
economy

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EForeign Markets Entry ModesE

Different modes of entry
EXPORTING
o indirect exporting
o direct exports
LICENSING
FRANCHISING
 SPECIAL MODES
o Contract manufacturing
o Management Contracts
o Turnkey projects
 FDI
 The internet

 Involves marketing and selling
home country goods and services
in another country
 No investment in host country
production facilities
 Most of the costs are marketing
expenses
Exporting

Forms of Exporting
Indirect exporting Direct exporting
Exporting

Direct export – Direct export means that the company
works with foreign customers or markets with the opportunity
to develop a relationship no involvement of agent, distributors,
export house or trading company

Indirect export –means that the company participates
in international business through an intermediary(agents,
distributors, export house, or trading company that performs
exporting activities) and does not deal with foreign customers
or markets

Advantage Disadvantage
• Relatively low financial risk
• Permit gradual market entry
• Acquire knowledge about
local market
• Avoid restrictions on foreign
investment
• Vulnerability to tariffs and
NTBs
• Logistical complexities
• Potential conflicts with
distributors
Exporting

Exporting is most effective when the host
country:
 is politically unstable
 has high production costs
 offers limited sales volume potential
 requires little adaptation of the good/service

Licensing is an agreement where when a firm (licensor) , leases
the right to use its intellectual property—technology, work methods,
patents, copyrights, brand names, or trademarks—to another firm
the(licensee), in return for a royalty fee from the licensee.
The intangible property (intellectual property ) licensed may
include:
– Patents
– Trademarks
– Copyrights
– Technology
– Technical know-how
– Specific business skills
Licensing

Advantages
• Low financial risks
• Low-cost way to assess
market potential
• Avoid tariffs, NTBs,
restrictions on foreign
investment
• Licensee provides
knowledge of local markets
Disadvantages
• Limited market
opportunities/profits
• Dependence on licensee
licensee
• Possibility of creating
future competitor
Licensing

Licensing is most effective when the
host country:
 has high investment and import barriers
 offers a small potential sales volume
 makes it difficult for a new competitor to enter the market
 requires a big cultural adaptation

 Franchising is basically a specialized form of licensing in which
the franchiser not only sells intangible property to the
franchisee, but also insists that the franchisee agree to abide
by strict rules as to how it does business.
 The franchiser typically receives a royalty payment.
 Whereas licensing is pursued primary by manufacturing firms,
franchising is employed primarily by service firms.
Franchising

 Franchisee has to pay a fixed
amount and royalty based on
sales.
 Franchisee should agree to
adhere to follow the franchisor’s
requirements
 Franchisor helps the franchisee in
establishing the manufacturing
facilities
 Franchisor allows the franchisee
some degree of flexibility.
 Eg. McDonalds, Subway, KFC
Franchising Agreements

Advantages
• Low-cost way to assess market
potential
• Avoid tariffs, NTBs, restrictions
on foreign investment
• Maintain more control than
with licensing
• Franchisee provides
knowledge of local market
Disadvantages
• Limited market
opportunities/profits
• Dependence on franchisee
franchisee
• Possibility of creating
future competitor
Franchising

 A joint venture entails
establishing a firm that is jointly
owned by tow or more
otherwise independent firms.
 Sony-Ericsson is a joint venture
by the Japanese consumer
electronics company Sony
Corporation and the Swedish
telecommunications company
Ericsson to make mobile phones
Joint Venture

Advantages:
• Benefit from local
partner’s knowledge.
• Shared costs/risks with
partner.
• Reduced political risk.
Disadvantages:
• Risk giving control of
technology to partner.
• May not realize
experience curve or
location economies.
• Shared ownership can
lead to conflict
Joint Venture

Joint venture are most effective when the host
country
 Offers a high potential sale volume
 Has some political risk
 Makes it difficult for foreign business owners
 Is able to provide the necessary skills and distribution network

 when the home country company
invests in plant, machinery and labour
in the overseas market.
 The investment is made by purchasing
an existing business or setting up a
new one.
 The significant level of investment
allows a high degree of control over
how the business is run.
Foreign Direct Investment (FDI)

Advantages
• Can better apply specialized
knowledge
• Obtain greater knowledge of
local market
• In control of
assets/technology
• Viewed as an insider
• Can claim foreign exchange
earnings
Disadvantages
• Higher risk than other
modes
• Need for more investment
of resources and
commitment
• May be difficult to
effectively manage the host
country resources
Foreign Direct Investment (FDI)

FDI is most effective when the host country:
 offers a high potential sales volume
 has a low political risk
 has high import barriers
 requires little cultural adaptation

 The Internet is used by both
conventional companies which
have integrated e-marketing
approaches, as well as new,
wholly Internet-based companies.
 For example, strawberrynet.com
sells perfume, skincare and make-
up products worldwide; all
exclusively online.
The internet

Advantages:
• Minimal investment and
risk
• Speedily implemented
• Can build global brand
awareness
• Usually high ROI
• A way of getting around
trade barriers
Disadvantages:
• Minimal customer
relationship: difficult to
build loyalty
• Limited to products that
need little/no cultural
adaptation, i.e.
standardized products
• Some host countries block
e-imports
The internet

The Internet is particularly effective when the
host country:
 offers a low potential sales volume
 has a high political risk
 applies minimal import duties
 requires no product adaptation

Task
Work with a partner. Find a company that has expanded
internationally and describe which one of the foreign
market entry modes they are using.
Here are some questions that will help start your research.
• What is the name of the company?
• Which countries do they operate in?
• Which foreign market entry modes are they using and how are
they utilizing it?
• Are there any other companies involved?
• Join another pair and compare your research.

 Contract manufacturing is outsourcing entire or part of
manufacturing operations.
 The iPad and iPhone, which are products from Apple Inc., are
manufactured in China by Foxconn. Hence, Foxconn is a
contract manufacturer and Apple benefits from a lower cost
of manufacturing devices
Contract manufacturing

Advantages
• Minimize resources
devoted to
manufacturing
• Focus firm’s
resources on other
elements of the
value chain
Disadvantages
• Reduced control
(may affect quality,
delivery schedules,
etc.)
• Reduce learning
potential
• Potential public
relations problems
Contract manufacturing

 A management contract is an agreement between two
companies whereby one company provides managerial
assistance, technical expertise and specialized services to the
second company for a certain period of time in return for
monetary compensation.
 Eg. Schools, sports facilities, hospitals, office buildings, malls
and large businesses have on-site cafeterias, restaurants.
Management Contract

Advantages
• Focus firm’s resources
on its area of contracts
• Minimal financial
exposure
Disadvantages
• Potential returns limited
by contract expertise
• May unintentionally
transfer proprietary
knowledge and
techniques to contractee
Management Contract

 A turnkey project is a contract under which a firm agrees to fully
design, construct and equip a manufacturing/business/service
facility and turn the project over to the purchaser when its
ready for operation, for a remuneration.
Turnkey Project

Turnkey Project
Advantages
• Focus firm’s resources
on its area of expertise
• Avoid all long-term
operational risks
Disadvantages
• Financial risks
-cost overruns
• Construction risks
-Delays
-Problems with suppliers

Merger :
The combining of two or more companies, generally by offering
the stockholders of one company securities in the acquiring
company in exchange for the surrender of their stock.
Acquisition :
When one company takes over another and clearly established
itself as the new owner, the purchase is called an acquisition.
Mergers and Acquisitions

Advantages
• Obtains control over the
acquired firm such as
factories and brand
names
• Integrate the mgt of the
firm into its overall
international strategy
Disadvantages
• Assumes all the liabilities
such as financial and
managerial
Mergers and Acquisitions

MAIN BARRIERS
 Cultural and social barriers
 Legal and political barriers
 Economic barriers

A
E
F Future Trends in Globalization

• By 2025 the global population is predicted to
reach 8 billion
• Dependency ratios are expected to proceed
upwards as a result of increasing life expectancy
and decaling birth rate
Demographic
and social
Change
• The aggregate purchasing power of emerging
economies will overtake that of G7 Countries by
2030.
• Consumers from various regions are increasing
consumptions at unprecedented rates.
shifts in
global
economic
power
• Rapid expansion is putting urban infrastructure,
environmental and social fabric under pressure
• Businesses have to adjust to the urban customer
base, and city leaders have to ensure growth is
sustainable
Rapid
Urbanisation

• The rise in global population increases demand
for finite resources such as energy food and water
Climate
change and
Resources
Scarcity
• Companies are now being forced to create
business plans that fit strategically to the digital
world
Technological
Breakthrough
• falling trade barriers allow firms to move
manufacturing activities to countries where
wages rates are much lower
Depressed
wages in
developed
nations

1. Political factors
2. High foreign investments
and high cost
3. Exchange instability
4. Entry requirements
5. Tariffs, quota etc.
6. Corruption and
bureaucracy
7. Technological policy
8. Quality Management
Problems in Globalization

Reasons for recent growth in
Globalization
 Advancement of technology
 Business is becoming more global because
•Transportation is quicker
•Communications enable control from afar
•Transportation and communications costs are more conducive for
international operations
 Liberalization of cross-border movements
 Lower Governmental barriers to the movement of goods, services,
and resources enable Companies to take better advantage of
international opportunities

Globalization vs internationalization
Globalization Internationalization
1 It is an economic process as it aims
in integrating the opening the
economies of the nation for the
other nations and to sync the rules
and regulations with other nations.
Internationalization is an improvisation
process as it will lead in expanding of the
business across the nations by producing
goods or delivering services that have the
capability of entering into the international
markets.
2 It is the bigger picture, the one into
which international business fits.
It is the part of globalization.
3 Globalization is a result which is
desired by the global economies
Internationalization is the task/process with
which globalization can be achieved
4 Globalization is more related to
economies of the nation
Internationalization is more related with the
individual firm or business for their goods
and services

Globalization vs internationalization
Globalization Internationalization
5 International Monetary Fund, world
Bank, world trade organization etc. are
handling globalization implementation
European Union, Asia Pacific Economic
Cooperation, North American Free Trade
Agreement, etc. work for boosting the
internationalization.
6 It is focusing on free flow of manpower
from one country to another countries
by eliminating visa obligations, removing
tariff and non-tariff trade barriers,
liberalizing investment-related
obligations etc.
Internationalization is sourcing, producing
or selling materials or delivering services
from one or more countries, setting up of
the branches and subsidiaries in other
countries etc.
7 Globalization gets affected by
infrastructural and logistics set up, and
telecommunications etc.
Internationalizations gets affected by
cultural tastes and preferences, local
traditions etc.

References:
• Hill,C. & Hernández-Requejo, W. (2011). Global business
today. New York, NY: McGrew-Hill.
• https://www.globalization101.org/what-is-globalization/
• https://youmatter.world/en/definition/definitions-
globalization-definition-benefits-effects-examples/
• https://www.piie.com/microsites/globalization/what-is-
globalization

Thank you for your attention
Course: International Business Management
Slide share: May,2020.
Email: mr_arjun_paudel@yahoo.com

Unit 1: Introduction to Globalization and International Business

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