Cavusgil Ib5 PPT 02-20190917112345

International Business: The New Realities
Fifth Edition
Chapter 2
Globalization of Markets
and the Internationalization
of the Firm
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Learning Objectives
2.1 Understand market globalization as an organizing

framework.
2.2 Learn the driving forces of globalization.
2.3 Understand the impact of technological advances and
globalization.
2.4 Learn the dimensions of globalization.
2.5 Understand firm-level consequences of market
globalization.
2.6 Understand the societal consequences of globalization.

Overview on Globalization of Markets
• Globalization and technological advances have altered

the international business landscape more than any other
trends.
• In this class, globalization refers to the
interconnectedness of national economies and the
growing interdependence of buyers, producers, suppliers,
and governments around the world.
• Globalization allows firms to view the world as one large
marketplace for goods, services, capital, labor, and
knowledge.

Phases of Globalization (1 of 2)
Phase of Globalization Approximate Period Triggers Key Characteristics
First phase 1830 to late 1800s, Introduction of Rise of manufacturing:

peaking in 1880 railroads and ocean cross-border trade of
transport commodities, largely by
trading companies
Second phase 1900 to 1930 Rise of electricity Emergence and
and steel production dominance of early MNEs
(mainly from Europe and
North America) in
manufacturing, extractive,
and agricultural industries
Third phase 1948 to 1970s Formation of Focus by industrializing
General Agreement Western countries to
on Tariffs and Trade reduce trade barriers; rise
(GATT); conclusion of MNEs from Japan;
of World War II; development of global
Marshall Plan to capital markets; rise of
reconstruct Europe global trade names

Phases of Globalization (2 of 2)
Phase of Globalization Approximate Period Triggers Key Characteristics
Fourth phase 1980s to about 2006 Privatization of state Rapid growth in cross-
enterprises in border trade of products,
transition economies; services, and capital;
revolution in rise of internationally
information, active SMEs and
communication, and services firms; rising
transportation prosperity of emerging
technologies; markets
remarkable growth of
emerging markets
Fifth phase 2007 to present Rise of digital Leveraging technology
technologies, and to facilitate trade and
other new local production; rising
technologies, which trade in digitally enabled
are boosting services but slowing
manufacturing growth of trade in
productivity and the merchandise goods
efficiency of
international trade in
services

The Death of Distance
In This Time Period... Fastest Transportation At a Speed of...
Was Via
1500 to 1840s • Human-powered ships 10 miles per hour

and horse-drawn
carriages
1850 to 1900 • Steamships 36 miles per hour

• Steam locomotive trains 65 miles per hour
Early 1900s to today • Motor vehicles 75 miles per hour

• Propeller airplanes 300-400 miles per
• Jet aircraft hour
500-700 miles per
hour

The Driving Forces, Dimensions, and
Consequences of Market Globalization (1 of 4)
1. Driving Forces of Market Globalization

• Worldwide reduction of barriers to trade and investment
• Market liberalization and adoption of free trade (e.g., in
China, former Soviet Union countries, and elsewhere)
• Industrialization, economic development, and
modernization
• Integration of world financial markets
• Advances in technology

2. Dimensions of Market Globalization

• Integration and interdependence of national economies
• Rise of regional economic integration blocs
• Growth of global investment and financial flows
• Convergence of buyer lifestyles and preferences
• Globalization of production activities
• Globalization of services

3a. Firm-level Consequences of Market Globalization:

Internationalization of the Firm’s Value Chain
• Countless new business opportunities for
internationalizing firms
• New risks and intense rivalry from foreign competitors
• More demanding buyers who source from suppliers
worldwide
• Greater emphasis on proactive internationalization
• Internationalization of firm’s value chain

3b. Societal Consequences of Market Globalization

• Contagion: Rapid spread of financial or monetary crises
from one country to another
• Loss of national sovereignty
• Offshoring and the flight of jobs
• Effect on the poor
• Effect on the natural environment
• Effect on national culture

Dimensions of Market Globalization (1 of 3)
• Integration and interdependence of national economies.

Results from firms’ collective international activities.
Governments contribute by lowering trade and
investment barriers.
• Rise of regional economic integration blocs. Free trade

areas are formed by two or more countries to reduce or
eliminate barriers to trade and investment, such as the E
U, NAFTA, and MERCOSUR.

• Growth of global investment and financial flows.

Associated with rapid growth in foreign direct
investment (FDI), currency trading, and global capital
markets.
• Convergence of buyer lifestyles and preferences.

Facilitated by global media, which emphasize lifestyles
found in the U.S., Europe, or elsewhere. Firms market
standardized products.

• Globalization of production. To cut costs, firms

manufacture in low labor-cost locations such as Mexico
and Eastern Europe. Firms also source services from
abroad.
• Globalization of services. Banking, hospitality, retailing,
and other service industries are rapidly
internationalizing. Firms outsource business processes
and other services in the value chain to vendors
overseas. And, in a new trend, many people go abroad
to take advantage of low-cost services.

Relationship Between Trade and GDP
Growth, in Billions of U.S. Dollars
Source: Based on World Bank, Data, 2018, www.worldbank.org .

Driving Forces of Market Globalization
(1 of 3)
• Worldwide reduction of barriers to trade and investment.

Over time, national governments have greatly reduced
trade and investment barriers. The trend is partly
facilitated by the World Trade Organization (WTO), an
organization of some 150 member nations.
• Market liberalization and

adoption of free markets.
Free market reforms in
China, India, and other
nations opened about 1/3
of the world to freer trade.

Driving Forces of Market Globalization (2 of 3)
• Industrialization, economic development, and

modernization. These trends transformed many
developing economies from producers of low-value to
higher-value goods, such as electronics and computers.
Simultaneously, rising living standards have made such

countries more attractive as target markets for sales and
investment.

Gross National Income in U.S. Dollars
(2017) (1 of 2)
SOURCE: Based on World Bank (2018); World Bank Development Indicator database, GNI per capita, Atlas method (current US$),
www.data.worldbank.org .

Gross National Income in U.S. Dollars
(2017) (2 of 2)

Driving Forces of Market Globalization
(3 of 3)
• Integration of world financial markets. Enables firms to raise

capital, borrow funds, and engage in foreign currency
transactions wherever they go. Banks now provide a range of
services that facilitate global transactions.
• Advances in technology. Reduces

the cost of doing business
internationally, by allowing firms
to interact cheaply with suppliers,
distributors, and customers
worldwide. Facilitates the
internationalization of companies,
including countless small firms.

Digital Technologies
• Profound advances have occurred in computers, digital

technologies, telephony, and the Internet.
• MNEs leverage digital technologies to optimize their
s
performance, managing operations around the world.
• Digital technologies opened the global marketplace to

firms that historically lacked the resources to
internationalize.

Declining Cost of Global Communication
and Growing Number of Internet Users
Sources: BridgeVoicePluto, “Disrupting Wholesale Telecom: VoIP Market Trends and Predictions,” 2017,
www.bridgevoice.com ; IMF, World Economic Outlook (Washington, DC: International Monetary Fund,
2017); United Nations International Telecommunications Union, ICT Statistics, 2017, www.itu.int
; Internet World Stats, Internet Usage Statistics, 2018, www.internetworldstats.com

Manufacturing and Transportation
Technologies
• Revolutionary developments facilitate low-scale and low-
cost manufacturing; firms can make products cost-
effectively even in short production runs. Online platforms
are increasing the productivity of business and industrial
activity.
• In transportation, key advances include fuel-efficient
jumbo jets, giant ocean-going freighters, and
containerized shipping. The cost of international
transportation has declined substantially, spurring rapid
growth in global trade.
• Collectively, technological advances have greatly
reduced the costs of doing business internationally.
Company Internationalization and the
Value Chain
• The most significant implication of market globalization
for companies is that a purely domestic focus is no longer
viable in most cases.
• Market globalization compels firms to internationalize
their value chain, and access the benefits of international
business.
• Value chain: The sequence of value-adding activities
performed by the firm in the process of developing,
producing, and marketing a product or a service.
• Globalization allows the firm to internationalize its value
chain, leading to various advantages.

Internationalization of the Firm’s Value
Chain (1 of 2)

Internationalization of the Firm’s Value
Chain (2 of 2)
• The truly international firm configures its sourcing,

manufacturing, marketing, and other value-adding
activities on a global scale.
• Rationale:
– cost savings
– increase efficiency, productivity, and flexibility of value
chain activities
– access customers, inputs, labor, or technology
– benefit from foreign partner capabilities

Societal Consequences of Globalization
(1 of 4)
• Loss of National Sovereignty. M N E activities can interfere with

governments’ ability to control of their own economies and social-
political systems. Some firms are bigger than the economies of
many nations (e.g., Walmart, Shell).
• However, some argue that global

competition in the context of global free
trade makes M N E s less powerful (e.g.,
The U S auto industry declined as foreign
rivals from Japan and Europe entered the U
S market. Some day, Walmart may be
overtaken by a giant Chinese retailer).

(2 of 4)
• Offshoring and the Flight of Jobs. Jobs are lost as firms

shift production of goods and services abroad, in order to
cut costs and obtain other advantages. Firms benefit,
communities and industries are disrupted. However,
some MNEs undertake reshoring-returning production to
the home country to benefit from home-based
advantages.
• Effect on the Poor. In poor countries, while globalization
usually creates jobs and raises wages, it also tends to
disrupt local job markets. MNEs may pay low wages, and
many exploit workers or employ child labor.
Globalization’s benefits are not evenly distributed.
(3 of 4)
Example
• Many people in India are losing jobs as the hand-woven
textiles industry is being gradually automated.

Nike’s Foreign Factories
• Nike has 100s of factories in Asia, Latin America, and
elsewhere.
• Nike was criticized for paying low wages and operating
sweatshop conditions.
• Labor exploitation and sweatshop conditions are genuine
concerns in many developing economies.
• However, consideration must be given to the other
choices available to people in those countries.
• Nike and many other MNEs have taken important steps
to improve working conditions in their foreign plants.

Growth of World GDP, Average Annual
Percent Change, 2009-2018 (1 of 2)
Source: International Monetary Fund, World Economic Outlook database, 2018, www.imf.org .

Growth of World GDP, Average Annual
Percent Change, 2009-2018 (2 of 2)

Percentage of Change in Annual GDP
Growth
Sources: World Bank, Data, GDP Growth (Annual %), http://data.worldbank.org , 2017; IMF, World Economic Outlook
(Washington, DC: International Monetary Fund, September 2017); IMF, World Economic Outlook Database, 2017,
www.imf.org ; United Nations, UNData, “GDP Growth (annual %),” 2017, http://data.un.org .

The Rise of Daily Income Levels, by
Region, in U.S. Dollars
Sources: L. Chandy, N. Ledlie, and V. Penciakova, The Final Countdown: Prospects for Ending Extreme Poverty by
2030, Policy Paper 2013-14 (Washington, DC: Brookings Institution); Economist, “Poverty’s Long Farewell,” February
28, 2015, p. 68; World Bank, GNI per capita, Atlas method (current US$), 2017, http://data.worldbank.org .
Note: The figures show average daily income per capita, in U.S. dollars, adjusted for inflation.

(4 of 4)
• Effect on Sustainability and the Natural Environment.

Globalization harms the environment by promoting
industrialization and other activities that generate pollution,
habitat destruction, and other environmental harm. E.g., As
China and India industrialize, air and water pollution have
become major hazards.

• However, as nations develop their economies, they tend
to pass laws that protect the environment. e.g., This
happened in Japan from the 1960s to the 1980s. In
Mexico, the government is gradually adopting policies to
protect the air, water, etc.
• Effect on National Culture. Globalization opens the door
to foreign firms, global brands, unfamiliar products, and
new values. Increasingly, consumers buy similar
products, modeled according to Western countries,
especially the US. In this way, traditional norms, values,
and behaviors may homogenize over time. National
identity may be lost to ‘global’ culture.

Automaker Market Shares, Passenger Car
Sales in the U.S, 1989 and 2017
Sources: Based on Craig Trudell, “U.S. Automakers Seen Losing Market Share amid 2012 Growth: Cars,” Bloomberg
BusinessWeek, February 8, 2012, www.businessweek.com ; J. Muller, “Automakers Gold Rush,”
Forbes, June 8, 2009, pp. 70-77; Wall Street Journal, “Sales and Total Share of Market by Manufacturer,” February 1, 2018,
www.wsj.com/mdc/public/page/2_3022-autosales.html

Ethical Connections
• In six years, Nigeria increased its telecom infrastructure
from just 500,000 phone lines to more than 30 million
cellular subscribers.
• This led to a big rise in productivity and commerce, which
has helped improve living standards.
• Access to cell phones saves wasted trips, provides
access to education and healthcare, and facilitates
communication between suppliers and customers.
• MNE telecom investment in Africa allows firms to fulfill
social responsibilities and improve the lives of millions of
poor people.

You Can Do It: Terrance Rogers (1 of 3)
• Terrance’s majors: Finance and
International Business
• Objectives: Exploration, international
perspective, self-awareness, career
growth, learning about foreign markets
• Internships during college: Deutsche
Bank
• Jobs held since graduating: All at
Deutsche Bank, Business Analyst,
Management Associate, Executive
Management Rotation, in New York.
Most recently, Executive Management
Associate at Deutsche Bank, London.

Terrance’s Advice for an International Career:

• Early exposure at his university to international business
and study abroad
Success Factors:
• Work on projects that expose you to people in different
regions across the globe
• Mention your interest in working abroad early and bring it
up in your annual review

• Find a way to impress the people who can make the

decision. It becomes easier to make the move when the
“right people” know you can deliver.
Challenges:
• Language and cultural barriers should be faced early in
your career. Learn from cultural missteps early, so that
you can be a better leader tomorrow.

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International Business: The New Realities

Copyright © 2020 Pearson Education, Inc. All Rights Reserved

2.1 Understand market globalization as an organizing

Copyright © 2020 Pearson Education, Inc. All Rights Reserved

• Globalization and technological advances have altered

Copyright © 2020 Pearson Education, Inc. All Rights Reserved

First phase 1830 to late 1800s, Introduction of Rise of manufacturing:

Copyright © 2020 Pearson Education, Inc. All Rights Reserved

Copyright © 2020 Pearson Education, Inc. All Rights Reserved

1500 to 1840s • Human-powered ships 10 miles per hour

1850 to 1900 • Steamships 36 miles per hour

Early 1900s to today • Motor vehicles 75 miles per hour

Copyright © 2020 Pearson Education, Inc. All Rights Reserved

1. Driving Forces of Market Globalization

Copyright © 2020 Pearson Education, Inc. All Rights Reserved

2. Dimensions of Market Globalization

Copyright © 2020 Pearson Education, Inc. All Rights Reserved

3a. Firm-level Consequences of Market Globalization:

Copyright © 2020 Pearson Education, Inc. All Rights Reserved

3b. Societal Consequences of Market Globalization

Copyright © 2020 Pearson Education, Inc. All Rights Reserved

• Integration and interdependence of national economies.

• Rise of regional economic integration blocs. Free trade

Copyright © 2020 Pearson Education, Inc. All Rights Reserved

• Growth of global investment and financial flows.

• Convergence of buyer lifestyles and preferences.

Copyright © 2020 Pearson Education, Inc. All Rights Reserved

• Globalization of production. To cut costs, firms

Copyright © 2020 Pearson Education, Inc. All Rights Reserved

Source: Based on World Bank, Data, 2018, www.worldbank.org .

Copyright © 2020 Pearson Education, Inc. All Rights Reserved

• Worldwide reduction of barriers to trade and investment.

• Market liberalization and

Copyright © 2020 Pearson Education, Inc. All Rights Reserved

• Industrialization, economic development, and

Simultaneously, rising living standards have made such

Copyright © 2020 Pearson Education, Inc. All Rights Reserved

Copyright © 2020 Pearson Education, Inc. All Rights Reserved

Copyright © 2020 Pearson Education, Inc. All Rights Reserved

• Integration of world financial markets. Enables firms to raise

• Advances in technology. Reduces

Copyright © 2020 Pearson Education, Inc. All Rights Reserved

• Profound advances have occurred in computers, digital

performance, managing operations around the world.

• Digital technologies opened the global marketplace to

Copyright © 2020 Pearson Education, Inc. All Rights Reserved

Copyright © 2020 Pearson Education, Inc. All Rights Reserved

Copyright © 2020 Pearson Education, Inc. All Rights Reserved

Copyright © 2020 Pearson Education, Inc. All Rights Reserved

• The truly international firm configures its sourcing,

Copyright © 2020 Pearson Education, Inc. All Rights Reserved

• Loss of National Sovereignty. M N E activities can interfere with

• However, some argue that global

Copyright © 2020 Pearson Education, Inc. All Rights Reserved

• Offshoring and the Flight of Jobs. Jobs are lost as firms

Copyright © 2020 Pearson Education, Inc. All Rights Reserved

Copyright © 2020 Pearson Education, Inc. All Rights Reserved

Copyright © 2020 Pearson Education, Inc. All Rights Reserved

Copyright © 2020 Pearson Education, Inc. All Rights Reserved