IBUS - Ch. 1 and 2 : Globalization/ Localization

Textbook and lecture video

globalization

the shift toward a more integrated and interdependent world economy

globalization of markets

merging of distinct national markets into one global marketplace, global brand recognition (ex. coca cola, apple, starbucks)

globalization of production

firms produce globally to: lower costs, access resources (ex. apple’s supply chain)

factors of production

inputs to production: labor, land, capital, technological know-how

international trade

exploiting goods or services to consumers in another country

foreign direct investment (FDI)

investing resources in business activities outside its home country

general agreement on tariffs and trade (GATT)

created after WWII, treaty that committed nations to lowering trade barriers; led to the world trade organization, overall help kickstart globalization

world trade organization (wto)

replaces gatt in 1995, enforces global trade rules

international monetary fund (imf)

maintains financial stability, provides loans to countries

world bank

provides development aids

multinational enterprise (mne)

firm with productive activities in 2+ countries, use foreign direct investment

mne now - more global, more complex, not just from developed countries anymore

moore’s law

microprocessor power doubles and cost halves every 18 months

BRIC countries

brazil, russia, india, china — fast growing emerging economies

outward stocks for FDI

total cumulative value of foreign investments by firms based in a nation

group of twenty (g20)

forum of finance ministers/ central bankers from 19 larger

what are they layers in globalization?

• broadening

• deepening

• interdependence

what is broadening in globalization?

when more countries are involved

what is deepening in globalization?

strengthening the connection

what is interdependence in globalization?

when countries reply on each other

drivers of globalization

1. decline in trade barriers - lower tariffs, increase trade agreements

2. technology. change - internet, shipping (containers), communication

3. more companies participating in global commerce

4. globalization of markets

5. globalization of production

changing global economy

trends:

• emerging markets growing (china, india)

• u.s. dominance declining (relatively)

• trade & FDI increasing

how globalized are we?

semi-globalization

international business

firms doing cross border economic activity

localization

segmentation and contraction of interactions between countries (countries remai different and separated)

forces of localization

CAGE framework (Ghemawat)

1. culture distance - language, religion, norms

2. administration distance - laws, political systems, corruption, colonial ties

3. geographic distance - physical distance, transportation, infrastructure, climate

4. economic distance - income levels, resource differences

glocalization

both globalization and localization happening at the same time

strategic trade-offs

firms must decide:

• global integration of value chain - centralized vs spread globally

  • apple = highly integrated

  • local firms = more separated

• adaptation of product/marketing - standardize vs localize

  • coca cola - more standardized

  • mcdanks - adapted menus

• organizational centralization vs. decentralization

  • centralized = consistency

  • decentralized = local responsiveness

• market entry decisions - where and when to enter

  • depends on: risk, culture, competition, institutions

• integrated ethical strategy (ethics, behaviors)

  • ex; labor practices, environmental standards

why is there not more trade?

barriers exit to accessing each other’s markets, localization limits globalization

GDP vs GNI

• gross domestic product = production inside country

• gross national income = includes income from abroad

• ex. Honda in U.S. → U.S. GDP, Japan GNI

outsourcing

Sourcing the goods and services from different locations to take advantage of differences in cost and quality of factors of production e.g. land, labor, energy, and capital

institution

formal and informal rules that shape behavior and reduce uncertainty

formal institution

laws, regulations, government

ex. legal systems, property rights

informal institution

culture, norms, and social expectations

ex. seattle freeze, relationship based behaviors

3 pillars of institution

• regulative - laws

• normative - social pressure, what you should do, peer pressure

• cognitive - just how things are, habit

why institutions matter?

• provide rules of the game

• reduce uncertainty

• shape behaviors

liability of foreignness

disadvantage firms face when entering a foreign country

ex. dont know rules, cultural differences, institutional differences

strong vs weak institution

strong - clear rules, enforced laws

weak - unclear rules, poor enforcement

uncertainty types - rules unclear

ambiguous institutions

uncertainty types - rules exist but not followed

unenforced institutions

institutional differences

create business risk

• corruption, bribes

• weak IP protection, fake goods

• safety issues (china toys, milk)

• legal differences (kinder eggs in germany)

FCPA

foreign corrupt practices act

ex. even if bribery is normal, still illegal for US firms

common law

precedent, what happened before guides what happens now, flexible, judges interpret cases, (United States)

civila law

bases on written rules, judges follow a code, less flexible (France, Germany)

theocratic law

religion based

market economy

private ownership, supply and demand decide everything, little government control, competition + market pressure = risk

ex. coffee market - low gov risk, high comp risk

command economy

government controls production, pricing, resources, little to no private ownership

ex. north korea - very high gov risk

mixed economy

combination of market + government control, most country today

ex. US still had regulations, taxes and , laws

political risks

• sanctions

• boycotts

• terrorism

voice strategy (adapt)

• influence government

• lobbying

• voice is big business (apple, meta)

exit strategy

leave the country

ex. fiji water case