Q.1 WHAT IS GLOBALIZATION? WHAT ARE ITS BENEFITS?

HOW DOES
GLOBALIZATION HELP IN INTERNATIONAL BUSINESS? GIVE SOME
INSTANCES.

Globalization

Economic "globalization" is a historical process, the result of human innovation and

technological progress. It refers to the increasing integration of economies around the
world, particularly through trade and financial flows. The term sometimes also refers to
the movement of people (labor) and knowledge (technology) across international
borders. There are also broader cultural, political and environmental dimensions of
globalization that are not covered here.

At its most basic, there is nothing mysterious about globalization. The term has come
into common usage since the 1980s, reflecting technological advances that have made
it easier and quicker to complete international transactions – both trade and financial
flows. It refers to an extension beyond national borders of the same market forces that
have operated for centuries at all levels of human economic activity – village markets,
urban industries, or financial centers.

Markets promote efficiency through competition and the division of

labor – the specialization that allows people and economies to focus on what they do
best. Global markets offer greater opportunity for people to tap into more and larger
markets around the world. It means that they can have access to more capital flows,
technology, cheaper imports, and larger export markets. But markets do not necessarily
ensure that the benefits of increased efficiency are shared by all. Countries must be
prepared to embrace the policies needed, and in the case of the poorest countries may
need the support of the international community as they do so.

Benefits of Globalization:-

1. Globalization offers extensive opportunities for truly worldwide development

2. Global economy more quickly than others

3. Countries that have been able to integrate are seeing faster growth and reduced
poverty.

4. Its build strong economies and a stronger world financial system.

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Globalization helps in International Business:-

One of the ironies of the recent success of India and China is the fear that… success in
these two countries comes at the expense of the United States. These fears are
fundamentally wrong and, even worse, dangerous. They are wrong because the world
is not a zero-sum struggle… but rather is a positive-sum opportunity in which improving
technologies and skills can raise living standards around the world.

They see globalization as the beneficial spread of liberty and capitalism. Liberals see it
as a tool for relieving poverty and providing the poor with a foothold in the global
economy.

Supporters of democratic globalization are sometimes called pro- globalists. They

believe that the first phase of globalization, which was market-oriented, should be
followed by a phase of building global political institutions representing the will of world
citizens. The difference from other globalists is that they do not define in advance any
ideology to orient this will, but would leave it to the free choice of those citizens via a
democratic process. Supporters of globalization argue that the anti-globalization
movement uses anecdotal evidence to support their protectionist view, whereas
worldwide statistics strongly support globalization.

The percentage of people living on less than $2 a day has decreased greatly in areas
affected by globalization, whereas poverty rates in other areas have remained largely
stagnant. In East-Asia, including China, the percentage has decreased by 50.1%
compared to a 2.2% increase in Sub-Saharan Africa.

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Q.2 WHAT IS CULTURE AND IN THE CONTEXT OF INTERNATIONAL
BUSINESS ENVIRONMENT HOW DOES IT IMPACT INTERNATIONAL
BUSINESS DECISIONS?

In this new millennium, few executives can afford to turn a blind eye to global business
opportunities. Japanese auto-executives monitor carefully what their European and
Korean competitors are up to in getting a bigger slice of the Chinese auto-market.

One such new trajectory is the concern with national culture. Whereas traditional IB
research has been concerned with economic/ legal issues and organizational forms and
structures, the importance of national culture – broadly defined as values, beliefs,
norms, and behavioural patterns of a national group – has become increasingly
important in the last two decades, largely as a result of the classic work of Hofstede
(1980).

The purpose of this Unit is to provide a state-of-the-art review of several recent

advances in culture and IB research, with an eye toward productive avenues for future
research. It is not our purpose to be comprehensive; our goal is to spotlight a few highly
promising areas for leapfrogging the field in an increasingly boundary-less business
world. We first review the issues surrounding cultural convergence and divergence, and
the processes underlying cultural changes. We then examine novel constructs for
characterizing cultures, and how to enhance the precision of cultural models by
pinpointing when the effects of culture are important.

1. Cultural change, convergence and divergence in an era of partial globalization

An issue of considerable theoretical significance is concerned with cultural changes and

transformations taking place in different parts of the world. Standard, culture-free
business practices would eventually emerge, and inefficiencies and complexities
associated with divergent beliefs and practices in the past era would disappear. In the
following section, we review the evidence on the issue and conclude that such an
outlook pertaining to the convergence of various IB practices is overly optimistic.

2. Evolution of partial globalization

Globalization refers to a ‘growing economic interdependence among countries, as

reflected in the increased cross-border flow of three types of entities: goods and
services, capital, and know-how’ (Govindarajan and Gupta, 2001, 4). Few spoke of

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‘world economy’ 25 years ago, and the prevalent term was ‘international trade’ (Drucker,
1995). However today, international trade has culminated in the emergence of a global
economy, consisting of flows of information, technology, money, and people, and is
conducted via government international organizations such as the North American Free
Trade Agreement (NAFTA) and the European Community; global organizations such as
the International Organization for Standardization (ISO); multinational companies
(MNCs); and cross – border alliances in the form of joint ventures, international
mergers, and acquisitions. These inter – relationships have enhanced participation in
the world economy, and have become a key to domestic economic growth and
prosperity (Drucker, 1995, 153).

3. Role of multiculturalism and cultural identity

The broad ideological framework of a country, corporation, or situation is the most

important determinant of the cultural identity that people develop in a given locale
(Triandis, 1994). The ‘melting pot’ ideology suggests that each cultural group loses
some of its dominant characteristics in order to become the mainstream: this is
assimilation, or what Triandis (1994) calls subtractive multiculturalism.

4. Implications of convergence and divergence issues

One message is clear: while convergence in some domains of IB activity is easily

noticeable, especially in consumer values and lifestyles, significant divergence of
cultures persists. In fact, Hofstede (2001) asserts that mental programs of people
around the world do not change rapidly, but remain rather consistent over time.

5. Processes of cultural changes

In the previous section, we make the point that, through the process of globalization,
cultures influence each other and change, but whether or not these changes will bring
about cultural convergence is yet to be seen. In this section, we delineate a general
model that describes and explains the complex processes underlying cultural changes.
As explained before, IB is both an agent and a recipient of cultural change, and for
international business to flourish it is important to understand its complex, reciprocal
relationships with cultural change.

6. The dynamics of culture as a multi-level, multi-layer construct

The proposed model consists of two building blocks. In the model, the most macro-level
is that of a global culture being created by global networks and global institutions that
cross national and cultural borders. As exemplified by the effort of the Davos group
discussed earlier, global organizational structures need to adopt common rules and
procedures in order to have a common ‘language’ for communicating across cultural
borders (Kostova, 1999; Kostova and Roth, 2003;

7. Factors that facilitate cultural change

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Culture itself influences the level of resistance or acceptance of change. Harzing and
Hofstede (1996) proposed that certain cultural values facilitate change, whereas others
hinder it. The values of low power distance, low uncertainty avoidance, and
individualism facilitate change. Change threatens stability, and introduces uncertainty,
and resistance to change will therefore be higher in cultures of high rather than low
uncertainty avoidance (Steensma et al., 2000). Change also threatens the power
structure, and therefore will be avoided in high power distance cultures. Finally, change
breaks the existing harmony, which is highly valued in collectivistic cultures, and
therefore will not be easily accepted by collectivists (Levine and Norenzayan, 1999).

8. Understanding when culture matters: increasing the precision of cultural

models

Beyond exploring new cultural constructs and the dynamic nature of culture, we also
argue for the importance of examining contingency factors that enhance or mitigate the
effect of national culture. Consider the following scenario. A senior human resource
manager in a multinational firm is charged with implementing an integrative training
program in several of the firm’s subsidiaries around the globe. Over the term of her
career, the manager has been educated about differences in national culture and is
sensitive to intercultural opportunities and challenges.

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Q.3 EXPLAIN THE MEANING OF THE TERM ‘TRADE LIBERALIZATION’
AND ADVANTAGES. ALSO, IDENTIFY SOME COMMONLY OBSERVED
MISTAKES IN INTERNATIONAL TRADE.

Trade Liberalization:-

Opening up their economies to the global economy has been essential in enabling
many developing countries to develop competitive advantages in the manufacture of
certain products. In these countries, defined by the World Bank as the "new
globalizers," the number of people in absolute poverty declined by over 120 million (14
percent) between 1993 and 1998. Freeing trade frequently benefits the poor especially.
Developing countries can ill-afford the large implicit subsidies, often channeled to
narrow privileged interests that trade protection provides. Moreover, the increased
growth that results from free trade itself tends to increase the incomes of the poor in
roughly the same proportion as those of the population as a whole. New jobs are
created for unskilled workers, raising them into the middle class. Overall, inequality
among countries has been on the decline since 1990, reflecting more rapid economic
growth in developing countries, in part the result of trade liberalization.

Some common mistake in International Trade:-

1. Failure to obtain export counselling and to develop a master international

marketing plan before starting an export business:

2. Insufficient commitment to overcome the initial difficulties and financial

requirements of exporting:

3. Failure to have a solid agent and or distributor’s agreement:

4. Blindly chasing orders from around the world

5. Failure to understand the connection between country risk and the probability of
getting export financing

6. Failure to understand Intellectual Property Rights (IPR):

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7. Insufficient attention to marketing and advertising requirements:

8. Lack of attention to product adaptation and preparation needs

9. Failure to consider legal aspects of going global.

10. Failure to know the rules of trade.

Advantages of International Trade:-

1. Enhance your domestic competitiveness

2. Increase sales and profits

3. Gain your global market share

4. Reduce dependence on existing markets

5. Exploit international trade technology

6. Reduce dependence on existing markets

7. Exploit international trade technology

8. Extend sales potential of existing products

9. Stabilize seasonal market fluctuations

10. Enhance potential for expansion of your business

11. Sell excess production capacity

12. Maintain cost competitiveness in your domestic market

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Q.4 EXPLAIN THE PRODUCT LIFE CYCLE THEORY.

Product Life Cycle Theory:-

Life cycle theory has been used since the 1970s to describe the behaviour of a product
or service from design to obsolescence.

The typical pattern of a product is represented by a curve divided into four distinct
phases: introduction, growth, maturity, and decline. Recent research in the area has
focused on its use in decision making in areas ranging from those as broad as overall
strategy to those as narrow as equipment replacement.

But does the product life cycle, or PLC, really tell the entire story? Consider the Ford
Mustang. Since its 1964 introduction, the automobile has undergone several changes.
Performance was increased with the addition of the 428 CobraJet in 1968 and Mach I
styling in 1969. Another substantial change took place in 1971 with the introduction of
the high-performance Boss 351. Then a true muscle car, the Mustang was detuned in
1974, when oil prices forced a more fuel-efficient redesign, called Mustang II. The fourth
generation Mustang, introduced as the 1994 model, has been further refined and is
more aerodynamic than its immediate predecessor. Yet it still shares roots with earlier

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models. A 302 V-8 is still offered, the wheelbase is similar, and if one looks closely
enough, one can see its genesis in the 1964 model. The pattern evidenced by the life of
the Mustang, then, is several curves of introduction, growth, maturity, and decline.

Another intriguing example is the C-130 Hercules aircraft manufactured by Lockheed.

The company recently announced the sale of 25 "J" models to the Royal Air Force,
which is the fifth version of the Hercules originally produced in the 1950s. Although the
aircraft resembles its older relatives, the new model features a totally different
electronics package and more powerful engines. Here again, the Hercules PLC shows a
curve with five local maximum points (swells of activity, in effect), rather than the
traditional, single maximum point, PLC curve.

The examples above suggest a PLC model represented by waves of product

introductions, growth, maturity, and decline. Design engineering, process engineering,
product marketing, production, and end-of-life decisions are key elements within the
system. Each has its own cycle consisting of varying levels of activity. The waves are
triggered by critical decision points during the life of a product, when production,
operations, and marketing managers must optimize their collective efforts.

Q.5 DISCUSS THE IMPLICATIONS OF HECKSCHER-OHLIN THEORY

MODEL.

Heckscher-Ohlin Trade Model:-

The Heckscher-Ohlin (HO hereafter) model was first conceived by two Swedish
economists, Eli Heckscher (1919) and Bertil Ohlin. Rudimentary concepts were further
developed and added later by Paul Samuelson and Ronald Jones among others. There
are four major components of the HO model:

1. Factor Price Equalization Theorem,

2. Stolper-Samuelson Theorem,

3. Rybczynski Theorem, and

4. Heckscher-Ohlin Trade Theorem.

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Due to the difficulty of predicting the goods trade pattern in a world of many goods,
instead of the Heckscher-Ohlin Theorem, the Heckscher-Ohlin-Vanek Theorem that
predicts the factor content of trade received attention in recent years.

1. Eli Heckscher (1879 – 1952)

Heckscher was a Swedish economist. He is probably best known for his book
"Mercantilist." Although his major interest was in studying economic history, he also
developed the essentials of the factor endowment theory of international trade in a short
article in Swedish in 1919. It was translated into English thirty years later.

2. Bertil Ohlin (1899-1979)

Heckscher’s student, Bertil Ohlin developed and elaborated the factor endowment
theory. He was not only a professor of economics at Stockholm, but also a major
political figure in Sweden. He served in Riksdag (Swedish Parliament), was the head of
liberal party for almost a 1/4 of a century. He was Minister of Trade during World War II.
In 1979 Ohlin was awarded a Nobel prize jointly with James Meade for his work in
international trade theory.

HO Model = 2 × 2 × 2 model (2 countries, 2 commodities, 2 factors)

For example, there are two countries (America and Britain); each country is endowed
with 2 homogeneous factors (labour and capital) and produces 2 commodities.

This is the smallest case of "even" model, i.e., the number of commodities is equal to
that of factors. Extending the model to a more general case is not easy. In fact, the
results obtained from a more general model do not have the clear, common sense
interpretations which the simple HO model enjoys.

3. Factor Price Equation Theorem

Among the four main results of the HO theory, FPE is the most fragile theorem. If any of
the eight assumptions are violated, it will not hold. However, this is one of the most
powerful findings, if not the most important one, in trade theory, as it shows how trade
affects the income distribution of a trading country.

Of course, the assumptions are somewhat unrealistic in the sense that they are not
likely to be observed in the real world. However, even if some of the assumptions are
violated, international trade has a tendency to equalize factor prices; it will remove the
wage gaps between countries, despite the constraint that trading countries impose on
the movement of factors, in particular, on the movement of workers.

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Q.6. DO YOU THINK WTO IS HELPFUL FOR PROMOTING
INTERNATIONAL BUSINESS? GIVE REASONS FOR YOUR ANSWER.

1. The system helps to keep the peace:-

This sounds like an exaggerated claim, and it would be wrong to make too much of it.
Nevertheless, the system does contribute to international peace, and if we understand
why, we have a clearer picture of what the system actually does.

Peace is partly an outcome of two of the most fundamental principles of the trading
system: helping trade to flow smoothly and providing countries with a constructive and
fair outlet for dealing with disputes over trade issues. It is also an outcome of the
international confidence and cooperation that the system creates and reinforces.

2. The system allows disputes to be handled constructively:-

As trade expands in volume, in the number of products traded, and in the numbers of
countries and companies trading, there is a greater chance that disputes will arise. The
WTO system helps resolve these disputes peacefully and constructively.

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There could be a down side to trade liberalization and expansion. More trade means
more possibilities for disputes to arise. Left to themselves, those disputes could lead to
serious conflict. But in reality, a lot of international trade tension is reduced because
countries can turn to organizations, in particular the WTO, to settle their trade disputes.

3. A system based on rules rather than power makes life easier for all:-

The WTO cannot claim to make all countries equal. But it does reduce some
inequalities, giving smaller countries more voice, and at the same time freeing the major
powers from the complexity of having to negotiate trade agreements with each of their
numerous trading partners

Decisions in the WTO are made by consensus. The WTO agreements were negotiated
by all members, were approved by consensus and were ratified in all members’
parliaments. The agreements apply to everyone. Rich and poor countries alike have an
equal right to challenge each other in the WTO’s dispute settlement procedures.

This makes life easier for all, in several different ways. Smaller countries can enjoy
some increased bargaining power. Without a multilateral regime such as the WTO’s
system, the more powerful countries would be freer to impose their will unilaterally on
their smaller trading partners. Smaller countries would have to deal with each of the
major economic powers individually, and would be much less able to resist unwanted
pressure.

4. Freer trade cuts the cost of living:-

We are all consumers. The prices we pay for our food and clothing, our necessities and
luxuries, and everything else in between, are affected by trade policies.

Protectionism is expensive: it raises prices. The WTO’s global system lowers trade
barriers through negotiation and applies the principle of non-discrimination. The result is
reduced costs of production (because imports used in production are cheaper) and
reduced prices of finished goods and services, and ultimately a lower cost of living.

5. It gives consumers more choice and a broader range of qualities to choose

from:-

Think of all the things we can now have because we can import them: fruits and
vegetables out of season, foods, clothing and other products that used to be considered
exotic, cut flowers from any part of the world, all sorts of household goods, books,
music, movies, and so on

6. Trade raises incomes:-

Lowering trade barriers allows trade to increase, which adds to incomes – national
incomes and personal incomes. But some adjustment is necessary.

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The WTO’s own estimates for the impact of the 1994 Uruguay Round trade deal were
between $109 billion and $510 billion added to world income (depending on the
assumptions of the calculations and allowing for margins of error).

More recent research has produced similar figures. Economists estimate that cutting
trade barriers in agriculture, manufacturing and services by one third would boost the
world economy by $613 billion – equivalent to adding an economy the size of Canada to
the world economy.

In Europe, the EU Commission calculates that over 1989 – 93 EU incomes increased by

1.1–1.5% more than they would have done without the Single Market.

7. Trade stimulates economic growth and that can be good news for
employment:-

Trade clearly has the potential to create jobs. In practice there is often factual evidence
that lower trade barriers have been good for employment. But the picture is complicated
by a number of factors. Nevertheless, the alternative – protectionism – is not the way to
tackle employment problems.

8. The basic principles make the system economically more efficient, and they cut
costs:-

Many of the benefits of the trading system are more difficult to summarize in numbers,
but they are still important. They are the result of essential principles at the heart of the
system, and they make life simpler for the enterprises directly involved in trade and for
the producers of goods and services.

Trade allows a division of labour between countries. It allows resources to be used

more appropriately and effectively for production. But the WTO’s trading system offers
more than that. It helps to increase efficiency and to cut costs even more because of
important principles enshrined in the system.

9. The system shields governments from narrow interests:-

The GATT – WTO system which evolved in the second half of the 20th Century helps
governments take a more balanced view of trade policy. Governments are better –
placed to defend themselves against lobbying from narrow interest groups by focusing
on trade – offs that are made in the interests of everyone in the economy

10. The system encourages good government:-

Under WTO rules, once a commitment has been made to liberalize a sector of trade, it
is difficult to reverse. The rules also discourage a range of unwise policies. For
businesses, that means greater certainty and clarity about trading conditions. For
governments it can often mean good discipline.

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The rules include commitments not to backslide into unwise policies. Protectionism in
general is unwise because of the damage it causes domestically and internationally, as
we have already seen.

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