How Businesses are affected by

International Competitiveness

Lecture 5
Business Studies

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 Learning Outcomes
 Globalization
 The developing global economy and its impact on business.
 What is Globalization?
 The dimension of globalization.
 Globalization :an opportunity or threat?
 Developing a global business strategy
 What is Multinational company
 Why individual businesses involved in international operations
 The advantage of being multinational
 The arguments of multinationals to an economy

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 Learning Outcomes
 International competitiveness
 What is Competitive advantage
 Factors that instills international competitiveness
 World Trade Organization
 The effects of barriers to trade
 Type of barriers
 The development of trading bloc
 The European Union
 The Treaty of Rome
 The Single Market
 The Maastricht Treaty
 EU keys institution
 Creation Of Euro
 How internet breaking down international barriers
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 The Developing Global Economy and its
Impact on Business.
 The world economy did not exist until the late 1980s due to
communism. i.e China and India
 In the last 20 years the dynamic growth of Asia-Pasific-Japan
region, the Asian tigers of South Korea, Hong Kong, Singapore and
Taiwan involved trading with America and Europe.
 Due to vast development, major trade blocs created; North
American Free Trade Area (NAFTA) and European Union (EU)
 Triad, main area of the globe focus on the three main blocs-
NAFTA, Japan and the tigers economies and European Union.

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 Globalization
 Globalization can be defined as the increasing international
integration of markets for goods, services and capital.
The OECD defines globalization as:-
“The geographic dispersion of industrial and service activities, for
example research and development, sourcing of inputs, production
and distribution, and the cross-border networking of companies, for
example through joint ventures and the sharing of assets”

International Monetary Fund:

“The process through which an increasingly
free flow of ideas, people, goods, services
and capital leads to the integration of
economies and societies”

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 Factor affecting Globalization

Technological change Free flow of capital

Transport
GLOBALIZATION
Changing in Customer
Taste & Preferences
Emerging Markets

Free Trade Deregulation

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Factors Affecting Globalisation
 The following main factors have fuelled the pace of globalisation:

 1. Technological change, especially in communications technology.

For example, UK businesses send data by satellite to India (taking advantage
of the difference in time zones) where skilled but cheaper data handlers
input the data and return it by satellite for the start of the UK working day.

 2. Transport is much cheaper and faster. This is not just aircraft, but
also ships. The development of containerisation in the 1950s was a major
breakthrough in goods handling, and there have been continuing
improvements to shipping technology since then.

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Factors Affecting Globalisation
 3.Deregulation. From the 1980s onwards (starting in the UK)
many rules and regulations in business were removed, especially
rules regarding foreign ownership. Privatization also took place, and
large areas of business were now open to purchase and/or take-
over. This allowed businesses in one country to buy those in another.
For example, many UK utilities, once government businesses, are
owned by French and US businesses.

 4. Removal of capital exchange controls. The movement of

money from one country to another was also controlled, and these
controls were lifted over the same period. This allowed businesses
to move money from one country to another in a search for better
business returns; if investment in one’s own country looked
unattractive, a business could buy businesses in another country.
During the 1990s huge sums of money, mainly from the US, have
come into the UK economy. See, for example, this news story

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Factors Affecting Globalisation

 5. Free Trade. Many barriers to trade have been removed. Some of this
has been done by regional groupings of countries such as the EU. Most of it
has been done by the WTO. This makes trade cheaper and therefore more
attractive to business.

 6. Consumer tastes have changed, and consumers are more

willing to try foreign products. The arrival of global satellite television,
for example, has exposed consumers to global advertising. Consumers are
more aware of what is available in other countries, and are keen to give it a
try.

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Factors Affecting Globalisation

 7. Emerging markets in developing countries, especially the ‘Tigers’

of SE Asia eg Thailand. There has been high growth of incomes in these
countries, which makes large consumer markets with money to spend.
Indonesia, for example, whilst still not particularly rich, has some 350 myn
consumers. Both India and China are very poor countries, but there are
small middle classes who are doing very well and have money to spend.
Although these groups are small in the context of the country, the overall
populations are so huge (over 1 byn) that a small middle class adds up to
many millions of consumers.

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 Globalization: an opportunity or threat?

 Globalization helps:-
 To Reduce cost of production
 To increase products variety
 Increased free trade between nations
 Increased liquidity of capital allowing investors in
developed nations to invest in developing nations

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 Globalization: an opportunity or threat?
 Corporations have greater flexibility to operate across borders

 Global mass media ties the world together

 Increased flow of communications allows vital information to be

shared between individuals and corporations around the world

 Greater ease and speed of transportation for goods and people

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 Globalization: an opportunity or threat?
 Globalization become threat when :-
1. Fastest rates of growth will create inequalities in income
between the rich and the poor
2. Greater chance of reactions for globalization being violent in an
attempt to preserve cultural heritage
3. It is often argued that poor countries are exploited by the richer
countries where the work force is taken advantage of and low
wages are implemented.
4. Companies face much greater competition. This can put
smaller companies, at a disadvantage as they do not have
resources to compete at global scale
5. Decreases in environmental integrity as polluting
corporations take advantage of weak regulatory rules in
developing countries
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 Developing a global business strategy
- Multinational company
 Multinational Companies (MNCs) – is a company with its
headquarters in one country but with operations in other
countries.
 i.e. Coca-Cola, Nestle, Nike
 Characteristic of MNCs
 Operates in changing environment in which there are range of
influences, including the actions of competitors, customers,
suppliers, financial institutions and governments.
 Able to draw a pool of resources and share within the
organization.

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 Why individual businesses involved in
international operations
 Opportunistic development
 Following customer abroad
 Geographic diversification
 To increase profit
 To exploit different economies growth rate
 To exploit differences in the product life-cycle
 The vastness of overseas markets
 Internationalizing for defensive reasons
 Pursuing a global logic- a condition in the market that
requires a company to adopt a global strategy.
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 The advantage of being multinational

 Protect themselves from the risks and uncertainties of the trade

cycle within their economy.
 Benefits from the growing world market for good and services.
 Expand into new market due to foreign competition
 Able to reduce cost
 Overcome tariff
 Obtain technology expertise

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 The Arguments of multinationals to an
economy

 + Job creation and employment- establishing a plant i.e. Coca

Cola in India / Maldives
 - some people argue working in MNCs is more risky as they may
pull out the plant to set up elsewhere when they find it more
beneficial to them

 + The balance of payment – creating export (selling the finished

products) for the country that they reside.
 - may need to import raw materials, parts, which go into the finish
products.

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 The Arguments of multinationals to an economy

 +Technology and expertise- MNCs may introduce technology,

production methods and more efficient and effective ways working
in an economy.
 - MNCs may transfer technology to other countries

 - Social responsibility-MNCs may export pollution, inequalities in

employment (local vs. foreign)

 -Government Control- due to large size and financial powers,

MNCs may evade taxation by transferring profits from one
country to another.

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 International competitiveness

Competitive advantage -
A superiority gained by an organization when it can provide the same
value as its competitors but at a lower price, or can charge higher
prices by providing greater value through differentiation. Competitive
advantage results from matching core competencies to the
opportunities.

Facebook's competitive advantage is not the users, but the fact that
they execute better than anyone else in the space and have leaders
with a deep understanding of the customer who are comfortable
defining "social" for the rest of us.

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 World Trade Organization

 The World Trade Organization (WTO) is the only global

international organization dealing with the rules of trade between
nations.
 At its heart are the WTO agreements, negotiated and signed by
the bulk of the world’s trading nations and ratified in their
parliaments.
 The goal is to help producers of goods and services, exporters,
and importers conduct their business.
 Is an extension of the General agreement on Tariff and Trades
(GATT)

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 THE 10 BENEFITS of WTO

 1. The system helps promote peace

2. Disputes are handled constructively
3. Rules make life easier for all
4. Freer trade cuts the costs of living
5. It provides more choice of products and qualities
6. Trade raises incomes
7. Trade stimulates economic growth
8. The basic principles make life more efficient
9. Governments are shielded from lobbying
10. The system encourages good government

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 The effects of barriers to trade

 Countries protect their own industries

 Countries restrict import to protect firms and employment.
 Trade restriction are used to protect new or infant industries.
 Countries may also want to restrict the import of strategic good-
energy, fuel and defense goods.

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 Type of Barriers –ways of restricting import
from other countries.

 Import duties
 A tax on goods imported into a country
 Subsidies
 benefit given by the government to groups or individuals usually in
the form of a cash payment or tax reduction. The subsidy is usually
given to remove some type of burden and is often considered to
be in the interest of the public.
 Quotas
 that sets a physical limit on the quantity of a good that can be
imported into a country in a given period of time
 Quotas, like other trade restrictions, are used to benefit the
producers of a good in a domestic economy at the expense of all
consumers of the good in that economy.

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 The development of trading bloc
1. Free– the removal of quotas and tariffs between members of the
trading community.
2. Custom Union – the member of states develop common trading
polices and move towards equal conditions for businesses to
compete in.
3. Common market – involves the free movement of factors of
production. i.e.EU characterized by 4 freedoms (movement of
goods, service, people and capital).
 Canada – Agreement on Internal Trade (AIT)
 European Free Trade Association (EFTA)
 European Economic Area (EEA)
 Switzerland – European Union[2]
4. Economic and monetary union- when countries operates in
single central bank, taxes.

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 The European union

 The European Union (EU) is an economic and political union of

27 member states which are located primarily in Europe.[7]
 The EU traces its origins from the European Coal and Steel
Community (ECSC) and the European Economic Community
(EEC), formed by six countries in 1958. In the intervening years
the EU has grown in size by the accession of new member states,
and in power by the addition of policy areas to its remit.
 The Maastricht Treaty established the European Union under its
current name in 1993.[8] The last amendment to the constitutional
basis of the EU, the Treaty of Lisbon, came into force in 2009

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 History of EU

 1951: The European Coal and Steel Community is established by

the six founding members
 1957: The Treaty of Rome establishes a common market
 1973: The Community expands to nine member states and
develops its common policies
 1979: The first direct elections to the European Parliament
 1981: The first Mediterranean enlargement
 1993: Completion of the single market
 1993: The Treaty of Maastricht establishes the European Union
 1995: The EU expands to 15 members
 2002: Euro notes and coins are introduced
 2004: Ten more countries join the Union

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 The treaty of Rome

 The Treaties of Rome are two treaties that were both

signed on 25 March 1957 by the same countries: Belgium,
France, Italy, Luxembourg, the Netherlands, and West
Germany; referred to as The Six of European integration.

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 The creation of single market

 the enabling instrument for the single market was the Single
European Act, which came into force in July 1987. Its
provisions included:
 extending the powers of the Community in some policy areas
(social policy, research, environment);
 gradually establishing the single market over a period up to the end
of 1992, by means of a vast legislative programme involving the
adoption of hundreds of directives and regulations;
 Increase voting for the council of ministers

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 Benefits from single market

 Reduction on cost of production

 Improved efficiency and effectiveness of business
 Increase competitions
 Increase innovations

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 The Maastricht treaty

 The Maastricht Treaty established the European Union under

its current name in 1993.[8] The last amendment to the
constitutional basis of the EU, the Treaty of Lisbon, came into
force in 2009.

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 Creation of Euro

 the euro came into existence on 1 January 1999, although it

has been a goal of the European Union (EU) and its
predecessors since the 1960s.
 After tough negotiations, particularly due to opposition from
the United Kingdom, the Maastricht Treaty entered into force
in 1993 with the goal of creating economic and monetary
union by 1999 for all EU states except the UK and Denmark
(even though Denmark has a fixed exchange rate policy with
the euro).

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 Advantages of creation of Euro

 Transaction costs will be eliminated.

 Price transparency
 Uncertainty caused by Exchange rate fluctuations eliminated.
 Single currency in single market makes sense.
 Prevent war- happy trade
 Rival to the "Big Two“; Japan and America

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 Disadvantages of creation of Euro

 The impact of the Euro could be a reduced market share

for local businesses due to greater competition from
elsewhere.
 National government have less control over policy.
 central bank cannot set inflation at the appropriate level
for each member state.

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 HOW THE INTERNET IS BREAKING DOWN INTERNATIONAL BARRIERS.

 A good form of network will result in:-

 A new market place
 A new form of communication
 A new means of distribution
 A new information system

 i.e. amazon.com, e-bay

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HOW THE INTERNET IS BREAKING DOWN INTERNATIONAL BARRIERS.

 THE INTERNET BANKING

The advanced technologies of the internet managed to free people from
the hassles of losing an enormous amount of time waiting in the line to
be served at the bank branches.
 Internet banking is the easy way of dealing with bank transactions
safely and quickly. Internet banking offers a wide range of transactions
that can be done including bill payments and transfers. Internet
banking is convenient also in that it is available twenty-four hours a day.

 THE INTERNATIONAL MARKET

The Internet enables you to buy anything you need from the comfort of
your own house. Many supermarkets take online orders and deliver the
stock within the day at your doorstep. Many consumer stores offer
online purchases about almost anything you can imagine (shoes,
clothes, apparel, accessories).
 Online shopping can save you time and money since it offers a wide
range of specials in much cheaper prices than what you will find in the
actual stores.
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HOW THE INTERNET IS BREAKING DOWN INTERNATIONAL BARRIERS.
 THE EMPLOYMENT AGENT
Another benefit that the internet has brought into our lives is that
ever since the internet has been introduced, new areas of jobs and
careers have opened up to the public.

 THE TREASURE BANK

The biggest benefit of the internet can be found in the educational
sector. Educators can obtain learning material from it, prepare
courses online and deliver audio/visual information to students.

 SO CLOSE…YET SO FAR AWAY!

One of the most important benefits offered from the wide
applications of the internet is communication. The internet managed
to eliminate distances and provide people with a unique opportunity
to talk, watch and have fun with their loved ones, friends or
acquaintances.

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