Chapter 3: Globalization

– Meaning, Definition and Features

– Stages
– Stages of Market Production
– Investment and Technology Globalization
– Advantages and Disadvantages of Globalization
– Methods and Essential Conditions for Globalization
– Globalization in Ethiopia
 Introduction
– Business is becoming a unified, global field
– Companies that think globally have a competitive edge
– Domestic markets are saturated for many companies
– Consumers can no longer tell from which country they are buying
– Trade and investment barriers are disappearing.
– Perceived distances are shrinking due to advances in transportation
and telecommunications.
– Material culture is beginning to look similar.
– National economies merging into an interdependent global economic
system.

2
 Meaning and Definition
– World Bank: Globalization is the growing integration of economies
and societies around the world.
– IMF: the growing economic interdependence of countries worldwide
through increasing volume and variety of cross-border transactions
in goods and services, freer international capital flows, and more
rapid and widespread diffusion of technology
– Trend toward greater economic, cultural, political and technological
interdependence among national institutions and economies
– The movement towards the expansion of economic and social ties
between countries through the spread of corporate institutions and
the capitalist philosophy that leads to the shrinking of the world in
economic terms
 Cont…d
– The shift toward a more integrated and interdependent economy
– Characterized by growing economic, financial, trade, and
communications integration
Characteristics
 Global (stateless) Corporations

– Number is increasing
– Awareness of national borders decreasing
– Rising managers expected to know a 2nd or 3rd language

6
 Cont…d
– Causes
– Improved communications
– Improved transport
– Free trade agreements
– Global banking
– Effects
– Changed food supply
– Division of labor
– Less job security
– Damage to the environment
– Cultural impacts
– Increase in anti-Globalization protests
 Dimensions:
– Economic: global finance & economy, multinationals,
networking, international trade & business, new labor markets,
new development cooperation
– Political: human rights, international terrorism, war and new
security problems
– Democracy: good governance by people’s participation, human
rights
– Ecological: sustainable globalization- use of common resources
and legislation
– Cultural: multicultural society of different identities- local,
political, gender, family, religious, national, individual & social
 Cont…d
– Essential conditions for globalization

– Business Freedom: There should not be unnecessary

government restrictions which come in way of
globalization, like import restriction, restrictions on
sourcing finance or other factors from abroad, foreign
investments etc.
– Facilities: The extent to which an enterprise can
develop globally from home country base depends on
the facilities available like the infrastructural facilities
 Cont…d
– Government Support: Although unnecessary government
interference is a hindrance to globalization, government
support can encourage Globalization. Government support may
take the form of policy and procedural reforms, development of
common facilities like infrastructural facilities, R&D support,
financial market reforms and so on.
– Resources: Resources is one of the important factors which
often decides the ability of a firm to globalize. Resourceful
companies may find it easier to thrust ahead in the global
market. Resources include finance, technology, R&D
capabilities, managerial expertise, company and brand image,
human resource etc.
 Cont…d
– Competitiveness: The competitive advantage of the company is
very important determinant of success in global business. A
firm may derive competitive advantage from any one or more
of the factors such as low costs and price, product quality,
product differentiation, technological superiority, after sales
service, marketing strength etc.
– Orientation: A global orientation on the part of the
business firms and suitable globalization strategies are
essential for globalization
Globalization

Globalization of markets
Globalization of
production
Convergence in buyer
Dispersal of production
preferences in markets
activities worldwide to
around the world
minimize costs or
New markets opened via maximize quality due to
Internet, jet aircraft transportation and
moves people & goods communication
faster advances
Global media creating a
worldwide culture
 Globalization of Markets

– Merging of historically distinct and separate national markets into one

huge global marketplace
– Facilitated by offering standardized products
– Does not have to be a big company to participate
 Globalization of Production
– Refers to sourcing of goods and services from locations around the world to
take advantage of differences in cost or quality of the factors of production
(land, labor, capital & energy)
– Companies hope to lower their overall cost structure and/or improve the
quality or functionality of their product/offering- increasing their
competitiveness
Benefits of Globalization

Globalization
of markets Globalization
of production

•• Reduces
Reducesmarketing
marketingcosts
costs •• Access
Accesslower-cost
lower-costlabor
labor
•• New
Newmarket
marketopportunities
opportunities •• Access
Accesstechnical
technicalexpertise
expertise
•• Levels
Levelsincome
incomestream
stream •• Access
Accessproduction
productioninputs
inputs
•• Increased
Increasedrevenue opportunity •• different
revenueopportunity differentnations
nations==different
differentproblems
problems
via
viaglobal
globalsales
sales ••Global
Globalplanning
planningmay
maybe
beeasy,
easy,
but
butglobal
globalexecution
executionisisnot
not
 Cont…d
– Attracting foreign capital
– Productivity grows more quickly when countries produce
goods in which they have comparative advantage
– Increase in competition would make companies more cost
and quality conscious and innovative
– Global competition and imports keep a lid on prices
– Liberalization and global competition enhance consumer
choice
– An open economy spurs innovation with fresh ideas from
abroad
– Export jobs often pay more
 Globalization: Boon or Bane?
Realm of Globalization Advantages Disadvantages

Political Weakens power of Unwanted external

authoritarian influences difficult to
governments control

Economical Jobs, capital, more Exploitative; uneven

choices benefits

Cultural Offers exposure to other Risks cultural imperialism

cultures
 Cont…d
– Adverse Effects
– Loss of jobs
– Fear of loss of jobs
– Facing pay cut demands from employers
– Services and white collar jobs are increasing
vulnerable to operations moving offshore
– Loss of comparative advantage for employees when
companies build facilities in low wage countries
Jobs and Income

Opponents Supporters

 Eliminates jobs in
developed nations-  Increases wealth and
move jobs to low cost efficiency everywhere
nations  Generates labor market
flexibility in developed
 Lowers wages in
countries
developed nations
 Advances economies
 Exploits workers in of developing nations
developing nations
 Cont…d

– Countries specialize in efficiently produced goods & import those they can
not efficiently produce
– Increase income in less developed countries
– May lead to income inequality
Labor, Environment, & Markets

Opponents Supporters

– Globalization lowers + Investment raises

labor standards labor standards

– Weakens protection of + Open economies most

the environment environment friendly

– Exploits workers in + Companies concerned

poor nations for future markets
 Cont…d
– Firms move to countries with weak laws
– Economic progress leads to stronger laws
– By creating wealth and incentives for technology improvements, world
will be better
– Tie strong laws to international agreements
– Firms are not amoral
 Income Inequality debate
Income Inequality
Inequality within nations

1 Poor people in developing nations benefit most from

an open economy

Inequality between nations

2 Nations open to world trade and investment grow faster

than rich nations

Global inequality

3 Inequality has fallen, but experts disagree on

the extent of the decline
National Sovereignty

Opponents Supporters

Supranational
Globalization has
institutions reduce
benefited societies by
autonomy of national,
helping to spread
regional, and local
democracy worldwide
governments
 Cont…d
– Under the new system, many decisions that affect billions of people are
no longer made by local and national governments but instead, if
challenged by any WTO member nation, would be deferred to a group of
unelected bureaucrats sitting behind closed doors in Geneva.
 Impact on Culture

Opponents Supporters

• Destroys cultural • Specialize and trade

diversity to obtain other goods
• Homogenizes our • Import cultural goods
world from other nations
• Bankrupts local • Protects deeper moral
small businesses and cultural norms
Strategies for Entering International Markets
High

Greenfield
Venture
Foreign Operations

Acquisition
Ownership of

Joint Venture

Franchising
Licensing

Exporting
Low Low Cost to Enter Foreign Operations High
27
 Four Stages of Globalization
Domestic stage:
– market potential is limited to the home country
– production and marketing facilities located at home
– surplus may or may not be exported
– no overt efforts to develop foreign markets
International stage:
– which markets to enter?
– global sourcing (seeking cheaper sources of raw material or labor)
– exports increase
– company usually adopts a multi-domestic approach
– Exporting
– Licensing
– Franchising
– Joint ventures/acquisitions
– Direct investments
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 Cont…d
Multinational stage:
– marketing and production facilities located in many countries
– Carry out its own manufacturing, marketing & sales in the key foreign markets
– Full insider position supported by a complete business system
– Calls on mrs to replicate the hardware, systems and operational approaches that
have worked so well at home
– more than 1/3 of its sales outside the home country
 Cont…d
Global (or stateless) stage:
– making sales and acquiring resources in whatever country
offers the best opportunities and lowest cost
– Moving towards a genuinely global mode of operation
– Creates a system of values shared by corporate managers
around the globe to replace the glue a nation based
orientation once provided
– ownership, control, and top management tend to be
dispersed
– True global corporations serve the interests of consumers,
not governments. They do not exploit local situations and
then repatriate all the profits at home, leaving each local
area poorer for their having being there
– Invest, train, pay taxes, build up infrastructure and provide
good value to customers in all the countries where they do
business
 Stages of Globalization
1. Domestic 2. International 3. Multinational 4. Global

Strategic Orientation Domestically Export- Oriented Multinational Global

Oriented multi-domestic

Stage of Development Initial foreign Competitive Explosion of Global

involvement positioning international
operations

Cultural Sensitivity Of little Very important Somewhat Critically

importance important important

Manager Assumptions “One best “Many good “The least-cost “Many good
way” ways” way” ways”

SOURCE: Based on Nancy J. Adler, International Dimensions

31
of Organizational Behavior, 4th ed. (Cincinnati, Ohio: South-
Western, 2002), 8-9.
Challenges to Business

Physical Digital Reputational

security security risk

Examine company Guard proprietary Require ethical and

vulnerability and information and lawful behavior from
create a disaster confidential all employees and
recovery plan communications business partners
Globalization Drivers I

Remove barriers to trade

and investment GATT

WTO

Regional trade
agreements
Globalization Drivers II
Technological Innovation

Email and Internet, intranets, Transportation

videoconferencing and extranets advancements

Better More efficient,

Improved
coordination dependable
communications and
and control shipping
management
Advice of Global Managers

 Communicate effectively
 Know the customer
 Emphasize global awareness
 Market effectively
 Monitor business environments
 Analyze problems correctly