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Introduction To International Business

What is meant by Globalization The world is getting closer in terms of cross border trade and investment, by distance, time zones, languages and by national differences in government regulation, culture and business systems and toward a world in which national economies are merging into one huge interdependent global economic system. Globalization is the trend toward a more integrated global economic system. The rate at which this shift is occurring has been accelerated recently.

Causes of Globalization

Changing international trade patterns, FDI flow, differences in economic growth among countries The rise of new MNCs are changing the nature of the world economy

Impact of Globalization

Opportunities and challenges due to globalization are increasing Globalization is affecting firms that previously operated in a nice, easy, protected national market. It also illustrates the increasing importance of thinking globally.

Globalization has two faces. 1. Globalization of markets 2. Globalization of production Globalization of markets: Globalization of markets refers to the fact that in many industries historically distinct and separate national markets are merging into one huge global market place.There is a movement towards a globalization of markets, as the tastes and preferences of consumers indifferent nations are beginning to converge upon some global norm. For Egsample The global acceptance of Coca-Cola,Levis jeans, Sony Walkmans, and McDonalds hamburgers are all examples. By offering a standard product worldwide, they are helping to create a global market. Even smaller companies can get the benefits from the globalization of markets. Despite the global prevalence of global brands such as Levis, City Bank, Pepsi etc, national markets are not disappearing.

Globalization of production:
The globalization of production refers to the tendency among many firms to source goods and services from different locations around the globe in an attempt to take advantage of national differences in the cost and quality of factors of production. (labor, energy, land and capital) Through this companies hope to lower their overall cost structure and or improve the quality or functionality of their product, thereby allowing them to compete more effectively against their rivals.

The examples of Boeing and Swan Optical illustrate how production is dispersed. Boeing companys commercial jet airliner, Boeing 777 contains 132,500 major components parts that are produced around the world by 545 different suppliers. Eight Japanese suppliers make parts of fuselage, doors and wings, a supplier in Singapore make the doors for the nose landing gear, three suppliers in Italy manufacture wing flaps etc. The result of having a global web of suppliers is a better final product, which enhances the chances of Boeing wining a greater share of aircraft orders than its global rival Airbus. While part of the rationale is based on costs and finding the best suppliers in the world, there are also other factors. In Boeings case, if it wishes to sell airliners to countries like China, these countries often demand thatdomestic firms be contracted to supply portions of the plane - otherwise they will find another supplier (Airbus)who is willing to support local industry.

Drivers of Globalization
Two key factors seem to underlie the trend towards the increasing globalization of markets and production: The decline of barriers to trade and investment Tariff Barriers Non Tariff Barriers Technological change

1. 2.

The decline of barriers to trade and investment:

Decline in Trade barriers International trade occurs when a firm exports goods or services to consumers in another country. Many of the barriers to international trade took the form of high tariffs on imports of manufactured goods. However, this depressed world demand and contributed to the great depression of the 1930s.After World War II, the industrialized countries of the West started a process of removing barriers to the freeflow of goods, services, and capital between nations.

Under GATT, over 140 nations negotiated even further to decrease tariffs and made significant progress on a number of non-tariff issues (e.g. intellectual property, tradein services). The most recent round of negotiations known as Uruguay round was competed in December 1993.The Uruguay round further reduced trade barriers, covering services as well as manufactured goods provided enhanced protection for patents, trade marks and copyrights and established WTO to police the international trading system. With the establishment of the WTO, a mechanism now exists for dispute resolution and the enforcement of trade laws. Average tariff rates have fallen significantly since 1950s, and under the Uruguay agreement, they haveapproached 3.9 percent by 2000.This removal of barriers to trade has taken place in conjunction with increased trade, world output, and foreign direct investment.

Decline in investment barriers:Definition


The Foreign direct Investment:
FDI occurs when a firm invests to international trade activities outside its home country. The growth of foreign direct investment is a direct result of nations liberalizing their regulations to allow foreign firms to invest in facilities and acquire local companies. With their investments, these foreign firms often also bring expertise and global connections that allow local operations to have a much broader reach than wouldhave been possible for a purely domestic company. The evidences also suggests that FDI is playing an increasing role in the global economy as firms increase their cross border investments. The major investors has been U.S, Japanese, and Western European Companies investing in Europe, Asia, (particularly in China, and India).

For example: In Japan, Kodak has taken market share from Fuji recent years. In theUnited States, Japanese firms have taken away market share from Ford Motors, General motors, and Chrysler. In Western Europe where the once dominant Dutch company Philips has seen its market share taken by Japans JVC, Matsushita and Sony. The growing integration into a single huge market place is increasing the intensity of competition in a widerange of manufacturing and

service industries

The Process of International Trade Economic Transaction Bilateral Trade/Multi Lateral Trade/ Plurilateral Trade.

Purpose of International Trade


Operation of Trade Outside the Country Institutional Arragement World Bank and IMF Massive Trade in Scale Analysing SLEPT Features.

Growing Importance
InterDependence Intense Competition Globalisation Price Diffference

International Business Vs Domestic Business


Different Legal Systems Different Political Systems Different Sociological Environment Different Currencies Different Business Practices Different Technology Wider Market High Transportation Cost Higher Counter Party Risk

International Trade Theories


Mercantilism Theory Theory of Absolute Advantage (Adam Smith) Comparative Advantage theory (David Ricardo) Factor Proportion Theory Theory of Country Size Country Similarity Theory Product Life Cycle Theory (Vernon) Human Capital Approach Natural Resources Theory Economics of Large Scale Theory Research and Development Theory