INTRODUCTION

Globalization is widely seen as the dominant trend of our time. It is a shorthand expression for a variety of processes encompassing worldwide integration of financial systems, trade liberalization, deregulation and market opening, and pressures towards cultural, economic and social homogeneity. In a nutshell, globalization refers to the emergence of a single, global business civilization: a remarkable event, but one that is feared as much as it is celebrated.

Globalization is not a single, all-encompassing process sweeping the globe. Rather, the term globalization refers to a number of processes by which products, people, companies and money are able to move around regardless of territorial limits or domestic boundaries.¹

Globalization is the process of increasing interconnectedness between societies such that events in one part of the world have an effect on people and societies far away. It is a consequence of the phenomenon of convergence, which is the tendency for the tastes and preferences of people in different countries to become similar, leading to a sameness or homogeneity. Convergence is encouraged by increasing global linkages, that is, networks of individuals, institutions and countries which are tied together in terms of trade, financial markets, technology and living standards more closely than at any other time in human history. These linkages take several different forms and are facilitated by TV, radio, movies, the Internet, music, and air and sea transport.

 

Globalization is not a new phenomenon, but what distinguishes the current wave of globalization from earlier waves is the scope and intensity of interdependency between nations. This interdependence is brought about by factors such as growing international trade and electronic commerce.

Despite cultural differences, people across the world have a great deal in common with one another. Developments in communication and transportation technologies have moved the world towards becoming a “global village” of interdependent people. Goods and services, as well as people, travel between continents and this has led to an economic system that transcends national boundaries and markets. National markets and their associated economic systems are no longer isolated from one another by distance, time or culture: they have merged into one huge global market. Global linkages result in people in many countries wearing jeans, drinking cola and eating pizza and hamburgers. Cultural linkages result in the growth of large shopping centres, two-income families and the like.

There are two broad and varied views on what constitutes the phenomenon of globalization. At one end of the spectrum are the hyperglobalists who consider the global economy to be inhabited by powerless nation states and homeless corporations.² According to their view, globalization is characterized by the declining powers of the nation state and increasing power of the TNC. The hyperglobalists, therefore, emphasize the decline of national cultures and hail the emergence of a global cosmopolitan corporate culture.

 

A less extreme view, put forward by transformationalists such as David Held,³ acknowledges globalization as a driving force reshaping modern societies, but takes a more cautious view of its outcomes. It looks at globalization as a complex, uneven set of processes, rather than a linear progression. In the changing global order, shifting patterns are emerging in the functions and powers of companies and governments. This changing global order is characterized by deepening integration and fragmentation through the emergence of other important forces, such as regionalism. This view of globalization acknowledges the accelerated impact of economic globalization, at the same time recognizing local differences, with deep social and cultural roots, leading to underlying tensions in the global business environment. As the transformational view takes note of the underlying complexity of the globalization processes, it is widely recognized as a more valid approach than the hyperglobalization school of thought.

ELEMENTS OF GLOBALIZATION

Globalization, as discussed earlier, does not have a single unified form. It comprises interconnected, interdisciplinary and diverse elements, which we discuss in this section.

Economic Globalization

Economic globalization is characterized by the emergence of increased global flows of international trade and investment. Its main agents are companies, investors, banks, financial institutions, private-sector industries, nation states and international institutions. The various dimensions of economic globalization are discussed here.

 

Globalization of the business corporation is the direct manifestation of economic globalization. Variously termed the “multinational enterprise” (MNE), the “multinational corporation” (MNC) and the “transnational corporation” (TNC), this ubiquitous form of corporations originated in the developed regions of the world and is characterized by multiple operations at multiple sites in the global economy. Originating as gigantic corporations employing thousands of people and grossing billions in revenue, they are now found in various avatars all over the globe as they have used various means and modes of entry into global markets. We take a more detailed look at them in Chapter 2. The emergence of the global enterprise is based on the globalization of both demand and supply in a fast-changing global economy.

Globalization of supply refers to the sourcing of goods and services from different parts of the world as a result of increased mobility of factors of production in order to take advantage of differences in cost and quality. Traditionally, firms in the manufacturing sector have outsourced business operations to reap the benefits of better quality and lower costs. Improvements in modern communication technology, especially the Internet, have now enabled the outsourcing of non-core business functions to low-cost destinations of the world. These outsourced functions range from simple back-office functions such as payroll accounting and customer call centres to specialized functions such as legal document processing and medical and hospital functions.

There has been a massive shift of manufacturing capacity to various countries of the developing world, in particular to East Asia. While many developing countries have participated and profited from this reorganization of global value chains, many others have been marginalized. There has also been a perceptible shift in the distribution of technological capacity. This is reflected in the increase in research and development (R&D) carried out in the developing world, instead of being traditionally concentrated in Europe, Japan and the United States. Attracted by rapidly expanding markets and the availability of low-cost researchers and research facilities, the world's leading multinationals have increased their R&D bases in low- and middle-income countries. There is even talk of a new business model emerging from the developing world, a model involving “frugal innovation”, designing not just products, but entire production processes to meet the needs of the poorest.

One concern is the growing technological divide between those developing countries which are capable of innovating and those which seem not to be. Innovation is not automatic; countries which have been proactive in terms of implementing a national innovation strategy have generally had more success. We discuss this in greater detail in Chapter 15.

Globalization of demand is the result of increasing interconnectedness among distinct national markets to form an integrated global structure. Facilitated by trade and investment liberalization, the dominance of global brands such as McDonald's, Nike, Coca-Cola, and Apple iPod is a sign of global markets. The concept of the global marketplace was introduced by Theodore Levitt⁴ in a path-breaking paper, and endorsed by others such as Kenichi Ohmae,⁵ but experience has indicated the need for a “glocal” approach for products to be accepted in different national markets. Globalization is often known as a process of “McDonaldization” of the world, and the ubiquitous Big Mac is found in all corners of the globe, but in a customized form: without beef in India and without pork in the Middle East, in deference to local tastes and preferences.

Cultural Globalization

Cultural globalization is commonly taken to refer to a process of cultural homogeneity of the global economy, involving complex movements of people, ideas, images, finance, technology, labour and capital. It emphasizes the choice between uniformity and diversity and adherence to the intensive and extensive forms of intercultural contact largely driven by the media and technological advancements. It addresses the issues of cultural homogenization versus cultural hybridization in the global economy, where homogenization is the outcome of Western media and consumerism and hybridization is the adaptation to local influence. The globalization of culture, visible in the form of a common preference for things such as McDonald's burgers, Nike shoes, iPods and BlackBerrys, is a symbol of a global similarity of taste. Argued by its opponents as symbolic of a capitalist culture propagated by TNCs in their quest for new markets and consumers and accused of destroying local culture and its symbols, globalization is nevertheless a phenomenon that is here to stay. Thus, we also see the emergence of a process of cultural hybridization, which is a process of re-contextualization and reattribution of meaning. Glocalization, or the amalgamation of the global with the local, assigns fresh meaning to global products such as Coke, branded washing machines and cell phones, and TV programmes so that they can fit better in the receiving culture. Cultural flows, therefore, are seen to result both in similarities and differences, resulting in varying degrees of homogeneity and heterogeneity, and the emergence of a transnational, hybridized “third culture”.

 

Political Globalization

Political globalization refers to processes of changes in the rules and structures of global governance. The last century witnessed the rise and fall of socialism in all its avatars. It also witnessed the emergence and domination of the world by global and regional institutions and trans-governmental networks, such as the World Trade Organization (WTO), the International Monetary Fund (IMF) and the World Bank, in a convergence of political systems and processes worldwide for global governance. These institutions are largely dominated by the United States and some powerful European countries and are considered responsible for the restructuring of large parts of the developing world economies, often with disastrous consequences as well. An increase in global sovereign states from 62 in 1914 to 149 in 1978, 193 in 1991,⁶ and 209 in 2007,⁷ has witnessed an increased acceptance of global governance and democratic decision making. At present, the world political system is in the midst of significant change as countries from the former less developed parts of the world are beginning to emerge as growth leaders and staking their rightful places in seats of global governance. India and China are two such emerging powers that are being carefully observed in the global arena.

 

DRIVERS OF GLOBALIZATION

The following factors, all based on change, are the leading drivers of globalization.

Political Forces

There have been rapid changes in the global economy since the beginning of the 1980s spearheaded by political change in all parts of the world. The most important of these concern the largest emerging markets of the world: Russia and its former allies, China, India, and Latin America.

A major change in the global system was the democratic revolution in the former communist countries of Eastern Europe, including the Soviet Union. As former bastions of communism moved towards free market principles, there emerged 15 independent countries out of the Soviet Union, the Czech Republic got broken into two states and Yugoslavia was divided into five successor states after a fierce civil war.

The move to a market-based system has also been part of the change witnessed in parts of Latin America, China and India. Although China continues to follow socialism, it has opened up its economy to free market forces since 1978, making it a huge untapped market with a population of approximately 1.3 billion people⁸ as of 2010 and increasing trade and foreign direct investment (FDI) flows.

The Latin American nations, many of which were under totalitarian rule since the end of World War II, have taken to both democracy and market-oriented reforms since the 1980s. Characterized by cycles of low growth, high debt and high inflation, all of which discouraged investment, these economies have now shown a fairly remarkable turnaround as a result of market-oriented reform packages.

The Indian economy also adopted a market-oriented system in 1991 after decades of inward-looking protectionist regimes. This has resulted in its moving out of the famous “Hindu rate of growth” of 3 per cent to 4 per cent in the 1950s to scale a 7 per cent to 8 per cent annual economic growth rate in the post-reform period. There has also been a significant increase in trade and investment flows, and India is one of the top-ranking countries in the global knowledge economy today.

Although the emergence of these new market-oriented economies presents enormous opportunities for trade and investment, it also presents a considerably risky business environment due to these countries’ underdeveloped economic, political and legal frameworks, continuous state of unrest, and totalitarian tendencies.

Economic Forces

Political change has been accompanied by rapid change in the global economic system. There is a trend towards the unification and socialization of the global community. Preferential trading arrangements such as the North American Free Trade Arrangement (NAFTA) and the European Union (EU) have helped group several nations into a single market, leading to significant business opportunities for trade and investment. There has been a progressive reduction of barriers to trade and foreign investment, leading to volumes of global trade and investment growing faster than global output. The period of the 1920s and the 1930s saw many nation states of the world erecting barriers to international trade and FDI in the form of both tariff and non-tariff measures. There were several reasons for this, which you will read about in detail in Chapter 8. The push for free trade has as its basic premise the belief that both import controls and export incentives (such as subsidies) are self-defeating and result in wasted resources.

South–South cooperation, implying the flow of resources from one developing economy to another, is a cooperation that specifically focuses on improving economic ties between developing countries. Its focus on South–South trade has developing countries now accounting for around 37 per cent of global trade with South–South flows making up about half of that total. It is projected that this trade could become one of the main engines of growth over the coming decade if the right policies are pursued. The immense potential is evident as South–South trade multiplied more than ten times between 1990 and 2008 while world trade expanded almost four-fold.

South–South FDI has also increased. China, with an investment stock estimated at more than USD 1 trillion, is the largest outward investor amongst developing countries. However, the phenomenon is broader, with growing activity from many firms in Brazil, India and South Africa, as well as from new smaller outward investors from countries like Chile and Malaysia. South–South investment has enormous untapped potential for low-income countries. Southern multinationals, for example, are more likely to invest in countries with a similar or lower level of development since they often have technology and business practices tailored to developing-country markets.⁹

Production is being globalized, as companies, free from most or all trade restrictions, are choosing optimal locations for their production facilities, generally in areas where labour costs are the lowest. The goal of free trade is enshrined in the General Agreement on Tariffs and Trade (GATT), the forerunner to the WTO, which presently acts as the global trade administrator and vigorously advocates the cause of free trade. At the same time, there is the simultaneous emergence of preferential trading arrangements, such as the NAFTA and EU, which have helped group several nations into a single market and led to the emergence of significant business opportunities for trade and investment.

A significant feature of the last few decades is the large-scale privatization of state-owned enterprises into privately owned and operated business enterprises. This was the outcome of liberalization and the opening up of large parts of the world, including the former socialist block.

Technological Forces

Advances in communication, information technology, and transportation technology have revolutionized the flow of ideas and information across borders. Thus, we find that telecommunications is creating a global audience and transport is creating a global village. All over the world, ordinary people are watching MTV, wearing Levi's jeans and using Apple iPhones. The technological revolution is driven by the following factors.

Discovery of the Microchip

The single most important innovation of the twentieth century has been the microchip, enabling both the explosive growth of high-power, low-cost computing and the processing of huge amounts of information by individuals and firms. This has been accompanied by the development of satellites, optical fibre and wireless technologies, all of which have resulted in a communication revolution. These technologies rely on the microprocessor to encode, transmit and decode vast amounts of information that flows along its electronic highways. The falling cost of the microprocessor has been accompanied by its increasing power, helping connect remote parts of the world into a global marketplace and being responsible for the rapid growth of the Internet and the World Wide Web. In 1990, there were less than one million users of the Internet. The number had gone up to 50 million by 1995 and to 655 million by 2002. It was estimated that there were 1.12 billion users of the Internet by 2005, a figure which has increased to approximately 2.09 billion as of March 2011. Thus, there was an overall increase of over 444 per cent of users between 2000 and 2010.¹⁰ The Internet and the World Wide Web are the information backbones of the global economy. The value of Web based transactions rose to USD 657 billion in 2000 from virtually nothing in 1994, and was estimated at USD 6.8 trillion by 2004.

Developments in Transportation

There have been several major innovations in transportation technology since World War II. The most important of these are the development of commercial jets and super-freighters and the introduction of containerization, which simplifies trans-shipment from one mode of transport to another. The advent of commercial jet travel has effectively shrunk the globe by cutting down considerably on travel time.

Containerization has revolutionized the transport business, significantly lowering the cost of shipping goods over long distances. Prior to the advent of containerization, moving goods from one mode of transport to another was a lengthy, time-consuming and labour-intensive process.

International trade owes its exponential growth to something utterly ordinary and overlooked, the shipping container, which didn't just rearrange the shipping industry or make winners of some ports, but changed the dynamics and economics of where goods are made and shipped to. The genesis of containerization can be traced to a war-surplus oil tanker, “Ideal-X”, which left port in Newark, New Jersey, with a steel frame welded to its deck. The frame held aluminium containers which were offloaded five days later on to trucks at Houston, giving birth to the modern container industry.¹¹ Widespread containerization in the 1970s and 1980s has resulted in a four-fold growth of the world's container fleet, reflecting growth in international trade as well as the use of improved modes of transporting goods across the world. There has also been an increase in the share of cargo travelling by air as a result of improvements in air travel.

Emergence of Global Governance

Globalization of markets and the increasing proportion of business activities taking place across national borders have given rise to the need for global institutions to help manage, regulate and police the global marketplace and protect the establishment of multinational treaties to govern the global business system. These organizations include the WTO (and GATT, its predecessor) in the area of international trade and the World Bank and the IMF in the area of international finance and the global monetary system. The United Nations, along with its associated institutions, is committed to preserving world peace through international cooperation and collective security.

Competitive Forces

The breakdown of the communist system and the liberalization of countries in Asia and Latin America have changed the face of global competition. This has led to the emergence of global players from these parts of the world that have changed the rules of the game. The better known among these emerging destinations for trade and commerce are Brazil, Russia, India and China, or the BRIC (a term coined for the first time in 2001 in a study by Goldman Sachs¹²) nations. It is now predicted that the BRIC's combined GDP will surpass the US GDP by 2018, and that they will account for half of the global economy by 2020. Other important emerging players in the global economy are Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa, collectively known as the CIVETS nations.

The 2011 BCG Global Challengers Report brought out by The Boston Consulting Group (BCG) lists 23 global challengers (companies from rapidly developing economies that are shaking up the economic order) covering 16 diverse nations. It has even identified five companies in countries such as Mexico, South Africa, Indonesia and Brazil that have started resembling established multinationals. It also recognizes four industries—mining and metals, construction, steel, and fossil fuels—as a common feature of these developing nations indicative of the importance of infrastructure and natural resources in the emergence of global players from developing economies. The significant trends that have emerged from this report are the emergence of Chinese contractors, the rush for natural resources, the rise of diversified global conglomerates, the challenges of building global consumer brands and the reliance on partnerships. Significant Western brands like Jaguar and Land Rover are now owned by India's Tata Group while Huawei Techologies and ZTE Corporation of China are the world's second and fifth largest manufacturers of telecom equipment in terms of revenue, Mexico's Grupo Bimbo is the world's largest bread maker, Brazil's JBS is the largest meat producer, and United Company Rusal from Russia is the world's largest producer of aluminium. These companies have been the hidden engines of the global economy in recent years, helping global per capita GDP to rise over 50 per cent in the last decade despite the global slowdown.¹³

Increasing marketization has also led to a change in existing nomenclature and classification systems by agencies such as the Organization for Economic Cooperation and Development (OECD). It has proposed a new classification which reflects the “new geography of growth”, according to which countries such as India should be termed converging rather than poor, indicating their efforts to catch up with their richer developed counterparts. With the economies of most of the communist states such as China having been closed to the world, these nations are now facing growing unrest on the transition path. While they present huge opportunities for export and investment, they also present a business environment which is uncertain and fraught with risk.¹⁴

INTERNATIONAL ORIENTATIONS

Transnational corporations vary widely in the degree and nature of their international orientations. International orientations reflect the attitude or strategic predisposition of a TNC towards doing things in a certain way. The analysis provided by Wind, Douglas and Perlmutter¹⁵ within the EPRG framework is helpful in understanding the international orientation of firms in international business.

 

The EPRG framework identifies four types of attitudes or orientations towards internationalization that are associated with successive stages in the evolution of international operations. These are: (1) ethnocentrism, or home-country orientation, (2) polycentrism, or host-country orientation, (3) regiocentrism, or regional orientation, and (4) geocentrism, or world orientation. These stages reflect the philosophy of the company in planning its international operations and the strategies based on it.

Ethnocentric Orientation

Ethnocentrism is the belief that the domestic or home-country culture is superior to any other. A TNC with an ethnocentric orientation relies on the values and interests of the parent company in formulating and implementing its internationalization plans. In the ethnocentric company, overseas operations are viewed as secondary to domestic operations, and primarily as a means of disposing “surplus” domestic production. The firm's international operations, therefore, take the form of an export department or international division and are manned by domestic personnel or export agents. As international marketing is normally characterized by the extension strategy, the domestic product mix is used in the foreign market too.

As it entails minimal risk and commitment to overseas markets (no international investment is required, and no additional selling costs incurred, with the possible exception of higher distribution costs), the ethnocentric position is appropriate for a small company just entering international operations or for companies with minimal international commitments.

Polycentric Orientation

As a company spends a significant amount of time in international markets, it begins to recognize the importance of inherent differences in various markets, giving rise to a polycentric attitude. It recognizes the fact that local personnel and techniques are best suited to deal with local market conditions, so it emphasizes decentralizing of control and granting of autonomy to its overseas units. Foreign market operations are carried out through independent subsidiaries which have independent control over its marketing objectives and plans. This leads to a strategy of market segmentation in formulating the marketing strategy. Local laws, customs and cultures are noticed, and great care is taken to understand the local way of doing business. This usually results in the maximum degree of geographic decentralization as local managers are recognized as being psychologically close to markets, environments and customers. Under polycentrism, marketing is normally characterized by adaptation strategy. Polycentrism, thus, is the opposite of ethnocentrism.

Regiocentric Orientation

A regiocentric company views different regions as different markets. Regions with important common marketing characteristics are regarded as a single market, ignoring national boundaries. Strategy integration, organizational approach and product policy tend to be implemented at a regional level. Objectives are set by negotiation between headquarters and regional headquarters on the one hand, and between regional headquarters and individual subsidiaries on the other.

Geocentric Orientation

A geocentric company views the entire world as a single market and develops a standardized marketing mix, projecting a uniform image of the company and its products for the global market. The business of the geocentric multinational is usually characterized by sufficiently distinctive national markets in which the ethnocentric approach is unworkable, and in which the importance of learning-curve effects in marketing, production technology and management makes the polycentric philosophy substantially sub-optimal.

There is improved coordination and control under the regiocentric and geocentric orientations as well as a set of standard policies for the organization. However, the costs of collecting information and administering policies on a worldwide scale makes the geocentric approach more expensive compared to the regiocentric attitude. Further, national differences may constrain and restrict multinational operations and make the global market approach unpractical.

INTERNATIONAL VERSUS DOMESTIC BUSINESS

International business refers to any business activity which involves the transfer of resources, goods, services, knowledge, skills or information across national boundaries. These activities may involve the production of physical goods or the provision of services such as banking, finance, insurance, education and construction. International business activities mainly take the form of international trade and international investment.

 

The main players in international business are individuals, business firms, institutions and governments. Out of these, business firms are the most significant participants. Any firm, whether big or small, which engages in international business activity as it is defined here is known as an MNE or a TNC. In this book, we use the term TNC to refer to all business entities which engage in cross-border trade and investment activities.

Traditionally, international business has been the outgrowth of domestic business. Large international corporations such as Toyota, Honda and Mitsubishi started operations in the domestic market before expanding into the international market. The Indian pharmaceutical firm Ranbaxy also started operations domestically before making its first foray into the international market as an exporter. As a firm's scale of operations increases, it gets drawn into the international market. Although international business is often an extension of domestic business, it differs from domestic markets in the following respects:

• Diverse business environments: International business operates in a diverse business environment as it is located in different countries. The business environment of an international business firm has different economic, cultural and politico-legal facets. Countries differ with regard to their currency, inflation and interest rates, economic regulations, political systems, social customs, laws, and government rules and regulations. This gives rise to complexities for business firms, which have to learn to operate in varying situations and adapt to them. The fast-food major McDonald's, which has a presence in almost all countries of the world, adapts its menu to local taste and religious leanings. In India, it has replaced beef products with chicken, and in the Middle East, it does not serve any products containing pork.
• Enhanced risk and uncertainty: Business firms face risks on account of the unpredictability of operational and financial outcomes. Uncertainty refers to the unpredictability of environmental or organizational conditions that affect firm performance. International business firms operate in situations of increased risk arising out of the multiplicity and diversity of their working environment. International corporations work in multiple financial environments, receive payments in different currencies and have to deal with the harmonization of firm accounts from subsidiaries in different countries. Market supply and demand conditions in the domestic market differ significantly from the international market. These are some of the differences and complexities which create more opportunities as well as more risk and uncertainty for international business firms.
• Operational complexities: Operationally, international business is often more difficult and costly to manage than activities in the domestic market alone. These difficulties manifest themselves in all functional areas of the business. For example, local employees and expatriates (employees from a foreign country) may have trouble getting along with each other because of cultural and language differences. The cultural diversity encountered when operating in several countries may create problems of communication, coordination and motivation in the employees of the organization. Organizational principles and managerial philosophies differ widely across nations, increasing the complexity of operation and management of international business. The extent of differences varies between firms and is determined by factors such as geographical proximity, cultural heterogeneity and political compatibility.

MOTIVES FOR INTERNATIONALIZATION

There are several reasons which motivate a firm to move on the internationalization path. These may be broadly classified as pull and push factors. Pull factors are offensive motives which pull a domestic business firm into foreign markets. Push factors, on the other hand, are defensive motives which force the domestic firm to react and move into the international arena. Firms are motivated to enter international markets as a result of push and pull factors.

 

Some of the reasons of firm internationalization are as follows:

• Increased profits: The basic raison d’être (reason for being) of a business enterprise is to maximize profits through increased revenues and/or reduced costs. International trade and investment are the means through which a business firm is able to benefit from differences in labour costs, availability of resources and capital, and differences in regulatory frameworks, such as taxation differences. The rapid growth of the outsourcing industry is an illustration of the ability of firms in developed parts of the world to take advantage of the low-cost skilled labour force in countries such as India, Ireland and the Philippines.
• Optimum capacity utilization: A business firm is able to maximize its profits only when it can minimize costs. This requires production at a large scale, which may be constrained due to a lack of demand in the domestic market. A firm can increase its scale of operations if it is able to tap into the demand in foreign markets. This not only leads it to newer consumers but also helps it in cost reduction and increased profits.
• Market motives: Firms choose to internationalize for reasons that originate in their domestic market conditions. This may take two different forms:
  1. Firms often need to protect and hold their market power or competitive position in the face of threats from domestic rivals or changes in government policy. For example Dell, a leading personal computer company, invested in Europe, Asia, Latin America and Africa because of strong competition in the US domestic market.
  2. Alternately, a firm may decide to seek international market opportunities in foreign countries through trade or investment. Companies such as Avon and Amway entered India in the early 1990s in search of opportunities in the direct marketing business.
• Strategic motives: Firms often participate in international business for strategic reasons. This includes capitalizing on distinctive resources or capabilities that have been developed by them. Leveraging these capabilities helps a firm establish itself through a “first mover” advantage. This leads the firm towards advantages such as technological leadership, brand image, customer loyalty, and competitive positioning. Finland's Nokia is an example of a firm that is a global leader in mobile handsets, a position it acquired as a result of its technological capabilities. A firm is also able to take advantage of vertical integration in different countries through an upstream or downstream movement.

TWO DECADES OF SHIFTING WEALTH

The 1990's and the 2000's have witnessed substantial changes in the global economy. These changes have been led by improvements in growth and reduction in poverty and inequality in the developing world.¹⁶ The pace of change has been so rapid that the world economy today is barely recognizable from that of twenty years ago. The centre of economic gravity is moving from the West to the East, from the industrialized economies to the large developing economies, particularly China and India. This is called “shifting wealth”, a trend that is set to continue and which anticipates that emerging and developing economies will account for nearly 60 per cent of world GDP by 2030.

India today leads the pack of an emerging-market middle class, which has incomes between USD 6,000 and USD 30,000 per year. While this section of the population constitutes 18 per cent of the Indian population at present, it is estimated to rise to 50 per cent soon. Predicted as “the story of the decade” by leading consultancies such as Goldman Sachs, this section of Indians is projected to become the global spending power within the next two decades.

The economic development of India forced traditional theories to be rewritten as India moved from being a predominantly agricultural economy to one in which growth was led by the service sector.

An Indian company, Tata Motors, despite having to face the results of recession in its UK operations in 2010, entered the Fortune Global 500 list for the first time within that year. The acquisition of Jaguar Land Rover and the launching of the world's cheapest car, the Nano, helped the car-maker enter the elite 500 list. In 2011, IndianOil cornered the ninety-eighth spot, moving up from its ranking in 2010. Mukesh Ambani-led Reliance India Limited also improved its ranking from 175 to 134. Other Indian companies that were a part of the 2010 list and continued to be a part of the 2011 list were Bharat Petroleum Corporation Limited, State Bank of India, Hindustan Petroleum Corporation Limited, Tata Motors, Oil and Natural Gas Corporation (ONGC), and Tata Steel. Table 1.1 presents the Indian companies that made it to the 2010 Fortune Global 500 list along with their 2011 ranking.

 

Table 1.1 Indian Companies in the 2010 and 2011 Fortune Global 500 Lists

 

 

These achievements would have been almost unimaginable twenty years ago. Today, China, India and other large emerging-market economies matter as a result of their sheer size and growth performance, and because they increasingly shape the global macroeconomic situation and prospects and have an impact on competitiveness and influence global income, employment and commodity price developments. In short, they matter because they affect development prospects in the rest of the world.

It is no longer appropriate to divide the world simply into the North and the South, or the developed and the developing countries. OECD's “Perspectives on Global Development: Shifting Wealth” report classifies the global economy into the four new categories of affluent, converging, struggling, and poor countries on the basis on their income and per capita rate of growth relative to the industrialized world. This suggests heterogeneity among countries of the South. It shows that while some developing countries are beginning to catch up with the living standards of the rich countries, others are still struggling to break through a middle-income “glass ceiling”, and some others are continuing to suffer under the weight of extreme poverty. There are a number of factors that are responsible for this shift in the economic order:

 

1. The opening of the former closed large economies of China, India and the former Soviet Union brought a supply shock to the global labour market. An additional 1.5 billion workers joined the open market-oriented economy in the 1990s, reducing the cost of a range of traded goods and services, making the take-off in a number of converging countries, principally in Asia, possible.
2. Growth in the converging countries boosted demands for many commodities, particularly fossil fuels and industrial metals, transferring wealth to commodity exporters and bringing in an immediate boost to growth in Africa, the Americas and the Middle East.
3. Many converging countries moved from being net debtors to net creditors, keeping US and global interest rates lower than they might otherwise have been.

There has also been a significant paradigm shift in the development path taken by different nations. Traditional thinking held that countries progressed by building up their technological capacity in the manufacture of relatively simple commodities (toys, textiles, etc.) and slowly upgrading towards more sophisticated goods. Today, we see that different development paths are possible. Some countries have already been positioning themselves very successfully and have harnessed the shift. Vietnam, for example, has integrated itself into global production chains, has impressive growth rates, and at the same time has sustained its strong record in poverty reduction. However, for other developing countries, such as Mexico, there are new competitive pressures stemming from the rise of the emerging countries, and successful positioning may mean finding new niches in the global market.

One of the positive consequences of rapid growth in China, India and elsewhere is poverty reduction. Since 1990, the number of people in the world living in extreme poverty on less than a dollar a day has fallen by more than a quarter and has become approximately half a billion. About 90 per cent of these people were in China. The record of poverty reduction in the rest of the developing world is more mixed, and the Millennium Development Goal of halving poverty by 2015 is still some way off.

Growth, however, is also accompanied by increasing inequality in many of the high-growth developing economies, causing governments to boost public spending on social protection, including welfare assistance, to reduce inequality.

Another interesting new feature of the global economy is the emergence of increasing “South–South” links. The number and intensity of economic ties between developing countries are increasing. The facts speak for themselves:

• In 2009, China became the leading trade partner of Brazil, India and South Africa.
• Tata, the Indian multinational, is now the second most active investor in sub-Saharan Africa.
• Emerging economies now give over 100 times more aid to developing countries than they did in 1990, to reach about 15 percent of the flows of OECD's Development Assistance Committee (DAC) donors indicating the growth of these economies.

Emerging markets such as China, Brazil, Russia, Turkey, India and Indonesia are bolstering the balance sheets of many Western firms. The Chinese bought more cars than Americans did in 2010, while India now has as many Internet users as the United States does. By 2030, more than nine of every 10 mobile phones will be owned by people in the developing world, even if large parts of Africa continue to remain unconnected through landline connections. Coca-Cola recently forecast a doubling of worldwide revenues to USD 200 billion over the next decade, thanks to the burgeoning middle class in the emerging economies.

THE GLOBALIZATION DEBATE

In recent years, the rapid pace of globalization of trade and investment has been accompanied by a corresponding debate regarding globalization's implications. The advocates of globalization claim that “the rising tide lifts all boats”, implying that the benefits of globalization permeate all levels of society and make everyone, in general, better-off. Opponents, however, claim that “it lifts only the yachts”, meaning that the rich get richer and the benefits of globalization are unequal and exclude the poor. This section provides a brief overview of some of the issues and arguments associated with the globalization debate. These issues are examined in more depth in subsequent chapters in this book.

Arguments in Support of Globalization

“The rising tide raises all boats” is the basic argument for positing globalization (which stems from the benefits of free trade and investment) as the best strategy for advancing the world's economic development. Initially articulated in Adam Smith's treatise, The Theory of Moral Sentiments,¹⁷ the concept of the “invisible hand”, emphasizes the case of individual self-interest as the forerunner of social good as it turns the quest for profit into an engine for social welfare through the medium of profit. Emerging as the basis of capitalism, the profit motive as the basis of economic activity has been shunned by as many as those who have advocated it. The measures on education, health, poverty, life expectancy, etc. indicate that there has been a definite change for the better with the advent of globalization. A marked decline in both the proportion and the absolute number of destitute people is another argument in favour of globalization.

Globalization has also has resulted in increased trade, which means more employment. Over the past two decades, a period of immense technological change and growth in trade has created millions of jobs all over the world. It is true that trade adjustment can cause some sectors to become uncompetitive and lead to loss of jobs. However, it is imperative to manage the costs of trade adjustment and support the transition of workers to more competitive employment.

Concerns with Respect to Globalization

Concerns about globalization come from a range of sources and cover a diverse set of issues. Some fundamentally oppose the very process and outcomes of globalization on ideological grounds (they are known as anti-globalizers), while others are merely concerned about finding ways to manage the processes and the outcomes of globalization better. Although many anti-globalizers agree that globalization “increases the size of the economic pie”, they also claim that it is accompanied by a number of negative social effects.

Globalization is a process which is uneven, and which excludes. It is argued that globalization has produced uneven results across nations and people. In stark contrast to the positive picture presented by supporters of globalization, opponents claim that the gap between the rich and the poor has increased since the advent of the Industrial Revolution. This is the result of the concentration of wealth in the hubs of global manufacturing all over the world.

It is also argued that while globalization benefits the individual, it has a negative impact on democracy and civil rights. Since globalization is a manifestation of capitalism, it promotes the cause of the TNC over that of the nation state, with negative consequences for various sections of the society. Prominent among such concerns are concerns about labour and labour standards. As globalization has led to trade liberalization, TNCs are easily able to invest in developing countries where labour standards and costs are relatively lower than in developed countries. This has led workers in developed countries to raise concerns over their loss in jobs. It also becomes difficult for developed countries to retain their industries and for their economies to reap the benefits of these industries. As a result, developed countries with more stringent labour standards tend to suffer. On the other hand, developing countries cannot afford to impose higher labour standards as their attraction lies in their low standards and costs. The greater the number of TNCs that invest in their country, the higher are their prospects of economic development as these TNCs pay higher wages, create newer jobs and facilitate R&D much more easily than local firms.

Globalization, it is alleged, is responsible for a combined social, environmental and economic debt which the rich countries owe to the poorer ones. This debt is a result of rich countries plundering the social and environmental resources of the less developed countries in the process of economic globalization. Beginning with slave labour and the use of natural resources from native areas, and culminating in industrialization, globalization has led to environmental degradation and contributed to a continuous decline of environmental and health conditions. On the other hand, the economic growth fostered by globalization can help generate and distribute additional resources for protecting the environment, and improved trade and investment can enhance the exchange of more environmentally friendly technologies and best practices, particularly within developing nations.

MANAGERIAL IMPLICATIONS: MANAGING A GLOBAL ENTERPRISE

Friedman's book, The World Is Flat,¹⁸ views the world as a level playing field in which all competitors have an equal opportunity. The book alludes to the perceptual shift required for countries, companies and individuals to remain competitive in a global market in which historical and geographical divisions are becoming increasingly irrelevant. So what are the essential issues in being “global” and what should a global corporation focus on?

A global corporation has a ubiquitous presence through the strategic use of resources for worldwide operations and profit maximization. Such a corporation looks for similarities, rather than differences, around the world in order to develop a global strategy. It emphasizes a small but critically important set of environmental and industry forces to research, analyse, and respond to.¹⁹

Terrorism

The modern global firm faces several challenges, such as terrorism in its environment of operation, over which it has little control. Firms and policymakers have a clear understanding that terrorism is an ongoing phenomenon to be confronted and dealt with. The root causes of terrorism are usually identified as policies towards immigrants, and extremists aiming to defend a belief in a specific religion, culture, etc. through violence. Better education, better jobs, and improved nourishment, reducing the gap between the different strata of society can help to address the causes of terrorism. Corporations often revive ethnocentric and polycentric policies and use export activities, rather than foreign direct investment, as the dominant form of dealing with foreign markets which harbour such threats.

Corruption

Corruption is another major challenge faced by the modern global firm. Its consequences are badly built roads, structures that collapse and clinics with equipment purchased at high prices or inappropriate specifications leading to safety and health hazards, increase in unemployment, deprivation of livelihoods, and unskilled people taking on inappropriate jobs arresting development. In all such circumstances, vast public expenditures do not achieve the envisioned use and local interest suffers.

Cultural Adjustment

With globalization, cultures around the world have become more similar resulting in cultural homogenization. As one culture has replaced another through history, conflict has followed the emergence of new learning, values, customs, aesthetics, etc. In today's world too, cultural clashes are quite common. In fact, they have gained a momentum with people being truly exposed to new cultural groups. For example, it is a new experience for many Americans to be exposed to large groups of Latinos, and, perhaps face the reality of becoming a regional minority.

Since culture is the result of learned, shared behaviour and undergoes constant change in the process of being adapted to new conditions, changes on a gigantic scale sometimes result in specific instances of xenophobia. However, it can also bring greater flexibility, better understanding and higher tolerance levels. Hence, cultural adjustment is a challenge that results in greater benefits for the modern global firm if it is positively dealt with.

Cultural globalization

Economic globalization

Globalization

Hyperglobalists

International business

International orientations

Political globalization

Pull factors

Push factors

Transformationalists

1. What is globalization? What are the main drivers of the current phase of globalization?
2. Discuss the relationship between international orientations and foreign market entry.
3. “International business is more complex, and works in greater diversity and operational complexity than domestic business.” Elucidate.
4. What are the major motives that drive a firm to internationalize?

1. The World Competitiveness Scoreboard (http://www.imd.org/research/publications/wcy/upload/scoreboard.pdf) ranks 59 countries on a scale for competitiveness. Check the latest rankings and compare them with the previous year's rankings for the purpose of a report.
2. The Global Policy Forum focuses on issues pertaining to the dark side of globalization. Prepare a report on any one aspect covered on the Web site, http://www.globalpolicy.org/globalization/cases-of-globalization.html.