Globalization of Markets and The Internationalization of The Firm

Chapter 2
Globalization of
Markets and the
Internationalization
of the Firm
Educator Resource PPT to accompany:

International Business: The New Realities
2nd Edition
By Cavusgil, Knight, Riesenberger,
Rammal and Rose
Slide 1
Copyright © 2015 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781486011049/Cavusgil/International Business 2/e
Learning Objectives
1. Explain why globalization is not a new phenomenon

2. Identify the dimensions and drivers of market
globalization
3. Assess the societal consequences of market
globalization
4. Analyze the firm-level consequences of market
globalization: internationalization of the firm’s value
chain
Slide 2
Bangalore: IT’s Global Destination
• On weekday evenings in Bangalore, thousands of young men

and women commute by bus to call centres throughout the
city, the fifth largest in India.
• Millions of people now work in outsourced information
technology (IT) services in India.
• What is the attraction?
1. Indians are paid roughly one-quarter of what Westerners
receive for similar work and often do a better job.
2. India is home to several million highly educated knowledge
workers.
3. English is widely spoken.
4. Different time zone allows Indians to take advantage of
time-sharing
Slide 3
Bangalore: IT’s Global Destination (cont’d)
• With computers becoming cheaper and more familiar around
the world, proprietary software can divide up any piece of
work, making it easy for anyone to do remote development.
• Globalization has several implications:

• Increasingly difficult to distinguish where you are in the world based on
the products and services that you consume.
• Important technologies can be developed in most locations worldwide.
• Jobs in the knowledge sector are being performed wherever the firm
can extract maximal advantages, anywhere in the world.
• Globalization allows consumers worldwide to receive maximum quality

at minimum price.
Slide 4
Bangalore: IT’s Global Destination (cont’d)
• Bangalore is also experiencing the downside of globalization.
• Once considered one of India’s most live able cities, the

arrival of hundreds of thousands of IT workers has brought
congestion, pollution, high rents, a thriving nightlife and
Western values.
• Bangalore recently opened a new, US$500 million airport to

support the city’s rapid growth; fewer than 5 per cent of
Bangalore residents have ever been inside an airplane.
• A shortage of affordable housing has forced long-time

residents out of the city or into slums, while government
construction projects focus on high-rise apartments for the
wealthy. Slide 5
Why Globalisation Is Not A New Phenomenon
• Globalization of markets: The gradual integration and growing

interdependence of national economies.
• Globalization allows firms to view the world as an integrated
marketplace. Initially referred to as market globalization.
• Declining trade barriers, and the ease with which international
business transactions take place due to the internet and other
technologies, are contributing to a gradual integration of most
national economies into a unified market.
Slide 6
Why Globalisation Is Not A New Phenomenon (cont’d)
• Phase 1: 1830 to 1800

Aided by growth of railroads, efficient ocean
transport, and rise of large manufacturing and
trading companies
• Phase 2: 1900 to 1930
Associated with the rise of electricity and steel
production; reached its height just before the
Great Depression
Slide 7
Why Globalisation Is Not A New Phenomenon (cont’d)
• Phase 3: 1948 to 1970s

Formation of General Agreement on Tariff and
Trade (GATT); conclusion of Second World War;
Marshall Plan to reconstruct Europe
• Phase 4: 1980 to present
Radical advances in information, communication,
manufacturing and consultation technologies;
privatisation of state-owned enterprises in
transition countries; remarkable economic growth
in emerging markets
Slide 8
Slide 9
The Drivers of Market Globalisation
Slide 10
Slide 11
Slide 12
An Organising Framework for Market Globalisation
• As market globalisation intensifies, individual business
enterprises must respond to challenges and exploit new
advantages.
• Firms also internationalise proactively to pursue new markets,

find lower-cost inputs or obtain other advantages.
• Adverse conditions in the home market, such as regulation or

declining industry sales, push firms proactively to expand
abroad.
• Firms that expand abroad tend to be more successful in global

competition than those that engage in international business
as a reactive move.
Slide 13
Dimensions of Market Globalisation
• Internationally active firms devise multi-country

operations through trade, investment, other activities.
• Value chain: The sequence of value-adding activities
performed by the firm in the process of developing,
producing, marketing and servicing a product.
• The aggregate activities of these firms give rise to
economic integration.
2-14
Slide 14
Dimensions of Market Globalisation
• In terms of international business, market globalisation

can be viewed simultaneously as a:
1. consequence of economic, technological and
government policy trends;
2. driver of economic, political and social
phenomena;
3. driver and consequence of firm-level
internationalisation.
2-15
Slide 15
Dimensions of Market Globalisation (cont’d)
• Integration and interdependence of national

economies
• Value chain: The sequence of value-adding
activities performed by the firm in the process of
developing, producing, marketing and servicing a
product.
• The aggregate activities of these firms give rise to
economic integration.
2-16
Slide 16
• Governments contribute to economic integration by:

1. gradually lowering barriers to international trade
and investment (trade agreements);
2. increasingly harmonising their monetary and
fiscal policies within regional economic
integration blocs (also known as ‘trade blocs’);
3. devising and supervising supranational
institutions (World Bank, IMF, WTO) that seek
further reductions in trade and investment
barriers.
2-17
Slide 17
• Rise of regional economic integration blocs. These

blocs consist of groups of countries within which trade
and investment flows are facilitated through reduced
trade and investment barriers.
• Growth of global investment and financial flows. In
the process of conducting international transactions,
firms and governments buy and sell large volumes of
national currencies (such as dollars, euros and yen).
2-18
Slide 18
• Convergence of consumer lifestyles and

preferences. Around the world, consumers spend
their money and time in increasingly similar ways.
Lifestyles and preferences are converging.
• Globalisation of production. Companies strive to
drive down prices through economies of scale, by
standardising what they sell, and by shifting
manufacturing and procurement to foreign locations
with inexpensive labour.
2-19
Slide 19
• Globalisation of services. The services sector is

undergoing widespread internationalisation.
1. Banking, hospitality, retailing and other service
industries are rapidly expanding abroad.
2. Firms increasingly outsource business processes
and other services-based value-chain activities to
vendors located abroad.
3. In a relatively new trend, people are increasingly
going abroad to take advantage of low-cost
services.
2-20
Slide 20
Drivers of Market Globalisation
• Worldwide reduction of barriers to trade and

investment. The tendency of national governments to
reduce trade and investment barriers has accelerated
global economic integration; also associated with the
emergence of regional economic integration blocs.
• Market liberalisation and adoption of free markets.
The launch of free market reforms in China, India and
the former Soviet Union marked the opening of roughly
1/3 of the world to freer trade.
2-21
Slide 21
Drivers of Market Globalisation (cont’d)
• Industrialisation, economic development and

modernisation. Rapidly developing economies in
Asia, Latin America and Eastern Europe are moving
from being low value-adding commodity producers,
dependent on low-cost labour, to sophisticated
competitive producers and exporters of premium
products such as electronics, computers and aircraft.
2-22
Slide 22
Gross National Income in US Dollars
Slide 23
Slide 24
Drivers of Market Globalisation (cont’d)
• Integration of world financial markets. Makes it

possible for internationally active firms to raise capital,
borrow funds and engage in foreign currency
transactions. Financial services firms follow their
customers to foreign markets.
• Advances in technology. Technological advances

are a remarkable facilitator of cross-border trade and
investment.
2-25
Slide 25
Technological Advances as a Driver of Market Globalisation
• Perhaps the most important driver of market

globalisation since the 1980s has been
technological advances in information,
communications, manufacturing and
transportation.
• While globalisation makes internationalisation

imperative, technological advances
provide the means for it to happen.
2-26
Slide 26
(cont’d)
• Information Technology. Information

technology is the science and process of
creating and using information resources.
• Communications. The most profound

technological advances have occurred in
communications, especially
telecommunications, satellites, optical fibre,
wireless technology and the internet.
2-27
Slide 27
Slide 28
(cont’d)
• Manufacturing. Revolutionary developments now

permit low-scale and low-cost manufacturing. Firms
can produce products in short production runs cost-
effectively.
• Transportation. Managers consider the costs of

transporting raw materials, components and finished
products when deciding either to export or to
manufacture abroad.
2-29
Slide 29
Global Trend –
Globalisation and e-business in the online world
• Information technology and the internet are

transforming international business by allowing firms
to conduct e-commerce online, as well as to integrate
e-business capabilities for activities such as sourcing
and managing customer relations.
• E-business provides at least three types of benefits:
1. Increases productivity through online integration and
coordination of production, distribution and after-sales
services.
2. Creates value for existing customers and uncovers new
sales opportunities.
3. Improves the flow of information and knowledge
throughout the firm’s worldwide operations.
2-30
Slide 30
(cont’d)
• Beginning in late 2008, the world economy

experienced the worst financial crisis and global
recession in decades.
• Precipitated by pricing bubbles (excessively high

prices) in housing markets and in commodities
throughout most of the industrialised world.
2-31
Slide 31
Slide 32
(cont’d)
• Crisis began in the United States and, like a

contagious disease, spread around the world.
• Contagion: The tendency for a financial or monetary
crisis in one country to spread rapidly to other
countries due to the ongoing integration of national
economies.
• Origins include the ‘easy money’ policy followed by the
US Federal Reserve Bank throughout most of the
2000s.
• Experts also point to the rapid growth in China’s giant
economy
2-33
Slide 33
(cont’d)
• Crisis raised questions about the merits of

globalisation.
• Modern technology facilitated the integration of
national economies and banking systems.
• In 2009, global growth declined sharply to levels not
seen since the Second World War.
• Key implication—when financial markets are
unchecked or unregulated, crises spread quickly and
take on a global scale.
2-34
Slide 34
Societal Consequences of Market Globalisation
• Sovereignty is the ability of a nation to govern its own affairs. One

country’s laws cannot be applied or enforced in another country. MNE
activities can interfere with the sovereign ability of governments to
control their own economies, social structures and political systems.
• Even the largest firms are constrained by market forces. In countries
with many competing companies, one company cannot force
customers to buy its products or force suppliers to supply it with raw
materials and inputs.
• Corporate social responsibility for global business is now a major
concern for MNEs in all regions because of increasing scrutiny
by key stakeholders, including employees, customers, shareholders,
government, environmental bodies and the media.
2-35
Slide 35
Societal Consequences of Market Globalisation (cont’d)
• Globalisation has created countless new jobs and

opportunities around the world, but it has also cost many
people their jobs.
• Offshoring is the relocation of manufacturing and other
value-chain activities to cost-effective locations abroad.
• Resulted in job losses in numerous mature economies.
2-36
Slide 36
• Multinational firms are often criticised for paying low

wages, exploiting workers and employing child labour.
• Labour exploitation and sweatshop conditions are
genuine concerns in many developing economies.
• Consideration must be given to the other choices
available to people in those countries.
• Abolishing formal-sector jobs does not ensure that
children leave the workforce and go to school.
2-37
Slide 37
Slide 38
Slide 39
Slide 40
• Globalisation can harm the environment by promoting

increased manufacturing and economic activity that
result in pollution, habitat destruction and deterioration
of the ozone layer.
• Evidence suggests that environmental destruction
diminishes as economies develop, at least in the long
run. Over time, governments pass legislation that
promotes improved environmental conditions.
• Evolving company values and concern for corporate
reputations also lead most firms to reduce or eliminate
practices that harm the environment.
2-41
Slide 41
• Globalisation exerts strong pressures on national culture.

Market liberalisation leaves the door open to foreign companies,
global brands, unfamiliar products and new values.
• Critics call these trends the ‘McDonaldisation’ or ‘Coca-
Colonisation’ of the world. To combat such trends, governments
try to block cultural imperialism and prevent the erosion of local
traditions.
• At the same time, the flow of cultural influence often goes both
ways. As the influence of the Chinese economy grows, Western
cultures will likely adopt cultural norms from China as well.
2-42
Slide 42
• Among all regions, Africa is home to the poorest

countries; least integrated into the world economy and
accounts for less than 3 per cent of world trade.
• Despite abundant natural resources, Africa remains
underdeveloped due to such factors as inadequate
commercial infrastructure, lack of access to foreign
capital, high illiteracy, government corruption, wars
and the spread of AIDS.
• As certain sectors in Africa have boomed in recent
years, foreign banks, retailers and MNEs have set up
operations in the continent.
2-43
Slide 43
Firm-level Consequences of Market Globalisation:
Internationalisation of the Firm’s Value Chain
• The most direct implication of market globalisation is for

the firm’s value chain.
• Market globalisation compels firms to organise their
sourcing, manufacturing, marketing and other value-
adding activities on a global scale.
• Each value-adding activity in an international firm’s value
chain is subject to internationalisation; that is, it can be
performed abroad instead of at home.
2-44
Slide 44
Slide 45
Closing Case –
The emergence of Emirates as a global airline
• Dubai’s flag carrier is born
• Gulf Air was the leading airline in the Middle East
during the 1980s.
• In 1984, Gulf Air decided to cut back its services to
and from Dubai International Airport, largely because it
felt it was aiding and benefiting its own competition.
• During its first year of operation, Emirates took
business away from its main rival, Gulf Air, whose
revenues dropped by 30 per cent.
• Emirates posted a modest profit in its very first year
and decided to expand its operations and invest in
infrastructure.
Slide 46
Closing Case – The emergence of Emirates as a
global airline (cont’d)
• Emirates Grows
• The following year Emirates posted a loss due to
investments in infrastructure but grew its flight network.
• Introduction of industry firsts aimed at achieving superior

customer service and operational efficiency.
• Emirates sought recognition in global markets

not only through the introduction of new destinations, but
also by establishing brand associations with high-profie
international events through sponsorships.
Slide 47
• Non-stop service to six continents from
one hub
• Emirates is currently considered among the top ten
airlines in the world.
• Reported to be the fastest growing airline in the world,
growing at an average rate of 20 per cent for some
years, returning profits every year since its inception
except for a loss in 1986.
• Has one of the youngest fleets of wide-bodied, long-
haul aircraft, and one of the highest aircraft utilisation
rates in the industry.
Slide 48
• Emirates: Flying into the future
• Emirates’ future is linked to the expansion of Dubai’s
airport facilities and the emirate’s open skies policy.
• ‘Open sky policy’ refers to a situation where airlines

from any country can apply for permission to operate
commercial flights to and from Dubai.
• Experienced a 9.2 per cent growth in passenger traffic

at the airport during 2009, in contrast to the
downtrend in passenger traffic elsewhere due to the
global financial crisis.
Slide 49
End of chapter
Slide 50

Globalization of Markets and The Internationalization of The Firm

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What are some of the drivers of globalization?

What are some of the drivers of globalization?

How has globalization impacted Bangalore, India?

How has globalization impacted Bangalore, India?

Chapter 2

Educator Resource PPT to accompany:

1. Explain why globalization is not a new phenomenon

• On weekday evenings in Bangalore, thousands of young men

• Globalization has several implications:

• Important technologies can be developed in most locations worldwide.

• Globalization allows consumers worldwide to receive maximum quality

• Once considered one of India’s most live able cities, the

• Bangalore recently opened a new, US$500 million airport to

• A shortage of affordable housing has forced long-time

• Globalization of markets: The gradual integration and growing

• Phase 1: 1830 to 1800

• Phase 3: 1948 to 1970s

• Firms also internationalise proactively to pursue new markets,

• Adverse conditions in the home market, such as regulation or

• Firms that expand abroad tend to be more successful in global

• Internationally active firms devise multi-country

• In terms of international business, market globalisation

• Integration and interdependence of national

• Governments contribute to economic integration by:

• Rise of regional economic integration blocs. These

• Convergence of consumer lifestyles and

• Globalisation of services. The services sector is

• Worldwide reduction of barriers to trade and

• Industrialisation, economic development and

• Integration of world financial markets. Makes it

• Advances in technology. Technological advances

• Perhaps the most important driver of market

• While globalisation makes internationalisation

• Information Technology. Information

• Communications. The most profound

• Manufacturing. Revolutionary developments now

• Transportation. Managers consider the costs of

• Information technology and the internet are

• Beginning in late 2008, the world economy

• Precipitated by pricing bubbles (excessively high

• Crisis began in the United States and, like a

• Crisis raised questions about the merits of

• Sovereignty is the ability of a nation to govern its own affairs. One

• Globalisation has created countless new jobs and

• Multinational firms are often criticised for paying low

• Globalisation can harm the environment by promoting

• Globalisation exerts strong pressures on national culture.

• Among all regions, Africa is home to the poorest

• The most direct implication of market globalisation is for

• Introduction of industry firsts aimed at achieving superior

• Emirates sought recognition in global markets

• ‘Open sky policy’ refers to a situation where airlines

• Experienced a 9.2 per cent growth in passenger traffic

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