International Business: Strategy, Management, and the New Realities

Chapter 2

Globalization of Markets and the Internationalization of the Firm

International BusinessStrategy Management & the New Realities

by Cavusgil, Knight and Riesenberger

International Business: Strategy, Management, and the New Realities

Globalization of Markets: A Macro Concept

• Two mega trends have altered the international business landscape: globalization and technological advances.

• Market globalization refers to the interconnectedness of national economies and growing interdependence of buyers, producers, suppliers, and governments in different countries.

• Globalization allows firms to view the world as one large marketplace for goods, services, capital, labor, and knowledge.

Globalization Index 2006

Blah

The World Competitiveness Scoreboard 2007

(2006 rankings are in brackets)

Source: IMD World Competitiveness Yearbook 2007

International Business: Strategy, Management, and the New Realities

Global Competitiveness Index 2006-2007

Relationship Between Globalization and Growth in Per Capita Gross Domestic Product, 1990s

Phases of Globalization1st Phase: 1830, peaking around 1880

Aided by railroads, ocean transport; resulting in the rise of mass production and growing trade

2nd Phase: 1900, peaking late 1920sFueled by electricity and emergent modern technologies; early MNEs

3rd Phase: 1948, peaking around 1970End of WW II; Marshall Plan; Gradual reduction of trade barriers, especially under General Agreement on Tariffs and Trade (GATT)

4th Phase: 1980, peaking around 1997Fueled by information and communications technologies. Rapid liberalization in Emerging Markets

International Business: Strategy, Management, and the New Realities

The Death of Distance

The Drivers and Consequences of Market Globalization

International Business: Strategy, Management, and the New Realities

Firms are Compelled to Internationalize

• Firms implement internationalization proactively are more successful than those reactively engaging.

• E.g., Vodafone has established production and marketing operations all around the world. Has some 200 million customers in 30 countries.

International Business: Strategy, Management, and the New Realities

Technological Advances as a Driver of Market Globalization

• Advances in technology provide the means for internationalization of firms

• Advances in technology:– Reduces cost of doing international

business; – Enables even small firms to go international– Helps coordinate worldwide activities;– Mitigates geographic distance

International Business: Strategy, Management, and the New Realities

Information Technology

• Cost of computer processing fell by 30% per year since late 1980s, and continues to fall.

• Increases productivity across the firm

• Impact of IT on our daily lives has been profound – laptops, intelligent cell phones, Internet, Google, etc.

Declining Cost of Global Communication and Growing Number of Internet Users

International Business: Strategy, Management, and the New Realities

Communications Technology

• Especially important. Includes telecommunications, satellites, optical fiber, wireless technology, and the Internet.

• The Internet, and Internet-dependent systems such as intranets, extranets, and e-mail, connect millions of people across the globe.

• The Internet opens up the global marketplace to all firms, large and small

International Business: Strategy, Management, and the New Realities

Manufacturing and Transportation Technologies

• Revolutionary developments now permit manufacturing that is both low-scale and low cost, with the support of computer-aided-design of products (CAD), robotics, and production lines managed and monitored by microprocessor-based controls.

• In the 1960s, technological advances have led to the development of fuel-efficient jumbo jets, giant ocean-going freighters, and containerized shipping.

• Thus, the cost of transportation has declined substantially, spurring rapid growth in international trade.

International Business: Strategy, Management, and the New Realities

Societal Consequences of Market Globalization

• Positive consequences – More jobs– Economic development and growing prosperity– Technology and knowledge transfer

• Negative consequences– Natural environment– Disruptive effects in national economies – Human rights violations abroad (e.g., sweatshops)– Job losses at home

International Business: Strategy, Management, and the New Realities

Economic Freedom Enhances Income Growth

• In the long run, globalization generally leads to:– higher living standards– more efficient resource usage – greater access to technology, products, and

services

• In particular, liberalization of markets appears to enhance income levels

International Business: Strategy, Management, and the New Realities

Unintended Consequences of Market Globalization

• Loss of national sovereignty– Power shifts to MNEs and larger countries

• Offshoring and the flight of jobs– Dislocation of jobs

• Effect on the poor– Benefits of globalization are not evenly distributed

• Effect on the natural environment

• Effect on national culture– Loss of national cultural values and identity

International Business: Strategy, Management, and the New Realities

International Business: Strategy, Management, and the New Realities

Corporate Social Responsibility

• Over time, governments pass legislation that promotes improved environmental conditions.

• In addition, many firms now consider the societal consequences of their actions -- Corporate Social Responsibilty (CSR)

• Examples: Benetton in Italy (clothing), Alcan in Canada (aluminum), and Starbucks have attempted to embrace practices that protect the environment, often at the expense of profits.

International Business: Strategy, Management, and the New Realities

Firm Level Consequences of Market Globalization

• Countless new business opportunities for internationalizing firms

• New risks and intense rivalry from foreign competitors

• More demanding buyers who source from suppliers worldwide

• Greater emphasis on proactive internationalization

• Internationalization of firm’s value chain

Examples of How Firms’ Value Chain Activities Can Be Internationalized

Value Chain: Sequence of value adding activities performed in the course of developing, producing, marketing, and servicing a product.

International Business: Strategy, Management, and the New Realities

Implications for Management • Global orchestration’ of value-chain activities (e.g.,

in order to cut costs, access resources, target new markets)

• Exploit knowledge acquired worldwide

• Increase productivity

• Collaborate with foreign partners

International Business: Strategy, Management, and the New Realities

• Open-mindedness• Tolerance for ambiguity• Perceptiveness• Premium on personal relationships • Flexibility, adaptability, and self-reliance • Good sense of humor• Warmth in human relationships• A curious mind

Implications for Managers: Acquiring Global Competence is a Requirement