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Chapter 1 Globalization
Managing Organizations in a Global
Economy: An Intercultural Perspective
First Edition
John Saee
Copyright  by South-Western, a division of Thomson Learning. All rights reserved.
The Nature of International
Business Management:
Globalization and Its Impact on
Management in a Global
Economy
What is international business?
International business is the business
whose activities involve crossing the
national border.
International Business Activities
• International trade: exporting and
importing
• Merchandise exports and imports
• Commodities exports and imports
• Service exports and imports
Foreign Investment
International investments take
place when residents of one
country supply capital to residents
of another country.
Portfolio Investment
Investors are not concerned with
controlling the firm. Foreign
financial assets (stocks and bonds)
are purchased to obtain return on
investment.
Foreign Direct Investment
FDI is the purchase of sufficient
stock in a foreign firm to obtain
significant management control.
International trade/globalization is not
a recent phenomenon.
Why trade between nations?
International Trade Theories
Theory of Absolute Advantage (Adam
Smith)
International Trade Theories
Theory of Comparative Advantage
(Ricardo)
Factor Proportions Trade Theory
(Hecksher-Ohlin Theory)
International Product Life Cycle
(Vernon)
International Trade Theories
Porter’s Competitive Advantage of
Nations
Theory of International Investment
Why Companies Go Global
Why Enter Foreign Markets?
The reasons for going abroad are the
desire to increase profits and sales and
to protect them from competition.
Why Companies Go Global
Increase profits and sales by entering
new markets:
 Emerging new markets
 Creation of large new markets due to
economic integration
 Faster-growing foreign markets
Why Companies Go Global
Obtain greater profits
 Less competition
 Reduced cost of R&D per unit of
product
 Lower manufacturing costs
Protect markets, profits, and sales
 Protect domestic market
 Protect foreign markets
Why Companies Go Global
Guaranteed supply of raw materials
Acquire technology and management
know-how
Geographic diversification
Satisfy management’s desire for
expansion
The Modern Market Place
Foreign Trade Volume
 According to the statistics released by
the World Trade Organization and the
United Nations, the volume of world
trade has grown consistently faster than
the volume of world output since 1950.
Trade in goods and services is
approaching $8 trillion. With world
GDP $30 trillion, one quarter of
everything produced in the world is
exported.
• Leading exporters and importers in
merchandise trade.
• Leading exporters and importers in
services.
• Australia’s international trade.
 Direction of Trade: Developed nations
trade primarily with other developed
nations and so do the developing
nations.
Trends: developed countries, especially
USA and Japan, increasingly trade with
developing nations; developing nations
increasingly trade with each other.
Foreign Direct Investment Volume
 According to the United Nations data,
between 1984 and 1996 the average
yearly outflow of FDI from all
countries increased by 830% to U.S.
$349 billion. This compares with a 92%
expansion in world trade and a 27%
expansion in world output over the
same period (Hill 1999).
Direction
 Industrialized nations invest primarily
in other industrialized nations just as
they trade more with them.
The Role of MNCs in the World
Economy
 There are 63 000 transnational
corporations with around 700,000
foreign affiliates in the world today
(UNCTAD 2000).
 The global 500 list by Fortune.
 The national composition of the largest
multinationals.
Less than 30 countries in the world
have GDP exceeding total revenues of
General Motors.
The importance of international
business has changed dramatically
over time.
 Foreign trade and foreign direct
investments have experienced explosive
growth.
 Large MNCs play increasingly
important roles in the world economy.
 National economies are becoming more
and more interdependent.
Changes in the world environment:
 Shrinkage of time and space due to
increased application of technology.
 Institutional developments and
arrangements.
 Economic integration.
 Unification and socialization of the
global community.
Globalization of the World
Economy
What is Globalization?
Sociologists’ definition:
 Globalization is a concept which is
describing the ever-intensifying
networks of cross-border human
interaction (Hoogvelt 1997).
Economists’ definitions:
 Globalization is a drive toward the
“commercial integration of world
economies” (Drago et al. 1992, p.192).
Causes of market and industry
globalization:
(1) Technological forces
 Industrialization
 Transportation
 Information and communication
 Increased role of technology
 Globalization as a move away from “an
economic system in which national
barriers are district entities, isolated
from each other by trade barriers and
barriers of distance, time, and culture
and toward a system in which national
markets are merging into one huge
global marketplace” (Hill 1999, p.5).
(2) Social forces
• Consumerism.
• Convergence in consumers’ tastes.
• Education and training.
(3) Political and legal forces
• Reduced barriers to trade.
• Increased protection of the intellectual
property.
• Reduction of the government
interference in the economy and
privatization.
(4) Economic forces
 Increased competition, trade, incomes.
 Instututional developments and
arrangments.
Globalization
The globalization debate: prosperity or
impoverishment?
Is the shift toward a more integrated
and interdependent global economy a
good thing?
Challenges of Managing
Organizations within the Global
Marketplace
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