Globalizing Business Lecture Notes

Globalizing Business

Dalai Lama's Perspective on Humanity

  • Dalai Lama Quote: "I am one of the 7 billion human beings alive today. We each have a responsibility to think about humanity and the good of the world because it affects our own future. We weren’t born on this planet at this time to create problems but to bring about some benefit."

Agenda Overview

  • International Business and Global Business

  • Globalization

    • Two key dimensions

    • Measuring globalization

    • Pros and cons of globalization

    • Three views on globalization

  • The Role of Emerging Economies

  • Reasons to Study Global Business

  • A Unified Framework for Studying Global Business

Defining Global Business

  • International Business (IB)

    • (1) A business (firm) that engages in international (cross-border) economic activities and/or (2) The action of doing business abroad.

  • Global Business

    • Business within and across various economies.

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Firms in Global Business

  • International Firms

    • Engage in cross-border activity such as exporting.

  • Multinational Enterprise (MNE) / Multinational Corporation (MNC)

    • Definition: A firm that engages in foreign direct investment (FDI).

    • Foreign Direct Investment (FDI): Investment in, controlling, and managing value-added activities in other countries.

    • UNCTAD Criteria: Minimum of 10% ownership required for classification as FDI.

    • Emphasis on firm-level investments rather than country-level/government.

  • Are MNEs Always Global?

    • Discussion of regional MNEs.

  • Domestic Firms

    • Competing and/or collaborating with foreign entrants in their markets.

Activities of IB and MNEs

MNEs Impact on Global Economy

  • As of 2015, there were approximately 85,000 MNEs operating globally; this is a conservative estimate.

  • The world’s 500 largest MNEs accounted for:

    • Over 50% of the world’s trade.

    • Over 90% of the world’s stock of FDI in recent decades.

  • The 2018 Fortune Global 500 list:

    • Contributed $30 trillion in revenues and $1.9 trillion in profits to the global economy in 2017.

  • These largest MNEs are concentrated within the “triad” of North America, Europe, and Asia, linking to the concept of regional MNEs.

Specifics on Largest Firms (2023)

  • Top ten firms measured by sales in USD:

    1. Walmart: Revenues $611,289M; Profits $11,680M; Employees 2,100,000

    2. Saudi Aramco: Revenues $603,651M; Profits $159,069M; Employees 70,496

    3. State Grid: Revenues $530,009M; Profits $8,192M; Employees 870,287

    4. Amazon: Revenues $513,983M; Profits $-2,722M; Employees 1,541,000

    5. China National Petroleum: Revenues $483,019M; Profits $21,080M; Employees 1,087,049

    6. Sinopec Group: Revenues $471,154M; Profits $9,657M; Employees 527,487

    7. Exxon Mobil: Revenues $413,680M; Profits $55,740M; Employees 62,000

    8. Apple: Revenues $394,328M; Profits $99,803M; Employees 164,000

    9. Shell: Revenues $386,201M; Profits $42,309M; Employees 93,000

    10. UnitedHealth Group: Revenues $324,162M; Profits $20,120M; Employees 400,000

Changes in Fortune Global 500 Rankings

  • China (including Hong Kong) has 136 companies on the list, the highest of any nation.

  • The U.S. ranks second with 124 firms.

  • Japan ranks third with 47 firms.

  • For the first time, companies in Chinese-speaking countries generated higher total revenue than U.S. companies on the list.

The Impact of Globalization

  • Globalization: Reshapes our lives due to new technologies decreasing costs of global communication and travel.

  • Resulting exposure to other cultures and practices.

  • Reduction of trade and investment barriers enables firms to enter foreign markets and increases competition.

  • Companies can now access local expertise and favorable business climates globally.

Key Dimensions of Globalization

  • Trend: Greater economic, cultural, political and technological interdependence among national institutions and economies.

  • Globalization of Markets: Convergence in buyer preferences across global markets.

  • Globalization of Production: Dispersal of production activities worldwide aimed at minimizing costs or maximizing quality.

Measurement of Globalization

  • Economic Globalization: Involves trade and investment flows, as well as trade barriers.

  • Social Globalization: Refers to the flow of ideas and information.

  • Political Globalization: Measures the degree of political cooperation between countries.

Quick Quiz

  1. Which country made the shirt you are wearing?

    • Options: (A) China (B) Malaysia (C) Mexico (D) Romania (E) US

  2. Which country made your mobile device?

    • Options: (A) China (B) Germany (C) Singapore (D) Taiwan (E) US

  3. How many member countries does the G-20 have?

    • Options: (A) 20 (B) 21 (C) 22 (D) 19 (E) 18

  4. Which city has the largest number of Fortune Global 500 company headquarters?

    • Options: (A) Beijing (B) Hong Kong (C) London (D) New York (E) Tokyo

  5. A 2,000-employee manufacturing plant is closing in a developed economy, and production is moving to an emerging economy. How many of the 2,000 jobs will the company keep?

    • Options: (A) 0 (B) 5-10 (C) 10-20 (D) 20-30 (E) 30-50

Discussion Questions

  • What benefits might companies gain from the globalization of markets and production?

  • What challenges might companies face due to globalization?

Benefits and Challenges of Globalization of Production

Potential Benefits

  • Cost advantages (e.g., cheaper labor, land, capital).

  • Quality advantages (e.g., access to specialized technical expertise).

  • Increased access to production inputs.

Potential Challenges

  • Difficulties in transferring knowledge and routines effectively.

  • Risks in monitoring activities across borders.

  • Safeguarding proprietary information and assets.

  • Necessity for focus on environmental and social responsibilities.

Benefits and Challenges of Globalization of Markets

Potential Benefits

  • Creation of new market opportunities for growth.

  • Potential to level income streams, mitigating seasonal revenue fluctuations.

  • Reduced marketing costs through wider reach.

  • Spreading R&D costs over a larger market base.

Potential Challenges

  • Overestimating convergence of tastes and preferences, leading to misalignment with local needs.

  • Potential necessity for organizational culture adaptations; globalization does not imply complete standardization.

Perspectives on Globalization

  • Three Views: Globalization may be seen as:

    • A new force in modern times.

    • A long-standing historical process.

    • A pendulum, swinging between extremes in different historical contexts.

Pendulum View

  • Globalization has fluctuated, with notable downturns like the Great Recession (2008-09).

  • Emphasizes risk management and scenario planning for preparing for various potential future scenarios.

Semiglobalization

  • Definition: A perspective suggesting that barriers to market integration are significant but not absolute.

  • Reference: Video by Pankaj Ghemawat on the concept that the world is not entirely flat.

The Globalization Debate

  • The necessity for business students and leaders to be mindful of their biases and potential blind spots that could hinder decision-making.

  • Impact Assessment of Globalization:

    • Effects on jobs and wages.

    • Influences on labor and environmental standards.

    • Implications for income inequality and national sovereignty.

    • Effects on cultures and the role of NGOs.

  • Encouragement of group discussions regarding these concerns using relevant examples.

Global Business and Emerging Economies

Emerging Economies (EEs)

  • Definition: "Low income, rapid-growth countries using economic liberalization as their primary engine of growth" (Hoskisson et al., 2000: 249).

  • Characterized by "institutional voids" (Khanna & Palepu, 2010):

    • Underdeveloped capital, labor, and product markets.

    • High transaction costs for buyers and sellers.

    • Shortcomings in institutions that facilitate market functions.

Importance of EEs

  • Rapidly growing markets contributing to global GDP growth.

  • Platforms for cost reduction and innovation.

  • Emergence of strong new competitors in the global market.

Projected Share of Global GDP by 2050

Data Overview

  • US: 28% (2004), 27% (2025), 26% (2050)

  • EU: 34%, 25%, 15%

  • Japan: 12%, 7%, 4%

  • China: 4%, 15%, 28%

  • India: 2%, 5%, 17%

  • Others: 20%, 21%, 10% (Source: Gupta & Wang, 2009)

Key Economic Terms

  • Purchasing Power Parity (PPP): A conversion that determines equivalent amounts of goods and services that different currencies can purchase.

  • Gross Domestic Product (GDP): The sum of value added by resident firms, households, and governments in an economy.

  • Gross National Product (GNP): GDP plus income from non-resident sources abroad.

  • Gross National Income (GNI): Similar to GDP, this is used by the World Bank and international organizations instead of GNP.

The Significance of BRIC and Emerging Markets

  • BRIC: Brazil, Russia, India, and China.

  • BRICS: Including South Africa.

  • Triad: North America, Western Europe, and Japan as economic powerhouses.

  • The Great Transformation: Refers to the shift in economic weight towards emerging economies and BRIC(S).

Typology of Emerging Economies

  • Figure 1.1: Classification of emerging economies based on institutional development, including:

    • Emerging Economies (e.g., India)

    • Traditional Emerging Economies (e.g., Belarus)

    • Newly Developed Economies (e.g., South Korea)

    • Mid-Range Emerging Economies (e.g., China, Brazil, Russia)

Base of the Pyramid (BoP)

  • Definition: Economies where individuals make less than US$2,000 per capita annually.

  • Reverse Innovation: Innovations originating in emerging markets that spread globally (Example: Mahindra & Mahindra’s small-horsepower tractors).

The Global Economic Pyramid

  • Figure 1.2: Visual representation of global economic tiers:

    • Top Tier: Per capita GDP/GNI > $20,000 (Approx. 1 billion people).

    • Second Tier: Per capita GDP/GNI $2,000-$20,000 (Approx. 1 billion people).

    • Base of the Pyramid: Per capita GDP/GNI < $2,000 (Approx. 5 billion people).

Importance of Studying Global Business

  • Table 1.1: Questions to reflect on regarding motivations for studying global business.

Working in a Global Firm

  • Expatriate Manager (Expat): A manager working abroad.

  • International Premium: A substantial salary increase received when working overseas.

  • Discussion: What benefits might expatriate managers experience?

Important IB Frameworks

  • Key Question: What determines the success and failure of firms globally?

  • Institution-based View: Success and failure of firms are shaped by institutions (rules of the game).

  • Resource-based View: Focuses on firm-specific resources and capabilities.

    • Liability of Foreignness: The inherent disadvantages faced by foreign firms in host countries due to their non-native status.

Unified Framework for Global Business

  • Figure 1.4: Integrates the institution-based and resource-based views around the fundamental question of firm success globally.

Discussion Breakout

  • Discussion on the trends leading to “deglobalization” and associated risks, among others including strategic decoupling between the U.S. and China.