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Chapter 1

Perspectives on globalization and international business


Management is essentially about getting work done through
others.
This process of management is influenced by various factors.
One of these factors is globalization.
Globalisation
Definition: 1.Willcocks(2013)-Globalisation can be defined
as the shift towards a more intergrated and interdependent
world economy.
2.Mauro Guillen-Globalisation is the process
leading to greater interdependence and mutual
awareness among economic, political and social units
in the world and among the people in the world
According to Willcocks(2013), defining globalization has big
implications; how it is explained to the public influences how
the idea is received.
Therefore, the above definitions of globalization imply on the
debates of globalization and other discussions on
globalization.

Features of globalization
Accelerated spread of communication
Rising power of multinational enterprises
Eliminating differences between distinctive cultures and
identities
Increasing amounts of cross border trade
Development of international bodies
Improvement in ICT
Rising power of MNEs and growing inequality
(Peng and

Unskilled workers are comparatively lost out


Meyer-2011)

Globalisation is hardly new-Peng and Meyer(2011)


The above statement is clearly shown from the waves
of globalization explained by Peng and Meyer(2011).
Waves of globalization
a.
b.
c.
d.

1880-1929 First global economy


1930-1980 Disintergration
1950-1979 Beginning of a new global economy
1979-present New global economy
*Read P&M for more details.

Accordingly, the process of globalization has been


driven out by two main macro factors. These factors are
also known as the drivers or driving forces of
globalization.
Drivers of globalisation
1. Decline in trade and investment barriers since the
Second World war
2. Technological change(Specially introduction of ICT)
As a result of these forces, there were several changes
that occurred, which in turn supported globalization.
These changes are the trends towards globalization.
Trends towards globalization(Hill-2010)
1. Changes in world output and world trade
2. FDI(Foreign direct investment)-P&M defines FDI as
the investments in, controlling and managing
value added activities in other countries

3. Types of companies-Increase in international


businesses and MNEs
(P&M defines international business as a firm that
engages in international economic activities or the
action of doing business abroad)
(P&M defines MNEs as firms that engage in FDI
and operate in multiple countries)
4. Change in world order
Globalization which has resulted by these trends, contributes
positively to businesses.
Benefits of globalization to businesses
1. Companies can work with the forces for
globalization and improve their global
performance.
2. Low trade barriers and investment mean that
companies can locate production facilities in the
optimal location.And, production and sales now
take place in multiple markets which create
interdependency between countries for goods and
services.
3. Cost of global communication has fallen
4. As a result of improvements in transportation, the
time and cost taken for delivery and exchanging
resources has shrunk.
The benefits of globalization are supported by
Willcocks(2013) as follows .
There is evidence that there have been huge global shifts in
the ways in which business is done but overall the strongest
companies are international, but are also strategically
sensitive to localizing products or
services in different markets

Also, in the above statement of Willcocks, it is clearly stated


that sometimes strategically localizing is used by the
strongest companies.
This hints that there are several problems of globalization
too.

Problems of globalization to businesses


1. Geographical and cultural variances
2. Should expect anti globalization protests(These protests are
often conducted by NGOs like human right activists)
3. Risk of disruptions(These include natural disasters, wars,
terrorism in another country can affect you)
4. Should respond to global changes(Eg: Financial crisis)
5. Low barriers to trade and investment can lead to greater
competition and difficulties for survival
Therefore, the next key question is Do low barriers to trade
affect businesses positively or negatively?
Consider this quiz in terms of the international trade
theories.
International Trade Theories
1. Mercantilism
-of the 16th century-A country can become better
off by encouraging exports and discouraging imports.
(However, the reality of this is questioned because
practically one country cannot gain from trade
without making the others worse off)
-modern mercantilism-A country can benefit
from trade through the use of protectionism.
2. Adam Smiths Theory of Absolute advantage-A
country can benefit from trade by producing the
goods at which it has the absolute advantage and

importing the rest.(Absolute advantage means being


able to produce a product better than other
countries-it is a form of specialization)
3. Ricardos Theory of comparative advantage-A
country can benefit from trade by producing goods
for which it has a relatively lower opportunity cost
than other countries and to import the rest.

4. Hecksher Ohlins Theory-This theory points out that a


countrys comparative advantage is a result of
differences in factor endowments. Accordingly, a
country can benefit from international trade by
trading in and out the factor endowments.
5. Porters Theory-A country can benefit from free trade
if they trade in and out four main factors (The
diamond of competitive advantage), which are
important for obtaining competitive advantage.
a) Factor endowments/Factors of
production
b) Demand
c) Related and supporting
industries(industries producing
substitutes and complements)
d) Firms strategy, structure and rivalry
Therefore, there are both people who support globalization
and who are against globalization.
These arguments of the proponents and critics of
globalization are mainly centred around 4 topics. These are
the 4 key globalization debates put forward by
Willcocks(2013).

Globalization debates
1. Jobs and income
Proponents-1.Free trade prompts countries to
specialize in what they are best at and import
the other items. This results in the whole
economy being better off in terms of able to
increase real consumer income.
2. free trade results in greater
job opportunities because now the economy
will be producing to satisfy its domestic and
foreign customers.
3. Top management jobs are paid
more and are in demand even during a
recession
Critics-1.Low skilled jobs command lower
salaries
2. Low skilled jobs are more
vulnerable to international competition
2. Labour policies and the environment
Proponents-1.Environmental regulations and
labour standards will improve with the
economic progress resulting from
globalization
Critics-1. Free trade encourages companies
from developed nations to enter developing
nations which have poor environmental and
labour regulations. Thus, developed nations
may exploit the environment and labour of
developing nations.
3. Shifts in Economic power
Proponents-1.The international bodies formed
as a result of globalization would promote the
collective interests of members.

Critics-1.The economic power is shifting away


from national governments to international
bodies
4. Wealth distribution
Proponents-1.Naturally due to globalization
the gap between the rich and the poor
become narrow.
(But, due to the policies implemented by the
governments, this gap has widened)
Critics-1. The gap between rich and poor is
growing as a result of globalization because
the benefits of globalization are not shared
equally among all countries.
Based on these debates, it is clear of the several problems
caused due to globalization.
This has resulted in several trends against globalization.
Trends against globalization
1. Protectionism-P&M defines protectionism as a situation of
protecting domestic firms from imports and encouraging
exports.
Tariffs-specific(fixed charge for each unit) and ad
valorem(proportion of the value of the good)
Subsidies
Quotas
Voluntary Export Restraints(Quotas on trade imposed
by the exporting country at the request of importing
countries)
Local content requirements(Government demands a
portion of production of a product to be done locally)
2. Localisation- Nationalising the production
3. Anti dumping policies

As a result of these trends towards and against globalization,


another key question arises on the extent of globalization that
has taken place and the extent of its impact.
This is the central discussion of Ghemawat(2001)Does
Distance Still Matter
Does Distance Still Matter?
Hyperglobalists argue that globalization has taken place to
greater extent and is taking place increasingly.
Friedman(2007)-Globalisation is accelerating and is
flattening the world so that every nation will eventually
be part of the global market place and production
process(in concern to technological distance)
- 10 flatteners have shaped globalization and
caused increased homogeneity in the world
Sceptists argue that globalization hasnt really taken place
to the extent that people believe that the world is
globalised.
Dicken(2010)-quantitative and aggregative
evidence suggests that the world economy
was more open and more intergrated in the
half century prior to the first world war than
it is today
Ghemawat(2001)-Companies overestimate
the attractiveness of foreign markets. The
true amount of trade and investment is
influenced largely by geographical and
cultural differences
-Assuming that global communications and
technologies shrink the world is an incorrect
assumption and a dangerous one

-The world is semi globalised(The CAGE


distance framework in Willcocks is a proof for
this)
Whichever the view out of the above is held, the next quiz to
consider is Does globalization have any impact on the
success or failure of businesses?
According to Peng and Meyer(2011), the success or failure
of firms around the globe are determined by several factors.
These factors are categorized in two main views.
1. Institution Based View-The success or failure
of firms depend on the formal and informal
rules of the game

(institutions)
( survival)
-

According to this view the success or failure of a


firm mainly depends on the external business
environment.
2. Resource based view-The success or failure
of a firm depend on the firm specific internal
resources and capabilities,which help to
overcome the liability of outsidership(The
internal business environment of a firm
mainly affects the success or failure of a
firm because it helps to overcome the lack
of familiarity of the external business
environment)

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