Chapter 1

Internationalization of Economies

It is commonly believed that among all factors affecting businesses, internationalization, or globalization of the economies, had the most profound impact on private business management since the Second World War. Of course, the subject of this book, cross-border mergers and acquisitions (M&As), is an important component of the internationalization or integration of diverse economic systems. Accordingly it is pivotally important to have a clear understanding of internationalization of the economies. We elaborate this important concept in this introductory chapter by examining the constituent parts of the internationalization process.

Internationalization of Product and Service Markets

It is common to use sum of exports X and imports M as a percentage of the gross domestic product (GDP) of a country as a measure of openness of the economy. According to this indicator, a rapid rise in international trade has occurred around the globe since World War II. We present values of the exports plus imports of goods and services as percentages of GDPs by types of economies since 1980 in Table 1.1.

As can be seen from Table 1.1, the degree of openness for all economies not only has increased drastically but with the exception of openness for the transition economies has been consistently on the rise over the last three decades. Of course, the rise in the openness index in an environment where both GDP and international trade were on the rise can only mean that the value of international trade is increasing at a faster rate than the rate of increase in the value of the GDP.

It should be noted that internationalization in services implies internationalization of transportation, tourism, telecommunications, banking, insurance, and other professional services.

The world trade data in all commercial services indicate that between 2000 and 2011, the value of all commercial service exports increased from $1491 billion to $4349.9 billion, an increase of 191.75 percent. Furthermore, the value of imported commercial services world-wide increased from $1463.8 billion to $4152.3 billion, an increase of 183.66 percent during the same period (World Trade Organization 2013).1

Internationalization of Financial Markets

An important contributing factor to rapid internationalization process over the last three decades is the removal of restrictions on capital flows across the national borders of many countries. With the removal of the restrictions on capital flows, the sum of value of equity markets’ capitalization, corporate and public bonds, and loans globally has increased from 12 trillion dollars in 1980 to 225 trillion in March 2013 (Lund et al. 2013).

International Transfers of Technology

International transfer of technology has increased through cross-border licensing agreements, cross-border M&As, joint ventures, foreign direct investment in wholly foreign-owned enterprises, and joint research and development (R&D) activities of multinational enterprises.

Internationalization of National Enterprises

An important aspect of internationalization of national enterprises, which began in the late nineteenth century and accelerated in the twentieth century, is global operations of what Alfred Chandler, Jr. (1984) called integrated industrial enterprises. The first step in the development of integrated international enterprises was the formation of an administrative organization. The pattern of development of these industrial enterprises and creation of the administrative organization is best described by Chandler:

It was essential first to recruit a team to supervise the process of production, then to build a national and very often international sales network, and finally to set up a corporate office of middle and top managers to integrate and coordinate the two. Only then did the enterprise become multinational. Investment in production abroad followed, almost never preceded, the building of an overseas marketing network. (Chandler Jr. 1984, 491–492)

Multinational enterprises can fall into one of two categories: multidomestic and global. The multidomestic enterprises operate on stand-alone, country-centered management strategy. The enterprise is present in many countries but competes on a country-by-country basis. These enterprises operate in retailing, retail banking, insurance, and consumer packaged goods industries.

Global enterprises, on the other hand, adopt the strategy of integrating operations on a worldwide basis. The enterprise’s competitive position in one country significantly affects and is affected by its position in other countries. The global enterprises operate in industries such as automobile, consumer electronics, semiconductors, and similar type of industries.

In addition to the rise of multinational enterprises, an increasing number of international coalitions and alliances among business entities for undertaking R&D, marketing, logistics, operations, and services have been formed in recent decades. These coalitions and alliances consist of joint ventures, licensing agreements, supply contracts, marketing agreements, and pooling of R&D activities.

Internationalization of the Labor Market

Internationalization of the labor market implies that the actors in the labor markets, that is, both the employers and suppliers of labor (workers), instead of entering the national labor markets interact in the global labor markets. Internationalization of the labor market also refers to the consequences of cross-border movements of goods, services, and capital as well as consequences of internationalization of production for the labor market. In short, internationalization of labor has taken place because of increased movement of work and labor across national boundaries. Specifically internationalization of labor over the last several decades has increased through rise in international trade, foreign investment, technology transfer, and increased mobility of people borders.

Clearly, not all immigrants enter the labor force of the host nation. This implies that only a portion of overall immigrants will enter in labor markets of the host countries. The data for the number of working immigrants globally is not available. Hence, we cite the stock of world immigrants as an indicator of the size of immigrants participating in the labor forces around the globe. Based on this we see that, for example, the stock of world migrants in mid-1990 is estimated to be 155,518,065. The number has increased to 213,943,812 in 2010, according to the United Nations (2013). This implies an average annual growth rate of 1.8 percent in stock of world total migration a portion of which constitutes labor force migration.

Internationalization of Communication and Transportation

Advances in communication and transportation technologies, mostly brought about by innovations in information technology (IT), have facilitated transnational movements of goods, services, and capital. These technological advances had and continue to have profound impacts on business organization, structure of industry, internationalization, and cross-border trade of services as well as cross-border M&As.

Having a clear definition for information technology, a term that is used frequently in the book will prove to be useful. Information technology refers “…to the interconnected set of technological and organizational innovations in electric computers, software engineering, control systems, integrated circuits, and telecommunications, that have made it possible to collect, generate, analyze, and diffuse large quantities of information at a minimal cost” (Miozzo and Soete 2001, 160).

It should be noted that internationalization of the economies to a large extent is made possible through services in general and via advances in IT and telecommunication services in particular, services that have been supplied with rapidly falling costs of production. Therefore, we find further discussions of the role services play in internationalization processes important, and we turn to discussions of these developments next.

What is the definition of services? A useful definition of the term refers to services as goods that are consumed at the time and location of the transaction. However, services are heterogeneous and the definition given here is not specific with respect to nature and categories of services. To have a clear understanding of which human activities constitute services and to gain insights into the important role these activities have played and are playing in internationalization of the economies, we discuss categories of services.

Even though there is no consensus on how to classify services, a technology-based taxonomy of services might be useful (Miozzo and Soete 2001). The technology-based taxonomy of services views services based on their intra- and inter-industry linkages. According to this taxonomy, services consist of the following types. First, personal services (restaurants, laundry, and beauty), and public and social services (health, education, and public administration); second, scale-intensive physical networks (transport, travel, and wholesale trade and distribution) and information network sectors (finance, insurance, and communications); and third, science-based and specialized supplier sectors (electronics and pharmaceutical).2

What is the mechanism by which advances in IT, specifically telecommunication services, affect internationalization of the economies? To answer this question, we need to define two characteristics of services: nonstorability and intangibility.

Nonstorability implies that services must be produced and consumed at the location and at the point of time the exchange is to take place. Intangibility refers to the uncertainty about the quality of services, which requires an ongoing interaction between the trading partners (Miozzo and Soete 2001).

Information technology increases transportability of services by eliminating or reducing the constraints of space and time of production and consumption, that is, by producing services at one place and consuming them simultaneously at another location. As an example, we may cite delivery of a lecture via the Internet, where the instructor and students are located at separate locations. Another example is an IT specialist who remotely connects to the network of a client in a perhaps far away location to perform a service.

Along with reduction in the nonstorability characteristic of services, the growing complexity of production and distribution of goods in the manufacturing sector has increased the service content of products. These services include R&D, design, marketing, distribution, and after-sales services that are essential inputs for many globally competitive enterprises.

With the steadily decreasing costs of communication, computing, and IT; increasing relaxation of controls on cross-border capital flows; and deregulation of industries in many countries, cross-border transactions of services have increased drastically in recent decades.

As a result of these technological developments, an important international market for M&A has also emerged. In this expanding global market, firms aim to take full advantage of their competitive advantages. Mergers and acquisitions, mostly acquisitions, appear to be the most efficient, and some believe a less expensive vehicle for the global presence of many enterprises.

Understanding the internationalization of the economies as discussed above is an important task in the development of strategies for acquiring another enterprise in domestic or international markets.

Summary

This chapter dealt with the rapid pace of internationalization of economies over the last several decades. The discussions involve internationalization of products, services, financial markets, technology transfers, labor markets, communications, and transportation. It was pointed out that as a result of the changes in information and communication technologies, cross-border M&A is becoming an increasingly popular strategy for growth and profitability by many enterprises.