International Trade and Globalization Essay Example

International Trade and Globalization Essay PART 1 GLOBAL BUSINESS ENVIRONMENT CHAPTER ONE Globalization Learning Objectives After studying this chapter, you should be able to 1. Describe the process of globalization and how it affects markets and production. 2. Identify the two forces causing globalization to increase. 3. Summarize the evidence for each main argument in the globalization debate. 4. Identify the types of companies that participate in international business. 5. Describe the global business environment and identify its four main elements. A LOOK AT THIS CHAPTER This chapter de? es the scope of international business and introduces us to some of its most important topics. We begin by presenting globalization—describing its in? uence on markets and production and the forces behind its growth. Each main argument in the debate over globalization is also analyzed in detail. We then identify the key players in international business today. This chapter closes with a model that depicts international business as occurring within an integrated global business environment. A LOOK AHEAD Part 2, encompassing Chapters 2, 3, and 4, introduces us to different national business environments. Chapter 2 describes important cultural differences among nations. Chapter 3 examines different political and legal systems. And Chapter 4 presents the world’s various economic systems and issues surrounding economic development. 24 Emirates’ Global Impact DUBAI, United Arab Emirates—The Emirates Group, founded in 1985 and headquartered in Dubai, is one of the world’s leading commercial air transportation service providers. Emirates has built up a strong brand name as a leader in the aviation industry, particularly in terms of its excellent customer service and its very rapid growth. It provides passenger, cargo, and postal carriage services to approximately 100 destinations worldwide. The company is also involved in the wholesale and retail of consumer goods, in-? ight and institutional catering, holiday services, and hotel operations in Europe, the Middle East, the Far East, Africa, Asia, Australasia, and North America. The Group’s operations are global in many ways. Emirates is renowned for its excellent customer service, but how does it attract new customers and keep current customers happy when it operates worldwide in many different countries and cultures? We will write a custom essay sample on International Trade and Globalization specifically for you for only $16.38 $13.9/page Order now We will write a custom essay sample on International Trade and Globalization specifically for you FOR ONLY $16.38 $13.9/page Hire Writer We will write a custom essay sample on International Trade and Globalization specifically for you FOR ONLY $16.38 $13.9/page Hire Writer The answer is that global customers need global services too. If you visit Emirates’ Web site (see www. emirates. com) you will see it has multi-language booking services, customized in-? ight entertainment and provides international food and drink during the ? ight. Furthermore, Emirates Group employs about 50,000 people, and it’s interesting to note that its cabin crew is highly diverse in terms of nationality, religion, and languages. In fact, the group operates a global recruitment process, and its staff, from cabin crew to engineers, comes from all over the world. As you read this chapter, consider how globalization is reshaping our personal lives and altering the activities of international companies. 1 Source:  © Mccarthystudio/ Dreamstime. 25 26 PART 1 †¢ GLOBAL BUSINESS ENVIRONMENT G lobalization is reshaping our lives and leading us into uncharted territory. As new technologies drive down the cost of global communication and travel, we are increasingly exposed to the traits and practices of other cultures. As countries reduce barriers to trade and investment, globalization forces their industries to grow more competitive if they are to survive. And as ultinationals from advanced countries and emerging markets seek out customers, competition intensifies on a global scale. These new realities of international business are altering our cultures and transforming the way companies do business. International Business Involves Us All The dynamic nature of international business affects each of us personally. In our daily communications, w e encounter terms such as outsourcing, emerging markets, competitive advantage, sustainability, and social responsibility. And each of us experiences the result of dozens of international transactions every day. The General Electric alarm clock/radio (www. ge. com) that woke you was likely made in China. The breaking news buzzing in your ears was produced by Britain’s BBC radio (www. bbc. co. uk). You slip on your Adidas sandals (www. adidas. com) made in Indonesia, Abercrombie Fitch T-shirt (www. abercrombie. com) made in the Northern Mariana Islands, and American Eagle jeans (www. ae. com) made in Mexico. You pull the charger off your Nokia phone (www. nokia. com), which was designed in Finland and manufactured in the United States with parts from Taiwan, and head out the door. You hop into your Korean Hyundai (www. hmmausa. com) that was made in Alabama, and pop in a CD performed by the English band Coldplay (www. coldplay. com). You swing by the local Starbucks (www. starbucks. com) to charge your own batteries with coffee brewed from a blend of beans harvested in Colombia and Ethiopia. Your day is just one hour old, but in a way you’ve already taken a virtual trip around the world. A quick glance at the â€Å"Made in† tags on your jacket, backpack, watch, wallet, or other items with you right now will demonstrate the pervasiveness of international business transactions. International business is any commercial transaction that crosses the borders of two or more nations. You don’t have to set foot outside a small town to ? nd evidence of international business. No matter where you live, you’ll be surrounded by imports—goods and services purchased abroad and brought into a country. Your counterparts around the world will undoubtedly spend some part of their day using your nation’s exports—goods and services sold abroad and sent out of a country. Every year, all the nations of the world export goods and services worth nearly $15 trillion. That ? ure is around 40 times the annual global revenue of Wal-Mart Stores (www. walmart. com). international business Commercial transaction that crosses the borders of two or more nations. imports Goods and services purchased abroad and brought into a country. exports Goods and services sold abroad and sent out of a country. Technology Makes It Possible Technology is perhaps the mo st remarkable facilitator of societal and commercial changes today. Consumers use technology to reach out to the world on the Internet—gathering and sending information and purchasing all kinds of goods and services. Companies use technology to acquire materials and products from distant lands and to sell goods and services abroad. When businesses or consumers use technology to conduct transactions, they engage in e-business (e-commerce)—the use of computer networks to purchase, sell, or exchange products; service customers; and collaborate with partners. E-business is making it easier for companies to make their products abroad, not simply import and export ? nished goods. Consider how Hewlett-Packard (HP) (www. hp. com) designed and built a computer server for small businesses. Once HP identi? d the need for a new low-cost computer server, it seized the rewards of globalization. HP dispersed its design and production activities throughout a specialized manufacturing system across ? ve Paci? c Rim nations and India. This helped the company minimize labor costs, taxes, and shipping delays yet maximize productivity when designing, building, and distributing its new product. Companies use su ch innovative production and distribution techniques to squeeze inef? ciencies out of their international operations and boost their competitiveness. e-business (e-commerce) Use of computer networks to purchase, sell, or exchange products; service customers; and collaborate with partners. CHAPTER 1 †¢ GLOBALIZATION 27 Workers at a factory in Indonesia inspect electronic parts bound for global markets. Today, companies can go almost anywhere in the world to tap into local expertise and favorable business climates. For example, U. S. businesses exploit technology by subcontracting work to Chinese companies that write computer software code and then e-mail their end-product to the U. S. clients. In this way, companies can lower costs, increase ef? ciency, and grow more competitive. In what other ways might technology and global talent facilitate international business activity? Source: AFP Photo/Bob Low/Newscom. Global Talent Makes It Happen Media companies today commonly engage in a practice best described as a global relay race. Fox and NBC Universal created Hulu (www. hulu. com), one competitor of YouTube, as a cool venue for fans to watch TV shows online. Hulu employs two technical teams—one in the United States and one in China—to manage its Web site. Members of the team in Santa Monica, California, work late into the night detailing code speci? cations that it sends to the team in Beijing, China. The Chinese team then writes the code and sends it back to Santa Monica before the U. S. team gets to work in the morning. 2 Some innovative companies use online competitions to tap global talent. InnoCentive (www. innocentive. com) connects companies and institutions seeking solutions to difficult problems using a global network of more than 145,000 creative thinkers. These engineers, scientists, inventors, and businesspeople with expertise in life sciences, engineering, chemistry, math, computer science, and entrepreneurship compete to solve some of the world’s toughest problems in return for significant financial awards. InnoCentive is open to anyone, is available in seven languages, and pays cash awards that range from as little as $2,000 to as much as $1 million. 3 This chapter begins by presenting globalization—we describe its powerful in? uence on markets and production and explain the forces behind its expansion. Following coverage of each main point in the debate over globalization, we examine the key players in international business. We then explain why international business is special by presenting the dynamic, integrated global business environment. Finally, the appendix at the end of this chapter contains a world atlas to be used as a primer for this chapter’s discussion and as a reference throughout the remainder of the book. Quick Study 1. De? ne the term international business, and explain how it affects each of us. 2. What do we mean by the terms imports and exports? 3. Explain how e-business (e-commerce) is affecting international business. 28 PART 1 †¢ GLOBAL BUSINESS ENVIRONMENT Globalization globalization Trend toward greater economic, cultural, political, and technological interdependence among national institutions and economies. Although nations historically retained absolute control over the products, people, and capital crossing their borders, economies are becoming increasingly intertwined. Globalization is the trend toward greater economic, cultural, political, and technological interdependence among national institutions and economies. Globalization is a trend characterized by denationalization (national boundaries becoming less relevant) and is different from internationalization (entities cooperating across national boundaries). The greater interdependence that globalization is causing means an increasingly freer ? w of goods, services, money, people, and ideas across national borders. As its de? nition implies, globalization involves much more than the expansion of trade and investment among nations. Globalization embraces concepts and theories from political science, sociology, anthropology, and philosophy as well as economics. As such, it is not a term exclusively reserved for multinational corpora tions and international ? nancial institutions. Nor is globalization the exclusive domain of those with only altruistic or moral intentions. In fact, globalization has been described as going â€Å"well beyond the links that bind corporations, traders, ? nanciers, and central bankers. It provides a conduit not only for ideas but also for processes of coordination and cooperation used by terrorists, politicians, religious leaders, anti-globalization activists, and bureaucrats alike. †4 For our purposes, this discussion focuses on the business implications of globalization. Two areas of business in which globalization is having profound effects are the globalization of markets and production. Globalization of Markets Globalization of markets refers to convergence in buyer preferences in markets around the world. This trend is occurring in many product categories, including consumer goods, industrial products, and business services. Clothing retailer L. L. Bean (www. llbean. com), shoe producer Nike (www. nike. com), and electronics maker Sony (www. sony. com) are just a few companies that sell global products—products marketed in all countries essentially without any changes. For example, Apple’s iPad qualifies as a global product because of its highly standardized features and the company’s global marketing strategy and global brand. Global products and global competition characterize many industries and markets, including semiconductors (Intel, Philips), aircraft (Airbus, Boeing), construction equipment (Caterpillar, Mitsubishi), autos (Honda, Volkswagen), ? nancial services (Citicorp, HSBC), air travel (Lufthansa, Singapore Airlines), accounting services (Ernst Young, KPM G), consumer goods (Procter Gamble, Unilever), and fast food (KFC, McDonald’s). The globalization of markets is important to international business because of the bene? ts it offers companies. Let’s now look brie? y at each of these bene? s. REDUCES MARKETING COSTS Companies that sell global products can reduce costs by standardizing certain marketing activities. A company selling a global consumer good, such as shampoo, can make an identical product for the global market and then simply design different packaging to account for the language spoken in each market. Companies can achieve further cost savings by keeping an ad’s visual component the same for all markets but dubbing TV ads and translating print ads into local languages. CREATES NEW MARKET OPPORTUNITIES A company that sells a global product can explore pportunities abroad if the home market is small or becomes saturated. For example, China holds enormous potential for e-business with more than 400 mi llion Internet users, which is greater than the population of the entire United States. But while more than 70 percent of people in the United States actively surf the Web, just 30 percent of people in China do. So, the battle for market share in the Middle Kingdom is raging between the top two online search engines— Google (www. google. cn) and Yahoo! (www. cn. yahoo. com). Seeking sales growth abroad can be absolutely essential for an entrepreneur or small company that sells a global product but has a limited home market. CHAPTER 1 †¢ GLOBALIZATION 29 Ecstatic customers display their new iPads in Mexico City. The iPad is Apple’s (www. apple. com) ? rst tablet computer and a global success that excites style-lovers the world over. The iPad lets users surf the Web, write e-mail, ? ip through photos, and watch movies—all on a device that is only 0. 5 inches thick. Thousands of applications expand the iPad’s capabilities even further and more are creat ed daily. Apple standardized the iPad to reduce production and marketing costs and to support its powerful global brand. Source: STR/Newscom. LEVELS UNEVEN INCOME STREAMS A company that sells a product with universal, but sea- sonal, appeal can use international sales to level its income stream. By supplementing domestic sales with international sales, the company can reduce or eliminate wide variations in sales between seasons and steady its cash ? ow. For example, a ? rm that produces suntan and sunblock lotions can match product distribution with the summer seasons in the northern and outhern hemispheres in alternating fashion—thereby steadying its income from these global, yet highly seasonal, products. YET LOCAL NEEDS ARE IMPORTANT Despite the potential bene? ts of global markets, managers must constantly monitor the match between the ? rm’s products and markets to not overlook the needs of buyers. The bene? t of serving customers with an adapted product may outweigh the ben e? t of a standardized one. For instance, soft drinks, fast food, and other consumer goods are global products that continue to penetrate markets around the world. But sometimes these products require small modi? cations to better suit local tastes. In southern Japan, Coca-Cola (www. cocacola. com) sweetens its traditional formula to compete with sweeter-tasting Pepsi (www. pepsi. com). In India, where cows are sacred and the consumption of beef is taboo, McDonald’s (www. mcdonalds. com) markets the â€Å"Maharaja Mac†Ã¢â‚¬â€two all-mutton patties on a sesame-seed bun with all the usual toppings. Globalization of Production Many production activities are also becoming global. Globalization of production refers to the dispersal of production activities to locations that help a company achieve its cost-minimization or quality-maximization objectives for a good or service. This includes the sourcing of key production inputs (such as raw materials or products for assembly) as well as the international outsourcing of services. Let’s now explore the bene? ts that companies obtain from the globalization of production. ACCESS LOWER-COST WORKERS Global production activities allow companies to reduce overall production costs through access to low-cost labor. For decades, companies located their factories in low-wage nations to churn out all kinds of goods, including toys, small appliances, inexpensive electronics, and textiles. Yet whereas moving production to low-cost 30 PART 1 †¢ GLOBAL BUSINESS ENVIRONMENT locales traditionally meant production of goods almost exclusively, it increasingly applies to the production of services such as accounting and research. Although most services must be produced where they are consumed, some services can be performed at remote locations where labor costs are lower. Many European and U. S. businesses have moved their customer service and other nonessential operations to places as far away as India to slash costs by as much as 60 percent. ACCESS TECHNICAL EXPERTISE Companies also produce goods and services abroad to bene? t from technical know-how. Film Roman (www.? lmroman. com) produces the TV series The Simpsons, but it provides key poses and step-by-step frame directions to AKOM Production Company (www. akomkorea. com) in Seoul, South Korea. AKOM then ? lls in the remaining poses and links them into an animated whole. But there are bumps along the way, says animation director Mark Kirkland. In one middle-of-the-night phone call, Kirkland was explaining to the Koreans how to draw a shooting gun. They don’t allow guns in Korea; it’s against the law,† says Kirkland. â€Å"So they were calling me [asking]: ‘How does a gun work? ’† Kirkland and others put up with such cultural differences and phone calls at odd hours to tap a highly quali? ed pool of South Korean animators. 7 ACCESS PRODUCTION INPUTS Globalization of production allows companies to access re- sources that are unav ailable or more costly at home. The quest for natural resources draws many companies into international markets. Japan, for example, is a small, densely populated GLOBAL CHALLENGES Managing Security in the Age of Globalization n a lawsuit. The damaged reputation of Goldman Sachs following its $550 million settlement with the Securities and Exchange Commission (for its actions before and during the ? nancial meltdown on Wall Street) is estimated to have cost the ? rm nearly 40 percent ($6 billion) of its brand value in one year. †¢ The Challenge. Like the risks themselves, the challenges are also varied. First, companies should identify all potential risks to their facilities and develop a bestpractice property risk program. Second, employees should change passwords often, guard computers and mobile devices ith software patches, and return company-owned digital devices when leaving the ? rm. Third, as they come under ever-increasing scrutiny, companies should act ethically and w ithin the law to protect their reputations. †¢ Want to Know More? Visit leading risk consultancy Kroll (www. krollworldwide. com), leading Internet security ? rm Check Point Software Technologies (www. checkpoint. com), and Internet security agency CERT Coordination Center (www. cert. org). Sources: Douglas McIntyre, â€Å"The 10 Biggest Brand Disasters of 2010,† Daily Finance Web site (www. daily? nance. om), July 21, 2010; Erik Schatzker and Christine Harper, â€Å"Goldman Could Have Managed Reputational Risks Better, Cohn Says,† Bloomberg Businessweek (www. businessweek. com), July 1, 2010; The Risk/Earnings Ratio: New Perspectives for Achieving Bottom-Line Stabililty (Johnston, RI; FM Global, June 2010); An Introduction to the Business Model for Information Security (Rolling Meadows, IL: ISACA, 2009). The globalization of markets and production creates new challenges for companies. As well as the need to secure lengthy supply chains and distribution channels, companies must secure their facilities, information systems, and reputations. Facilities Risk. Careful planning and facilities assessment (around $12,000 for a midsized company; $1 million for a large ? rm) can be well worth the cost. Large companies with top-notch property risk management programs are said to produce more stable earnings. And companies practicing weak risk management experience 55 times greater risk of property loss due to ? re and 29 times greater risk of property loss caused by natural hazards. †¢ Information Risk. Computer viruses, software worms, malicious code, and cyber criminals cost companies around the world many billions of dollars each year. The usual suspects include disgruntled employees and dishonest competitors, but often are hackers who steal customers’ personal and ? nancial data that is then sold worldwide to the highest bidder. Upon quitting their jobs, some employees simply walk away with digital devices containing con? dential memos, competitive data, and private e-mails. †¢ Reputational Risk. News regarding the actions of today’s largest corporations spreads worldwide quickly. Reputational risk is anything that can harm a ? rm’s image, including accounting irregularities, product recalls, workers’ rights violations, and involvement CHAPTER 1 †¢ GLOBALIZATION 31 island nation with very few natural resources of its own—especially forests. But Japan’s largest paper company, Nippon Seishi, does more than simply import wood pulp. The company owns huge forests and corresponding processing facilities in Australia, Canada, and the United States. This gives the ? rm not only access to an essential resource but also control over earlier stages in the papermaking process. As a result, the company is guaranteed a steady ? ow of its key ingredient (wood pulp) that is less subject to swings in prices and supply associated with buying pulp on the open market. Likewise, to access cheaper energy resources used in manufacturing, a variety of Japanese ? rms are relocating production to China and Vietnam, where energy costs are lower. Despite its bene? ts, globalization also creates new risks and accentuates old ones for companies. To read about several key risks that globalization heightens and how companies can better manage them, see this chapter’s Global Challenges feature, titled â€Å"Managing Security in the Age of Globalization. † Quick Study 1. De? ne globalization. How does denationalization differ from internationalization? . List each bene? t a company might obtain from the globalization of markets. 3. How might a company bene? t from the globalization of production? Forces Driving Globalization Two main forces underlie the globalization of markets and production: falling barriers to trade and investment and technological innovation. These two features, more than anything else, are increasing competition among nations by leveling the global business playing field. Greater competition is simultaneously driving companies worldwide into more direct confrontation and cooperation. Local industries once isolated by time and distance are increasingly accessible to large international companies based many thousands of miles away. Some small and medium-sized local firms are compelled to cooperate with one another or with larger international firms to remain competitive. Other local businesses revitalize themselves in a bold attempt to survive the competitive onslaught. And on a global scale, consolidation is occurring in many industries as former competitors link up to challenge others on a worldwide basis. Let’s now explore in greater detail the pivotal roles of the two forces driving globalization. Falling Barriers to Trade and Investment In 1947, political leaders of 23 nations (12 developed and 11 developing economies) made history when they created the General Agreement on Tariffs and Trade (GATT)—a treaty designed to promote free trade by reducing both tariffs and nontariff barriers to international trade. Tariffs are essentially taxes levied on traded goods, and nontariff barriers are limits on the quantity of an imported product. The treaty was successful in its early years. After four decades, world merchandise trade had grown 20 times larger, and average tariffs had fallen from 40 percent to 5 percent. Signi? cant progress occurred again with a 1994 revision of the GATT treaty. Nations that had signed on to the treaty further reduced average tariffs on merchandise trade and lowered subsidies (government ? nancial support) for agricultural products. The treaty’s revision also clearly de? ned intellectual property rights—giving protection to copyrights (including computer programs, databases, sound recordings, and ? ms), trademarks and service marks, and patents (including trade secrets and know-how). A major ? aw of the original GATT was that it lacked the power to enforce world trade rules. Likely the greatest accomplishment of the 1994 revision was the creation of the World Trade Organization. WORLD TRADE ORGANIZATION The World Trade Organization (WTO) is the international organization that enforces the rules of international trade. The three main goals of the WTO (www. wto. org) are to help the free ? ow of trade, help negotiate the further opening of markets, General Agreement on Tariffs and Trade (GATT) Treaty designed to promote free trade by reducing both tariffs and nontariff barriers to international trade. World Trade Organization (WTO) International organization that enforces the rules of international trade. 32 PART 1 †¢ GLOBAL BUSINESS ENVIRONMENT and settle trade disputes among its members. It is the power of the WTO to settle trade disputes that really sets it apart from its predecessor, the GATT. The various WTO agreements are essentially contracts between member nations that commit them to maintaining fair and open trade policies. Offenders must realign their trade policies according to WTO guidelines or face ? es and, perhaps, trade sanctions (penalties). Because of its ability to penalize offending nations, the WTO’s dispute settlement system truly is the spine of the global trading system. The WTO replaced the institution of GATT but absorbed all of the former GATT agreements. Thus, the GATT institution no longer of? cially exists. Today, the WTO recognize s 153 members and 30 â€Å"observer† members. The WTO launched a new round of negotiations in Doha, Qatar, in late 2001. The renewed negotiations were designed to lower trade barriers further and to help poor nations in particular. Agricultural subsidies that rich countries pay to their own farmers are worth $1 billion per day— more than six times the value of their combined aid budgets to poor nations. Because 70 percent of poor nations’ exports are agricultural products and textiles, wealthy nations had intended to further open these and other labor-intensive industries. Poor nations were encouraged to reduce tariffs among themselves and were to receive help in integrating themselves into the global trading system. Although the Doha round was to conclude by the end of 2004, negotiations are proceeding more slowly than was anticipated. REGIONAL TRADE AGREEMENTS In addition to the WTO, smaller groups of nations are integrat- ing their economies as never before by fostering trade and boosting cross-border investment. For example, the North American Free Trade Agreement (NAFTA) gathers three nations (Canada, Mexico, and the United States) into a free-trade bloc. The more ambitious European Union (EU ) combines 27 countries. The Asia Paci? c Economic Cooperation (APEC) consists of 21 member economies committed to creating a free-trade zone around the Paci? c. The aims of each of these smaller trade pacts are similar to those of the WTO but are regional in nature. Moreover, some nations are placing greater emphasis on regional pacts because of resistance to worldwide trade agreements. TRADE AND NATIONAL OUTPUT Together, the WTO agreements and regional pacts have gross domestic product (GDP) Value of all goods and services produced by a domestic economy over a one-year period. gross national product (GNP) Value of all goods and services produced by a country’s domestic and international activities over a one-year period. boosted world trade and cross-border investment signi? cantly. Trade theory tells us that openness to trade helps a nation to produce a greater amount of output. Map 1. 1 illustrates that growth in national output over a recent 10-year period is signi? cantly positive. Economic growth is greater in nations that have recently become more open to trade, such as China, India, and Russia, than it is in many other countries. Much of South America is also growing rapidly, while Africa’s experience is mixed. Let’s take a moment in our discussion to define a few terms that we will encounter time and again throughout this book. Gross domestic product (GDP) is the value of all goods and services produced by a domestic economy over a one-year period. GDP excludes a nation’s income generated from exports, imports, and the international operations of its companies. We can speak in terms of world GDP when we sum all individual nations’ GDP figures. GDP is a somewhat narrower figure than gross national product (GNP)—the value of all goods and services produced by a country’s domestic and international activities over a one-year period. A country’s GDP or GNP per capita is simply its GDP or GNP divided by its population. GDP or GNP per capita Nation’s GDP or GNP divided by its population. Technological Innovation Although falling barriers to trade and investment encourage globalization, technological innovation is accelerating its pace. Signi? cant advancements in information technology and transportation methods are making it easier, faster, and less costly to move data, goods, and equipment around the world. Let’s examine several innovations that have had a considerable impact on globalization. E-MAIL AND VIDEOCONFERENCING Operating across borders and time zones complicates the job of coordinating and controlling business activities. But technology can speed the ? w of information and ease the tasks of coordination and control. Electronic mail (e-mail) is an CHAPTER 1 †¢ GLOBALIZATION 33 indispensable tool that managers use to stay in contact with international operations an