International
Business
Fourth Edition
CHAPTER 1
Globalization
1-3
The Global Retail Market
What Drives Globalization
Top 25 Retailers
%
Decline in cross-border
investment barriers.
40
16
2000
2009
Market Share
McGraw-Hill/Irwin
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1-4
The Global Retail Market
What Drives Globalization
Top 25 Retailers
%
40
Decline in cross-border
investment barriers.
Saturation and slow growth in
local markets.
16
2000
2009
Market Share
McGraw-Hill/Irwin
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1-5
The Global Retail Market
What Drives Globalization
Top 25 Retailers
%
40
16
2000
Decline in cross-border
investment barriers.
Saturation and slow growth in
local markets.
Retailers believed they would
benefit from economies of scale
from global buying power.
2009
Market Share
McGraw-Hill/Irwin
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1-6
The Global Retail Market
What characterizes these
retailers is that they all held
strong domestic market positions.
Top 25 Retailers
%
40
16
2000
2009
Market Share
McGraw-Hill/Irwin
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1-7
The Global Retail Market
Globalization Strategies
Top 25 Retailers
%
40
Carrefour, WalMart, Ahold, and
Tesco have led the Globalization of
retail stores with different
strategies:
16
2000
2009
Market Share
McGraw-Hill/Irwin
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1-8
The Global Retail Market
Globalization Strategies
Top 25 Retailers
%
40
Carrefour, WalMart, Ahold, and
Tesco have led the globalization of
retail stores with different
strategies:
Ahold: “going global with a local
face”
16
2000
2009
Market Share
McGraw-Hill/Irwin
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1-9
The Global Retail Market
Globalization Strategies
Top 25 Retailers
%
40
16
2000
Carrefour, WalMart, Ahold, and
Tesco have led the globalization of
retail stores with different
strategies:
Ahold: “going global with a local
face”
WalMart: “Global retail brand”
2009
Market Share
McGraw-Hill/Irwin
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1-10
But, It Isn’t Easy
National differences in
tastes and preferences
McGraw-Hill/Irwin
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1-11
But, It Isn’t Easy
National differences in
tastes and preferences
Distribution channels
McGraw-Hill/Irwin
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1-12
But, It Isn’t Easy
National differences in
tastes and preferences
Distribution channels
Culturally embedded value systems
McGraw-Hill/Irwin
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1-13
But, It Isn’t Easy
National differences in
tastes and preferences
Distribution channels
Culturally embedded value systems
Difficulty in establishing common retail model such
as:
Ahold: “going global with a local face”
McGraw-Hill/Irwin
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1-14
But, It Isn’t Easy
National differences in
tastes and preferences
Distribution channels
Culturally embedded value systems
Difficulty in establishing common retail model such
as:
Ahold: “going global with a local face”
WalMart: “Global retail brand”
McGraw-Hill/Irwin
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1-15
But, It Isn’t Easy
National differences in
tastes and preferences
Distribution channels
Culturally embedded value systems
Difficulty in establishing common retail model such as:
 Ahold: “going global with a local face”
 WalMart: “Global retail brand”
As well as factors like Labor costs, Desirable
locations, Sophistication of local supply base.
Cause problems for globalization. Therefore, we
should not assume globalization is a done deal.
McGraw-Hill/Irwin
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1-16
Globalization
Trade and investment
barriers are disappearing.
McGraw-Hill/Irwin
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1-17
Globalization
Trade and investment barriers are
disappearing.
Perceived distances are
shrinking due to advances in
transportation and
telecommunications.
McGraw-Hill/Irwin
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Globalization
Trade and investment barriers are
disappearing.
Perceived distances are shrinking due to
advances in transportation and
telecommunications.
Material culture is beginning
to look similar.
McGraw-Hill/Irwin
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1-19
Globalization
Trade and investment barriers are
disappearing.
Perceived distances are shrinking due to
advances in transportation and
telecommunications.
Material culture is beginning to look
similar.
National economies merging
into an interdependent global
economic system.
McGraw-Hill/Irwin
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1-20
Globalization: Pros& Cons
Pros
Increased revenue
opportunity through global
sales.
McGraw-Hill/Irwin
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1-21
Globalization: Pros& Cons
Pros
Increased revenue opportunity
through global sales.
Reduced costs by
producing in ‘low cost’
countries.
McGraw-Hill/Irwin
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1-22
Globalization: Pros& Cons
Pros
Increased revenue opportunity
through global sales.
Reduced costs by producing in ‘low
cost’ countries.
McGraw-Hill/Irwin
Cons
Different nations =
different problems.
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-23
Globalization: Pros& Cons
Pros
Increased revenue opportunity
through global sales.
Reduced costs by producing in ‘low
cost’ countries.
McGraw-Hill/Irwin
Cons
Different nations = different
problems.
Similarities between
nations may be superficial.
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-24
Globalization: Pros& Cons
Pros
Increased revenue opportunity
through global sales.
Reduced costs by producing in ‘low
cost’ countries.
Cons
Different nations = different
problems.
Similarities between nations may be
superficial.
Global planning may be
easy, but global execution
is not.
McGraw-Hill/Irwin
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1-25
What is “Globalization”?
Markets
“The shift toward a
more integrated and
interdependent world
economy.”
McGraw-Hill/Irwin
Production
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-26
Globalization of Markets
Globalization means “Merging of historically distinct
and separate national markets into one huge global
marketplace.”
McGraw-Hill/Irwin
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1-27
Globalization of Markets
Globalization is
Facilitated by offering standardized products:
Citicorp
Coca-Cola
Sony PlayStation
McDonalds
Does not have to be a big company to participate:
Over 200,00 U.S. companies with less than 100
employees had foreign sales in 2000.
McGraw-Hill/Irwin
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1-28
Globalization
Where will
globalization most likely prosper better?
In consumer goods
Or
In industrial goods and materials
McGraw-Hill/Irwin
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The Largest Global Markets
Not
Consumer
Goods
McGraw-Hill/Irwin
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The Largest Global Markets
Not
Consumer
Goods
McGraw-Hill/Irwin
Industrial Goods and
Materials
Commodities such as
aluminum, oil and wheat.
Industrial products such as
microprocessors, aircraft.
Financial assets such as
U.S. Treasury bills and
Eurobonds.
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-31
Globalization of Production
Why does
globalization of production take place?
McGraw-Hill/Irwin
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Why Globalization of Production?
“The sourcing of goods and
services from locations
around the globe to take
advantage of national
differences in the cost and
quality of factors of
production (labor,energy,
land and capital).”
McGraw-Hill/Irwin
“Global Products”
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-33
Why Globalization of Production?
“The sourcing of goods and services from
locations around the globe to take
advantage of national differences in the
cost and quality of factors of
production (labor,energy, land and
This also increases
the company’s chance to
obtain those countries
market for their products
as well.
“Global Products”
capital).”
McGraw-Hill/Irwin
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Why Globalization of Production?
“The sourcing of goods and services from
locations around the globe to take advantage
of national differences in the cost and
quality of factors of production
(labor,energy, land and capital).”
“Global Products”
Companies hope to lower
their overall cost structure
and/or improve the quality
or functionality of their
product offering increasing their
competitiveness.
McGraw-Hill/Irwin
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1-35
Macro Factors
Decline in Trade
Barriers
Globalization
Technological
Change
McGraw-Hill/Irwin
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1-36
International Trade: When a firm exports goods
or services to consumers in another country.
Foreign Direct Investment: When a firm invests
resources in business activities outside its home
country.
McGraw-Hill/Irwin
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1-37
General Agreement on Tariffs and Trade
Member states (140) in eight negotiating ‘rounds’
worked to lower barriers to the free flow of
goods and services.
In the most recent round, the Uruguay Round,
nations agreed to enhanced patent, copyright and
trademark protections and established the
World Trade Organization.
McGraw-Hill/Irwin
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Average Tariff Rates on Manufactured
Products as Percent of Value
France
Germany
Italy
Japan
Holland
Sweden
Britain
U.S.A.
1913
21%
20
18
30
5
20
44
1950
18%
26
25
11
9
23
14
1990
5.9%
5.9
5.9
5.3
5.9
4.4
5.9
4.8
2000
3.9%
3.9
3.9
3.9
3.9
3.9
3.9
3.9
Table 1.1
McGraw-Hill/Irwin
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Fewer FDI Restrictions
 Between 1991 and 2000
of the 1,121 changes worldwide in laws
governing FDI, 95% created a more
favorable investment environment.
 During 2000, 69 countries made 150
changes to FDI regulations, 147 or 98%
were more favorable to investment.
McGraw-Hill/Irwin
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1-40
The Growth of World Trade and
Output
2500
2000
Trade
1500
Trade
1000
Output
GDP
500
0
1950
McGraw-Hill/Irwin
1960
1970
1980
1990
2000 Figure 1.1
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-41
The Role of Technological Change
Even though the lowering of
trade barriers made
globalization a
theoretical possibility,
the new technologies
made it a reality.
McGraw-Hill/Irwin
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The Role of Technological Change
Invention and innovations in
Microprocessors and
telecommunications
McGraw-Hill/Irwin
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The Role of Technological Change
Invention and innovations in
Microprocessors and
telecommunications
Container transportation
McGraw-Hill/Irwin
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1500-1840
The Shrinking Globe
Best average speed of
horse-drawn coaches and
sailing ships, 10mph.
1850-1930
Steam locomotives average 65mph.
Steamships average 36mph.
1950s
Propeller aircraft
300-400 mph.
Figure 1.2
McGraw-Hill/Irwin
1960s
Jet passenger aircraft
500-700mph.
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1-45
The Role of Technological Change
Invention and innovations in
Microprocessors and
telecommunications
Container transportation
The Internet and World
Wide Web
McGraw-Hill/Irwin
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1-46
Worldwide E-Commerce Growth
Forecast
8000
7000
6000
Rest of World
5000
Latin America
4000
3000
W.Europe
Asia Pacific
2000
1000
North America
0
2000
McGraw-Hill/Irwin
2001
2002
2003
2004
Figure 1.2
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-47
Implications for Globalization of Production
Production dispersed to
economical locations
due to transportation and communication advances.
It has allowed firms to create and manage a globally
Dispersed production system, further facilitating
Globalization of production
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Implications for Globalization of Markets
•New markets opened through WWW.
•Jet aircrafts move people and goods.
•Global media such as
(CNN, HBO, MTV) are creating a worldwide culture.
McGraw-Hill/Irwin
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1-49
The Changing Paradigm of the Global Economy
Old:
U.S. dominance of the world economy and world
trade.
McGraw-Hill/Irwin
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1-50
The Changing Paradigm of the Global Economy
Old:
U.S. dominance of the world economy and world trade.
U.S. dominance in world FDI.
McGraw-Hill/Irwin
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1-51
The Changing Paradigm of the Global Economy
Old:
U.S. dominance of the world economy and world trade.
U.S. dominance in world FDI.
U.S. firms dominance of international business.
McGraw-Hill/Irwin
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1-52
The Changing Paradigm of the Global Economy
Old:
U.S. dominance of the world economy and world trade.
U.S. dominance in world FDI.
U.S. firms dominance of international business.
½ of the world economies (Communist dominated)
were off-limits to western businesses.
McGraw-Hill/Irwin
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The Changing Pattern of World Output and
Trade
 Output measured by GNP.
SHARE OF
WORLD OUTPUT
1963
SHARE OF
WORLD OUTPUT
2000
SHARE OF
WORLD EXPORTS
2000
40.3%
27%
12.3%
5.5
14.2
7.54
9.7 (W. Ger.)
7.3
8.7
France
6.3
5.2
4.7
United
Kingdom
Italy
6.5
4.1
3.7
3.4
4.1
3.7
Canada
3.0
2.0
4.4
China
NA
3.2
3.92
South Korea
NA
1.4
2.7
COUNTRY
United States
Japan
Germany
McGraw-Hill/Irwin
Table 1.2
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-54
Percentage Share of Total FDI Stock, 1980-2000
45
40
35
30
25
1980
20
1990
15
2000
10
McGraw-Hill/Irwin
Japan
France
Netherlands
U.S.A.
Germany
0
U.K.
5
Dev.
Countries
Figure 1.4
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-55
FDI Inflows, 1988-2000
($ Billions)
1000
800
600
400
Developed Countries
Developing Countries
United States
China
200
0
McGraw-Hill/Irwin
Figure 1.5
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-56
The National Composition of the Largest Multinationals
1973
1990
1997
2000
U.S.A.
48.5%
31.5%
32.4%
26%
Japan
3.5
12
15.7
17
U.K.
18.8
6.8
6.6
8
France
7.3
10.4
9.8
13
Germany
8.1
.9
12.7
12
Table 1.3
McGraw-Hill/Irwin
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1-57
The Changing World Order
The fall of Communism in Eastern Europe and the
former Soviet Union.
McGraw-Hill/Irwin
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The Changing World Order
The fall of Communism in Eastern Europe and the
former Soviet Union.
Czechoslovakia has divided itself into two states.
McGraw-Hill/Irwin
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The Changing World Order
The fall of Communism in Eastern Europe and the
former Soviet Union.
Czechoslovakia has divided itself into two states.
Yugoslavia has divided into 5 (often warring) successor
states.
McGraw-Hill/Irwin
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The Changing World Order
The fall of Communism in Eastern Europe and the
former Soviet Union.
Czechoslovakia has divided itself into two states.
Yugoslavia has divided into 5 (often warring) successor
states.
Pro-democracy movement (suppressed) in China.
McGraw-Hill/Irwin
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The Changing World Order
The fall of Communism in Eastern Europe and the
former Soviet Union.
Czechoslovakia has divided itself into two states.
Yugoslavia has divided into 5 (often warring) successor
states.
Pro-democracy movement (suppressed) in China.
Latin America has seen both democracy and free
market reforms.
McGraw-Hill/Irwin
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1-62
Hopes and Fears of the 21st Century
1. Will economic and
political reforms hold?
McGraw-Hill/Irwin
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Hopes and Fears of the 21st Century
1. Will economic and
political reforms hold?
2. Economic problems are
no longer isolated and
can become global.
McGraw-Hill/Irwin
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Globalization
Twin engines of prosperity
Lower trade barrier
McGraw-Hill/Irwin
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1-65
Globalization
Twin engines of prosperity
Lower trade barriers
FDI
McGraw-Hill/Irwin
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Globalization
Jobs and Income
Firms move jobs to low cost
countries.
McGraw-Hill/Irwin
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Globalization
Jobs and Income
Firms move jobs to low cost
countries.
Countries specialize in
efficiently produced goods
and import those they can
not efficiently produce.
McGraw-Hill/Irwin
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Globalization
Jobs and Income
Firms move jobs to low cost
countries.
Countries specialize in
efficiently produced goods
and import those they can
not efficiently produce.
Increases income in less
developed countries.
McGraw-Hill/Irwin
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Globalization
Jobs and Income
Firms move jobs to low cost
countries.
Countries specialize in
efficiently produced goods
and import those they can
not efficiently produce.
Increases income in less
developed countries.
May lead to income
inequality.
McGraw-Hill/Irwin
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1-70
Globalization
Jobs and Income
Firms move jobs to low cost
countries.
Countries specialize in
efficiently produced goods
and import those they can
not efficiently produce.
Increases income in less
developed countries.
May lead to income
inequality.
McGraw-Hill/Irwin
Labor Policies and the
Environment
Firms move to countries
with weak laws.
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-71
Globalization
Jobs and Income
Firms move jobs to low cost
countries.
Countries specialize in
efficiently produced goods
and import those they can
not efficiently produce.
Increases income in less
developed countries.
May lead to income
inequality.
McGraw-Hill/Irwin
Labor Policies and the
Environment
Firms move to countries
with weak laws.
Economic progress leads to
stronger laws.
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-72
Globalization
Jobs and Income
Firms move jobs to low cost
countries.
Countries specialize in
efficiently produced goods
and import those they can
not efficiently produce.
Increases income in less
developed countries.
May lead to income
inequality.
McGraw-Hill/Irwin
Labor Policies and the
Environment
Firms move to countries
with weak laws.
Economic progress leads to
stronger laws.
By creating wealth and
incentives for technology
improvements, world will be
better.
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-73
Globalization
Jobs and Income
Firms move jobs to low cost
countries.
Countries specialize in
efficiently produced goods
and import those they can
not efficiently produce.
Increases income in less
developed countries.
May lead to income
inequality.
McGraw-Hill/Irwin
Labor Policies and the
Environment
Firms move to countries
with weak laws.
Economic progress leads to
stronger laws.
By creating wealth and
incentives for technology
improvements, world will be
better.
Tie strong laws to
international agreements.
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-74
Globalization
Jobs and Income
Firms move jobs to low cost
countries.
Countries specialize in
efficiently produced goods
and import those they can
not efficiently produce.
Increases income in less
developed countries.
May lead to income
inequality.
McGraw-Hill/Irwin
Labor Policies and the
Environment
Firms move to countries
with weak laws.
Economic progress leads to
stronger laws.
By creating wealth and
incentives for technology
improvements, world will be
better.
Tie strong laws to
international agreements.
Firms are not amoral.
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-75
Environmental Performance Index
Environmental Performance and Income
7.0
6.5
6.0
5.5
5.0
Germany
Finland
Netherlands
Bulgaria
Ireland
Jamaica
Korea
China
S.Africa
India
Tunisia Trinidad
Kenya Nigeria
Egypt
Malawi
Thailand
Tanzania
Bangladesh
Bhutan
Ethiopia
6
7
8
9
10
Income Index
McGraw-Hill/Irwin
11
Figure 1.6
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1-76
Globalization and National Sovereignty
Under the new system, many decisions that affect billions of
people are no longer made by local and national governments
but instead, if challenged by any WTO member nation, would
be deferred to a group of unelected bureaucrats sitting
behind closed doors in Geneva. The bureaucrats can decide
whether or not people in California can prevent the destruction
of the last virgin forests or determine if carcinogenic pesticides
can be banned from their foods; or whether European countries
have the right to ban dangerous biotech hormones in meat…
At risk is the very basis of democracy and accountable decision
making.
Ralph Nader.
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Globalization and National Sovereignty
WTO
EU
WTO
 Founded 1994
 140 members
 Police GATT trading system
UN
McGraw-Hill/Irwin
Supranational organizations
are limited to powers granted
by member countries and serve
the collective interests of its
members.
Power is derived from
the organization’s ability to sway
members to action.
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1-78
Globalization and the World’s Poor
Critics argue that globalization has not helped poor.
1870: per capita income of 17 richest nations was
2.4x that of all other countries.
McGraw-Hill/Irwin
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Globalization and the World’s Poor
Critics argue that globalization has not helped poor.
1870: per capita income of 17 richest nations was
2.4x that of all other countries.
1990: it was 4.5x larger.
McGraw-Hill/Irwin
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Globalization and the World’s Poor
Other factors may have influenced the gap.
Totalitarian governments.
McGraw-Hill/Irwin
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Globalization and the World’s Poor
Other factors may have influenced the gap.
Totalitarian governments.
Economic policies that destroyed wealth creation.
McGraw-Hill/Irwin
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Globalization and the World’s Poor
Other factors may have influenced the gap.
Totalitarian governments.
Economic policies that destroyed wealth creation.
Little protection of property rights.
McGraw-Hill/Irwin
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Globalization and the World’s Poor
Other factors may have influenced the gap.
Totalitarian governments.
Economic policies that destroyed wealth creation.
Little protection of property rights.
Expanding populations.
McGraw-Hill/Irwin
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Globalization and the World’s Poor
Other factors may have influenced the gap.
Totalitarian governments.
Economic policies that destroyed wealth creation.
Little protection of property rights.
Expanding populations.
War.
McGraw-Hill/Irwin
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-85
Managing in the Global Marketplace
An International Business is any firm that engages in
international trade or investment.
Managing an international business is different
than managing a domestic business:
1. Countries are different.
McGraw-Hill/Irwin
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-86
Managing in the Global Marketplace
An International Business is any firm that engages in
international trade or investment.
Managing an international business is different
than managing a domestic business:
1. Countries are different.
2. Problems are more complex.
McGraw-Hill/Irwin
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-87
Managing in the Global Marketplace
An International Business is any firm that engages in
international trade or investment.
Managing an international business is different
than managing a domestic business:
1. Countries are different.
2. Problems are more complex.
3. Must work within government regulations.
McGraw-Hill/Irwin
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-88
Managing in the Global Marketplace
An International Business is any firm that engages in
international trade or investment.
Managing an international business is different
than managing a domestic business:
1. Countries are different.
2. Problems are more complex.
3. Must work within government regulations.
4. Currency conversion presents unique problems.
McGraw-Hill/Irwin
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.
1-89
Managing in the Global Marketplace
An International Business is any firm that engages in
international trade or investment.
Managing an international business is different
than managing a domestic business:
1. Countries are different.
2. Problems are more complex.
3. Must work within government
regulations.
4. Currency conversion presents
unique problems.
McGraw-Hill/Irwin
© 2003 The McGraw-Hill Companies, Inc., All Rights Reserved.