International Business in an Age of Globalisation

The world is moving away from self-contained national economies toward an interdependent, integrated global economic system.
Globalisation refers to the shift toward a more integrated and interdependent world economy.

Trade between countries decreases on average 1% for every 1% increase in the physical distance of the countries.
Trade increases with:
- The size of economies
- Shared language between countries (by 200%)
- Preferential trading arrangements, common currency, and political union (by 300%)
- A colony-colonizer relationship (up to 900%)

Institutions created to promote the establishment of multinational treaties and to manage, regulate, and police the global marketplace:

the World Trade Organization (WTO), previously the General Agreement on Tariffs and Trade (GATT)
the International Monetary Fund (IMF)
the World Bank
the United Nations (UN)
the G20

Multinational enterprise (MNE):
- A large company with substantial resources that performs various business activities through a network of subsidiaries and affiliates located in multiple countries (e.g., Samsung, Unilever, Disney).
Small and medium-sized enterprise (SME):
- Typically, companies with 500 or fewer employees, comprising over 95% of all firms in most countries.
- SMEs increasingly engage in international business.
Born global firm:
- A young, entrepreneurial SME that undertakes substantial international business at or near its founding.

Historically distinct and separate national markets are merging.
There is the “global market”
- Falling trade barriers make it easier to sell globally.
- Consumers’ tastes and preferences are converging.
- Firms promote the trend by offering the same products.
Benefits small and large companies.
Competitors may not change among nations.
Products that serve universal needs are global.
Significant differences exist between national markets.

Firms source goods and services from locations around the globe to capitalize on national differences in the cost and quality of factors of production like natural resources, labor, and capital.
Companies can:
- Lower their overall cost structure.
- Improve the quality or functionality of their product offering.
Early outsourcing was confined to manufacturing.
Impediments:
- Formal and informal barriers to trade
- Transportation costs
- Political and economic risk
- Coordination

The decline in barriers to the free flow of goods, services, and capital that has occurred since the end of World War II
- Since 1950, average tariffs have fallen significantly
- More favorable environment for FDI
Technological change
- Microprocessors and telecommunications
- The Internet and World Wide Web
- Transportation technology

International trade occurs when a firm exports goods or services to consumers in another country.
Foreign direct investment (FDI) occurs when a firm invests resources in business activities outside its home country.
Declining Trade & Investment Barriers - Average Tariff Rates on Manufactured Products as Percent of Value
- Table with data for France, Germany, Italy, Japan, Holland, Sweden, United Kingdom and United States for the years 1913, 1950, 1990, 2014

Some important trends:
1. The changing world output and world trade picture
2. The changing foreign direct investment picture
3. The changing world order

In the 1960s, U.S. firms accounted for about two-thirds of worldwide FDI flows.
Today, the United States accounts for less than one-fifth of worldwide FDI flows.
Other developed countries have followed a similar pattern.
In contrast, the share of FDI accounted for by developing countries has risen.
Developing countries, especially China, have also become popular destinations for FDI.
FDI inflows by selected region or economy in selected time period shown in a graph for Developed economies and Developing economies from 1990-2020

Many former Communist nations in Europe and Asia are now committed to democratic politics and free market economies
- Creates new opportunities for international businesses
- But, there are signs of growing unrest and totalitarian tendencies in some countries
China and Latin America are also moving toward greater free market reforms
- China moving to industrial superpower
- Latin America debt and inflation are down, more private investors, expanding economies

Lower barriers to trade and investment mean that firms can:
- View the world, rather than a single country, as their market
- Base production in the optimal location for that activity
But, firms may also find their home markets under attack by foreign firms

Managing an international business differs from managing a domestic business because:
- Countries are different
- The range of problems confronted in an international business is wider and the problems more complex than those in a domestic business
- Firms have to find ways to work within the limits imposed by government intervention in the international trade and investment system
- International transactions involve converting money into different currencies

Barriers to the free flow of goods, services, and capital have been coming down.
Strengthened by the widespread adoption of liberal economic policies by countries that had firmly opposed them.
Globalization is not inevitable.
Countries may pull back.
Risks are high.

Growing economic wealth but… Growing economic disparity
Reduction of trade barriers but… Many industries most important to developing countries still closed
Less poverty in rapidly industrializing countries but… Absolute levels of poverty still high in many countries