Global Business

Environment
What is globalization ?
• It means integration of national economies with the world economy.
• Globalization is the process in which an activity or undertaking becomes
worldwide in scope.
• It refers to the expansion of business in the global market.
• Globalization may be defined as “ the growing economic
interdependence of countries worldwide through increasing volume and
variety of cross border transactions in goods and services and of
international capital flows, and also through the more rapid and
widespread diffusion of technology”.
• Globalization may be considered at two levels .Viz, at the macro level (i.e.,
globalization of the world economy) and at the micro level (i.e.,
globalization of the business and the firm). Globalization of the world
economy is achieved, quite obviously, by globalizing the national
economies.
• Globalization of the economies and globalization of business are very
much interdependent.
REASONS FOR GLOBALIZATION
• The rapid shrinking of time and distance across the globe
thanks to faster communication, speedier transportation,
growing financial flows and rapid technological changes.

• The domestic markets are no longer adequate rich. It is

necessary to search of international markets and to set up
overseas production facilities.

• Companies may choose for going international to find

political stability, which is relatively good in other
countries.

• To get technology and managerial know-how.

• Companies often set up overseas plants to reduce high
transportation costs.

• Some companies set up plants overseas so as to be close to

their raw materials supply and to the markets for their finished
products.

• Other developments also contribute to the increasing

international of business.

• The US, Canada and Mexico have signed the North American
Free Trade agreement (NAFTA), which will remove all barriers to
trade among these countries.

• The creation of the World Trade Organization (WTO) is

stimulating increased cross- border trade.
 Nature of Globalization
1. Integration through interdependence

2. Free market economies

3. Free movement of products

4. Free flow of factors of production
5. Standardized technology 6. Information and
communication
6. Global corporation with global image=
Forms of globalization

•Economic globalization

•Political globalization

•Cultural globalization

•Environmental globalization
Effects of Globalization
•Liberalized International Trade

•Import Penetration

•Foreign Direct Investment

•Multinational Companies

•Competitive Environment

•Workforce Diversity
ADVANTAGES OF GLOBALIZATION
• Productivity grows more quickly when countries produce
goods and services in which they have comparative advantage.
• Living standards can go up faster.

• Global competition and imports keep a lid on prices, so

inflation is less likely to derail economic growth.

• An open economy spurs innovation with fresh ideas from

abroad.

• Export jobs often pay more than other jobs.

• Unfettered capital flows give access to foreign investment and

keep interest rates low.
DISADVANTAGES
• Millions have lost jobs due to imports or production shifts
abroad. Most find new jobs that pay less.

• Millions of others fear losing their jobs, especially at those

companies operating under competitive pressure.

• Workers face pay cut demands from employers, which

often threaten to export jobs.

• Services and white-collar jobs are increasingly vulnerable to

operations moving offshore.

• Employees can lose their comparative advantage when

companies build advanced factories in low-wage countries,
making them as productive as those at home.
ESSENTIALS FOR GLOBALIZATION

•They are some essential conditions to be satisfied on the part

of the domestic economy as well as the firm for successful
globalization of the business.

• Business freedom There should not be unnecessary

government restrictions like import restriction, restrictions on
sourcing finance or other factors from abroad, foreign
investments etc. the economic liberalization is regarded as a
first step towards facilitating globalization.

• Facilities The extent to which an enterprise can develop

globally from home country base depends on the facilities
available like the infrastructural facilities.
• Government support Government support may take the form
of policy and procedural reforms, development of common
facilities like infrastructural facilities, R & D support, financial
market reforms and so on.
• Resources Resourceful companies may find it easier to thrust
ahead in the global market. Resources include finance,
technology, R & D capabilities, managerial expertise, company
and brand image, human resource etc.
• Competitiveness A firm derives competitive advantage from
any one or more of the factors such as low costs and price,
product quality, product differentiation, technological
superiority, after sales services, marketing strength etc.
• Orientation A global orientation on the part of the business
firms and suitable globalization strategies are essential for
globalization.
Problems of International Trade
• Different laws and regulations • Different financial and currency systems •
Immobility of factors of production • Risks in transit • Chain of intermediaries

Multinational Companies It is defined as the company engaged in

producing and selling goods or services in more than one country. The dynamics of
the business environment fostered by the drastic political changes in the erstwhile
communist and socialist countries and the economic liberalization across the world
has enormously expanded the opportunities for the multinational corporations, also
known by such names as international corporation, transnational corporation,
global corporation (or firm, company or enterprise) etc. “A company that controls
production facilities in more than one country, such facilities having been acquired
through the process of foreign direct investment. Firms that participate in
international business, however large they may be, solely by exporting or by
licensing technology are not multinational enterprises.” Types of MNCs 1. Raw
material Seekers 2. Market Seekers 3. Cost Minimizers
Advantages of MNCs

• MNCs help increase the Investment level and thereby the

income and employment in host country.
• The transnational corporation has become vehicles for the
transfer technology, especially to the developing countries.
• They also kindle a managerial revolution in the host
countries through professional management and the
employment of highly sophisticated management techniques.
• The MNCs enable the host countries to increase their exports
and decrease their import requirements.
.
• They work to equalize the cost of factors of production
around the world.
• MNCs provide an efficient means of integrating national
economies.
• The enormous resources of the multinational enterprises
enable them to have very efficient research and
development systems. Thus, they make a commendable
contribution to inventions and innovations.
• MNCs also stimulate domestic enterprise because to
support their own operations, the MNCs may encourage
and assist domestic suppliers.
• MNCs help increase competition and break monopolies
Disadvantages of MNCs

• The MNCs technology is designed for worldwide profit

maximization, not the development needs of poor countries.

• Through their power and flexibility, MNCs can evade or

undermine national economic autonomy and control, and their
activities may be inimical to the national interests

• MNCs may destroy competition and acquire monopoly powers.

• The tremendous power of the global corporations poses the risk

that they may threaten the sovereignty of the nations in which
they do business.
.
• MNCs retard growth of employment in the home country.

• The transnational corporations cause fast depletion of some

of the nonrenewable natural resources in the host country.
They have also been accused of the environmental problems.

• The transfer pricing enables MNCs to avoid taxes by

manipulating prices on intra company transactions

• The MNCs undermine local culture and traditions; change

the consumption habits for their benefits against the long-
term interests of the local community
Foreign Direct Investment (FDI)
• It is the investment made from one country to another by
Multinational Companies.
• It is long term capital investment, involve in acquisition of
domestic firms by foreign based factories or any other type
of business firm.
• The investor enjoys managerial control over the assets of
acquired firm
Objectives of FDI:
• Expands sales in foreign
• Gain excess to raw material suppliers
• Take advantage of cheap labor
• Transfer of technology management and technical skills to
foreign skills
[World Trade Organization]
• WTO was established on 1st Jan. 1995.
• It is successor to the GATT( General Agreement on Tariffs and Trade)
which was signed on 30th Oct. 1947 by 23 nations and came into force on
1st Jan. 1948.
• WTO is a legal and institutional foundation of multinational trading
system.
• It is the global platform on which trade relation among countries evolve
through collective debate, negotiation and adjudication.
• It covers trade in goods, services and intellectual property.
• It is significantly strengthened legal mechanism for resolving trade
disputes, multilaterally.
• It is the body which regularly conduct research and studies on trade
facilitation.
• regional grouping is the first phase in the creation of a smoothly
functioning multi-trading system
 It is based on rules of trade which need to be
followed by all the members.

• Trade liberalization is main focus of WTO.

• It has given due attention to investment and issue of
boarder economic cooperation.
• To integrate world economy, it has emphasized in
elimination of barriers in trade and investment.
• WTO has generated growth and encouragement to
competitive activity which benefit to mankind across the
globe.
• WTO has accepted and recognized the importance and
relevance of regional grouping as the
Objectives of WTO

The purpose of WTO is to promote free trade by persuading countries

to abolish import tariff and other barriers. It offers a system for
international commence.

The main objectives of WTO are as follow:

• Raise standards of living

• Increase incomes
• Promote full employment
• Expand production and multilateral trade
• Protect environment through optimum utilization of
world’s resources for sustainable development.
• Take positive steps to secure a better share of growth in
trade of developing and least developed countries.
Functions of WTO

• Administer and implement multi-lateral trade

agreement
• Act as a forum for multi-lateral trade negotiation
• Seek to resolve trade disputes
• Oversee national trade policy
• Cooperate with other international institution involved
in global economic policy making such as IMF
[international monetary fund] and World Bank.
• Maintain trade related data base.
• Act as a watch dog of international trade
• Provide technical assistance and training for
developing countries and LDC.