Unit 1
Globalization and International Business
Ø Concept of Globalization
Since this is the age of
globalization it has known as various terms westernization, universality, modernization,
internationalization, commoditization, monoculture and cultural imperialism
etc. It has yielded a tremendous impact on the global economy. It is become a
buzz word in socio- economic and political arena for the last two decades with
a lot of controversies. The term ‘globalization ‘which came in to common usage
in the 1980s refers to the increasing integration of economies around the world
especially by way of trade and financial flows across the globe.
Globalization is not a single process.
It has become a catch all concept to describe a wide range of trends and forces
leading openness, integration and interdependence of economies. Thus globalization
includes a variety of trends and tendencies. It is not a single process but a
combination of different processes. It is the process of integrating national
socio-economic phenomena, cultural, technical, historical and religious aspects
to international market.
There are two concepts of
globalization:
1) Globalization is as interdependence
concept: Free flows of goods, services, capital, ideas, information and people
from one country to another country without any barriers.
2) Globalization is as time-space
compression concept:
a) Global village due to global
networking
b) It is borderless world or transaction
concept
Dimension of Globalization
Ø Economic: It
is mainly characterized the rapid expansion of international trade, foreign
direct investment (FDI) and capital market.
Ø Political: Democracy,
political freedom, people’s participation, voting right, self-governance, less
government responsibility etc. are concerned with political globalization.
Ø Social : Education
system, information technological development, human development and healthy
environment etc. are concerned with social globalization
Ø Cultural:
Religion , custom ,values, norms , belief etc. are concerned with cultural
globalization
Ø Environmental:
Global warming, depletion of ozone layer, transport border pollution, global ecology,
floods, soil-erosion, water pollution etc. are concerned with environmental
globalization.
Reasons for International Business Expansion
Ø Development of multi -national companies.
Ø Technological innovation
Ø Democratization of politics
Ø Modernization
Ø Rapid liberalization
Ø Growing global competition
Ø Geographic diversification
Ø Benefitting from technological
advances
Ø Matching with consumer pressure
Ø Political trend towards
cross-national economic cooperation
Drivers of Market Globalization
Market globalization has gained more speed,
particularly because of the following driving forces
1. Crisis in capitalism
2. Technological advances
3. World economic boom
4. Comparative and competitive
advantages
5. Decreasing barriers to trade and
investment
6. International media outreach
7. Competition
8. Increasing market size and
geographical diversification
9. Political trend towards promoting
regional economic blocs
10.
Growing consumer pressure
11.
Growing global corporation
12.
Increasing
global outsourcing
Domestic VS International Business
Business
is an economic activity involves the task of adjustment the means to ends or
the ends to means. The nature of business differs depending upon the form of
economic activity being undertaken and organized. The business which is
transferred from the physical territory of the country in to global market is
simply known as international business whereas the business which is diffused
within the border of the country is known as domestic business. Managing an
international business is significantly different from managing a domestic business
due to the following reasons
1. Multiplicity of the countries: It indicates there is diversity in political ,legal and other environmental
factors which are responsible to make
difference the nature and feature of business
2. Range of problem: The range of
problems faced by a manager in international business is wider and complex as
compared to the managers of domestic business: policy and programs enacted by
government are differ from country to country which also determines the nature of
government intervention.
3. Currency: International transactions
involve converting money in to different currencies .Domestic business needs no
such conversion. Complexities and fluctuations in foreign currency generally
complicate business activities whereas it is not so in domestic business.
4. Socio- cultural elements: socio-
cultural elements are differ country to country which provide a variety of
ideologies and philosophies regarding business activities to people in the
globe. So the pattern of business
activity changes from country to country.
5. Ecological and Environmental concerns: Due to ecological and environmental difference,
countries in the world face a variety of business diversification so
international business transaction is of complex nature as a domestic market
faces.
UNI 2: Theories of International Trade and Investment
Ø They are the two sides of a same coin
Ø International trade and investment
both are the essential parts of the modern economic system across the globe.
Ø Transaction involving international trade and
investment are probably the most dynamic and dominating components of
international business activities and they have tremendous impact in overall
socio- economic scenarios globally.
Ø Both are closely related to each other since
trade derives the forms of investment in market and sets a volume of capital
injection to expand business activities through mobilization technology,
innovative ideas and human resources.
Ø Velocity of international trade
forces to make a big dose of capital investment between countries in the global
market due to which countries in world economy are involving in trade to meet the
growing demand of people and their preferences.
Ø In fact, international trade between
countries takes place because the people of different countries have different
needs and preferences and the countries are endowed with different resources.
Ø Comparative advantages is the prime
part of trade to be happened between countries in global market.
In the global trade, there are a
variety of trade theories which describe the need of doing international trade.
Trade theories initially provide the basic criteria and major doctrines related
to trade to be conducted between the countries. Here are some doctrines
regarding global trade which make trade possible among countries with their
respective objectives.
International Trade theories by nature
A) Interventionist doctrine:
It is also known as conventional doctrine. It has two trade
philosophies
i)
Mercantilism:
It is the idea and policy which dominated the economic scene of England and
parts of Europe between the close of the 16th century and the middle
of the 18th century. Mercantilism emphasizes on three aspects:
Trade, treasure and power. It is the doctrine which advocated the principle of
balance of trade which requires the creation of surplus of exports over
imports. Mercantilists favored to stimulate export and discourage imports. Commercial
measures suggested by Mercantilists were: a) Restriction on import of
manufactured goods b) Encouragement to the export of manufactured goods c)
Restriction on industries which interfered with other industries.
ii)
Laissez-
faire Policy: It is the policy designed by classical economist Adam Smith known
as father of economics. It is the doctrine which favors the minimum role of
government in economic activities and trade. According to this policy, the
government is the best which governs least.
B) Theories related to free trade :
Under it there are two theories of international trade
namely
i)
Absolute
Advantage Theory: It was developed by Adam Smith a classical economist who
focused on absolute difference in cost due to which trade between countries
take place. The idea of this theory is that every country should specialize in
the production of that commodity which it can produce more cheaply than others
and exchange it for the commodities which cost less in another countries. This
highlights division of labor at the international level requires the existence
of absolute differences in costs.
With
the help of table it can discuss.
Country
|
Goods-X
|
Goods-Y
|
A
|
10
|
5
|
B
|
5
|
10
|
The table
reveals that country A can produce 10X or 5Y with one unit of labor and country
B can produce 5X or 10Y with one unit of labor. In this case, country A has an
absolute advantage in the production of X and country B has an absolute
advantage in the production of Y.
ii)
Comparative
Cost Advantage or Difference in Cost Theory: This doctrine was developed by
David Ricardo. According to him, it is not absolute but the comparative
differences in cost that determines trade relations between two countries. Production
costs differ in countries because of geographical deviation, division of labor
and specialization in production. In this way, each country specializes in the
production of that commodity in which its comparative cost of production is the
least. With the help of following fig, we can discuss it.
Country
|
Wine
|
Cloth
|
England
|
120
|
100
|
Portugal
|
80
|
90
|
The
table shows that the production of a unit of wine in England requires 120 men
for a year, while a unit of cloth requires 100 men for the same period. On the
other hand the production of the same quantities of wine and cloth in Portugal
requires 80 and 90 men respectively. Thus England uses more labor than Portugal
in producing both wine and cloth. In other words, the Portuguese labor is more
efficient than the England labor in producing both goods. So Portugal possesses
an absolute advantage in both wine and cloth but Portugal would benefit more by
producing wine and exporting it to England because it possesses greater
comparative advantage in it.
C) Factor Endowment theory:
This theory was developed by Eli Heckscher and Bertil Ohlin.
The central idea of this theory is that the main cause of trade between regions
is the difference in prices of commodities based on relative factor endowments
and factor prices. Some countries have much capital and some countries have
much labor. The theory now says that countries that are rich in capital will
export capital- intensive goods and the countries that have much labor will
export labor –intensive goods.
This theory
is based on some assumptions
1. It is a two –by –two-by two model.
2. There is perfect competition in
commodity and factor market
3. There is full employment of resources
4. There is no change in technology
5. There is free trade between two countries.
D) International product life cycle theory:
Prof Raymond Vernon explained this
theory in 1966. The theory is based on the experience of US economy. According
this theory as the product reaches the stage of maturity and decline,
production will shift to foreign locations especially to emerging economies
where unskilled, inexpensive labor can be made efficient for standardized production
process. In any given market, products pass through four distinct phases of
life cycle in the international market. Introduction, the growth, the maturity
and the declining and death. Hence a product reaching at maturity and decline
phase in one country, market may be introduced afresh in another country
markets.
E) The theory of National competitive Advantage: Porter’s Diamond:
This theory highlights about how the countries in the global
market are capable and efficient in a particular product in their domestic market.
Porter tried to solve the puzzle by identifying of national competitive
advantage. As per this theory there are four attributes that always shape the
environment in which local firms compete. These attributes known as Porter’s Diamond
are
1. Factor Endowment
2. Demand condition
3. Related and Supporting Industries
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