Week 1

1.0 Introduction to globalization

Focusing on globalization at the firm level and understanding the drivers of globalization.
-Understand globalization of markets and production
-Understand the drivers of globalization
-Understand the changing nature of the global economy

Topic overview

Over the last several decades the global economy has been moving away from state-
dominated isolated economies to market-driven globally integrated economies.
This shift towards greater integration and interdependence with the rest of the global
economy is taking place across all economies, but with increasing intensity in the emerging
or developing economies including Brazil, India, and China. While advancement in
technology and lowering of trade and investment barriers have been fuelling the
globalization phenomenon, global firms have been the primary vehicles through which
globalization of markets and production have taken place. The effect of globalization and of
global firms is so pervasive that today it is difficult to imagine a product that does not have
any global linkage. It is thus not only relevant but critical that we develop an understanding
of global firms, their strategies, factors that shape global strategy, and implications they
have on the wider society.
1.1 Required reading
Two most important benefits of opening borders for trade
-opening borders can allow for knowledge-intensive activities of foreign multinational
enterprises to be performed in the home market, which can then lead to knowledge spill
over and transfer to local companies ultimately leading to greater innovation potential

The benefits of opening border trade are diverse. It can be subdivided into benefits to the
whole world, benefits to each country, and benefits to individuals. 1. Opening border trade
brings different cultures and new products to different countries, enhances exchanges
between countries, and improves the diversity of products in the market. 2. Increase global
GDP, positive influence for many industries, may improve income for individuals.
 1.2 Globalization of markets and production

Globalization of markets
Globalization of markets refers to the merging of distinct national markets into one huge
global marketplace.
Falling barriers to cross-border trade and investment have made it possible for firms to
sell internationally. In addition, tastes and preferences of consumers across the world
are also converging on some global norm for a wide range of products and services. This
allows for firms to be able to become global by selling their products beyond their
home markets. While the globalization of markets is very easily discernible for specific
firms and the products that they sell, such as Coca-cola soft drinks, Starbucks coffee and
IKEA furniture, it can also be observed at the wider industry level.
 Example: The wine industry

The below chart on consumption of red wine is indicative of how red wine, at the
industry level, has a global market and is not restricted to the typical traditional markets
of wine producing nations such as France and Italy. If anything, there is actually a major
shift in the growth markets for red wine from the West (Europe) to the East (China).

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Globalization of production

Globalization of production refers to the sourcing of goods and services from locations
around the globe to make the final product or service. This is done primarily to take
advantage of national differences in the cost and quality of factors of production such as
labor, energy, land and capital.

Example: Tesla
For example, Tesla has a number of suppliers spread across the world, including Harada,
based in Japan that supplies the Antenna system, and Brembo, based in Italy that supplies
the brake calliper and disc. It is interesting to analyse why a firm such as Tesla which is
based in the United States (US) and is extremely resourceful sources certain parts from
distant locations.
Example: Boeing
An even more geographically diversified supply chain network is evident in the case of
Boeing 787 where parts are sourced from Australia, Asia, Europe in addition to from the
home country of US. Could there be factors beyond cost and quality for such a globalized
production network of one of the largest aircraft manufacturers that has been historically
supported by the US government?

1.3 Drivers of globalization

Decline in barriers to trade and investment
Historically, we have witnessed the reduction with the formation of international
organizations, regional economic blocs, and government initiatives to promote
globalization.
The establishment of the World Trade Organization (WTO) in 1995 after several rounds of
multilateral negotiations was a milestone that paved the way for freer global trade and
investment flows. The pre-war global economy was characterized by high tariffs and
retaliatory policies. WTO’s key role has been harmonizing regulations among member
countries and arbitration of trade disputes.
As a consequence of the declining trade and investment barriers, the world is becoming
more globalized as seen in the rapid growth of world trade compared to growth in GDP.
GDP is the total value of products and services produced in a country over the course of a
year, and this has been lagging behind the growth of world trade. With the exception of the
dot-com bubble burst, global financial crisis, and covid-19 pandemic, international trade has

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shown an upward trend.

The trend shows that lowering of tariffs is happening not only in advanced economies but
also in developing economies. WTO membership comes with obligations to reduce trade
barriers. Such policies facilitate goods and services entering the country and increase trade
volume.

Technological advances
In the 19th century, the introduction of railroads and shipping contributed to the increase in
cross-border trade. Many multinational enterprises (MNEs) emerged with the widespread
use of electricity in manufacturing. Some outcomes of this include:

Decline in the costs of transporting goods by shipping, air freight, travel (business and
tourism), communications (phone charges) and the internet contribute to the rapid increase
in global interconnectedness and expansion of worldwide networks.
Drastic decline in the cost of communications, especially telephone charges, had a
significant effect on globalization. We'll explore this further in the example below.
Example: International call costs

Example: In the 1970s, a doctoral student in Michigan, USA, making weekly trunk calls
through a phone operator to reach his parents in Malaysia had to pay $10 per minute and
could only afford a short chat each time. The same can be applied to a company

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headquartered in the UK communicating with sales agents based in cities in Asia and
America. In the 1980s, HQ communications with overseas subsidiaries were conducted via
phone, fax, telex or postal mail. These were slower and more costly than what we are used
to and take for granted today.

The internet has contributed to real time dissemination of information and the rapid
expansion of international networks. It has become more economical for firms to expand
their operations overseas in multiple locations and integrate their global value chain
activities (GVC) with suppliers, intermediate producers, processors and distributors. It has
become more economical for firms to expand their operations overseas in multiple locations
and integrate their GVC.

The media and advertising have helped to promote lifestyles and values of US and EU
countries. This enabled firms to standardise production and achieve scale economies. E.g.
energy saving electrical appliances and automobiles.

At the same time, technological advances have opened opportunities for emerging
economies. In Thomas Friedman’s book “The world is flat” (2005) he argued that more
people in different parts of the world (including in less developed countries) can collaborate
with the technological tools available to all to provide ICT services for finance and
healthcare worldwide.

Knowledge society
In an information age, the global economy is characterized by knowledge. Education,
mobility of human resources and spillovers from knowledge transfer provide the
foundations for knowledge building and the potentials to create scientific and technological
bases .

Many new products and services based on technical and scientific innovations are created
and exchanged in the new knowledge economy.
Firms that own intellectual property and difficult to imitate technology and innovation enjoy
competitive advantage vis-a-vis their rivals.
Countries that have the resources for R&D and a pool of talents in science and technology
support higher value-added activities and firms that are competitive in global markets.
The United Nations and the Global Talent Competitive Index identified countries that are
the best at attracting and retaining highly-skilled workers. Such movement of highly skilled
workers contributes to the globalization phenomenon. Migrant communities bring about
their home culture, new ideas and thinking to the country they move to.

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Changing demographics of the global economy
Recent decades saw huge market potential of former closed economies being unleashed when they
engaged with the global economy.  Former communist countries introduced market reforms that
support exporting and investment opportunities. For example, China opened its doors in 1978 and
further liberalised and spurred firms to be more competitive when it acceded to WTO in 2001.
Transitioning economies that offer growth potential can be found in Eastern Europe and Central Asia.
Besides the BRIC countries (Brazil, Russia, India, China) the global rising stars identified & coined
by EIU (2008) as the next wave of emerging economies are the CIVETS (Columbia, Indonesia,
Vietnam, Egypt, Turkey, South Africa). Another group is the N-11 (the next eleven, which includes
Mexico, Bangladesh, Iran, Nigeria, Pakistan and the Philippines).
The growth of advanced/mature economies has plateaued and their markets saturated. Emerging
markets are catching up with GDP growth and the average GDP per capita. The G20 with 4.2 billion
consumers has eclipsed the G8 with only 900 million consumers.
The character of the MNE has evolved with the rise of multinationals from emerging economies.  A
decade ago, more than a third of the world’s 2000 largest multinationals were US firms. However,
Fortune Global 500 companies in 2020 are from 32 countries. Of these 124 are Chinese companies
(including HK) ahead of the 121 from the US, whereas there were no Chinese companies on the list in
1990.

Lobbyists of protectionist policies and crises in the global economy are not drivers of
globalization. Protectionism increases barries to free trade, and financial crises tend to
shake confidence and discourage global expansion.

1.4 Changing nature of the global economy

Changes during the past two decades
The global economy has changed from being industrially focused to being technologically
focused over the past two decades. Digitalization plays a significant role in the current
global economy. Most international companies today are high-tech companies, such as IBM,
Microsoft, Apple, and Google. The industrially focused firms General Electric, Walmart, and
Ford represent a minority of exceptions.

Another change in the global economy is the development of emerging markets. The
economic rise of China has been a compelling story for decades. Until recently, the world
has only seen a fraction of the Eastern superpower’s economic capabilities—in the coming
years, these capabilities will become apparent at a startling scale. Understandably, for
westerners, the scope of China’s population and economy remain quite difficult to grasp, as
China has countless cities, each with a higher economic productivity than entire countries.

The global economy has changed from high- to low-transaction cost. Tariff has been
reduced significantly in the past few decades. Even if anti-globalist nationalism exists in
many developed countries—such as with the United Kingdom's (UK) Brexit and United
States (US) President Trump’s Trade Policy—globalization is reversible. After joining the
World Trade Organisation (WTO), China plays an important role in the global economy.

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Chinese President Xi Jingping has recently inaugurated the Belt and Road Initiative and also
leads the newly formed Regional Comprehensive Economic Partnership. These
developments are signs that China is willing to join the global economy. Moreover, the
transportation cost has reduced significantly owing to the invention of container
transportation. Whereas it used to take several years to travel from China to India—like it
says in Monkey King—now it only takes a few hours.

Trade war has affected the trend of the global economy

The trade war has been taking place for more than a year and weakened economic
development in China has been reflected particularly in the decline of foreign trade. China’s
imports of goods have decreased from last year. Especially, the value of goods imported
from the US has dropped sharply. July 2019 saw a drop of more than 25 percent compared
with that of a year previous. Lower demand and fragmentation of production chains caused
by the trade war have diminished the foreign trade flows of goods imported from China’s
neighbouring countries as well. In the current year, annual growth in the value of imports
from the European Union (EU) has almost come to a standstill, while just last year the value
of imports grew by more than 10 percent annually. The US’ share of Chinese imports has
fallen sharply since early 2018, whereas the EU’s market share has recently increased
slightly. In a survey by the American Chambers of Commerce, three out of four American
companies in China say that increases in US and Chinese tariffs are having a negative impact
on their businesses. According to the same survey, around 40 per cent of respondents are
considering relocating or have already relocated their manufacturing facilities outside of
China—mostly to other Asian countries or to Mexico. However, since Trump lost the US
election, the US trade policy will change. Biden probably will have a different strategy and
the global economy still has a promising future.

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Week 2

2.0 Introduction to strategic challenges in globalization

choice of market and choice of product in their internationalization process.
-Understand the different facets of a global company
-Understand the complexity in choosing the product for internationalization
-Understand the complexity in choosing the market to internationalize into

Topic overview
Global companies are complex entities given their business interest in a wide variety of
international markets. Their complexity also derives from the fact that their business
interest itself could vary in the different international markets that they operate in or wish
to operate in. While they may be selling their products and services in one international
market, they could be using another international market as the location to source their
supplies or organize some part of their value chain activity such as manufacturing.
Furthermore, they could be interested in yet other international markets for raising capital.
Finally, global companies also derive their globality based on the mind-set of their top
management team. All these make understanding of the internationalization process
complicated.
2.1 Required reading
is the world flat or spiky? Why?
I think the world is getting flat especially under blooming period of the technology and internet.
Open the boarder allows circulation of commodities among countries. And it enhances the supply
chain outsourcing and even brings the E-commerce into our life. This speeds up the import and
export and connects the markets in different countries together. This shapes the strategies of
different companies to have more similarities. In addition, when an enterprise is at its peak, its
growth trend will be slow down and this point, enterprise has to seek outside opportunity such as
cooperate with other firms to expand their business. Technological and corporate trends are
driving the world to become flat.

Taking this line of thought forward, I would urge you to consider businesses that are almost
fully digital such as Uber and Tiktok. Agreeably, the world is very flat for businesses in the
digital space, there are aspects of differences (especially in the regulatory domain) in
different countries which cause 'spikes'. For companies to internationalize their operations
and do it successfully it is critical that they understand the finer nuances of the nature of
'spikes' in their respective industries and regions they wish to operate in.

What is a global company?

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a global company is one that sells its products in foreign countries, but also sources the
supply of its intermediary products from foreign countries. Moreover, it may also raise
capital in foreign countries and have managers from a variety of different country
backgrounds making it a truly global company. The below diagram nicely captures all the
characteristics of a global company.

In practice, while we find a large number of companies with sales and supplies from foreign
countries, only a handful of companies raise capital in foreign markets or have a very internationally
diverse management team. Even in terms of sales and supplies, the vast majority is usually in foreign
countries that are relatively proximate and are in the same region as the home market of the focal
company. In that sense, companies are typically qualified as regional rather than global. 

2.3 Market choice

Choice of market
Choosing the right foreign market to enter is one of the key challenges that all
internationalizing firms face, especially if they are starting their internationalization journey
and are thereby in the early phase of internationalization process. Some of the main
considerations that firms think about while making this market choice decision include the
following:

– Proximity of the foreign market to their home market: proximity (or nearness) is seen in
terms of geographic, cultural, regulatory, political, as well as economic distances

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– Potential of the foreign market: potential in terms of size of consumer base, growth of
that consumer base, income levels of consumer in the foreign market, as well as
learning opportunity for the firm in the foreign market
– Degree of adaptation required: to what extent will the firm need to make changes in
their products and processes to operate in the foreign market will determine to a large
extent the costs involved of entering and operating in the particular foreign market.
– Degree of competition in the foreign market: the firm’s competitive advantage vis-a-vis
rivals (local and other foreign firms) in the foreign market will determine the ability of
the firm to exploit the foreign market presence and derive benefits.
– Firm resources and capabilities: The nature of firm resources and capabilities will also
determine the ability of the firm to leverage differences that exist between the foreign
and home markets.
Framework for choice of market
One can develop a framework to address the issue of choice of foreign markets to enter
with the help of two main factors - the strategic importance of the foreign market and the
firm's ability to exploit the foreign market. The importance of the foreign market will
depend on potential sales of the firm's products and services and the learning opportunity.
The firm's ability to exploit the market will depend on the firm's resources and capabilities,
as well as the nature of competition and entry barriers in the foreign market.
The framework can be presented in four quadrants where the horizontal axis is the firm’s
ability to exploit the market and the vertical axis is the strategic importance of the market.
Both axis range from low to high.
• The top right-hand quadrant (where the firm’s ability to exploit the market and
strategic importance of the market are both high) will consist of the most attractive markets
as those markets are highly important and the firm has the ability to exploit (leverage and
benefit) those markets.
• The bottom right-hand quadrant (where the firm’s ability to exploit the market is
high and the strategic importance of the market is low) will consist of the second most
attractive markets as those markets are not as highly important from a strategic standpoint,
but the firm is well placed to exploit those markets.
• The top left-hand quadrant (where the firm’s ability to exploit the market is low and
the strategic importance of the market is high is high) will consist of the next set of
attractive markets as those markets are highly important but the firm in question is not well
positioned to exploit and benefit from entry and operation in those markets.
• The bottom left-hand quadrant (where the firm’s ability to exploit the market is low
and the strategic importance of the market is low) will consist of the least attractive
markets.
2.4 Product choice
Minimizing risk in internationalization

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Internationalization is an inherently risky activity for firms to undertake. This is because by
embarking on an internationalization journey firms enter into unfamiliar territories which
they need to navigate with limited resources. In such a context, most firms generally tend to
avoid taking on additional risks which are associated with taking multiple products to the
international market in one go. Firms, typically, choose one product instead of all or many
products that they might be selling in their domestic operations when initiating
internationalization. The rationale for choosing the right product revolves around the
concerns about cost and benefit of launching the product in the new foreign market. Cost
will be determined by the degree of adaptation needed to fit the product with the local
requirements of the foreign market. Benefits will be determined by the expected payoffs,
mainly in terms of additional revenue, from launching the product in the new foreign
market.
Framework for choice of products
Marriott corporation is one of the largest and most global hotel chains in the world today. It
started its internationalization process in the early 1980's. By that time it had already gained
market dominance in its home market of USA and it was looking for new opportunities to
expand its revenue base. Europe and UK, in particular, was quite attractive as the new
foreign market to enter as the differences between USA and UK relative to other countries
was less. In fact, you can use the framework of choice of market to analyse why Marriott
chose UK as the first foreign market to enter. The more complex issue that managers of
Marriott had to decide was the specific product of their firm that they should take to the UK.
At that time Marriott was present in two broad categories of business. Each category further
had sub-categories of service offerings. They were:

Lodging services: full-service hotels and resorts; midprice hotels (Courtyard); budget hotels
(Fairfield Inn); Long term stay hotels (Residence Inn); and

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Contract services: Marriott management services; host/travel plazas; senior living services

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