Chapter 4 Notes: Business in a Globalized World
Globalization and Business in a Globalized World
Chapter focus: This chapter helps you understand how the world is becoming more connected (globalization), how businesses operate worldwide, the important international groups that shape this process, and the social, political, and ethical issues that come with global business.
What you will learn (Learning Objectives - LO):
LO 4-1: What globalization is, and the main ways companies enter the global market.
LO 4-2: The important international money and trade organizations that influence globalization.
LO 4-3: The good and bad sides of global business.
LO 4-4: The main political and economic systems businesses operate within.
LO 4-5: How unevenly wealth and income are shared globally; understanding challenges for very low-income people (the “bottom of the pyramid”).
LO 4-6: How businesses can work with governments and non-profit groups to solve global problems.
The Process of Globalization
Globalization definition: It's the increasing movement of goods, services, money, and people across countries. It's a continuous process that changes technology, culture, and politics worldwide.
Globalization as a global system (Thomas Friedman): It's not just a trend but a world system with its own rules that affect politics, the environment, international relations, and economies everywhere.
Universality: Globalization impacts all businesses, whether small local ones or large international companies.
Ways companies enter the global marketplace:
Sell: They export products to foreign buyers after succeeding in their home market. For example, Nestlé started in Switzerland and now sells globally. Small companies use online sales (e-commerce) to reach customers worldwide (e.g., PayPal handles about 80\text{ billion} in international transactions each year).
Make: They set up factories or service centers in other countries to reduce costs. For example, BMW has manufacturing plants in 15 countries like Brazil, the U.S., and Egypt.
Source: They hire foreign suppliers to produce their goods, building global supply chains. Examples: Nike, Gap, and Abercrombie & Fitch use many suppliers in Asia.
Three-word summary of globalization strategies: Sell, Make, Source. Many companies now use all three approaches in different markets.
Major Multinational Enterprises (MNEs): These are large companies that have significant assets, income, or offices in foreign countries.
Even though only about 1 in 1,000 businesses are MNEs, they have a huge impact. They handle a large share of world trade, stock value, and intellectual property.
Financial presence: MNE subsidiaries collectively produce about 10% of the world's total economic output (GDP). MNEs might control over half of global trade and a significant portion of stock market value.
Top 10 nonfinancial MNEs (ranked by foreign assets; 2016 data):
Royal Dutch Shell — Home: United Kingdom — Industry: Petroleum — Foreign Assets: 349,720\text{ million}
Toyota Motor — Home: Japan — Industry: Motor vehicles — Foreign Assets: 303,678\text{ million}
BP — Home: United Kingdom — Industry: Petroleum — Foreign Assets: 235,124\text{ million}
Total (France) — Home: France — Industry: Petroleum — Foreign Assets: 233,217\text{ million}
Anheuser-Busch InBev — Home: Belgium — Industry: Food & Beverages — Foreign Assets: 208,012\text{ million}
Volkswagen Group — Home: Germany — Industry: Motor vehicles — Foreign Assets: 197,254\text{ million}
Chevron — Home: United States — Industry: Petroleum — Foreign Assets: 189,116\text{ million}
General Electric — Home: United States — Industry: Industrial and Commercial Machinery — Foreign Assets: 178,525\text{ million}
Exxon Mobil Corporation — Home: United States — Industry: Petroleum — Foreign Assets: 165,969\text{ million}
Softbank Corp — Home: Japan — Industry: Telecommunications — Foreign Assets: 145,611\text{ million}
Global capital flows: Money moving between countries. Foreign Direct Investment (FDI) is a main way economies are linked. In 2016, FDI totaled 1.75\text{ trillion}.
Sovereign wealth funds (SWFs): Investment funds owned by governments that manage the country's foreign money reserves. The largest SWFs come from oil-rich or exporting nations (like Norway, UAE, China) and are investing more and more internationally.
Inversions (tax inversion) example: Burger King bought Tim Hortons in 2014 for 11.5\text{ billion}. After this, Burger King officially moved its company headquarters to Canada to save around 275\text{ million} in U.S. taxes over three years. Changes in tax laws in 2018 lowered the U.S. corporate tax rate from 35% to 21%.
Global migration: People moving across borders is still common despite political challenges. In 2017, there were 258\text{ million} migrants, representing about 3.4% of the world's population. Developed countries host about 12% of their populations as migrants. Top destinations include Saudi Arabia (37% of its population), Canada (22%), United States (15%), and Germany (15%).
Refugee inflow from Syria: In the late 2010s, up to 800,000 people per year left Syria, with many settling in Europe.
German company response to refugees: In 2015, German companies formed "Wir zusammen" (We Together) to combine resources for language training, housing, and job training. For example, ThyssenKrupp offered internships. Challenges included language barriers and paperwork, but with proper support, refugees successfully integrated.
International Financial and Trade Institutions (IFTIs)
Key institutions and their roles:
World Bank (WB): Started in 1944 to give loans to developing countries for projects like infrastructure, education, and health. In 2016, it provided 61\text{ billion} in financing. It gets money from member countries and financial markets. Voting power is based on a country's economic size; the U.S. is the largest shareholder.
International Monetary Fund (IMF): Also started in 1944. Its goal is to keep currency exchange rates stable and manage international payments. It lends foreign money to member countries. Sometimes, loan conditions require countries to cut spending, devalue their currency, boost exports, open up financial markets, or lower wages. Such conditions can be tough for borrowers (e.g., Greece).
Greece debt crisis (2010 onwards): The IMF, European Central Bank, and European countries provided billions in loans. Conditions included strict budget cuts and selling state assets. This led to a 25% drop in Greece's economy, unemployment around 27%, and extensive belt-tightening. By 2018, some relief and restructuring options emerged.
Debt relief for Highly Indebted Poor Countries (HIPCs): By 2017, over 77\text{ billion} in debt relief was given to 36 very poor countries, easing their loan payment burdens and allowing more spending on development. However, "vulture funds" can sometimes try to profit from these debts, undermining relief efforts.
World Trade Organization (WTO): Created in 1995 (taking over from GATT). It sets the rules for international trade. Most nations are members. Its aim is to promote free trade by reducing import taxes (tariffs) and preventing unfair trade practices. The "most-favored-nation" rule prohibits treating products from one foreign country better than another. Exceptions can occur for safety or to protect local industries from sudden increases in imports. WTO negotiations happen in "rounds."
Dispute Settlement Body (DSB): If member countries disagree on WTO rule interpretations, they can bring their disputes to the DSB. Its rulings are binding. If non-compliance continues, retaliation can be authorized.
How they affect business: Global commerce needs to follow WTO rules. Many developing economies depend on World Bank/IMF loans. The policies of these organizations influence how globalization is viewed.
Exhibit 4.A (Vulture Funds): Private funds buy distressed government debt (like Argentina's 2001 default) at very low prices, then sue the country for full repayment plus interest. Such actions can take away resources meant for health, education, and infrastructure. The IMF and World Bank see vulture funds as threats to fragile economies.
Exhibit 4.B (Tariffs on Solar Panels): In 2018, a 30% tax was placed on imported solar panels and cells. This immediately raised prices for components, mostly from China, Korea, and Malaysia. It had mixed job impacts: some manufacturing jobs (around 2,000) were protected, but there were potential net job losses in installation and maintenance (estimates of up to 23,000 U.S. jobs lost in 2018). There was also a risk of other countries retaliating, harming exporters. While new manufacturing might start in the U.S., consumers could face higher input costs.
Exhibit 4.C (China: A Case of Authoritarian Capitalism?): This describes a system where market economics exist alongside strong political control. The Heritage Foundation's index of economic freedom ranks nations on private property rights and limited government involvement. Top economies include Hong Kong, Singapore, and Canada. Lower-ranked ones include Iran, Venezuela, and North Korea. The U.S. ranked 48th in 2018.
The Benefits and Costs of Globalization
Benefits of globalization:
Increases economic productivity: Countries specialize in what they do best (comparative advantage), which makes everyone more efficient and raises living standards.
Sources of comparative advantage: These can be natural resources, skilled workers, or good infrastructure. For example, India is strong in software engineering; China in electronics manufacturing; France/Italy in fashion/design; the U.S. in film and entertainment.
Lower prices for consumers: Global sourcing reduces production costs (e.g., Walmart's international sourcing lowers clothing prices).
Access to foreign investment and technology transfer: Developing nations gain money and expertise. International companies often train local workers in advanced production methods. Export-focused manufacturing creates jobs and improves skills.
Allen Hammond's two additional benefits: (1) It can help spread democracy and freedom through open markets and information flow. (2) It can reduce military conflicts by connecting nations through trade and shared investments.
Costs of globalization:
Job insecurity and displacement: When manufacturing (and recently, office jobs) moves abroad, it can lead to job losses and lower wages at home. Examples: textile job losses in the American South; customer service jobs moved to the Philippines/India; back-office work moved to India/China. Increased competition can also drive down wages (a "race to the bottom").
Some companies are moving production back to their home country to better control their supply chains. For example, LightSaver Technologies shifted production from China to California due to easier logistics and supervision. Rising wages in China and higher U.S. productivity also support bringing jobs back.
Environmental and labor standards may be weakened: Companies might look for places with fewer regulations. WTO rules can prevent individual nations from setting environmental or social protections that unfairly target foreign products.
Trade restrictions (when used) can support local goals: For example, a U.S. ban on Indonesian clove cigarettes led to a WTO dispute; the U.S. made concessions to settle. Such cases show the conflicts between trade rules and public health policies.
Globalization can harm local and national cultures: Concerns about cultures becoming too similar, too focused on buying things, and losing linguistic/religious diversity. "Anti-Americanism" is sometimes linked to the perceived cultural dominance of U.S. multinational companies.
Market capitalism and democracy: Critics argue that market-friendly policies can exist under authoritarian regimes, which raises concerns about human rights and environmental protection taking a backseat to economic gains.
Overall takeaway: Globalization can improve global well-being but creates winners and losers. The ongoing challenge is to expand its benefits while reducing negative effects, especially for workers and communities most affected by changes.
Doing Business in a Diverse World: Political and Economic Systems
Democracy (UN's four key features):
Fair elections with many political parties.
Independent media for free expression.
Power divided among the executive, legislative, and judicial branches of government.
An open society that allows citizens to organize groups for various purposes.
Global democratization trends:
In the early 1900s, few people could vote. By the late 1900s, many authoritarian governments fell, leading to a wave of countries becoming democratic.
Freedom House (2017) reported that for 11 years in a row, more nations lost political rights and civil liberties than gained them. Some regimes became stricter (China, Russia, Turkey), and some previously free countries became less free (Venezuela).
About a quarter of the world's nations were not considered "free" in 2017; approximately 30% were "partly free."
Human rights: The Universal Declaration of Human Rights (1948) and other agreements set standards for decent living, free expression, religious freedom, and fair legal processes. Major ongoing human rights concerns include child mortality, forced labor, human trafficking, and protecting minority groups.
Economic freedom continuum:
Ranges from free enterprise (private ownership, voluntary trade) to central state control (government owns everything; restricted private markets).
Most nations combine elements of both systems (mixed economies).
China as an example of authoritarian capitalism: It has significant private property rights and private investment alongside strong political control. There's debate about whether it will become more liberal or evolve into new forms of state-led capitalism.
Heritage Foundation rankings (2018): Countries with top economic freedom include Hong Kong, Singapore, and Canada. Those with less include Iran, Venezuela, and North Korea. The United States ranked 48th out of 183 countries.
Exhibit 4.C (China): Explores how China combines market economics with strict government control. It discusses potential future paths: liberalization, continued authoritarian capitalism, or a hybrid model.
Global Inequality and the Bottom of the Pyramid
Wealth vs. income inequality: Two different ways to analyze how unevenly money is distributed.
Global wealth pyramid (Credit Suisse, Global Wealth Report 2017):
Top of the pyramid: 36 million people (less than 1%) with assets worth over 1,000,000.
High wealth: 391 million people (8%) with assets between 100,000 and 1,000,000.
Middle class: 1,054\text{ million} people (21%) with assets between 10,000 and 100,000.
Base of the pyramid: 3,474\text{ million} people (70%) with assets less than 10,000.
The base group makes up most of the world's population; the middle class is growing fast, especially in China.
Income-based bottom of the pyramid: Refers to people earning less than about 3,000 \text{ per year} (adjusted for local purchasing power), which includes about 4 billion people worldwide.
Implication for business: Historically, large companies focused on rich and middle-class consumers. But Prahalad argued that the "bottom of the pyramid" is a huge, untapped market with high overall purchasing power, if companies offer low-cost, high-volume products and services (addressing the "poverty premium").
Market opportunities at the base:
This market is estimated to be worth up to 5\text{ trillion}.
Companies are increasingly serving these low-income customers by offering affordable, good quality products and creating jobs in underserved communities.
Examples:
WOW (S.C. Johnson) in Ghana: Sells malaria prevention and household products using refillable containers and subscription sales, distributed through local communities. Partnership with Gates Foundation; learning about consumer needs and sustainable business models.
Microfinance: Providing small loans to low-income clients or groups who don't get traditional bank loans. Examples include Indonesia’s BTPN, which expanded into microloans for the productive poor, using small branches and fingerprint tech for customers who couldn't read. Loans were typically 4,000 or less for 1-2 years. By 2011, BTPN became very profitable by empowering small entrepreneurs.
Grameen Bank (Bangladesh): By 2018, it extended about 1.7 million microloans, helping nearly 10 million people. The Grameen Foundation and partners scaled microfinance across Asia, Africa, and Latin America.
Collaborative Partnerships for Global Problem Solving
Global Action Networks (GANs): Partnerships between businesses (private sector), governments (public sector), and non-profit groups (civil society) focused on specific social issues.
Three-sector world: Each sector has unique resources and skills, plus weaknesses:
Business: Access to money, technical know-how, networks, efficiency. Weakness: often focused on short-term profits, might ignore long-term or wider impacts.
Government: Policy knowledge, power to enforce rules, tax revenue. Weakness: slow, inflexible, poorly coordinated.
Civil Society (NGOs, non-profits): Deep community knowledge, volunteer energy, leadership. Weakness: often lacks funding, limited technical resources, narrow focus.
Figure 4.4 illustrates how each sector's strengths can help achieve shared goals and compensate for others' weaknesses.
Example: Kimberley Process (a global action network to end trade in conflict diamonds): Collaboration among the World Diamond Congress, DeBeers, governments, and NGOs to track diamonds from mines to jewelry shops and ensure a conflict-free supply.
Cross-sector collaborations extend to other issues discussed in later chapters (e.g., Chapter 10, Chapter 17).
Other applications: Efforts to ban "conflict minerals" and other initiatives to ensure ethical global supply chains.
The main message: Globalization presents both opportunities and challenges. Responsible leadership requires working with governments and non-profit groups to promote social and economic fairness while also achieving good business results.
Exhibits and Case Highlights
Exhibit 4.A: Vulture funds – Private funds that buy cheap government debt from struggling countries and then sue for full face-value repayment. This negatively impacts debt relief efforts and social investments. NGOs and the IMF/World Bank highlight their negative effects on health, education, and infrastructure spending.
Exhibit 4.B: Tariffs on solar panels (Trump, 2018) – A 30% tax on imported solar panels and cells. This caused immediate price increases for components (mostly from China, Korea, Malaysia). It had mixed effects on jobs: some manufacturing jobs (around 2,000 panel workers) were protected, but there were potential net job losses in installation/maintenance (estimated up to 23,000 U.S. jobs lost in 2018) and a risk of retaliation harming exporters. While new U.S. manufacturing might start, consumers could face higher input costs.
Exhibit 4.C: China – a case of authoritarian capitalism – Explores how a country can achieve economic growth using market rules while keeping strong political control. It discusses potential future paths: liberalization, continued authoritarian capitalism, or a new hybrid model.
Summary and Key Takeaways
Globalization is a dynamic and debated process that increases the movement of goods, services, money, and people across borders, with both good and bad effects for different groups.
Companies enter global markets by exporting, setting up operations abroad, or global sourcing; many now combine all three ("sell, make, source").
A small number of Multinational Enterprises (MNEs) drive much of global business and investment, but most companies participate in global markets to some extent.
International financial and trade institutions (WB, IMF, WTO) shape globalization by providing money, stabilizing currencies/policies, and setting trade rules; their actions have broad social and economic consequences.
Globalization brings significant benefits (higher productivity, lower consumer prices, technology transfer, access to investment, potential spread of democracy) but also costs (job insecurity, weaker environmental/labor standards, cultural homogenization, potential to empower non-democratic regimes).
The bottom of the pyramid represents a huge potential market and a development opportunity, while also involving social impact considerations and risks; microfinance and inclusive business models are key strategies.
Cross-sector collaboration through global action networks (GANs) offers a way to address global problems by using the unique strengths of business, government, and civil society.
Understanding different political and economic systems, human rights realities, and levels of economic freedom is crucial for responsible global business leadership.
Key Terms
anti-Americanism: Feelings of hostility towards the United States.
bottom of the pyramid: The poorest segment of the global population, often seen as an untapped market.
central state control: An economic system where the government owns and controls most businesses and economic decisions.
civil society: Non-governmental organizations and institutions that represent diverse interests and values.
debt relief: The reduction or cancellation of a country's debt, often by international organizations.
democracy: A political system where citizens have power through fair elections and basic freedoms.
foreign direct investment (FDI): When a company or individual invests money directly into businesses or assets in another country.
free enterprise system: An economic system where private businesses can compete freely with minimal government control.
global action network (GAN): Partnerships involving businesses, governments, and non-profits to address global issues.
globalization: The increasing connection and movement of goods, services, money, and people across national borders.
international financial and trade institution (IFTI): Global organizations like the World Bank, IMF, and WTO that manage international finance and trade.
International Monetary Fund (IMF): An IFTI that works to stabilize global currency exchange rates and international payments.
microfinance: Providing small financial services, like loans, to low-income people who lack access to traditional banking.
multinational enterprise (MNE): A large company with significant operations or assets in multiple countries.
nongovernmental organizations (NGOs): Non-profit organizations independent of governments, often focused on social or environmental issues.
race to the bottom: When countries or companies lower labor, environmental, or tax standards to attract foreign investment or gain a competitive edge.
tariff: A tax imposed on imported goods or services.
World Bank (WB): An IFTI that provides development loans to countries for projects aimed at reducing poverty and improving living standards.
World Trade Organization (WTO): An IFTI that sets and enforces rules for international trade to promote free and fair commerce.
Resources
World Trade Organization: www.wto.org
International Monetary Fund: www.imf.org
World Bank: www.worldbank.org
Global Policy Forum: www.globalpolicy.org
World Economic Forum: www.weforum.org
United Nations and Civil Society: www.un.org/en/sections/resources-different-audiences/civil-societyx
Additional: www.wto.org, www.imf.org, www.worldbank.org, www.ifg.org, www.globalpolicy.org, www.weforum.org, www.un.org/en/sections/resources-different-audiences/civil-societyx
Connections to the Big Picture
Globalization is complex; it connects the world and can improve lives, but needs careful management.
Businesses must operate thoughtfully, considering political freedoms, human rights, environmental rules, and different cultures while trying to make money.
Collaborative models (like GANs) can help businesses work towards social goals while also being profitable, solving big global problems more effectively than if they worked alone.