GLOBAL ENVIRONMENT

GLOBALIZATION - IMF
The growing economic inter-

dependence of countries through

increasing volume and variety of cross-

border transactions in goods &

services, freer international capital

flows, and more rapid & widespread

diffusion of technology

GLOBALIZATION World Bank

Freedom and ability of individuals
and firms to initiate voluntary economic transactions with residents of other countries

GLOBALIZATION
Process of international integration of products, technologies, human resources, capital, information and

cultures.

ECONOMIC GLOBALIZATION
4 different flows: Flow of goods/services (free trade)

Flow of people (migration)

Flow of Capital (FII & FDI) Flow of Technology (Technology Transfer)

WORLD ECONOMY in recent years

Capital movements, rather than Trade, as driving force of World Economy
Production uncoupled from Employment World Economy dominates not the macro-economics of individual countries Growth of e-commerce has made geographical boundaries irrelevant

LEVELS OF GLOBALIZATION
World-level Country-level Industry-level Firm-level

World-level Globalization
Highest level at which perceived Theoretically, no globalization if each county was self-sufficient

Process begins with international economic, social & political relations From business environment point of view, focus is on economic & business relations

Indicators of world-level..
Share of world trade in World GDP

FDI in the world as % of world investment

Foreign output of MNCs as % of world GDP

Global transactions in foreign exchange as a proportion of world GDP

Aggregate turnover in forex markets Total BoP receipts of all countries as a proportion of GDP

World Trade Organization

an organization that intends
to supervise and liberalize international trade.

Objectives - GATT
Raising the standard of living

Ensuring full employment

Ensuring a large & steadily growing volume of real income & demand Developing full utilization of resources

Expansion of production and international trade

GATT - Principles
NON DISCRIMINATION PROHIBITION OF QUANTITATIVE RESTRICTIONS CONSULTATION

Country-level Globalization

EXTENT TO WHICH A COUNTRY IS

INTEGRATED WITH THE WORLD

Indicators of Country-level Globalization

Share of foreign trade in national income

Foreign investment as % of national income

Emigrant & immigrant population as a % of total population International tourism traffic as a % of total population

Share of (foreign output of domestic MNCs + domestic output of foreign MNCs) as a % of national income

 Globalization level of a country can also be assessed in terms of its sensitivity to changes in economic or social conditions in other regions of the world. Following correlations can be viewed:
World price index & home price index Key stock price indices world & home Mean level of rate of interest World growth rate & home exports World growth rate & home growth rate Exchange rate variations leading world currencies & home currency

Industry-level Globalization
A few industries may be operating at global level while others are home-oriented Such industries have:
high degree of tech advancement & competitive advantages and can compete large presence of MNCs Better access to foreign markets, suppliers, finance & tech expertise

Indicators of Industry-level.
Industry exports+ imports as % of output

Foreign investment in industry + foreign investment by cos in industry as a proportion of total investment in industry
Total forex transactions by firms in industry as % of total transactions

Total foreign output as a proportion of total output

Firm-level Globalization
Individual firms operating globally Foreign collaborations or global operations

Have high tech development, competitive advantages, outsourcing connections & access to foreign markets

Globalization in India
Economic reforms-economy have opened up Various sectors open to foreign competition directly

Factors influencing Globalization

1. Integrating role of Technology, Computing, Communication & Transportation

2. Dynamics of Capital flows

3. Production sharing 4. Strategic Alliances & global Competition

Impact of Globalization
Designing in global environment Production location selection Rationalised Production

MNC
A Multi-National Company is an

enterprise headquartered in one

country but having operations in more

than one country

Multi-National Company
BY SIZE BY PERFORMANCE

BY STRUCTURE BY BEHAVIOUR

By Size
Many dimensions: Turnover used most often Profits Market value

By structure

Coca Cola operates in more than 200 countries and has widespread share holdings.

By performance
Earnings
Sales & Assets

By behaviour
It is the behavioral characteristics
of the top management which decides whether a company is an

MNC or not

Multi-National Enterprise
MNE is a company that takes a global approach to foreign markets and production;
Willing to consider locations of market and production anywhere in the world

Not all MNEs are MNCs since not all companies are organized as Corporations

Trans-national Company
A Company that: tries to achieve economies of scale through global integration of its functional area while

being highly responsive to

different locational environment

Global Company
A Global company is one which basically

treats the whole world as a single

homogeneous market. It also sources products, raw materials, financing, human resources worldwide.

Multi-Domestic Company
A company that operates in several countries, but treats each different country as a different domestic market, and each of its country units as a separate

profit centre.

Impact of MNCs
Play a pivotal role in global economy

Link rich & poor economies

Transfer of capital, knowledge, ideas and value systems across borders Their interactions with institutions, organizations & individuals generate both +ve and ve impacts among stakeholders

Impact of MNCs
On Trade balance they influence both imports and exports Promotion of small scale and ancillary industries Knowledge transfer Level of technology of local firms

Impact of MNCs (contd)

Utilization of resources

Development of infrastructure and economic development Inter-industry linkages

Forward & backward linkages

Employment

Trade balance
OUTFLOWS Intermediate goods for local assy M/cery for local prodn Global products for local sale Equity investment INFLOWS Final goods for global markets Intermediate goods for global markets

Profit remittance
Interest payments

Loans from parent to affiliate

Repayment of loans

SSE & Ancillary

MNCs catalyse export of

complex, tech-intensive products

made by SMEs located in host countries

Knowledge Transfer
Host countries especially developing economies aim to create an indigenous capability technical, managerial & institutional to improve efficiencies in their own companies Foreign cos a potential source can transfer info, also stimulate new knowledge Knowledge transfer raises productivity level in the host country

Level of Technology FDI importance lies less on transfer of money than transfer of technology

Tech & best practices transfer improves productivity and international competitiveness Because of above, host country govts encourage formation of JVs Above transfer also takes place because of transfer of labour and manpower

 Utilization of Resources: For eg: in India, rich mineral resources were not properly utilised till MNEs came and helped utilization Infrastructure: FDI is more long term than portfolio investment

De-merits of MNCs
MNCs become too powerful by themselves + as compared to governments Put Profits before People Exploitation of workers

Oligopoly formation because of MNCs

M & As may proliferate

INTERNATIONAL BUSINESS

International Business Environment refer to the conditions which affect exporters &

importers by influencing their export

performance, import behaviour,

competitiveness, cost structure and thus,

profitability

International business
Has Costs & Benefits that are very attractive Also adds new challenges like product life-cycle management Intensifies some existing problems such as protecting Intellectual Property Rights

EXIM POLICY
Performance of Exports, and, the
environment of Imports are both

predominantly set by the Exim

policy

 A no. of global concerns:

Bio-diversity; environmental protection; poverty; sustainable development; international security & cooperation

Appreciation of Yen

Cheap Thai labour

High Return in Thailand Portfolio Investment Short-term funds

Japanese FDI

Over- building of Industries

OVER-HEATING OF THAILAND ECONOMY

Rise in labour cost

Indiscriminate lending by fund-flush banks

Inflation

Real-estate bubble

Weak financial system

Cheap Chinese exports

Exports suffer

Imports Rise

Real estate crash Bank failures

Large currenta/c deficit

Panic

Run on Baht

Depreciation of Baht

FOREIGN DIRECT INVESTMENT

Foreign Direct Investment occurs when a firm directly invests in facilities to produce and / or market a product in a foreign country

 FOREIGN DIRECT INVESTMENT

Green-field Investment Mergers / Acquisitions

FOREIGN PORTFOLIO INVESTMENT LICENSING

GREEN-FIELD INVESTMENT

Establishment of a wholly new operation in a foreign country

M&A

Mergers or Acquisitions involve acquiring or merging with an existing firm in a foreign country

FDI
HORIZONTAL FOREIGN DIRECT INVESTMENT: FDI in the same industry in which a firm operates at home

VERTICAL FOREIGN DIRECT INVESTMENT: FDI in an industry that either provides inputs to the firm at home, or, sells products of domestic operations in a foreign country

Benefits of FDI to Host Country

The Resource transfer effect The Employment effect The Balance of Payment effect Effect on Competition & Economic growth

Benefits of FDI to Home Country

3 Sources:
1. Capital A/c of the home country benefits:
I. from inward flow of foreign exchange from investments in another country

II. If foreign subsidiary creates demand for home-countrys exports of Capital equipment, intermediate goods or complimentary products

Benefits of FDI to Home Country

2. Employment in home-country improves when demand for related products from host- country is generated 3. Home-country MNC learns valuable skills from its exposure to foreign markets, that can be transferred back to home country

FOREIGN EXCHANGE MARKET

2 MAIN FUNCTIONS: Currency Conversion Provide Insurance against foreign exchange risk

Uses of Foreign Exchange for International Businesses

Inward payments for exports Payments for foreign companys products Investments in short-term money markets For Currency Speculation (George

Insurance against Forex Risk

Spot Exchange Rates (based on demand & supply) Forward Exchange Rates Currency Swap