What is Globalization ??

Paradigm shift of national economies into international economies as a more integrated and interdependent world economy through
Trade FDI Capital flows

Migration/Transportation
Technology

Globalization components
Globalization of markets
Globalization of production

Globalization of Markets
Merging of separate national markets into global

market place Not only for consumer products but also for industrial products Al, oil, computer chips etc Standardized product creates global market Small business contribute major share in exports

Globalization of Production
Sourcing of goods and services from locations around

the globe Benefits from national advantages in cost and quality of factors of production (labor, land, capital)

Boeing 777
Fuselage, Doors, Wings Japan

Nose landing gear Singapore

Wing Flaps - Italy

IBM Think Pad X31

Product Design, Microprocessor USA
Case, Keyboard, HDD Thailand Screen, Memory South Korea

Assembling Mexico

Drivers of Globalization
Two major factors of Globalization are : Declining Trade and Investment Barriers Technological Changes

Declining Trade and Investment Barriers

International Trade - Firm exports goods /services to consumer in another country - High tariffs on imported goods - To protect domestic from foreign competition
Foreign Direct Investment - Firm invests resources

of its business activities outside its home country - Free flow of goods and services between nations - GATT

General Agreement on Tariffs and Trade

148 member states came to negotiation to lower

barriers for free flow of goods and services Provided protection doe patents, trademarks, copyrights WTO was assigned to monitor the system In 2001, global trade was liberalized Cutting tariffs on industrial goods/services, agro products

Technological Change
1. Microprocessors and Telecommunications

High power, Low cost Development in satellite, wireless Moores Law power doubles, cost reduces to 50%

1. Internet 1990 1 million users then, now ~ 2 billion users 1. Transportation

Commercial jet airways

Super freighters Containerization

Implications
Decline of transportation cost
Cost of information processing and communication

has fallen Ex: 1.Dell 2. s/w testers debug codes of Microsoft head quartered at Washington Internet electronic global market place Ex: Flipkart, Accessibility to MC Donald's, Adidas etc

Modes and Entries of International Business

Entry Decisions to enter a market Which foreign market to enter ? a. Political factor cost, risk, return b. Economic factors purchasing power, size of market When to enter market ? a. First movers b. Late entrants

First Movers
Advantages Ability to preempt rivals and capture demand by establishing strong brand name Ability to build sales volume via cost advantage Ability to create switching cost

Disadvantages
Gives rise to pioneering costs
Benefits late entrants by observing the mistakes of

latter Ex: KFC to china, then Mc D Risk of change is rules and regulations of the country

Scale of Entry
Large scale
Small scale

Modes of Entry
Export
Trunkey project Licensing

Franchising
Joint Ventures Subsidiary set up in host country

Export
Mode of serving a foreign market via goods/services

Advantages Substantial cost is reduced Helps to achieve experience curve Economies of scale (lowers the avg cost/unit as production increases) Ex: Sony

Experience curve

Disadvantages
High transport cost for bulk products
Tariff barriers Delegation of operations (mktng, sales, service)

Turnkey Projects
In terms of contract, after the completion of contract the key is handed over to company; chemicals, metal refining industries Advantages The value of know-how is high Reduces FDI Dis advantages No long term interest with the partner company Threat of competition

Licensing
An agreement where licensor grants rights to intangible property to another entity/licensee for a specified period - Intangible property; patents, inventions, formulas, processes, designs, copyrights and trademarks Ex:

Advantages
Development cost and risk associated with foreign company

is reduced Strong hold for companies lacking capital to develop operations overseas Acts as gate pass through barriers into foreign markets

Disadvantages Restrictions on strategies for licensee, resulting in loss of experience curve Cannot compete in global market vis supporting competitive attacks Licensor loses the control over know-how skills over licensee Cross licensing give and take policy

Franchising
Franchisor sells intangible property to franchisee there

by abiding to rules regarding doing business Assist to run business via capitals, operations Majority in service sectors implement franchising

Advantages
Firms breath at ease in cost and risk

Creates good incentive for franchisee

Build global prescence

Disadvantages Service oriented, no need of experience curve pertaining to manufacturing Quality control maintenance

Joint ventures
A firm jointly owned by two or more independent firms on the basis of percentage of partnership stakes

Advantages
Firm benefits from local partners R&D of host country Development cost and risk are high, the cost will be

shared Reduces government interference; local host having influence over the government Disadvantages Giving control over technology Majority/dominant partnership benefits the most Creates conflicts w.r.t investment for future goals and objectives

Wholly owned subsidiaries

Firm owns 100% stock Green field venture/acquisition to promote their

product

Advantages
Reduces the risk of losing the control over competency

vis competency level; technology Gives the firm tight control of operations National subsidiary focus on manufacturing particular parts in product line; reducing cost at each stage Disadvantages Expensive to serve market Cost is high, risk is high Acquisitions make the company to start from the beginning