UNIT I
INTERNATIONAL BUSINESS AND GLOBAL
LESSON 1
INTRODUCTION TO INTERNATIONAL
TRADE AND GLOBALIZATION
Learning Outcomes:
• To make you understand as a student of international
business management what is the subject all about.
• To know the concepts involved in international business and
globalization.
• To understand how does globalization effects the working
of the economy of a country.
Objective of the lesson:
After studying this lesson, you should understand:
• The meaning of international trade and globalization.
• Why is it important to study international business?
• What are the basic criteria’s involved in international
business?
Introduction
A fundamental shift is occurring in the world economy. We are
moving rapidly away from a world in which national economies
were relatively self-contained entities, iso-lated from each other
by barriers to cross-border trade and investment; by distance,
time zones, and language; and by national differences in
government regulation, cul-ture, and business systems. And we
are moving toward a world in which barriers to cross-border
trade and investment are tumbling; perceived distance is
shrinking due to advances in transportation and telecommuni-
cations technology; material culture is starting to look similar
the world over; and national economies are merging into an in-
terdependent global economic system. The process by which
this is occurring is com-monly referred to as globalization.
In this interdependent global economy, an American might
drive to work in a car designed in Germany that was assembled
in Mexico by DaimlerChrysler from compo-nents made in the
United States and Japan that were fabricated from Korean steel
and Malaysian rubber. She may have filled the car with gasoline
at a service station owned by a British multinational company
that changed its name from British Petroleum to BP to hide its
national origins. The gasoline could have been made from oil
pumped out of a well off the coast of Africa by a French oil
company that transported it to the United States in a ship
owned by a Greek shipping line. While driving to work, the
American might talk to her stockbroker on a Nokia cell phone
that was designed in Finland and assembled in Texas using chip
sets produced in Taiwan that were designed by Indian engineers
working at a firm in San Diego, California, called Qualcomm.
She could tell the stockbroker to purchase shares in Deutsche
Telekom, a German telecommunications firm transformed
from a former state-owned monopoly into a global company
by an energetic Israeli CEO. She may turn on the car radio,
which was made in Malaysia by a Japanese firm, to- hear a
popular hip-hop song composed by a Swede and sung by a
group of Danes in English who signed a record contract with a
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11.154
ECONOMY
French music company to promote their record in America. The
INTERNATIONAL BUSINESS MANAGEMENT
driver might pull into a drive-through coffee stall run by a
Korean immigrant and order “single-tall-non-fat latte” and
chocolate-covered biscotti. The coffee beans come from Brazil
and the chocolate from Peru, while the biscotti was made locally
using an old Italian recipe. After the song ends, a news an-
nouncer might inform the American listener that
anti-globalization protests at a meeting of heads of state in
Genoa, Italy, have turned vio-lent. One protester has been
killed. The announcer then turns to the next item, a story about
how an economic slowdown in America has sent Japan’s Nikkei
stock market index to 16-year lows.
This is the world we live in. It is a world where the volume of
goods, services, and investment crossing national borders has
expanded faster than world output every year for the past two
decades. It is a world where more than $1.2 billion in foreign
exchange transactions are made every day. It is a world in which
international institutions such as the World Trade Organization
and gatherings of leaders from the world’s most, pow-erful
economies have called for even lower barriers to cross-border
trade and invest-ment. It is a world where the symbols of
material and popular culture are increasingly global: from Coca-
Cola and McDonald’s to Sony PlayStations, Nokia cell phones,
MTV shows, and Disney films. It is a world in which products
are made from inputs that come from all over the world. It is a
world in which an economic crisis in Asia can cause a recession
in the United States, and a slowdown in the United States re-ally
did help drive Japan’s Nikkei index in 2001 to lows not seen
since 1985. It is also a world in which a vigorous and vocal
minority is protesting against globalization, which they blame
for a list of ills, from unemployment in developed nations to
envi-ronmental degradation and the Americanization of
popular culture. And yes, these protests really have turned
violent.
For businesses, this is in many ways the best of times. Global-
ization has increased the opportunities for a firm to expand its
revenues by selling around the world and re-duce its costs by
producing in nations where key inputs are cheap. Since the
collapse of communism at the end of the 1980s, the pendulum
of public policy in nation after nation has swung toward the
free market end of the economic spectrum. Regulatory and
administrative barriers to doing business in foreign nations
have come down, while those nations have often transformed
their economies, privatizing state-owned enterprises,
deregulating markets, increasing competition, and welcoming
investment by foreign businesses. This has allowed businesses
both large and small, from both ad-vanced nations and
developed nations, to expand internationally.
The globa1.retailing industry, profiled in the opening case, is
something of a late mover in this development. Some indus-
tries, such as commercial jet aircraft, automo-biles, petroleum,
1
 semi-conductor chips, and computers, have been global for
INTERNATIONAL BUSINESS MANAGEMENT
decades. Retailing has been primarily local in orientation, but in
a testament to the scope and I pace of globalization, this too is
now changing. Falling barriers to cross-border invest-ment have
made this possible. Rapid economic growth in developing
nations and mar-ket saturation at home- has made globaliza-
tion a strategic imperative for established retailers seeking to
grow their business. Many, such as Wal-Mart and Tesco, feel that
they must move aggressively now lest they lose the initiative to
early movers like Car-refour. They see their strategic advantage in
terms of building a global brand, realizing economies of scale,
and leveraging skills across national borders. In this, they are no
different from companies in other industries that have already
gone global.
At the same time, going global is not without problems. This
too was evident in the opening case. The grand strategic vision
of retailers such as Wal-Mart and Carrefour has often run up
against the hard reality that for all the superficial similarities in
ma-terial and popular culture and in business systems, doing
business in foreign nation still has unique challenges. Because
of different tastes and preferences, what sells in Britain may not
sell in Thailand, operating systems that give a retailer a competi-
tive advantage in America may be difficult to implement in
Mexico, and a brand that means something in Kansas may
mean little in Indonesia.
The tension evident in the opening case between the economic
opportunities associated with going global and the unique
challenge associated with doing business across borders is an
important one in international business. To begin with,
however, we need to take a closer look at the process of
globalization. We need to understand what is driving this
process, appreciate how it is changing the face of international
businesses, and better comprehend why globalization has
become a flash point for debate, demonstration, and conflict
over the future direction of our civilization.
What is globalization?
Globalization refers to the shift toward a more integrated and
interdependent. World economy. Globalization has two main
components; the globaliza-tion of markets and the globaliza-
tion of production.
The Globalization of Markets
The globalization of markets refers to the merging of histori-
cally distinct and national markets into one huge global
marketplace. Falling barriers to cross-border trade have made it
easier to sell internationally. It has been argued for some time
that the tastes and preferences of consumers in different
nations are beginning to converge on some global norm,
thereby helping to create a global market. Consumer product
such as Citicorp credit cards, Coca-Cola soft drinks, Sony
PlayStation, and McDonald’s hamburgers are frequently held,
up as prototypical examples of this trend. Firms such as
Citicorp, Coca-Cola, McDonald’s, and Sony are more than just
benefactors of this trend; they are also facilitators of it. By
offering a standardized product worldwide they help to create a
global market.
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2 11.154
A company does not have to be the size of these multinational
giants to facilitate, and benefit from, the globalization of
markets. In the United States, more than 200,000 small
businesses with fewer than 100 employees registered foreign
sales in 2000. Typical of these is Hytech, a New York-based
manufacturer of solar panels that generates 40,percent of its $3
million in annual sales from exports to five countries, or B&S
Aircraft Alloys, another New York company whose exports
account for 40 percent of its $8 million annual revenues.
Despite the global prevalence of Citicorp credit cards and
McDonald’s hamburgers it is important not to push too far the
view that national markets are giving way to the global market
very significant differences still exist between national markets
along many relevant dimensions, including consumer taste and
preferences, distribution channels, culturally embedded value
systems, and the like. These differences frequently require that
marketing strategies, product features; and operating practices be
customized to best match conditions in a country. For ex
ample, automobile companies will promote different car
models depending on a range of factors such as local fuel costs,
income levels, traffic congestion, and cultural values. Similarly, as
we saw in the opening case, global retailers may still need to vary
their product mix from country to country depending on local
tastes and preferences.
The most global markets currently are not markets for con-
sumer products-where national differences in tastes and
preferences are still often important enough to act as a brake on
globalization-but markets for industrial goods and materials
that serve a universal need the world over. These include the
markets for commodities such as alu-minum, oil, and wheat;
the markets for industrial products such as microprocessors,
DRAMs (computer memory chips), and commercial jet aircraft;
the markets for com-puter software; and the markets for
financial, assets from U.S. Treasury bills to eu-robonds and
futures on the Nikkei index or the Mexican peso.
In many global markets, the same firms frequently confront
each other as competi-tors in nation after nation. Coca-Co la’s
rivalry with Pepsi is a global one, as are the ri-valries between
Ford and Toyota, Boeing and Airbus, Caterpillar and Komatsu,
and Nintendo and Sega. If one firm moves into a nation that is
not currently served by its rivals, those rivals are sure to follow
to prevent their Competitor from gaining an ad-vantage. The
opening case revealed that retailers such as Wal-Mart, Carrefour,
and Tesco are starting to engage in a global rivalry. As firms
follow each other around the world, they bring with them many
of the assets that served them well in other national markets-
including their products, operating strategies, marketing
strategies, and brand names-creating some homogeneity across
markets. Thus, greater uniformity replaces diversity. Due to such
developments, in an increasing number of industries it is no
longer meaningful to talk about “the German market,” “the
American market,” “the Brazilian market,” or “the Japanese
market”; for many firms there is only the global market.
The Globalization of Production
The globalization of production refers to the sourcing of
goods and services from loca-tions around the globe to take
advantage of national differences in the cost and qual-ity of
factors of production (such as labor, energy, land, and capital). by their very actions fostering increased globalization. These

INTERNATIONAL BUSINESS MANAGEMENT

By doing this, companies hope to lower their overall cost firms, however, are merely responding in an efficient manner to
structure and/or improve the quality or functionality of their changing conditions in their erating environment-as well they
product offering, thereby allowing them to compete more effec- should. In the next section, we look at the main drivers of
tively. Consider the Boeing Company’s latest commercial jet globalization.
airliner, the 777. The 777 contains 132,500 major component
Drivers of Globalization
parts that are produced around the world by 545 suppliers.
Two macro factors seem to underlie the trend toward greater
Eight Japanese suppliers make parts for the fuselage, doors,
globalization. The first is the decline in barriers to the free flow
and wings; a sup-plier in Singapore makes the doors for the
of goods, services, and capital that has oc-curred since the end
nose landing gear; three suppliers in Italy manufacture wing
of World War II. The second factor is technological change, par-
flaps; and so on. Part of Boeing’s rationale for outsourcing so
ticularly the dramatic developments in recent years in
much production to foreign suppliers is that these suppliers are
communication, information processing, and transportation
the best in the world at performing their particular activity. A
technologies.
global web of suppliers yields a better final product, which
enhances the chances of Boeing winning a greater share of total Declining Trade and Investment Barriers
orders for aircraft than its global rival, Airbus Industrie. Boeing During the 1920s and 30s, many of the nation-states of the
also outsourcers some production to foreign Countries to world erected formidable barriers to international trade and
increase the chance that it will win significant orders from air- foreign direct investment. International trade oc-curs when a
liners based in that country. firm exports goods or services to consumers in another country.
Foreign direct investment occurs when a firm invests resources
The global dispersal of productive activities is not limited to
in business activities outside its home country. Many of the
giants such as Boeing. Many much smaller firms are also getting
barriers to international trade took the form of high tar-iffs on
into the act. Consider Swan Optical, a U.S. -based manufacturer
imports of manufactured goods. The typical aim of such tariffs
and distributor of eyewear. With annual sales revenues of $20
was to protect domestic industries from foreign competition.
mil-lion to $30 million, Swan, is hardly a giant, yet Swan
One consequence, however, was “beg-gar thy neighbor”
manufactures its eyewear in low-cost factories in Hong Kong
retaliatory trade policies with countries progressively raising
and China that it jointly owns with a Hong Kong- based
trade barriers against each other. Ultimately, this depressed
partner. Swan also has a minority stake in eyewear design
world demand and contributed to the Great Depression of the
houses in Japan, France, and Italy. The company has dispersed
1930s.
its manufacturing and design processes to different locations
around the world to take advantage of favorable skill bases and Having learned from this experience, the advanced industrial
cost structures. Foreign investments in Hong Kong and then nations of the West committed themselves after World War II
China have helped swan lower its cost structure, while invest- to removing barriers to the free flow of goods, services, and
ments in Japan, France, and Italy have helped it produce capital between nations. This goal was enshrined in the treaty
designer eyewear for which it can charge a premium price. By known as the General Agreement on Tariffs and Trade (GATT).
dispersing its manufacturing and design activities, Swan Under the umbrella of GATT, eight rounds of negotiations
established a competitive advantage for it-self in the global among member states, which now number more than 140,
marketplace for eyewear, just as Boeing has tried to do by have worked to lower barriers to the free flow of goods and
dispersing some of its activities to other countries. services. The most recent round of negotiations, known as the
Uruguay Round, was completed in December 1993. The
Robert Reich, the former secretary of labor in the Clinton
Uruguay Round further reduced trade barriers; extended GATT
administration, has ar-gued that as a consequence of the trend
to cover services as well as manufactured goods; provided
exemplified by Boeing and Swan Optical, in many industries it
enhanced protection for patents, trademarks, and copyrights;
is becoming irrelevant to talk about American products,
and established the World Trade Organization (WTO) to police
Japanese products, German products, or Korean products.
the international trading system. Table 1.1 summarizes the
Increasingly, according to Reich, outsourcing of productive
impact of GATT agreements on average tariff rates for
activities to different suppliers results in the creation products
manufactured goods. As can be seen; average tariff rates have
that are global in nature; that is, “global products.” But as with
fallen significantly since 1950 and now stand at 3.9 percent.
the globalization of markets, one must be careful not to push
Discussions aimed at launching a new round of cuts in barriers
the globalization of production too far substantial impedi-
to cross-border trade and investment were scheduled to begin
ments still make it difficult firms to achieve the optimal
in LATE 2001. If and when the round begins, the likely focus
dispersion of their productive activities to locations around the
will be services and agricultural products, where tariffs still
globe. These impediments include formal and informal barriers
remain high. The average agricultural tariff rates are still around
to trade tween countries, barriers to foreign direct investment,
40 percent, and rich nations spend some $300 billion a year in
transportation costs, and issues associated with economic and
subsidies to support their farm sectors.
political risk.
Nevertheless, we are traveling down the road toward a future
characterized by increased globalization of markets and
production. Modern firms are important actors in this drama,

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11.154 3
 Table 1.1 nation-states are becoming more intertwined. As trade expands,
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Average Tariff Rates on Manufactured
Products as percent of Value
1913 1950 1990 2000
France 21% 18% 5.9% 3.9%
Germany 20 26 5.9 3.9
Italy 18 25 5.9 3.9
Japan 30 - 5.3 3.9
Holland 5 11 5.9 3.9
Sweden 20 9 4.4 3.9
Britain - 23 5.9 3.9
United States 44 14 4.8 3.9
In addition to reducing trade barriers, many countries have also
been progressively removing restrictions to foreign direct
investment (FDI). Between 1991 and 2000, of the 1,121
changes worldwide in the laws governing foreign direct
investment, 95 per-cent created a more favorable environment
for FDI, according to the United Nations. During 2000 alone,
69 countries made 150 changes to regulations governing foreign
di-rect investment, of which 147 (or 98 percent) were more”
favorable to foreign in-vestors. A dramatic increase in the
number of bilateral investment treaties designed to protect and
promote investment, between two countries also reflects
governments desire to facilitate FDI. As of 2000, there were
1,856 such treaties in the world involv-ing over 160 countries, a
10-fold increase from the 181n-eaties that existed in 1980.
Such trends facilitate both the globalization of markets and the
globalization of pro-duction. The lowering of barriers to
international trade enables firms to view the world, rather than a
single country, as their market. The lowering of trade and
investment bar-riers also allows firms to base production at the
optimal location for that activity, serv-ing the world market
from that location. Thus, a firm might design a product ill one
country, produce component parts in two other countries,
assemble the product in yet another country, and then export
the finished product around the world. The lowering of trade
barriers has facilitated the globalization of production. Ac-
cording to data from we World Trade Organization, the volume
of world trade has grown consistently faster than the volume
of world output since 1950. From, 1950 to 2000, world trade
expanded almost 20-fold, far out stripping world output,
which grew by six and half times. As suggested by Figure 1.1,
the growth in world trade seems to have accelerated in recent
years. In 2000, the last year for which full data are avail-able, it
increased by a strong 12.5 percent. The global economic
slowdown that oc-curred in 2001, along with the-economic
aftermath of the September 11th terrorist attacks on the United
States, indicate that 2001 may be the first year in almost two
decades during which the volume of world trade contracted. If
history is any guide, however, any such contraction will be
modest and short lived. - ductions in trade barriers. If trade barriers decline no further, at
The data summarized in Figure 1.1 imply two things. First,
more firms -are doing what Boeing does with the 777: dispers-
ing parts of their overall production process to different
locations around the globe to drive down production costs and
increase product quality. Second, the economies of the world’s
nations are becoming increasingly dependent on each other fat
important goods and services.
The evidence also suggests that foreign direct investment is
playing an increasing role in the global economy as firms
ranging in size from Boeing to Swan Optical in-crease their
cross-border investments. The average yearly outflow of FDI
increased from about $25 billion in 1975 to a record $1.3 trillion
in2000. The flow of FDI not only accelerated over the last
quarter century, but it also has accelerated faster than the growth
in world trade. For example, between 1990 and 2000, the total
flow of FDI from all countries increased about fivefold, while
world trade grew by some 82 percent and world output by 23
percent. As a result of the strong FDI flow, by 2000 the global
stock of FDI exceeded $6 trillion. In total, by 2000, 60,000
parent companies had 820,000 affiliates in foreign markets that
the collectively produced an estimated $14 tril-lion in global
sales, nearly twice as high as the value of global exports.
The globalization of markets and production arid the resulting
growth of world trade, foreign direct investment, and imports
all imply that firms are finding their home markets under attack
from foreign competitors. This is true in Japan, where U.S.
companies such as Kodak, Procter & Gamble, and Merrill Lynch
are expanding their presence. It is true in the United States,
where Japanese automobile firms have taken market share away
from General Motors and Ford. And it is true, in Europe,
where the once dominant Dutch company Philips has seen its
market share in the consumer electronics industry taken by
Japan’s JVC, Matsushita, and Sony. The bot-tom line is that the
growing integration of the world economy into a single, huge
marketplace is increasing the intensity of competition in a range
of manufacturing -and service industries.
Figure 1.1
The Growth of world Trade and World Output
Having said all this, declining trade barriers can’t be taken for
granted demands for “protection” from foreign competitors are
still often heard in countries around the world, including the
United States. Al-though a return to the restrictive trade policies
of the 1920s and 30s is unlikely, it is’ not clear whether the
political majority in the industrialized world favors further re-
least for the time be-ing, a temporary limit may have been
reached in the globalization of both markets and production.
The Role of Technological Change
The lowering of trade barriers made globalization of markets
and production a theo-retical possibility. Technological change

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4 11.154
has made it a tangible reality. Since the end of World War II, the The Internet and World Wide Web (WWW) promise to

INTERNATIONAL BUSINESS MANAGEMENT

world has seen major advances in communication, information develop into the infor-mation backbone of tomorrow’s global
processing, and transportation technology, including the economy. According to Forrester Research, the value of Web-
explosive emergence of the Internet and World Wide Web. In based transactions hit $657 billion in 2000, from virtually
the words of Renato Ruggiero, director general of the World nothing in 1994, and could grow, to $6.8 trillion by 2004, with
Trade Organization, Telecommunications is creating a global the United States accounting for 47 percent of all Web-based
audience. Transport is creating a global village. From Buenos transactions (see Figure 1.2). Many of these transactions are not
Aires to Boston to Beijing, ordinary people are watching MTV business-to-consumer transactions (e-commerce), but business-
they’re wearing Levi’s Jeans, and they’re-listening to Sony to-business (or e-business) transactions. The greatest current
Walkmans as they commute to work. potential of the Web seems to be in the business-to-business
arena.
Microprocessors and Telecommunications
Included in the expanding volume of Web-based traffic is a
Perhaps the single most important innovation has been
growing percentage of cross-border trade. Viewed globally, the
development of the microprocessor, which enabled the
Web is emerging as an equalizer. It rolls back some of the
explosive growth of high-power, low-cost computing, vastly
constraints of location, scale, and time zones. The Web allows
increasing the amount of information that can be processed by
businesses, both small and large, to expand their global
individuals and firms. The microprocessor also underlies many
presence at a lower cost than ever before. One example is a small
recent advances in telecommunications technology. Over the
California-based start-up, Cardiac Science, which makes defib-
past 30 years, global communications have been revolu-tionized
rillators and heart monitors. In 1996, Cardiac Science was itching
by developments in satellite, optical fiber, and wireless technolo-
to break into inter-national markets but had little idea of how
gies, and now the Internet and the World Wide Web. These
to establish an international presence. By1998, the company was
technologies rely on the microproces-sor to encode, transmit,
selling to customers in 46 countries and foreign sales accounted
and decode the vast amount of information that flows along
for 85 percent of its $1.2 million revenues. Although some of
these electronic highways. The cost of microprocessors contin-
this business was developed through conventional export
ues to fall, while their power increases (a phenomenon known
channels, a growing percentage of it came from “hits” to the
as Moore’s Law, which predicts that the power of microproces-
company’s website, which, according to the company’s CEO,
sor technology doubles and its cost of production falls in half
“attracts in-ternational business people like bees to honey.
every 18 months). As this happens, the costs of global commu-
Similarly, 10 years ago no one would have through that a small
nications are plummeting, which lowers the costs of
British company based in Stafford would have been able to
coordinating and controlling a global organization. Thus,
build a global market for its products by utilizing the Internet,
between 1930 and 1990, the cost of a three-minute phone call
but that is exactly what Bridgewater Pottery has done.
between New York and London fell from $244.65 to $3.32.
Bridgewater has traditionally sold premium pottery through
exclusive distribution channels, but the company found it
The Internet and World Wide Web difficult and labori-ous to identify new retail outlets. Since
The phenomenal recent, growth of the Internet and the establishing an Internet presence in 1997, Bridgewater has
associated World Wide Web (which utilizes the Internet to conducted a significant amount of business with consumers in
communicate between World Wide Web sites) is the latest other countries who could not be reached through existing
expression of this development. In 1990, fewer than 1 million channels of distribution or could not be reached cost effectively.
users were connected to the Internet. By 1995 the figure had The Web makes it much easier for buyers and sellers to find
risen to 50 million. In 2001 it grew to 490 million. By the year each other, wherever they may be located and whatever their
2005, forecasts suggest that the Internet may have over size.
1.12billion users, or about 18 percent of the world’s popula-
tion. In July 1993, some 1.8 million-host computers were
connected to the Internet (host computers host the Web pages
of local users). By January 2001, the number of host computers
had increased to109 million and the number is still growing
rapidly. In the United States, where In-ternet usage is most
advanced, 58 percent of the population had Internet access at
home by July 2001. the rate of growth in Internet adoption is
now slowing markedly in the United States as the market
becomes more saturated. The increase in total Internet usage is
also slowing. However, most-observers believe that this is due
to the dominance of slow connections to the Internet (tele-
phone lines) and they believe that once high-speed connections
become more widely available (such as cable modems that can
transmit data 1,000 times faster-than a slow telephone line with
a conventional modem), we will see a sharp upswing in the
volume of traffic on the Web.

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11.154 5
 Figure 1.2 1950s
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Worldwide E-Commerce Growth Forecast

Propeller aircraft
300-400 mph.
1960s

Jet passenger aircraft

500-700 mph.
The Web makes it much easier for buyers and sellers to find
each other, wherever they may be located and whatever their
size.
Transportation Technology
In addition to developments in communication technology,
several major innovations in transportation technology have
occurred since World War II. In economic terms, the most
Figure 1.3 important are probably the development of commercial jet
The Shrinking Globe aircraft and su-perfreighters and the introduction of container-
ization, which simplifies transshipment from one mode of
1500-1840 transport to another. The advent of commercial jet travel, by re-
ducing the time needed to get from one location to another, has
effectively shrunk the globe (see Figure 1.3). In terms of travel
time, New York is now “closer” to Tokyo than it was to
Philadelphia in the Colonial days.
Containerization has revolutionized the transportation
business, significantly low-ering the costs of shipping goods
over long distances. Before the advent of container-ization,
moving goods from one mode of transport to another was
Best average speed of horse-drawn coaches very labor intensive, lengthy, and costly. It could take days and
and sailing ships, 10 mph. several hundred longshoremen to unload a ship and reload
goods onto trucks and trains. With the advent of widespread
1850-1930
containerization in the 1970s and 1980s, the whole process can
be executed by a handful of longshoremen in a couple of days.
Since 1980, the world’s containership fleet has more than
quadrupled, reflecting in part the growing volume of interna-
tional trade -and in part the switch to this mode of
transportation. As a result of the efficiency gains -associated
with containerization, transportation costs have plummeted,
making it -much more economical to ship goods around the
globe, there by helping to drive the globalization of markets
and production. Between 1920 and 1990 the average ocean
freight and port charges per ton of U.S. export and import
Steam locomotives average 65 mph. cargo fell from $95 to $29 (in 1990 dollars). The cost of
Steamships average 36 mph. shipping freight per ton-mile on railroads in the United States

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6 11.154
fell from 3.04 cents in 1985 to 2.3 cents in 2000, largely as a
result of efficiency gains from the widespread use of containers.
An increased share of cargo now goes by air. Between 1930 and
1990, average air transportation revenue per passenger mile fell
from $0.68 to $0.11.
Implications for the Globalization of Production
As transportation costs associated with the globalization of
production declined, dispersal of production to geographically
dispersed locations became more economical. As a result of the
technological innovations discussed above, the real costs of
information processing and communication have fallen
dramatically in the past two decades. These developments make
it possible for a firm to create and then manage a globally
dispersed production system, further facilitating the globaliza-
tion of production.
A worldwide communications network has become essential
for many international businesses. For example, Hewlett-
Packard uses satellite communications and information
processing technologies to link its worldwide operations.
Hewlett Packard’s product development teams consist of
individuals based in different coun-tries (e.g., Japan, the United
States, Great Britain, and Germany). When developing new
products, these individuals use videoconferencing to “meet” on
a weekly basis. They also communicate with each other daily via
telephone, electronic mail, and fax. Communication technolo-
gies have enabled Hewlett-Packard to integrate its global
dispersed operations and to reduce the time needed for
developing new products (for details see the Management
Focus about Radha Basu, a global manager in the information
age).
The development of commercial jet aircraft has also helped knit
together the worldwide operations of many international
businesses. Using jet travel, an America manager need spend a
day at most traveling to her firm’s European or Asian opera-
tions. This enables her to oversee a globally dispersed
production system.
Implications for the Globalization of Markets
In addition to the globalization of production, technological
innovations have also facilitated the globalization of markets.
As noted above, low-cost transportation has made it more
economical to ship products around the world, thereby helping
to create global markets. Low-cost global communications
networks such as the World Wide Web are helping to create
electronic global marketplaces. In addition, low-cost jet travel
has resulted in the mass movement of people between
countries. This has reduced the cultural distance between
countries and is bringing about some converge of consumer
tastes and preferences. At the same time, global communication
networks and global media are creating a worldwide culture. U.S.
television networks such as CNN, MTV, and HBO are now
received in many countries, and Hollywood films shown the
world over. In any society, the media are primary conveyors of
culture; as global media develop, we must expect the evolution
of something akin to a global culture. A logical result of this
evolution is the emergence of global markets for consumer
products. The first signs of this are already apparent. It is now
as easy to find a Mc Donald’s restaurant in Tokyo as it is in New
© Copy Right: Rai University
11.154
York, to buy a Sony Walkman in Rio as it is in Berlin, and to
INTERNATIONAL BUSINESS MANAGEMENT
buy Levi’s jeans in Paris as it is in San Francisco. The accompany-
ing Management Focus, “Homer Simpson-A Global Brand,”
illustrates the power of the media to create global market
opportunities.
Despite these trends, we must be careful not to overemphasize
their importance. While modern communication and transpor-
tation technologies are, ushering in the “global village,” very
significant national differences remain in culture, consumer pref-
erences, and business practices. A firm that ignores differences
between countries does so at its peril.
Case study
Radha Basu-A Global Manager in the Information Age
In the era of globalization, corporations in-creasingly hire the
best talent they can find, no matter what the nationality or
gender. Radha Basu is a good example of the emerging class of
internationally mobile global managers who are equally at home
in different cultures and have to manage across borders on a
day-to-day basis, aided by modern communications and
transportation technology. Radha was born in Madra in
southern India in 1953. Raised as a Hindu, she was nevertheless
edu-cated by Irish nuns in a Catholic school. Radha was a
strong math student and gained entry to an Indian uni-versity
to study engineering. She graduated with honors and won
admission to the University of Southern Cali-fornia to do
graduate work in computer science. Later she went to work for
Hewlett-Packard where she gained her first international
experience as a manager in Germany. That was followed by a
stint in India, but she is now back in the United States working
for Hewlett- Packard and is a naturalized American citizen.
Radha’s job spans the world. She manages teams of software
engineers spread across 15 time zones in Cali-fornia, Colorado,
England, Germany, Switzerland, India, Japan, and Australia.
These teams must work together on collaborative efforts,
presenting Radha with a daunt-ing management challenge. A
generation ago, such a task would have been nearly impossible,
but thanks to advances in communications, computing, and air
travel, collaboration between such far-flung co-workers is in-
tense and intimate. Radha logs more than 100,000 air miles a
year keeping projects on track, and she commu-nicates regularly
with colleagues at distant locations us-ing videoconferencing
and teleconferencing. She exchanges scores of e-mails a day and
sends si-multaneous voice-mail messages to many of the 1,000
people in her division.
Impromptu conversations are the staple of her life. She may be
awakened at 6 A.M. by a phone call from her Swiss team, which
needs approval to sign a contract to sell soft-ware to a major
customer, and spend the next hour refining her team’s prom-
ises to the customer while eating breakfast and driving to work.
Like all of her meetings, this one will be held in English, the
language of international business. The widespread use of
English is a definite plus, but it can cause confusion too,
masking differences in style, practices, and interpretations. The
same words in the same language don’t necessarily mean the
same things to people of different nationalities. Radha says she
once told some German engineers that they should do
7
 something and was puzzled when they didn’t. She discovered
INTERNATIONAL BUSINESS MANAGEMENT
that to a German, should means that he has the option of not
doing it, and the Germans elected to take this option. Now
when Radha wants something done, she uses the word must, a
word that conveys the imperative to her German colleagues.
Source: Adapted from G. Pascal Zachary, “The Global Me,”
Public Affairs, 2000, pp. 51-55.
The Changing Demographics of the Global Economy
Hand in hand with the trend toward globalization has been a
fairly dramatic change in the demographics of the global
economy over the past 30 years. As late as the 1960s, four
stylized facts described the demographics of the global
economy. The first was U.S. dominance in the world economy
and world trade picture. The second was U.S. dominance in
world foreign direct investment. Related to this, the third fact
was the dominance of large, multinational U.S. firms on the
international business scene. The fourth was that roughly half
the globe-the centrally planned economies of the Com-munist
world-was off-limits to Western international businesses. As
will be explained below, all four of these qualities either have
changed or are now changing rapidly.
Case study
Homer Simpson—A Global Brand!
If a poll were held to identify the world’s fa-vorite dysfunctional
family, the Simpsons would probably win hands down. The
Fox Broadcasting Company production that doc-uments the
life and times of homer and his irreverent clan is the most
decorated and longest running animated TV show in history.
Some 60 million viewers in more than 70 countries tune in to
watch the weekly antics of the Simpsons. The show seems to
have universal appeal; with the audience split 50/50 between
adults and children, and with audience ratings running high in
countries as diverse as Spain and Japan. Time magazine named
“The Simpsons the 20th century’s best TV show, and the chair
of the philosophy department at the University of Manitoba
wrote an article claiming “The Simpsons” is the deep-est show
on television.
Whatever the sources of the show’s appeal, there is no question
that Homer and his family have be-come a powerful global
brand. Not only do fox and its parent News Corporation
benefit from the huge syndication rights of the show, but they
also have made a significant sum from licensing the charac-ters.
Since the inception of the show in 1990, “The Simpsons” has
generated more than $1 billion in retail sales from tie-in
merchandise, much of it outside he United States. In 2000,
about 50 large brand and marketing partners around the world
used the Simpsons to sell everything from toilet paper in
Germany, Kit Kat bars and potato chips in the United King-
dom, EI Cortes Bart Simpson dolls in Spain, and Intel
mi-croprocessors in the United States. Clinton Cards, a British
greeting card retailer, used Father’s Day in 2000 as the perfect
opportunity to find the British father whose behavior most
resembles that of Homer Simpson. The competition was rolled
out across all of the company’s 692 stores and sup-ported by
TV advertising.
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8 11.154
So what’s next for the Simpsons? Fox has been careful to
manage the licensing deals so that Homer and clan don’t suffer
from overexposure or aren’t used in inappropriate ways.
According to Matt Groen-ing, the show’s creator, “ ‘The
Simpsons’ is a commer-cial enterprise and we embrace the
capitalistic nature of this project What we try to do with ‘The
Simpsons’ is not do a label slap-that is, we don’t just slap their
drawings on the side of a product We try to make each item
witty, and sometimes we comment on the ab-surdity of the
hem itself.” In short, Fox tries to make sure that “The
Simpsons” characters are used in a way that is consistent with
the irreverent nature of the show itself. “If we didn’t do this,”
notes a Fox spokesman, “we would lose credibility with the
fans, and we have to make sure that doesn’t happen.”
Source: D. Finnigan, “Homer Improvement,” Brandweek.
November 27, 2000,pp. 22-25; and “The Simpsons-Picking a
Winner,” Marketing, June 29, 2000, pp. 28-29.
The Changing World Output and World Trade
Picture
In the early 1960s, the United States was still by far the world’s
dominant industrial power. In 1963, for example, the United
State accounted for 40.3 percent of world output. By 2000, the
United States accounted for 27 percent of world output, still by
far the world’s largest industrial power but down significantly in
relative size since the 1960s (see Table 1.2). Nor was the United
States the only developed nation to see its relative standing slip.
The same occurred to Germany, France, and the United King-
dom, all nations that were among the first to industrialize. This
decline in the U.S. po-sition was not an absolute decline, since
the U.S. economy grew at a robust average annual rate of over 3
percent from 1963 to 2000 (the economies of Germany, France,
and the United Kingdom also grew over this time period).
Rather, it was a relative de-cline, reflecting the faster economic
growth of several other economies, particularly in Asia. For
example, as can be seen from Table 1.2, from 1963 to 2000,
Japan’s share of world output increased from 5.5 percent to
14.2 percent. Other countries that markedly increased their share
of world output included China, Thailand, Malaysia, Taiwan,
and South Korea. By virtue of its huge population and rapid
industrialization, China is emerging as a potential economic
colossus..
By the end of the 1980s, the U.S. position as the world’s leading
exporter was threatened. Over the past 30 years, U.S. dominance
in export markets has waned as Japan, Germany, and a number
of newly industrialized countries such as South Korea and
China have taken a larger share of world exports. During the
1960s, the United States routinely accounted for 20 percent of
world exports of manufactured goods. But as Table 1.2 shows,
the U.S. share of world exports of manufactured goods had
slipped to 12.3 percent by 2000. Despite the fall, the United
States still remained the world’s largest exporter, ahead of
Germany and Japan.
In 1997 and 1998 the dynamic economies of the Asian Pacific
region were hit by a serious financial crisis that threatened to
slow their economic growth rates for several years. Despite this,
their powerful growth may continue over the long run, as will
that of several other important emerging economies in Latin
America (e.g., Brazil) and Eastern Europe (e.g., Poland). Thus, a Figure 1.4 Percentage Share of Total FDI Stock, 1980-2000

INTERNATIONAL BUSINESS MANAGEMENT

further relative decline in the share of world output and world
The Changing Foreign Direct Investment Picture
exports accounted for by the United States and other long-
Reflecting the dominance of the United States in the global
established developed nations seems likely. By itself, this is not
economy, U.S. firms accounted for 66.3 percent of worldwide
a bad thing. The relative decline of the United States reflects the
foreign direct investment flows in the 1960s. British firms were
growing economic development and industrialization of the
second, accounting for 10.5 percent, while Japanese firms were a
world economy, as opposed to any absolute decline in the
distant eighth, with only 2 percent. The dominance of U.S.
health of the U.S. economy, which entered the new millennium
firms was so great that book were written about the economic
stronger than ever.
threat posed to Europe by U.S. corporations. Several European
If we look 20 years into the future, most forecasts now predict a governments, most notably that of France, talked of limiting
rapid rise in the share of world output accounted for by inward in vestment by U.S. firms.
developing nations such as China, India, In-donesia, Thailand,
South Korea, and Brazil, and a commensurate decline in the
share enjoyed by rich industrialized countries such as Great
Britain, Germany, Japan, and the United States. The World
Bank, for example, has estimated that if current trends con-
tinue, by 2020 the Chinese economy could be larger than that of
the United States, while the economy of India will approach
that of Germany.
Table 1.2
The Changing Pattern of World Output and Trade
However, as the barriers to the free flow of goods, services, and
Share of World Share of World Share of World capital fell, and as other countries increased their shares of
Country Output, 1963t Output, 2000 Exports, 2000 world output, non-U.S. firms increasingly began to invest across
United States 40.3% 27.0% 12.3 % national borders. The motivation for much of this foreign
Japan 5.5 14.2 7.54
direct investment by non-U.S. firms was the desire to disperse
Germany 9.7 7.3 8.7
France 6.3 5.2 4.7
production activities to opti-mal locations and to build a direct
United Kingdom 6.5 4,1 4.4 presence in major foreign markets. Thus, beginning in the
Italy 3.4 4.1 3.7 1970s, European and Japanese firms began to shift labor-
Canada 3.0 2.0 4.4 intensive manufactur-ing operations from their home markets
China, NA 3.2 3.92
to developing nations where labor costs were lower. In
South’ Korea NA 1.4 2.7
addition, many Japanese firms invested in North America and
Europe--often as a hedge against unfavorable currency move-
The World Bank also estimates that today’s developing nations
ments and the possible imposition of trade barriers. For
may account for over 60 percent of world economic activity by
example, Toyota, the Japanese automobile company, rapidly in-
2020, while today’s rich nations, which currently account for
creased its investment in automobile production facilities in the
over-55 percent of world economic activity, may account for
United States and Great Britain during the late 1980s and early
only about 38 percent by 2020. Forecasts are not always correct,
1990s. Toyota executives believed that an increasingly strong
but these suggest that a shift in the eco-nomic geography of the
Japanese yen would price Japanese automobile exports out of
world is now under way, although the magnitude of that shift
foreign markets; therefore, production in the most important
is still not totally evident. For international businesses, the
foreign markets, as op-posed to exports from Japan, made
implications of this chang-ing economic geography are clear:
sense. Toyota also undertook these investments to head off
many of tomorrow’s economic opportunities may be found in
growing political pressures in the United States and Europe to
the developing nations of the world, and many of tomorrow’s
restrict Japa-nese automobile exports into those markets.
most capable competitors will probably also emerge from these
regions. Figure 1.5
FDI Inflows, 1988-2000 (in $ billions)
One consequence of these developments is illustrated in Figure
1.4, which shows how the stock of foreign direct investment by
the world’s six most important national sources-the United
States, United Kingdom, Japan, ‘Germany, France, and the
Netherlands-changed between 1980 and 1999. (The stock of
foreign direct invest-ment refers to the total cumulative value of
foreign investments.) Figure 1.4 also shows the stock accounted
for by firms from developing economies. The share of the total
stock accounted for by U.S. firms declined substantially from
about 42 percent in 1980 to 24 percent in 1999. Meanwhile, the
shares accounted for by Japan, France, other developed nations,

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11.154 9
 and the world’s developing nations increased markedly. The rise
INTERNATIONAL BUSINESS MANAGEMENT
in the share for developing nations reflects a growing trend for
firms from these countries, such as South Korea, to invest
outside their borders. In 1999 firms based in develop-ing
nations accounted for 9.9 percent of the stock of foreign direct
investment, up from only 3.1 percent in1980.
Figure 1.5 illustrates two other important trends-the continued
rapid growth in cross-border flows of foreign direct investment
and the emerging importance of de-veloping nations as the
destination of foreign direct investment. Throughout the
1990s, the amount of investment directed at both developed
and developing nations increased dramatically, a trend that
reflects the increasing internationalization of busi-ness corpora-
tions. Until 1998, developing nations were taking an increasingly
large percentage share of this flow. This trend changed between
1998 and 2000, primarily due to the lingering effects of the 1997
Asian economic crisis and the resulting slump in economic
activity in the region. Despite this slump, China retained its
importance as the leading destination for foreign direct invest-
ment among developing economies, with about $40 billion in
foreign investment flowing into this economy every year since
the mid-1990s. In the long run, the flow of money into the
developing world will probably reaccelerate, reflecting the
economic opportunities in many of these nations.
The Changing Nature of the Multinational Enterprise
A multinational enterprise is any business that has productive
activities in two or more countries. Since the 1960s, there have
been two notable trends in the demographics of the multina-
tional enterprise: (1) the rise of non-U.S.mulitinationals,
particularly Japanese multinationals, and (2) the growth of
mini-multinationals.
1973 1990 1997 2000
United S tates 48.5% 31.5% 32.4% 26%
Table 1.3
The national Japan 3.5 12 15.7 17
Composition of
The Largest United Kingdom 18.8 16.8 6.6 8
Multinationals
France 7.3 10.4 9.8 13
Germany 8.1 8.9 12.7 12
Non-U.S. multinationals
In the 1960s, global business activity was dominated by large
U.S. multinationals corporations. With U.S. firms accounting
for about two-thirds of foreign direct investment during the
1960s, one would expect most multinationals to be U.S.
enterprises. According to the data summarized in the table 1.3,
in 1973, 48.5 percent of the world’s 260 largest multinationals
were U.S. firms. The second largest source country was the
United Kingdom, with 18.8 percent of the largest multination-
als. Japan accounted for only 3.5 percent of the largest
multinationals at the time. The large number of U.S. multina-
tionals reflected U.S. economic dominance in the three decades
after World War II, while the large number of British multina-
tionals reflected that country’s industrial dominance in the early
decades of the 20th century.
By 1999, however, things had shifted significantly. U.S. firms
accounted for 26 percent of the world’s 100 largest multination-
als, followed by Japan with 17 percent. France was third with 13
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10
percent. Although the 1973 data summarize in the Table 1.3 are
not strictly comparable with the data for the 1990s, they
illustrate the trend. (The 1973 figures are based on the largest
260 firms, whereas the figure for the 1990s are based on the
largest 100 multinationals.) The globalization of the world
economy together with Japan’s rise to the top rank of economic
powers has resulted in the global marketplace.
According to United Nations data, the ranks of the world’s
largest 100 multinationals are still dominated by firms from
developed economies. However, for the first time three firms
from developing economies entered the UN’s list of the 100
largest multinationals. They were Hutchison Whampoa of
Hong Kong, China, which ranked 48 in terms of foreign assets,
Petroleos de Venezuela of Venezuela, which ranked 84,and
Cemex of Mexico, which came in at 100. However, if we look at
smaller firms, it is evident that there has been growth in the
number of multinationals from developed economies. At the
of the 1990s, the largest 50 multinationals from developing
economies had foreign sales of $ 103 billion out of the total
sales of $453 billion and employed 483,129 people outside of
there home country. Some 22 percent of these companies came
from Hong Kong, 16.7 percent from Korea, 8.8 percent from
China, and 7.6 percent from Brazil. Looking to the future, we
can reasonable expect growth of new multinational enterprises
from the world’s developing nations.
The Rise of Mini-Multinationals
Another trend in international business has been the growth of
medium-sized and small multinationals (mini-multinationals).
When people think of international business, they tend to
think of firms such as Exxon, General Motors, Ford, Fuji,
Kodak, Matsushita, Procter &Gamble, Sony, and Unilever-large,
complex multinational corporations with operations that span
the globe. Although it is certainly true that most international
trade and investment is still conducted by large firms, it is also
true that many medium-sized and small businesses are
becoming increasingly involved in international trade and
investment. We have already discussed several examples in this
chapter-Swan optical, Bridgewater Pottery, and Cardiac Science-
and we have noted how the rise of the Internet is lowering the
barriers that small firms in building international sales.
For another example, consider Lubricating System, of Kent,
Washington. Lubricating systems, which manufactures lubricat-
ing fluids for machine tools, employs 25 people and generates
sales of $6.5 million. It’s hardly a large, complex multinational,
yet more than $2 million of the company’s sales are generated
by exports to a score of countries from Japan to Israel and the
United Arab Emirates. Lubricating systems also has set up a
joint venture whit a German company to serve the European
market consider also Lixi, Inc., a small U.S. manufacturer of
industrial X-ray equipment: 70 percent of Lixi, $4.5million in
revenues comes from export to Japan. Or take G. W. Barth, a
manufacturer of cocoa-bean roasting, machinery based in
Ludwigsburg, Germany. Employing just 65 people, this small
companies international business is conducted not just by large
firms but also by medium-sized and small enterprises.
11.154
The Changing World Order
Between 1989 and 1991 a series of remarkable democratic
revolutions swept the communist world. In country after
country throughout Eastern Europe and eventually in the
Soviet Union itself, communist governments collapsed like the
shells of rotten eggs. The Soviet Union is now history, having
been replaced by 15 independent republics. Czechoslovakia has
divided itself into two states, while Yugoslavia has dissolved
into a bloody civil war among its five successor states.
Many of the former Communist nations of Europe and Asia
seem to share a commitment to democratic politics and free
market economics. If this continues, the opportunities for
international businesses may be enormous. For the best part of
half a century, these countries were essentially closed to Western
international businesses. Now they present a host of export
and investment opportunities. Just how this will play out over
the next 10 to 20 years is difficult to say. The economies of
most of the former communist states are in very poor condi-
tion, and their continued commitment to democracy and free
market economics cannot be taken for granted. Disturbing sings
of growing unrest and totalitarian tendencies continue to be
seen in many Eastern European states. Thus, the risk involved
in doing business in such countries are very high, but then, so
may be the returns.
In addition to these changes, more quite revolutions have been
occurring in China and Latin America. Their implications for
international businesses may be just as profound as the collapse
of communism in Eastern Europe. China suppressed its own
prodemocracy movement in the bloody Tiananmen Square
massacre of 1989. Despite this, China continues to move
progressively toward greater free market reforms. If what is
occurring in China continues for two more decades, China may
move from Third World to industrial superpower status even
more rapidly than Japan did. If China’s gross domestic product
(GDP) per capita grows by an average of 6 percent to 7 percent,
which is slower than the 8 percent growth rate achieved during
the last decade, then by 2020 this nation of 1.273 billion people
could boast an average income per capita of about $13,000,
roughly equivalent to that of Spain’s today.
The potential consequences for western international business
are enormous. On the one hand, with 1.2 billion people, China
represents a huge and largely untapped market. Reflecting this,
between 1983 and 2000, annual foreign direct investment in
China increased from less than $2 billion to $40 billion. On the
other hand, China’s new firms are proving to be very competi-
tors, and they could take global market share away from western
and Japanese enterprises. Thus the changes in China are creating
both opportunities and threats for established international
businesses.
As for Latin America, both democracy and free market reforms
also have taken hold. For decades, most Latin America countries
were ruled by dictators, many of whom seemed to view western
international businesses as instruments of imperialist domina-
tion. Accordingly, they restricted direct investment by foreign
firms. In addition, the poorly managed economies of Latin
America were characterized by low growth, high debt, and
hyperinflation-all of which discouraged investment by interna-
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11.154
tional businesses. Now much of this seems to be changing.
INTERNATIONAL BUSINESS MANAGEMENT
Throughout most of Latin America, debt and inflation are
down, governments are selling state-owned enterprises to
private investors, foreign investment is welcomed, and the
region’s economies are growing rapidly. These changes have
increased the attractiveness of Latin America, both as a market
for export and as a site for foreign direct investment. At the
same time, given the long history of economic mismanagement
in Latin America, there is no guarantee that these favorable
trends will continue. As in the case of Eastern Europe,
substantial opportunities are accompanied by substantial risk.
The Global Economy of the 21st Century
The last quarter of century has seen rapid changes in the global
economy. Barriers to the free flow of goods, services, and capital
have been coming down. The volume of cross-border trade
and investment has been growing more rapidly than global
output, indicating that national economies are becoming more
closely integrated into a sin-gle, interdependent, global eco-
nomic system. As their economies advance, more na-tions are
joining the ranks of the developed world. A generation ago,
South Korea and Taiwan were viewed as second-tier developing
nations. Now they boast large economies, and their firms are
major players in many global industries from ship-building and
steel to electronics and chemicals. The move toward a global
economy has been further strengthened by the widespread
adoption of liberal economic, policies by countries that for two
generations or more were firmly opposed to them. Thus, fol-
lowing the normative prescriptions of liberal economic
ideology, in country after country we are seeing state-owned
businesses privatized, widespread deregulation, markets being
opened to more competition, and-increased commitment to
removing barriers to cross-border trade and investment. This
suggests that over the next few decades, countries such as the
Czech Republic, Poland, Brazil, China, and South Africa may
build powerful market-oriented economies. In short, current
trends indicate that the world is moving rapidly toward an
economic system that is more favor-able for the practice of
international business.
On the other hand, it is always hazardous to take established
trends and use them to predict the future. The world may be
moving toward a more global economic sys-tem, but globaliza-
tion is not inevitable. Countries may pull back from the recent
com-mitment to liberal economic ideology if their experiences
do not match their expectations. There are signs, for example,
of a retreat from liberal economic ideology in Russia. Russia has
experienced considerable economic pain as it tries to shift from a
centrally planned economy to a market economy. If Russia’s
hesitation were to become more permanent and widespread,
the liberal vision of a more prosperous global econ-omy based
on free market principles might not come to pass as quickly as
many hope. Clearly, this would be a tougher world for interna-
tional businesses to compete in.
Moreover, greater globalization brings with it risks of its own.
This was starkly demonstrated in 1997 and1998 when a financial
crisis in Thailand spread first to other East Asian nations and
then in 1998.to Russia and Brazil Ultimately the crisis threat-
ened to plunge the economies of the developed world,
11
 including the United States, into a recession. For now it is
INTERNATIONAL BUSINESS MANAGEMENT
simply worth noting that even from a purely economic
perspective, globalization is not all good. The opportu-nities
for doing business in a global economy may be significantly
enhanced, but as we saw in 1997-98, the risks associated with
global financial contagion are also greater. Still, there are ways for
firms to exploit the opportuni-ties associated with globaliza-
tion, while at the same time reducing the risks through
appropriate hedging strategies.
Globalization, Jobs, and Income
One concern frequently voiced by opponents of globalization is
that falling barriers to international trade destroy, manufacturing
jobs in wealthy advanced economies such as the United States
and the United Kingdom. The critics argue that falling trade
barriers allow firms to move their manufacturing activities to
countries where wage rates are much lower D.L. Bartlett and J. B.
Steele, two journalists for the Philadelphia Inquirer who have
gained notoriety for their attacks on free trade, cite the case of
Harwood Industries, a U.S. clothing manufacturer that dosed
its U .S. opera-tions, where it paid workers $9 per hour, and
shifted manufacturing to Honduras, where textile workers
receive 48 cents per hour. Because of moves like this, argue
Bartlett and Steele, the wage rates of poorer Americans have
fallen significantly over the last quarter of a century.
Supporters of globalization reply that critics such as Bartlett and
Steele miss the es-sential point about free trade—the benefits
outweigh the costs. They argue that free trade will result in
countries specializing in the production’ of those goods and
services that they can produce most efficiently, while importing
goods that they cannot produce as efficiently. When a country
embraces free trade, there is always some dislocation -lost textile
jobs at Harwood Industries, for example—but the whole
economy is bet-ter off as a result. According to this view, it
makes little sense for the United States to produce textiles at
home when they can be produced at a lower cost in Honduras
or China (which, unlike Honduras, is a major source of U.S.
textile imports). Importing, textiles from China leads to lower
prices for clothes in the United States, which en-ables consum-
ers to spend more of their money on other items. At the same
time, the increased income generated in China from textile
exports increases income levels in that country, which helps the
Chinese to purchase more products produced in the United
States, such as Boeing jets, Intel-based computers, Microsoft
software, and Mo-torola cellular telephones. In this manner,
supporters of globalization argue that free trade benefits all
countries that adhere to a free trade regime.
Supporters of globalization do concede that the wage rate
enjoyed by unskilled workers in many advanced economies may
have declined in recent years. For exam-ple, data for the
Organization for Economic Cooperation and Development
suggest that since 1980 the lowest 10 percent of American
workers have seen a drop in their real wages (adjusted for
inflation) of about 20 percent, while the top 10 percent have
enjoyed a real pay increase of around 10 percent. In the same
vein, a Federal Reserve study found that in the seven years
preceding 1996, the earnings of the best paid 10 percent of U.S.
workers rose in real terms by 0.6 percent annually while the
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earnings of the 10 percent at the bottom of the heap fell by 8
percent. In some areas, the fall was much greater. Similar trends
can be seen in many other countries.
However, while globalization critics argue that the decline in
unskilled wage rates is due to the migration of low-wage
manufacturing jobs offshore and a corresponding reduction in
demand for unskilled workers, supporters of globalization see
a more com-plex picture. They maintain that the declining real
wage rates of unskilled workers owes far more to a technology-
induced shift within advanced economies away from jobs where
the only qualification was a willingness to turn up for, work
every day and toward jobs that require significant education and
skills. They point out that many ad-vanced economies report a
shortage of highly skilled workers and an excess supply of
unskilled workers. Thus, growing income inequality is a result
of the wages for skilled workers being bid up by the labor
market, and the wages for unskilled workers being discounted.
If one agrees with this logic, a solution to the problem of
declining in-comes is to be found not in limiting free trade and
globalization, but in increasing so-ciety’s investment in educa-
tion to reduce the supply of unskilled workers.
Research also suggests that the evidence of growing income
inequality may be sus-pect. Robert Lerman of the Urban
Institute believes that the finding of inequality is based on
inappropriate calculations of wage rates. Reviewing the data
using a differ-ent methodology, Lerman has found that far
from income inequality increasing, an in-dex of wage rate
inequality for all workers actually fell by 5.5 percent between
1987 and 1994. If future research supports this finding, the
argument that globalization leads to growing income inequality
may lose much of its punch. During the last few years of the
1990s, the income of the worst paid 10 percent of the popula-
tion actually rose twice as fast as that of the average worker,
suggesting that the high employment levels of these years have
triggered a rise in the income of the lowest paid.
Globalization, Labor Policies, and the Environment
A second source of concern is that free trade encourages firms
from advanced nations to move manufacturing facilities to less
developed countries that lack adequate regu-lations to protect
labor and the environment from abuse by the unscrupulous.
Glob-alization critics often argue that adhering to labor and
environmental regulations significantly increases the costs of
manufacturing enterprises and puts them at a com-petitive
disadvantage in the global marketplace vis-a-vis firms based in
developing na-tions that do not have to comply with such
regulations. Firms deal with this cost disadvantage, the-theory
goes, by moving their production facilities to nations that do
not have such burdensome regulations or that fail to enforce
the regulations they have.
If this is the case, one might expect free trade to lead to an
increase in pollution and result in firms from advanced nations
exploiting the labor of less developed na-tions. This argument
was used repeatedly by those who opposed the 1994 forma-
tion of the North American Free Trade Agreement (NAFTA)
between Canada,
Figure 1.6
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 Environmental performance and income
Mexico, and the United States. They painted a picture of U.S.
manufacturing firms moving to Mexico in droves so that they
would be free to pollute the environment, employ child labor,
and ignore workplace safety and health issues, all in the name of
higher profits.
Mexico, and the United States. They painted a picture of U.S.
manufacturing firms moving to Mexico in droves so that they
would be free to pollute the environment, employ child labor,
and ignore workplace safety and health issues, all in the name of
higher profits.
Supporters of free trade and greater globalization express
serious doubts about this scenario. They point out that tougher
environmental regulations and stricter labor standards go hand
in hand with economic progress. In general, as countries get
richer, they enact tougher environmental and labor regulations.
Because free trade enables developing countries to increase their
economic growth rates and become richer, this should lead to
tougher environmental and labor laws. In this view, the crit-ics
of free trade have got it backward-free trade does not lead to
more pollution and labor exploitation, it leads to less. By
creating wealth and incentives for enterprises to produce
technological innovations, the free market system and free trade
could make it easier for the world to cope with problems of
pollution and population growth. In-deed, while pollution
levels are rising in the world’s poorer countries, they have been
falling in developed nations. In the United States, for example,
the concentration of carbon monoxide and sulphur dioxide
pollutants in the atmosphere decreased by 60 percent between
1978 and 1997,while lead concentrations decreased by 98 percent
-and these reductions have occurred against a background of
sustained economic ex-pansion. Drawn from a study under-
taken for the Organization for Economic Cooperation and
Development, Figure 1.6 shows there is a clear positive
relationship between the income levels in a country and the
environmental performance of that country as measured by
various indicators.
Supporters of free trade also point out that it is possible to tie
free trade agreements to the implementation of tougher
environmental and labor laws in less developed countries.
NAFTA, for example, was passed only after side agreements
had been ne-gotiated that committed Mexico to tougher
enforcement of environmental protection regulations. Thus,
supporters of free trade argue that factories based in Mexico are
now cleaner than they would have been without the passage of
NAFTA.
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11.154
They also argue that business firms are not the amoral organiza-
INTERNATIONAL BUSINESS MANAGEMENT
tions that critics sug-gest. While there may be a few rotten
apples, most business enterprises are staffed by managers who
are committed to behave in an ethical manner and would be
unlikely to move production offshore just so they could pump
more pollution into the atmo-sphere or exploit labor. Further-
more, the relationship between pollution, labor ex-ploitation,
and production costs may not be that suggested by critics. In
general, a well-treated labor force is productive, and it is
productivity rather than base wage rates that often has the
greatest influence on costs. The vision of greedy managers who
shift production to low-wage countries to exploit their labor
force may be misplaced.
Globalization and National Sovereignty
Another concern voiced by critics of globalization is that today’s
increasingly interde-pendent global economy shifts economic
power away from national governments and toward suprana-
tional organizations such as the World Trade Organization, the
Euro-pean Union, and the United Nations. As perceived by
critics, unelected bureaucrats now impose policies on the
democratically elected governments of nation-states, thereby
undermining the sovereignty of those states and limiting the
nation-state’s ability to control its own destiny.
The World Trade Organization (WTO) is a favorite target of
those who attack the headlong rush toward a global economy.
The WTO was founded in 1994 to po-lice the world trading
system established by the General Agreement on Tariffs and
Trade. The WTO arbitrates trade disputes between the 140 or
so states that are sig-natories to the GATT. The arbitration
panel can issue a ruling instructing a mem-ber state to change
trade policies that violate GATT regulations. If the violator
refuses to comply with the ruling, the WTO allows other states
to impose appropri-ate trade sanctions on the transgressor. As a
result, according to one prominent critic, U.S. environmentalist
and consumer rights advocate Ralph Nader:
Under the new system, many decisions that affect billions of
people are no longer made by local or 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 (which is where the headquarters of the
WTO are located). The bureaucrats can decide whether or not
people in California can prevent the destruction of the last
virgin forests or determine if carcinogenic pesticides can be
banned from their foods; or whether European countries have
the right to ban dangerous biotech hormones in meat . . . At
risk is the very basis of democracy and accountable decision
making.
In contrast to Nader’s rhetoric, many economists and politicians
maintain that the power of supranational organizations such as
the WTO is limited to that which nation-states collectively agree
to grant. They argue that bodies such as the United Nations and
the WTO exist to serve the collective interests of member
states, not to subvert those interests. Supporters of suprana-
tional organizations point out that the power of these bodies
rests largely on their ability to persuade member states to follow
a certain action. If these bodies fail to serve the collective
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 interests of member states, those states will withdraw their
INTERNATIONAL BUSINESS MANAGEMENT
support and the supranational organization will quickly
collapse. In this view, real power still resides with individual
nation-states, not supranational organizations
Managing in the Global Marketplace
An international business is any firm that engages in interna-
tional trade or investment. A firm does not have to become a
multinational enterprise, investing di-rectly in operations in
other countries, to engage in international business, although
multinational enterprises are international businesses. All a firm
has to do is export or import products from other countries.
As the world shifts toward a truly integrated global economy,
more firms, both large and small, are becoming international
busi-ness. What does this shift toward a global economy mean
for managers within an international business?
As their organizations increasingly engage in cross-border trade
and investment, it means managers need to recognize that the
task of managing an international business differs from that of
managing a purely domestic business in many ways. At the
most fundamental level, the differences arise from the simple
fact that countries are different Countries differ in their cultures,
political systems, economic systems, legal systems and levels of
economic development. Despite all the talk about the emerging
global village, and despite the trend toward globalization of
markets and production,
Differences between countries require that an international
business vary its practices country by country. Marketing a
product in Brazil may require a different approach than market-
ing the product in Germany; managing U.S. workers might
require different skills than managing Japanese workers;
maintaining close relations with a particular level of government
may be very important in Mexico and irrelevant in Great Britain;
the business strategy pursued in Canada might not work in
South Korea; and so on. Managers in an international business
must not only be sensitive to these differences, but tlley must
also adopt the appropriate policies and strategies for coping
with them.
A further way in which international business differs from
domestic business is the greater complexity of managing an
international business. In addition to the prob-lems that arise
from the differences between countries, a manager in an
international business is confronted with a range of other
issues that the manager in a domestic business never confronts.
An international business must decide where in the world to
site its production activities to minimize costs and to maximize
value added. Then it must decide how best to coordinate and
control its globally dispersed production activities (which, as we
shall see later in the book, is not a trivial problem). An in-
ternational business also must decide which foreign markets to
enter and which to avoid. It also must choose the appropriate
mode for entering a particular foreign country. Is it best to
export its product to the foreign country? Should the firm allow
a local company to produce its product under license in that
country? Should the firm enter into a joint venture with a local
firm to produce its product in that country? Or should the firm
set up a wholly owned subsidiary to serve the market in that
country? As we shall see, the choice of entry mode is critical
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14
because it has major implications for the long-term health of
the firm.
Conducting business transactions across national borders
requires understanding the rules governing the international
trading and investment system. Managers in an international
business must also deal with government restrictions on
international trade and investment. They must find ways to
work within the limits imposed by spe-cific governmental
interventions. Nominally committed to free trade, they often
intervene to regulate cross-border trade and investment.
Managers within international businesses must de-velop
strategies and policies for dealing with such interventions.
Cross-border transactions also require that money be converted
from the firm’s home currency into a foreign currency and vice
versa. Since currency exchange rates vary in response to changing-
economic conditions, an international business must develop
policies for dealing with exchange rate movements. A firm that
adopts a wrong policy can lose large amounts of money, while a
firm that adopts the right policy can increase the profitability of
its international transactions.
In sum, managing an international business is different from
managing a purely do-mestic business for at least four reasons:
(1) countries are different, (2) the range- of problems con-
fronted by a manager in an international business is wider, and
the prob-lems themselves more complex than those confronted
by a manager in a domestic business, (3) an international
business must find ways to work within the limits im-posed by
government intervention in the international trade and
investment system, and (4) international transactions involve
converting money into different currencies.
Activity (Questions):-
Q1) Comment on changing demographics of the global
economy?
Q2) How has global economy of the 21st century effected the
world trade picture, foreign direct investment, and jobs and
income in the world? comment .
Q3) How does one manage himself in the global market place,
discuss in brief ?
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