Baba globalisation and internationalisation

What is globalisation and what are its characteristics?

Globalisation is the economic integration of different countries through increasing freedoms in the cross-border movement of people, goods, services, technology and finance.

Characteristics of globalisation include:

· Increasing foreign ownership of companies

· Increasing movement of labour and technology across borders

· Free trade in goods and services

· Easy flows of capital across borders

In 2000, the value of global trade was approximately $6.45 trillion; by 2020, this figure was $19 trillion. Numerous factors have contributed to the rapid increase in the pace of globalisation.

What are the reasons for increased globalisation? (Political change and reduced transport costs)

Political change: Changes in the government of a country can influence the country's attitude to trade. E.g. China joined the World Trade Organisation (WTO) in 2001, which led to a significant increase in exports.

Reduced cost of transport and communication: Economies of scale due to innovation in containerisation on large ships has reduced business costs. Technological advancements due to the internet and mobile technology have made it easier for buyers and sellers to connect with one another.

What are the reasons for increased globalisation? (Transnational companies and investment flows)

Increased significance of transnational companies: Transnational companies have their headquarters in one country but have other branches in other countries. E.g. Nike has its headquarters in Oregon, United States. As of 2022, they have 1046 retail stores throughout the world. With increasing numbers of transnational companies operating globally, there is an increased pressure by countries to engage in free trade.

Increased investment flows (FDI): FDI is important for job and wealth creation within an economy. It allows businesses to establish themselves in countries where they may face trade barriers.

What are the reasons for increased globalisation? (Migration, labour force and structural change)

Migration (within and between economies): Migration is the movement of people from one location to another. Migration has led to increased globalisation as better transportation and deregulation have allowed workers to have more flexibility when looking for work. E.g. In 2022, the United Arab Emirates had the highest proportion of immigrants at 88%.

Growth of the global labour force: The global labour force has grown significantly, especially due to the growth of emerging economies such as India and China. This has increased globalisation due to the following reasons: More people in work means more income to spend on goods and services, boosting global demand. An increased supply of labour leads to falling wages, which reduces costs. More people working generates increased levels of entrepreneurship.

Structural change: This occurs when a country, industry or market changes which sector of industry they operate in. E.g. the UK has shifted from the manufacturing sector to the tertiary sector over the last 50 years. Offshoring speeds up the process of globalisation.

Why does globalisation matter to business?

Globalisation offers businesses huge chances to grow and cut costs, but it also brings greater competition, more complex operations and risk. Companies that plan well, perhaps by adapting products, securing reliable global supply chains and understanding local cultures, can turn global reach into long-term success.

Why globalisation matters to business:

1. Larger markets: More customers - Selling in several countries multiplies the potential customer base well beyond the limits of the home market. Economies of scale - A bigger output allows fixed costs, such as R&D, marketing and equipment, to be spread over more units, lowering average costs and helping prices stay competitive

2. Cheaper or better inputs: Global sourcing - Firms can shop around the world for raw materials, components or services at the best balance of price and quality. Specialist skills - Access to clusters such as India's IT sector or Germany's precision engineering brings in expertise that may be scarce at home

3. Risk spreading: Diversified revenue - Weak demand in one region can be balanced by strength in another, making overall sales less volatile

4. Knowledge and technology transfer: Learning from partners - Joint ventures, licensing and worldwide supply chains expose firms to new ideas, production techniques and management practices. Innovation stimulus - Competing on a global stage pushes businesses to improve products and processes faster

5. Access to finance: Broader funding sources - Listing on foreign stock exchanges or issuing global bonds widens the pool of investors and can lower the cost of capital

What is the importance of emerging economies?

In the past twenty years, the economic power of less economically developed countries has increased. Emerging economic powers of countries within Asia, Africa and other parts of the world include:

· BRICS: Brazil, Russia, India, China and South Africa

· MINT: Mexico, Indonesia, Nigeria and Turkey

Emerging economies have a growing middle class with increasing incomes, which allows their citizens to spend more on domestic goods and imported goods from abroad. This increases opportunities for international firms who sell their goods and services in these emerging economies. It also means British firms can benefit from low production costs if they move facilities such as factories to these countries. However, their lower cost base, including their lower labour costs, means they are becoming a competitive threat for British firms.

What are the opportunities of emerging economies for UK businesses?

New customers: Brazil, India, Indonesia, Turkey and others have fast-growing middle classes that want higher-quality food, fashion, leisure and financial services. Many British businesses specialise in these goods and services.

Cheaper production bases: Setting up factories or outsourcing tasks in countries such as Vietnam or Mexico can cut labour and overhead costs.

Access to natural resources: Emerging economies often control key raw materials (e.g. lithium in Chile, iron ore in Brazil). Forming supply contracts can secure these valuable inputs at favourable prices.

Joint-venture partners: Teaming up with local firms helps UK brands navigate regulations and distribution, gaining a first-mover advantage over slower rivals.

Market diversification: Earning revenue in several regions spreads risk if sales slow in the UK or EU.

What are the threats of emerging economies for UK businesses?

Stronger competition: Growing firms from China, India or Turkey may enter the UK and European markets with lower prices or new digital ideas.

Political and currency volatility: Sudden policy shifts, trade barriers or exchange rate volatility can increase costs and disrupt sales forecasts.

Intellectual property risks: Weaker patent or copyright enforcement in some countries makes copying easier and can erode a brand's value.

Supply chain uncertainty: Poor infrastructure, port congestion or extreme weather may delay shipments and raise logistics costs.

Cultural and regulatory hurdles: Unfamiliar legal systems, different product standards and business customs can add time, cost and compliance risk to any expansion plan.

Why do businesses target international markets? (Sales growth and risk spreading)

Pursuing sales growth in larger or faster-growing markets: When demand in the home market begins to level off, entering overseas markets allows a firm to attract new groups of customers to keep revenue rising. E.g. Apple expanded aggressively into China and, more recently, India; international sales now account for well over half of its total turnover.

2. Spreading risk through market diversification: Operating in several economies means that an economic downturn or a government policy change is less likely to threaten the whole business. E.g. Starbucks relied on rising sales in China and the Asia-Pacific region to offset periods of weaker sales in North America.

Why do businesses target international markets? (Economies of scale and product life cycle)

Gaining economies of scale and lower unit costs: Supplying a global customer base supports longer production runs, bulk purchasing and shared research and development. E.g. Toyota builds cars like the Corolla on shared global designs, making them in large numbers for sale worldwide, which lowers the cost of each car.

4. Extending the product life cycle: A product that is mature at home may still be in its introduction or growth phase abroad, allowing the firm to generate additional revenue without having to change the product's design. E.g. Netflix launched its streaming service in South America and Africa after US subscriber growth slowed.

What is exporting and what are its advantages and disadvantages?

Exporting is the act of selling goods or services produced in one country to customers located in another country.

· A business manufactures or supplies the product at home

· It finds overseas buyers, usually through agents, distributors, trade fairs or online platforms

· The firm handles (or outsources) tasks such as packaging for international transport, arranging shipping, completing export paperwork and complying with foreign regulations

Exporting is the simplest step into international trade. The product is still made in the home country; only marketing and delivery cross national borders.

Advantages:

· Extra sales revenue: Overseas customers add to total demand and income

· Economies of scale: Higher output for export can lower average costs

· Risk spreading: Sales in other countries can offset a slump in revenue at home

· Builds reputation: Selling abroad can raise the brand's profile worldwide

Disadvantages:

· Transport costs: Shipping goods long distances is expensive

· Complex paperwork: Export licences, customs forms and product standards take time to meet

· Exchange rate risk: Currency movements can reduce profit margins

· Less market control: It is harder to manage marketing and customer service from afar

What is licensing and what are its advantages and disadvantages?

Licensing is a legal arrangement where a business (the licensor) grants a foreign company (the licensee) the right to make or sell its product, use its brand name or make use of technology in return for a fee or royalty payment.

· The product is usually made and marketed by the licensee in its own country

· The licensee follows set standards to protect the licensor's brand or patents

· The licensor monitors quality and may exert some influence on strategy in the new market

Case Study: Kurkure is a popular Indian snack brand owned by PepsiCo. In some parts of India, especially in smaller towns and rural areas, PepsiCo licenses the production and distribution of Kurkure to local food manufacturers. PepsiCo allows local manufacturers to produce and sell Kurkure under its brand. The local firms must follow PepsiCo's strict quality and branding standards. In return, these firms pay royalties to PepsiCo for the right to use the Kurkure brand.

Advantages:

· Low capital investment: No need to build factories overseas

· Faster market entry: A licence can be signed more quickly than setting up a subsidiary

· Steady royalty income: A steady flow of income with limited ongoing effort

· Uses local expertise: The licensee already understands its home market

Disadvantages:

· Less control: Quality and brand image depend on the licensee

· Risk of creating a competitor: The licensee learns the know-how and may break away and set up their own business

· Limited profit share: Royalties are only a fraction of potential full market profits

· Difficult to monitor: Enforcing intellectual property rights abroad can be costly

What is a strategic alliance and what are its advantages and disadvantages?

: A strategic alliance is a formal agreement where two (or more) separate businesses team up to work on a specific task, while each business keeps full ownership of itself.

· Examples include designing a new product, making it, selling it or distributing it

· The partners agree on clear goals. E.g. how they will enter a new country together, how research costs will be shared or how savings or profits will be split

· Each firm brings something it already does well so the combined effort is stronger than going alone. Examples include ideas, production, sales outlets, or a strong brand

· They do not set up a new joint company

· They stay independent and follow a contract that sets out who does what and how the rewards are shared

Advantages:

· Pooled skills: Each firm gains know-how or technology it does not have

· Quicker entry: Working together helps a new launch happen faster

· Shared costs and risks: R&D, marketing or other agreed costs are split

· Learning: Staff can pick up new ideas and methods from the partner firm

Disadvantages:

· Skill leakage: The partner might copy or reveal a firm's specialist know-how

· Different goals: Partners may have different objectives which can lead to disagreement

· Slower decisions: Both sides must agree before acting, which may mean opportunities are missed

· Extra management: Meetings and coordination add extra work for managers

What is direct investment and what are its advantages and disadvantages?

Direct investment, often called foreign direct investment (FDI), is when a business sets up or buys assets, such as factories, offices or shops, in another country. Typical forms include:

· Greenfield investment: building a brand-new site from the ground up

· Acquisition: buying an existing foreign firm to gain its sites, staff and customers in one go

· Major expansion: turning a small overseas branch into a full production base

Examples of UK businesses making direct foreign investments:

· Jaguar Land Rover: In 2018, JLR opened a brand new £1bn assembly plant in Slovakia. The greenfield investment gave JLR full control over production close to key European customers. It also freed-up space in its crowded UK factories

· Tesco: Britain's largest supermarket chain has spent more than two decades building and expanding hypermarkets in Hungary and the Czech Republic. These stores, distribution centres and local head offices were financed directly by Tesco

Advantages:

· Full control: The parent company decides on quality, branding and day-to-day running

· Keeps all profits: No need to share sales revenue with partners

· Closer to customers: Making products locally can reduce delivery times and avoids tariffs

· Access to local resources: The firm can use skilled labour, raw materials or government incentives such as tax reductions

Disadvantages:

· Very high cost: Buying or building abroad needs a lot of money up front

· Risk exposure: Political changes or recessions in the host country can hit the investment hard

· Management complexity: Running operations far from home requires more coordination

· Cultural and legal hurdles: Unfamiliarity with laws and business customs can slow decisions and raise costs

What factors influence the attractiveness of international markets? (Market size and stability)

When a business is deciding whether to move into a new country, it needs to determine whether it will support it in meeting its long-term strategic objectives. Managers weigh up several key features of the target economy before committing time and money.

1. Market size and growth rate: Large populations with rising incomes, or smaller markets growing quickly, offer more potential customers and fast sales growth

2. Economic and political stability: Low inflation, steady government policies and the absence of conflict reduce the risk of sudden losses or business disruption

What factors influence the attractiveness of international markets? (Legal, competition and culture)

Legal and regulatory environment: Clear, business-friendly laws on property rights, taxes and product standards make it easier and cheaper to operate

4. Competitive intensity: Entering a market with few strong rivals can be more attractive than trying to compete with established global brands

5. Cultural and consumer similarity: When tastes, language and buying habits are similar to those at home, a business can adapt its product and marketing with less cost and risk

What factors influence the attractiveness of international markets? (Infrastructure)

Quality of infrastructure: Reliable transport, power, internet and supply networks cut delays and costs, helping a business meet customer demand efficiently.

Countries with high quality infrastructure, are politically stable and are culturally similar are likely to be attractive markets.

What is offshoring and what are its advantages and disadvantages?

Offshoring occurs when a business sets up operations in another country to carry out certain business processes so as to:

· Take advantage of lower labour costs

· Gain access to specialised skills

· Expand into new markets

Common examples of offshoring practices include call centres in foreign countries, software development teams or manufacturing plants established in countries with cheaper labour.

Advantages:

· Labour costs are often lower in offshore locations which reduces costs (salaries, benefits etc)

· Allows businesses to tap into skilled labour that may not be readily available domestically

· By offshoring operations to different time zones, businesses can take advantage of 24/7 operations and provide better customer support

· By establishing a presence in a foreign country, businesses can gain local market insights, develop relationships with customers and spot new growth opportunities

Disadvantages:

· Offshoring can present challenges in terms of communication and language differences which may result in delays

· Maintaining quality control can be more challenging when operations are moved offshore

· Offshoring involves sharing sensitive information and intellectual property with external parties which may raise concerns about data security or confidentiality

· Offshoring can result in domestic job losses as operations are shifted to

lower-cost locations

What is reshoring and what are the reasons to reshore?

Reshoring occurs when a business brings back its production activities to its home country from abroad. It involves reversing the previous decision to offshore or outsource those activities to another country. There are several reasons why a company may choose to reshore its operations:

1. Cost considerations: The initial cost advantages of offshoring may reduce due to factors such as rising labour or transportation costs in the foreign country

2. Quality control: By reshoring, companies can have better control over the manufacturing processes and ensure higher quality control standards, which may lead to improved customer satisfaction

3. Intellectual property protection: By bringing manufacturing back to their home country, they can reduce the risk of intellectual property theft

4. Supply chain resilience: The COVID-19 pandemic highlighted the vulnerabilities of global supply chains when disruptions in transportation, logistics and international trade led to delays and shortages of critical goods. Reshoring reduces dependence on foreign suppliers

5. Market proximity: Can allow companies to be closer to their target markets, which can lead to faster delivery times, reduced transportation costs and improved responsiveness to customer needs

What is a multinational company and what are its advantages and disadvantages?

A multinational company (MNC) is a business that is registered in one country but has manufacturing operations or outlets in different countries. E.g. Starbucks' headquarters are in Washington, USA but they have 32,000 stores in 80 countries. Factors such as globalisation and deregulation have contributed to the growth of MNC's. MNC's usually choose locations based on factors such as cost advantages and access to markets. E.g. Nike originates from the USA but 50% of their manufacturing takes place in China, Vietnam and Indonesia due to the lower production costs in these countries.

Advantages:

· Access to larger markets: Selling in many countries widens the customer base and is likely to increase sales revenue

· Economies of scale: Higher worldwide output means bulk buying and shared R&D, reducing average costs

· Diversified risk: Weak sales in one region may be offset by stronger sales elsewhere, steadying a firm's overall performance

· Access to global talent and resources: A firm can tap into the best skills, technology and raw materials wherever they are found

Disadvantages:

· Cultural and language gaps: Misunderstandings can weaken marketing messages and slow decision-making

· Political risk: Changes in laws, taxes or government stability abroad can disrupt operations or cut profits

· Complex coordination: Managing factories, staff and supply chains across time zones raises admin costs

· Greater ethical scrutiny: Media and pressure groups may criticise labour or environmental practices abroad, damaging the brand

What pressures do managers face when managing international business?

When firms operate across many countries, managers face two powerful and competing pressures. They must decide how far to adapt to local conditions while also trying to keep costs low through worldwide efficiency.

Pressures for local responsiveness: Businesses face pressure to tailor their products, marketing and operations to each country in which they operate. Managers may need to decentralise certain decisions, allow country managers to adapt the marketing mix, and sometimes run multiple product versions side by side.

Pressures for cost reduction: Businesses face pressure to strip waste to achieve the lowest possible unit cost worldwide. Managers may look to centralise R&D and production, design globally standard products, and use uniform marketing where possible to keep costs low.

What are the differences between international markets?

Difference | Explanation |

|---|---|

| Customer tastes and habits | Food portions, fashion sizes and plug fittings can vary widely, so standardised products may not sell without adaptations |

| Local laws and standards | Safety rules, food labelling and data-privacy laws can force design or packaging changes |

| Cultural sensitivities | Language, images and branding that work at home may offend or confuse elsewhere, risking reputational damage |

| Host government demands | Some countries' governments insist on local sourcing or joint ventures. E.g. Until 2022 China made it a condition of entry that foreign car makers could only manufacture cars in the country if they set up a 50:50 joint venture with a local partner |

| Local competitors | Domestic rivals often know the market better, so matching them may need customised features or specialised customer service |