Chapter 1: Globalization and International Business

Introduction

Globalization is an idea that defines integration on a global scale, usually in terms of economics. However, it can also be considered in terms of various other disciplines such as sociology, politics, culture, and management. International Business, on the other hand, refers to the exchange of goods and services across the border between two or more nations.

Although these two terms, globalization and international business, differ in their definitions, there is a crucial link between them. Today, businesses operate in a complex and rapidly changing environment in the globalized world. The international business environment is full of opportunities, resources, trends, as well as threats.

Globalization Defined

In the mid-1990s, the IMF’s World Economic Outlook defined globalization as the growing interdependence of countries worldwide through the increasing volume and variety of cross-border transactions in goods and services and of international capital flows, and also through the more rapid and widespread diffusion of technology. From a broader perspective, globalization can also be defined as the process of social, political, economic, cultural, and technological integration among countries around the world.

Economists focus on those aspects of globalization concerning international trade, international capital flows, and the dominance of multinational enterprises (MNEs) over international and domestic economies. Political scientists view it as a concept concerning the nation-state and new forms of governance. Sociologists approach the same phenomenon in terms of the rising of global culture and global companies’ dominance in creating and sustaining it. International relations experts tend to focus on global conflicts and global institutions.

There are at least two aspects through which globalization occurs, namely globalization of markets and globalization of production. With the rise of globalization, distinct national markets merged into one huge global marketplace. Trade barriers have fallen; thus it has become easier to sell internationally.

By facing the same brands, the same messages, and identical products, consumers’ preferences gradually became relatively similar, which helped the construction of the global market. The globalization of production can be easily understood by looking at the back of an Apple iPhone, which reads, ‘Designed by Apple in California, Assembled in China.’

Johnson and Turner developed three dimensions to address the question whether globalization is a myth or reality. The first dimension is the scope. Scope refers to “the extent to which international economic integration is genuinely global rather than confined to the ‘triad’ of North America, Europe, and Japan/East Asia.” The second dimension is intensity. Intensity refers to ‘the depth, embeddedness, and extensiveness of the integration that has taken place, both between countries and within firms.’ The last dimension offered is sensitivity, which refers to ‘the degree to which events in one part of the global system transmit themselves to other parts of the system.’

Furthermore, a new term, glocalization (global+local), has been created to emphasize the application of localization as a response to globalization. It is mostly about adapting global conditions to local conditions, including cultural aspects, laws, and regulations. It involves thinking globally but acting locally in all international business efforts.

Globalization has changed the model of business performance from a micro-level business model to a macro level business model. Businesses are no longer bound to a specific environment, which means they are now global. Products are manufactured in one part of the world to be sold in another.

Drivers of Globalization

To understand globalization in terms of its more profound meaning and significance, it is essential to analyze the key, closely linked drivers behind the globalization process. These drivers can be divided into two macro factors. One of them is declining trade and investment barriers, and the other one, as we all are facing every day, is technological change.

During the 1920s and 1930s, nation-states initiated substantial barriers to international trade and foreign direct investment. The main idea behind this was to protect domestic manufacturers from international competition. Barriers meant high tariffs on imports, mainly on manufactured goods. In the end, high tariffs decreased the global demand and became one of the primary reasons for the Great Depression of the 1930s.

After World War II, experienced Western nations decreased the tariffs and facilitated the free flow of goods, services, and capital among nations. Lowering the barriers accelerated the economic growth rates globally. Declining barriers made globalization a reality in theory, but realization took place with advancements in technology, including communication, information processing, transportation, and the net.

The Positive and Negative Sides of Globalization

Globalization is a complicated issue. Is an integrated and interdependent global economy a good thing for all? Or does the weak suffer? Proponents argue that everyone benefits from globalization, as evidenced in lower prices, greater availability of goods, better jobs, and access to technology. Those who favor globalization see threats but view them as short-term disruptions. Opponents, on the other hand, point out growing trade deficits and slow growth as factors damaging emerging economies, consequently, putting more pressure on the weaker ones and potentially causing a total collapse.

Globalization and Changing Business Strategies

A global economy implies a borderless economic space in which the integration of operations and markets takes place according to economic and market imperatives as opposed to the fragmentation of production and markets. An international economy implies no fundamental shift in the underlying principles of an economic organization but simply more cross-border transactions. Globalization brings fundamental implications for governance and political organization whereas internationalization, although posing governance challenges at the national and international level, can be absorbed within existing governance frameworks.

The CAGE (cultural-administrative-geographic-economic) framework is useful for analyzing the different dimensions of the distance between any two countries. Culture refers to the attributes of a society that are sustained mainly by interactions among people, rather than by the state. Differences in languages, ethnicities, religions, values, and norms make cultural distance greater.

Administrative attributes encompass laws, policies, and institutions that typically emerge from a political process and are mandated or enforced by the government. Lack of colonial ties, lack of shared regional trade block, lack of common currency, and prevalence of political hostility increase administrative distance.

The geographic attributes of countries that can affect cross-border economic activity mostly grow out of natural phenomena, although some human interventions may also be involved. Greater physical distance, lack of land border, and differences in time zones and climates enhance geographic distance.

Economic distance refers to differences that affect crossborder economic activity through economic mechanisms. Differences in economic size (GDP), wealth (GDP per capita), cost or quality of natural resources, financial resources, human resources, information or knowledge, and infrastructure heighten geographic distance. The kinds of industries that are sensitive to each component of distance are shown on page 9 of your textbook in table 1.1.

International Business and its Key Players

Globalization provides a broader vision when compared to internationalization, which refers to the process of business crossing national and cultural borders. Countries engage in trade partnerships to fulfill their needs and to trade excess products and services to bring in revenues.

Developments in technology also lead to advancements in communications and transportation, which further helps develop shared understanding and cooperation between countries that have an open path of trades across borders. In general, this leads to the exchange of goods, services, and information across borders for people and countries.

Internationalization could be defined as the process by which a firm gradually changes in response to the imperatives of international competition, domestic market saturation, desire for expansion, new markets, and variation. It is an institutional or corporate strategy that focuses on making goods and services as adaptable as possible so that they can quickly enter different national markets. Any firm that engages in international trade or investment is called an international business. So international business may mean both the activity and the entity itself.

International management is the process of using management concepts and techniques in a multinational environment and adapting management practices to different economic, political, and cultural contexts.

Managing an international business is different from conducting business activities domestically at least for four reasons. Initially, international business involves different countries. Secondly, managers of international businesses face more comprehensive and sophisticated challenges than their domestic counterparts. Thirdly, government intervention is inevitable in international transactions. Lastly, international business requires companies to work with different currencies.

A Multinational Enterprise (MNE) is any business that has productive activities in two or more countries. Multinational Corporation (MNC), similar to MNEs, is a firm that has operations and international sales in more than one country and a mix of nationalities among managers and owners. MNC is an umbrella concept. International business terminology distinguishes different types of MNCs, including global corporations, multidomestic corporations, and transnational corporations.

John Deere is an example of a multi-domestic corporation with its line of highly customizable products. Ford is given as an example for the transnational corporation, and Sony Corporation is an example of a global corporation.

A born-global firm is generally defined as a company that adopts a global perspective, sells and uses resources on a worldwide scale, and engages in international business from or near its inception. Exporters from the beginning, advanced technology firms, and start-ups are the main types of born-globals.

The Impact of Globalization on International Business

The USA dominated the global economy for a long time, but today its dominance over the world economy, international trade, foreign direct investments is shaking; multinational companies are not just US controlled organizations anymore, and the global economy is not limited to Western societies. The developing world is now in the passing lane. Emerging countries of the world are now predicted to occupy increasingly dominant roles in the global economic system.

G7 countries are gradually being caught by countries such as Brazil, China, India, Indonesia, Mexico, Russia, and Turkey, which are today labeled as E7. American MNCs such as Apple, Chevron, Johnson & Johnson, Coca-Cola, Ford Motor Company, ExxonMobil, Caterpillar, Walmart, Microsoft, and Google have all earned more annual revenue in the international arena than they have in the US. It should also be underlined that globalization and the rise of emerging markets’ MNCs have brought prosperity to many previously underdeveloped parts of the world. Nonetheless, whether or not the MNCs are friends or rivals for the developing countries is still unknown.

Global Business Environment

Political and Legal Systems

The political system has a significant influence on how business is conducted in that country. Managing successful business operations in different countries requires knowledge beyond the basics of the governmental practices to the extent to which peculiar legal and regulatory aspects of a given nation-state can be understood.

Democracy is a political system in which the government is controlled by the citizens. Totalitarianism is a political system in which there is only one representative party, which exhibits control over every side of political and social life, and Individualism, collectivism, and socialism are all different ideologies shaping nation states. Different political systems generate various legal systems/traditions, thus they create different regulatory environments, which makes conducting business operations on a global scale even more complex.

Global Economic Systems

A country’s decision on how to assign factors of production results in three different economic systems. These are market, command, and mixed economies. Recognizing global opportunities requires international businesses to understand the particular aspects of these systems.

A market economy prioritizes individuals. Factors of production are privately owned and managed. In a pure market economy, the law of supply and demand determines the price and the control of the market. A Command economy can be regarded as a state motivated monopoly where the state also owns properties. Command economy is on the opposite side of the market economy where factors of production are state-owned, and the economy is centrally planned and managed. In mixed economies state and private ownership are present, some sectors are left for private ownership and market mechanism rules, and some industries are state-owned and controlled. Mixed economies were more common in the past that they are today.

Key Institutes in the Global Business Environment

The increasing international trade and the globalization of markets led to the emergence of institutions managing, regulating, and policing the system, thus multinational treaties were established to govern the global business system.

The General Agreement on Tariffs and Trade (GATT) is a legal agreement among many countries to develop a mechanism so the businesses can perform their trade-in respective countries, and it removes barriers by providing defined trade channels. The main aim of the GATT is to reduce quotas, tariffs, and subsidies and to facilitate trade among its member countries across the globe.

The World Trade Organization (WTO), which replaced the GATT in 1995, is an international institution that supervises the rules and regulations for international trade and investment, including agriculture, intellectual property, services, competition, and subsidies. The main aim of the WTO is to promote secure and safe trade across the globe and protect the best interest of producers and consumers. Its primary responsibility is to regulate the world trade system and to make nation-states follow the rules laid down in treaties signed by member states.

The International Monetary Fund (IMF), formed in July 1944, helps international financial stability and monetary cooperation along with sustainable economic growth to facilitate international trade. It works to maintain stability by preventing potential crises in the international monetary system. It monitors the monetary system of the countries across the globe on regional, national, and international levels to control the smooth flow of the world’s economic system. Moreover, it also helps countries develop their economic system by providing them with the needed advice. Its functions include financial assistance, capacity development such as technical assistance and training, governance, and organization.

Another institution founded together with the IMF is the World Bank. The World Bank is less controversial than the IMF. Its primary responsibility is promoting economic development. It has two missions; first one is to end extreme poverty by decreasing to no more than 3% the percentage of people living on less than $1.90 a day. The other is to promote shared prosperity by fostering the income growth of the bottom 40% of the population for every country. The World Bank aims to reach this mission by the year 2030.

The United Nations (UN), founded in 1945 and headquartered in New York City, is now made up of 193 member states. The primary mission of the UN is preserving peace through international cooperation and collective security. The UN set Seventeen Sustainable Development Goals were set for a more sustainable future. They recognize that ending poverty must go hand-in-hand with strategies that build economic growth and address a range of social needs, including education, health, social protection, and job opportunities while tackling climate change and environmental protection.

The International Organization for Standardization (ISO) is an independent, non-governmental international organization with a membership of 164 national standards bodies. Through its members, it brings together experts to share knowledge and develop voluntary, consensus-based, market-relevant International Standards that support innovation and provide solutions to global challenges. The ISO provides standards, through which companies across the globe evaluate their quality standards. These are to enable buyers and sellers to assess the effectiveness of their deals when trading internationally.

Culture’s Influence on International Business

Culture is a multi-level phenomenon grouping people together at various levels such as team, organizational, national, and beyond. International business has one very critical aspect, which is a multicultural element. Cultural differences make international business an exciting subject while also making it complicated for practitioners and scholars alike. Cultural values affect technology transfer, managerial attitudes, managerial ideologies, and businessgovernment relations.

Cultural Clusters

Society is defined as a group of people who share a common set of values and norms. Culture is the social glue that binds society together. Nation-states are political creations that are made up of various subcultures. In the cluster approach, countries sharing similar cultures are grouped. The three influential clusters according to Peng are shown on page 20 of your textbook in Table 1. 3.

Hofstede’s Dimensions

Countries scoring high on this dimension are known to be individualistic. Individualistic cultures value hard work and risk-taking. People are free to focus on their personal goals, but they are also held responsible for their actions. On the other hand, in collectivist cultures, people tend to be strongly associated with groups such as family or work teams. Collective goals are prioritized over personal ones. Success/failure is shared among teammates.

Masculinity vs. femininity, sometimes called achievement vs. nurturing, dimension ‘identifies whether traditionally masculine or feminine values prevail in a given society.’. High masculine cultures tend to appreciate assertiveness and materialism. In contrast, low masculine cultures; in other words, feminine cultures emphasize the quality of life and concern for others and relationships.

Trompenaars’s Dimensions

Fons Trompenaars, another Dutch scholar, researched cultural variations across society in 1994 and expanded the work of Hofstede. It took Trompenaars ten years to complete his research conducted based on 15,000 questionnaires applied to managers from 28 countries (Luthans and Doh, 2018: 139). He identified five key relationship dimensions and two dimensions related to the perception of time and the engagement with nature/ environment (Johnson and Turner, 2003: 205). These dimensions are as follows (Trompenaars and HampdenTurner, 1997):

  • Universalism vs. Particularism
  • Individualism vs. Communitarianism
  • Neutral vs. Affective
  • Specific vs. Diffuse
  • Achievement vs. Ascription
  • Attitudes toward Time
  • Attitudes toward the Environment

Global Leadership and Organizational Behavior Effectiveness (GLOBE)

The Global Leadership and Organizational Behavior Effectiveness (GLOBE) project extends and integrates cultural dimensions developed previously by Hofstede and Trompenaars. Three phases of the project were conducted in the years 2004, 2007, and 2012. A team of 170 scholars worked on the project, and Robert J. House (1932 – 2011) led the team. In phases one and two, 17,000 managers in three industries from 951 organizations representing 62 countries were researched. In phase three, the research team focused more on upper-level managers. The project’s contribution to the field is unique in that it established the connection between how it should be and how it is based on nine cultural dimensions. The project leaders of the GLOBE study view it as ‘a rare exception to the parochialism of the management literature’. The GLOBE dimensions are shown on page 22 of your textbook in Table 1.4.