CHAPTER 1

INTRODUCTION TO INTERNATIONAL
BUSINESS AND THE RISE OF
GLOBALIZATION

COMPILER: DR. PRECILA R. BAUTISTA

Countries continue to progress individually in terms of local
industries and national economies, their relationship with other
countries trade-wise also evolves.

In the latter part of the 20th century, countries have been becoming
more open towards international trade and business, paving the
way for better economies, better markets, and better global
industrial harmony.

The business trading from one country to another country is called

international business. It is described as the purchasing and selling
of goods, commodities and services of a country outside of its own
borders.

International business is business done outside the origin country’s

national border.
With the advancement of technology, businesses that were able to
achieve self-sustainability in their own country have ventured into
international connections, extending their services and/or products
to other countries. These businesses are not limited to goods and
manufacturing industries, but also includes the service industry.

Once these business activities extend or cross the national

borders, they are already considered as an international
business.

Technology in terms of communication as well as software

technology, has changed the way business organization manage
activities ranging from manufacturing, procurement, finance, and
sales. The advancement of software applications drive the trade
processes, working efficiently at the speed of thought.
In our present day, no country can afford to remain
isolated from and not to participate in globalization.
While countries do open their economies to global
competition, they need to tread very carefully not to
upset their domestic economy and protected industries.

This balancing act is often managed through individual

countries trade and tariff policy, which forms a part of
each country’s foreign trade policy that governs its
approach to international trade and commerce.
THE EVOLUTION OF THE CONCEPT OF INTERNATIONAL
TRADE AND BUSINESS
- History of international business goes back as far as the barter
system.
1. Ancient records show that merchants from the 19th century have
been participating in different barter modes and routes of trade –
most of the trading happens in the seas and ports, with goods
such as silk, spices, and precious stones. This pave the way for
the creation of the Silk Road and the Spic Route.

2. Mercantilism in England spread, the first systematic body of

thought focused on international trade. This school of thought
argued that there should always be a “favorable balance” in trade.
This balance, according to mercantilism writers, is a trade in
which the domestic goods exported are more valuable than the
goods that are imported. In general, mercantilism favors
exportation heavily and importation less.
3. In 1776, Adam Smith- the father of economics – published his
book entitled “An inquiry into the nature and causes of the wealth of
nations, fundamentally challenging mercantilism. Even though there
were a number of people against the concept of mercantilism, only a
handful were advocating for the concept of free trade. Smith book
provided the spart that would soon spread the concept of
international trade.

4. In the first quarter of the 19th century, David Ricardo, as well as

James Mill and Robert Torrens, introduced the theory of comparative
advantage. Ricardo’s theory, published in his book “Principles of
Political Economy, further reinforced the idea of free trade. The
theory of comparative advantage suggests that a country export
goods in which its relative cost advantage, and not their absolute
cost advantage, is greatest in comparison to other countries.
5. The anti-mercantilism movement won the world’s ideologies, hence countries
began to plan their international pacts and policies were made, including tariff-free
importation. By 1913, the world was immerse in FREE TRADE – all currencies can
be converted to gold, with the gold becoming an international monetary currency
accepted anywhere in the world. Anyone can establish a new business anywhere,
anyone can work for a living anywhere. Global trade and businesses were alive and
blooming.

6. However, the freedom of international trade did not last too long. The First World
War changed the entire course of the world trade and countries began to build walls
around themselves with wartime controls. Even after the war ended, countries were
still picking up the pieces of their own economies, trying to get back on their feet and
gradually opening up trade policies again. However, the war brought along an
economic recession in 1920, further changing the situation of global trade. Countries
had to reassess their trade policies, leading to imposing of tariffs on imports and
customs duties.
7. With the global economic imbalance and unstable condition, world
leaders, headed by the League of Nations, held the World Economic
Conference in May 1927. This conference opened the door to
discussions on how to ease the international trade issues and
economic pressures, leading to the establishment of the Multilateral
Trade Agreement.

8. Despite these agreements, the world faced another disruption

with another depression during the 1930s. This lead to the countries
further raising tariffs on imported goods. This depression then paved
the way for another league of nations conference in 1947,
establishing the General Agreement on Tariff and Trade.
9. Today the concept of international trade and business is in a much
better place in terms of freedom and management. Global
competition affects nearly every company- regardless of size. Many
source suppliers from foreign countries compete against products or
services that originate abroad. International business remains a
broad concept that encompasses the smallest companies that may
only export or import with one other country, as well as the largest
global firms with integrated operations and strategic alliances around
the globe.

10. International businesses grew in scope and size to the point

where at the moment, the global economy is dominated by
multinationals from all countries in the world. What was primarily a
phenomenon of western corporations has now expanded to include
companies from the East (from countries like India and China).
TYPES OF INTERNATIONAL BUSINESS COMPANIES
1. Multi-domestic – a strategic business model that involves
promoting products and services in various markets around the
world and adapting the product/service to the cultural norms,
taste preferences and religious customs of the various markets.
It is an organization with multi-country affiliates, each of which
formulates its own business strategies based on perceived
market differences.

2. Multi-national – a business strategy that involves selling products

and services in different foreign markets without changing the
characteristics of the product/service to accommodate the cultural
norms or customs of the various markets.
Also dubbed as Global companies, these organizations attempt
to standardize and integrate operations worldwide in all
functional areas.
3. International – this type could either be multi-domestic or multi-national.
International businesses have to ensure that they blend the global outlook and the local
adaptation resulting in a “glocal” phenomenon wherein they would have to think global and
act local. Further, international businesses need to ensure that they do operate within local
laws and at the same time repatriate profits back to their home countries.
✓ Domestic market extension by exporting – firms following this strategy locate all production
function and as many as the marketing function as possible in the home country. Export
managers must be knowledgeable about any differences between domestic and foreign
environmental forces that could have impact on the marketing mix.
✓ Multi-domestic company – similar to a holding company – strong financial control from
headquarters but whose subsidiary have considerable autonomy in formulating their own
business strategies based on perceived market differences. Headquarter managers maintain
veto power.
✓ Global corporation – management of global corporation look at the world economy as the
single market. There is a strong central authority with global managers of functional areas
such as marketing and production etc. who attempt to standardize their operations worldwide
and there is no international division. Managerial functions such as strategic planning and
budgeting are performed globally.
BENEFITS OF INTERNATIONAL BUSINESS
- The rise of international trade is beneficial to both the nation and
the businesses.

Benefits to Nation
1. It encourages a nation to obtain foreign exchange that can be
utilized to import merchandise from the global market.
2. It prompts specialization of a country in the production of
merchandise which it creates in the best and affordable way.
3. It helps a country in enhancing its development prospects and
furthermore make opportunity for employment.
4. International business makes it comfortable for individuals to
utilize commodities and services produced in other nations which
help in improving their standard of life.
Benefits to Firms
1. It helps in improving profits of the organizations by
selling products in the nations where costs are high.
2. It helps the organization in utilizing their surplus
resources and increasing profitability of their activities.
3. It helps firm’s in enhancing their development prospects.
4. International business also goes as one of the methods
for accomplishing development in the firms confronting
extreme market conditions in the local market.
5. It enhances business vision as it makes firms more
aggressive and diversified.
THE RISE OF GLOBALIZATION
- When the world grew to be interdependent when it comes to
the global economy, it also achieved globalization.
But what is globalization?
- In post-cold war, the term was used to describe the world
becoming more interdependent in its economical and
informational dimension. As it was still a complex concept
then, definition of globalization centered only on this aspect.
- He defined globalization as “the understanding of the world
and the increased perception of the world as a whole. –
Roland Robertson, a professor of sociology at the University
of Aberden.
- Sociologist Martin Albrow and Elizabeth King define the term
as “all those processes by which the people of the world are
incorporated into a single world society.”
- Anthony Giddens uses the following definition: Globalization can
be defined as the intensification of social relations throughout the
world, linking distant localities in such a way that local happenings
are formed as a result of events that occur many miles away and
vice versa.”
- David Held defined globalization “referring to a rapid global
interconnection, deep and on large scale, such definition but
requires now a more complex research”
- Swedish journalist Thomas Larsson says that globalization “is the
process of the shrinking of the world, the shortening of distances,
and the closeness of things. It allows the increased interaction of
any person on one part of the world to someone found on the
other side of the world, in order to benefit.”
With all these definitions, it is safe to say that GLOBALIZATION is
not a new phenomenon. As the world leaned away from self-
contained national economies toward an interdependent, integrated
global economic system, globalization took place.
THE TWO FACETS OF GLOBALIZATION
A. The globalization of markets
- Refers to the merging of historically distinct and separate national
markets into one huge global marketplace. There is no longer an
“American Market” or “Philippine Market.” Instead there is only the
global market.
Benefits
1. Falling trade barriers make it easier to sell internationally,
effectively reducing market costs.
2. The tastes and predilections of consumers are congregating on
some global norm.
3. Companies help generate the global market by offering the same
basic products worldwide, while still meeting the needs of the local
buyers.
B. The globalization of production
- Refers to the sourcing of goods and services from locations
around the glove to take advantage of national differences in
the cost and quality of factors of production like land, labor and
capital. Companies compete more effectively by lowering the
overall cost structure or improving the quality or functionality of
their product offering.
Benefits
1. More companies are taking advantage of modern
communication technology, like the internet, to outsource
service activities to low-cost producers in other nations.
2. Because of these tech advancement, companies are able to
outsource even technical experts without losing full control of
their production.
THE DRIVERS OF GLOBALIZATION
Falling barriers
- Referring to declining trade and investment barriers.
International trade occurs when a firm exports goods or
services to consumers in another country. Foreign direct
investment (FDI) occurs when a firm invests resources in
business activities outside its home country.
- After the world war 2, advanced countries made a commitment
to lower barriers to trade and investment. Since 1950, average
tariffs have fallen significantly and are now at about 4%
countries have also been opening markets to FDI.
- Lower barriers to trade and investment mean that firms can
view the world, rather than a single country, as their market and
that firms can base production in the optimal location for that
activity.
Technological changes
- While the lowering of trade barriers made globalization of markets
and production a theoretical possibility, technological change
made it a tangible reality.
- Microprocessors and telecommunications: major developments in
communication and information processing have dropped the cost
of global communication, along with this the cost of coordinating
and controlling a global organization was also lowered.
- The internet and the world wide web: web-based transactions
have increased from practically zero in 1994 to approximately $7-
Trillion in 2004.
- Transportation technology: the most important developments are
probably the development of commercial jet aircrafts and super
freighters along with the start of containerization, simplifying trans-
shipment from one mode of transport to another. Improvements in
transportation technology have enabled firms to better respond to
international customer demands.
 Managers of today operate in an environment that offers more
opportunities, but is also mor complex and competitive than that of a
generation ago.
Implications of technological change for the globalization of
production include:
1. Lower transportation costs that enable firms to disperse production
to economical, geographically separate locations
2. Lower information processing and communication costs that enable
firms to create and manage globally dispersed production systems

Implications of technological change for the globalization of markets

include:
1. Low cost global communications networks help create electronic
global marketplace
2. Low-cost transportation help generate global markets
3. A worldwide culture created by global comms networks, as well as a
global market for consumer products.
BENEFITS OF GLOBALIZATION
1. Free trade – a way for countries to exchange goods and
resources. This means countries can specialize in
producing goods where they have a comparative
advantage (this means they can produce goods at a
lower opportunity costs).
2. Free movement of labor – increased labor migration
gives advantages to both workers and recipient
countries. If a country experiences high unemployment,
there are increased opportunities to look for work
elsewhere. This process of labor migration also helps
reduce geographical inequality. This has been quite
effective in the EU, with many Eastern European
workers migrating west.
3. Increased economies of scale- production is increasingly
specialized. Globalization enables goods to be produced in
different parts of the world. This greater specialization enables
lower average costs and lower prices for consumers.

4. Greater competition – domestic monopolies used to be protected

by a lack of competition. However, globalization means that firms
face greater competition from foreign firms.

5. Increased investment - globalization has also enabled increased

levels of investment. It has made it easier for countries to attract
short-term and long-term investment. Investment by multi-national
companies can play a big role in improving the economies of
developing countries.
COSTS OF GLOBALIZATION
1. Free trade can harm developing economies. Developing
countries often struggle to compete with developed countries,
therefore it is argued free trade benefits developed countries
more. There is an infant industry argument which says industries
in developing countries need protection from free trade to be able
to develop. However, developing countries are often harmed by
tariff protection, that western economies have on agriculture.
Paradox of free trade.
2. Environmental costs. One problem of globalization is that it has
increased the use of non-renewable resources. It has also
contributed to increased pollution and global warming. Firms can
also outsource production to where environmental standards are
less strict. However, arguably the problem is not so much
globalization as a failure to set satisfactory environmental
standards.
3. Labor drain. Globalization enables workers to move more freely.
Therefore, some countries find it difficult to hold onto their best-skilled
workers, who are attracted by higher wages elsewhere.

4. Less cultural diversity. Globalization has led to increased economic

and cultural hegemony. With globalization there is arguably less
cultural diversity; however, it is also led to more options for some
people.

5. Tax competition and tax avoidance. Multi-national companies like

Amazon and Google, can set up offices in countries like Bermuda and
Luxembourg with very low rates of corporation tax and then funnel
their profits through these subsidiaries. This means they pay very little
tax in the countries where they do most of their business. This means
government have to increase taxes on VAT and income tax. It is also
seen as unfair competition for domestic firms who don’t use the same
tax avoidance measures.
THANK YOU ☺
GOD BLESS US!!!