Globalization

Definition
Module – 2
The process by which different parts
of the world interact economically,
politically, and culturally.
 Meaning of Globalization

Globalization refers to the increasing
unification of the world's economic order
through reduction of such barriers to
international trade as tariffs, export fees,
and import quotas.

The goal is to increase material wealth,
goods, and services through an
international division of labor by
efficiencies catalyzed by international
relations, specialization and competition.
 Globalization - Meaning

It describes the process by which regional
economies, societies, and cultures have
become integrated through
communication, transportation, and trade.
 Effects of Globalization

Industrial

Financial

Economical

Political

Ecological

Language

Cultural
 Effects of Globalization

Globalization has various aspects which
affect the world in several different ways
Industrial

Emergence of worldwide production
markets and broader access to a range of
foreign products for consumers and
companies, particularly movement of
material and goods between and within
national boundaries.
 Financial Effects of
 Globalization
International trade in manufactured goods
has increased more than 100 times (from
$95 billion to $12 trillion) since 1955.
China's trade with Africa rose sevenfold
during 2000–07 alone.
Financial

Emergence of worldwide financial markets
and better access to external financing for
borrowers. By the early part of the 21st
century more than $1.5 trillion in national
currencies were traded daily to support
 Economic Effects of
Globalization

Economic
Realization of a global common market,
based on the freedom of exchange of
goods and capital.

Further, in the job market, employees

compete indirectly in a global job market.
In the past, the economic fate of workers
was tied to the fate of national economies.
With the advent of the information age
 Economic Effects of
Globalization

Because workers compete in a global
market, wages are less dependent on the
success or failure of individual economies.
This has had a major effect on wages and
income distribution.

Survival in the new global business
market calls for improved productivity and
increased competition. Due to the market
becoming worldwide, companies in
various industries have to upgrade their
Political Effects of Globalization
Political
•The development of globalization has wide-
ranging impacts on political developments,
which particularly go along with the
decrease of the importance of the state.
•Through the creation of sub-state and
supra-state institutions such as the EU, the
WTO, the G8 or the International Criminal
Court, the state loses power of policy
making and thus sovereignty.
Political Effects of Globalization

However, many see the relative decline in
US power as being based in globalization,
particularly due to its high trade
imbalance.

The consequence of this is a global
power shift towards Asian states,
particularly China, that has seen
tremendous growth rates.

In fact, current estimates claim that
China's economy will overtake that of the
 Informational effects of
Globalization
Informational
•Increase in information flows between
geographically remote locations. Arguably
this is a technological change with the
advent of fibre optic communications,
satellites, and increased availability of
telephone and Internet.
 Language effects of
Globalization
Language
The most spoken first language is Mandarin
(845 million speakers) followed by Spanish
(329 million speakers) and English (328
million speakers). However the most popular
second language is undoubtedly English,
the "lingua franca" of globalization.
 Language effects of
Globalization

About 35% of the world's mail, telexes,
and cables are in English.

Approximately 40% of the world's radio
programs are in English.

English is the dominant language on the
Internet.
 Ecological Effects of
Globalization
Ecological
•The advent of global environmental
challenges that might be solved with
international cooperation, such as climate
change, cross-boundary water and air
pollution, over-fishing of the ocean, and the
spread of invasive species.
•Since many factories are built in developing
countries with less environmental regulation,
globalism and free trade may increase
 Ecological Effects of
Globalization

On the other hand, economic
development historically required a "dirty"
industrial stage, and it is argued that
developing countries should not, via
regulation, be prohibited from increasing
their standard of living.
Cultural effects of Globalization
Cultural
•Growth of cross-cultural contacts; advent of
new categories of consciousness and
identities which embodies cultural diffusion,
the desire to increase one's standard of
living and enjoy foreign products and ideas,
adopt new technology and practices, and
participate in a "world culture".

Some bemoan the resulting consumerism
and loss of languages,
Transformation of culture. This might also
affect the spreading of multiculturalism,
and better individual access to
cultural diversity
 Technical effects of
Globalization
Technical
Central aspect of globalisation has been the
development of a Global Information
System, and greater transborder data flow,
using such technologies as the Internet,
communication satellites, submarine fiber
optic cable, and wireless telephones, which
increased the number of standards applied
globally (e.g., copyright laws, patents and
world trade agreements).
 Technical aspects of
Globalization
New aspects of Legal/Ethical norms such as
the creation of the
international criminal court and
international justice movements, crime
importation and raising awareness of global
crime-fighting efforts and cooperation, the
emergence of Global administrative law.
 Religious effects of
Globalization
Religious
•The spread and increased interrelations of
various religious groups, ideas, and
practices and their ideas of the meanings
and values of particular spaces.
Cultural effects of Globalization
Cultural effects
•Globalization has influenced the use of
language across the world. This street in
Hong Kong, a former British colony, shows
various signs, a few of which incorporate
both Chinese and British English.
•Japanese Noodles, Swedish Meatballs,
KFC, McDonald's fast food as evidence of
corporate globalization and the integration of
the same into different cultures.
 Cultural Effects – Contd.,

"Culture" is defined as patterns of human
activity and the symbols that give these
activities significance. According to
prevailing notions, globalization has
'joined' different cultures and turned them
into something different.

The dominant view stresses that
globalization should be distinguished from
Americanization. This approach has been
used since the late 1980s to conceal the
unidirectional, top-down character of US-
 Democratizing effects
Democratizing effect of communications
•Exchange of information via the internet is
playing a major role in the democratization
of many countries.

•Virtualization of industries since the dawn of

ecommerce has transferred the power to the
buyer, and the same effect has transitioned
into voting systems by the grouping effect of
social media.
 Globalisation
Advantages Disadvantages

Increased free trade 
Increased flow of skilled
between nations and non-skilled jobs from

Increased liquidity of developed to developing
capital allowing investors nations since
in developed nations to corporations want
invest in developing cheapest labour.
nations. 
Increased likelihood of
economic disruptions in
one nation affecting
other and all nations.
 Globalisation
Advantages Disadvantages

Corporations have 
Corporate influence of
greater flexibility to nation-states far exceeds
operate across borders. that of civil society

Global mass media ties organizations and
the world together average individuals.

Increased flow of 
Threat that control of
communications allows world media by a handful
vital information to be of corporations will limit
shared between cultural expression
individuals and 
Greater chance of
corporations around the reactions for
world. globalization being
 Globalisation
Advantages Disadvantages

Greater ease and speed 
Greater risk of diseases
of transportation for being transported
goods and people unintentionally between

Reduction of cultural nations
barriers increases the 
Spread of a materialistic
global village effect lifestyle and attitude that

Spread of democratic sees consumption as the
ideals to developed path to prosperity.
nations 
International bodies like
the World Trade
Organization infringe on
national and individual
 Globalisation
Advantages Disadvantages

Greater interdependence 
Increase in the chances
of nation-states. of civil war within

Reduction of likelihood of developing countries and
war between developed open war between
nations. developing countries as
they vie for resources

Increases in
environmental protection 
Decreases in
in developed nations environmental integrity
as polluting corporations
take advantage of weak
regulatory rules in
developing countries.
 Advantages of Globalisation
1. Intergration of markets: Markets are interlinked- European Union
2. Cheaper Products for Consumer: Trainers are Cheap.
3. Leads to Outsourcing in some cases which can lead to job loses:
Moving call centers to India.
4. Lowering of international Bariers: Now European Union can Trade
with ASEAN and NAFTA.
5. Providing jobs in LEDC's and help develop economy (less
Economically Developed Countries)
 Advantages of Globalization

6. Helps prevent market Saturation in a
specific market: stops there being too
much competitors in one place e.g too
much call centres in UK, so move to India
7. Standardisation of product: the same
products can be seen in some many
places - e.g coke and McDonalds
Disadvantages of Globalization
1. Intense Competition
2. Widening of Gap between rich and poor
countries
3. Harder for Smaller businesses to
establish themselves
4. Exploitation of workers: Paying the
workers in LEDC's a fraction of what would
be paid in to workers in MEDCs.
5. Income generated in Host country is not
always spent in the same country - money
earned from supplying cheap call centres in
India will not be spent in India but maybe in
 History of Globalization

Sharing between world cultures began
1000s of years ago.

In the 19th century cultural sharing
exploded.
 19 Century
th


Europeans discover the Americas

European Imperialism

Industrial Revolution

Inventions
 Transportation
 Telephone
 Telegraph
 20 Century
th


Free market capitalism
- End of Closed Economies
 End of the Cold War

THE INTERNET
 Exchange ideas
 Transfer $$
 Share culture
 24/7
 Opponents of Globalization

THIRD WORLD

Exploitation of child labor

Environmental degradation

Destruction of indigenous cultures

Destruction of small farmers

Genetically engineered foods
 Child Labor

Christians helped to stop Child Labor in
the United States.

Pakistan 2006

United States 1909

 Opponents of Globalization

USA

Corporate greed

Job loss

Retirement loss

Trade imbalance

Loss of small farms

Loss of small businesses
 Proponents of Globalization

Increased Employment?

Lower Wages

More “Service” Jobs

Cheaper Goods

(like gas? like cars?
like food? like textbooks?)
 NAFTA

North American Free Trade Agreement
(1993)

Removed Tariffs

motor vehicles and automotive parts,
computers, textiles, and agriculture.

US President George H. W. Bush.

US President Bill Clinton
 GATT

General Agreement on Tariffs and Trade

an international agreement

Reduced tariffs

Favored Nation Status

Updated 1947 to 1990s
 RACE TO THE BOTTOM

NAFTA & GATT
 Capitalize on Third World Poverty
 Low environmental standards
 Low wages
 Poor safety
 Child labor
 Companies compete to find the poorest most
desperate country in which to manufacture
 US-MEXICO BORDER

NAFTA agreement between Mexico-US-
Canada
 Why is it different along the US-Mexico
Border?
 Maquiladoras
 Babies without brains/mentally retarded
 Xylene in the local water in Mexico
registering at 6,300 times U.S. drinking water
standards.
 FREE TRADE IS GOOD

Protection dulls US workers ambitions

Erecting barriers to FREE TRADE
causing other counties to punish the US

US workers are mismatched with
service/technology society
 People need to be technical
 Mathematical
 creative
 FREE TRADE
MEANS BETTER JOBS

Refocus US jobs
 Boeing
 Microsoft
 Hollywood
 pros and cons of globalization

PRO-GLOBALIZATION 
ANTI-GLOBALIZATION

Multinational 
Child labor
Corporations Exploitation


World Economic 
Third World
Relationships Poverty


Free Trade 
Protectionism


“cheap” goods 
Environmental hazards
 Who benefits from free trade, and
who does not?

Corporations 
Poor People in Poor

Real smart people Countries
who invent things 
Poor People in the

Real aggressive US
people who start 
Non-technical people
large companies in the US

Communist 
Manual Labor in the
Governments like US
China 
The Environment

Small Farms and
Businesses
What could be an ideal economic
globalization?

The Solar Economy;
Renewable Energy
For a Sustainable
Global Future.

America's ideal of
freedom, citizens find
the dignity and
security of economic
independence.

Worldwide education
and health.
 Ralph Nader’s Argument
 Today, much of this economic, political, and
technological power is in the hands of global
corporations wielding immense influence over our
government in very intricate ways. One industry after
another, not the least being the mass media, is
dominated by increasingly fewer giant companies. The
trajectory of this power is to centralize control - using
our own government, wherever necessary, against its
own people - and advance short-term commercial
interests at the expense of the elevated living
conditions and realizable horizons that should be the
just rewards of all people.
 Brookings Institute

Economic theory points to two quite robust conclusions
about the likely economic impact of off-shoring. Overall,
off shoring will offer economic gains. American workers,
companies, and possibly communities will learn to
adjust to a more technological work style in the process.

Foreign outsourcing may also accelerate the formation
of innovative products and services—an effect that has
thus far been unmeasured but may be important. Some
new and young firms, especially those that rely on
information technology, are using highly trained foreign
technicians (principally in India and China) to build
prototypes of new products and services.
 INDIA & CHINA

Benefits of fast- 
Problems of fast-
growing economy. growing economy.

The economic 
Coups, political strife,
fundamentals of both and bad
nations, with their management.
enormous 
Both China and India
populations of young need annual growth
workers and of at least 8% just to
consumers, point to provide jobs for the
strong growth for tens of millions
decades under joining the workforce
almost every each year.
forecast.
 Outsourcing, Off-shoring, and
Globalization

OKLAHOMA

The creation of new
jobs - blue collar and
white collar – in the
third/developing
world is just one
controversial element
of globalization.

Small Farms and
Dairies in decline.
 The Mercantile Theory

Mercantilism was the most influential early
trade theory; it dominated the economies
of most western European nations from
the 1500s through the late 18th century.

The main doctrine of this theory was that
the economic well being of a country
could be improved by exports alone;
imports were to be reduced and, if
possible, avoided.
 The Mercantile Theory

All trade was carried out under
governmental authority, and the financial
wealth of a country was defined by how
much gold it accumulated.

A major problem with mercantile theory is
that the focus on exports at the expense
of imports actually hampers the
development of international trade.
Absolute Advantage Versus
Comparative Advantage

A country enjoys an absolute
advantage over another country in
the production of a product if it uses
fewer resources to produce that
product than the other country does.

A country enjoys a comparative
advantage in the production of a good
if that good can be produced at a
lower cost in terms of other goods.
The Economic Basis for Trade:
Comparative Advantage

Corn Laws were the tariffs, subsidies,
and restrictions enacted by the British
Parliament in the early nineteenth
century to discourage imports and
encourage exports of grain.

David Ricardo’s theory of
comparative advantage , which he
used to argue against the corn laws,
states that specialization and free trade
will benefit all trading partners (real
 Mutual Absolute Advantage
YIELD PER ACRE OF WHEAT AND COTTON
NEW ZEALAND AUSTRALIA

Wheat 6 bushels 2 bushels

Cotton 2 bales 6 bales

• In this example, New Zealand can produce three

times the wheat that Australia can on one acre of
land, and Australia can produce three times the
cotton. We say that the two countries have mutual
absolute advantage.
 Mutual Absolute Advantage
• Suppose that each country divides its land to obtain
equal units of cotton and wheat production.
TOTAL PRODUCTION OF WHEAT AND COTTON
ASSUMING NO TRADE, MUTUAL ABSOLUTE
ADVANTAGE, AND 100 AVAILABLE ACRES
NEW ZEALAND AUSTRALIA
25 acres x 6 bushels/acre 75 acres x 2 bushels/acre
Wheat 150 bushels 150 bushels
75 acres x 2 bales/acre 25 acres x 6 bales/acre
Cotton 150 bales 150 bales
Production Possibility Frontiers for Australia
and New Zealand Before Trade


Because both countries have an absolute advantage
in the production of one product, specialization and
trade will benefit both.
 Gains from Specialization
 An agreement to trade 300 bushels of wheat for
300 bales of cotton would double both wheat and
cotton consumption in both countries.

PRODUCTION AND CONSUMPTION OF WHEAT

AFTER SPECIALIZATION
PRODUCTION CONSUMPTION
NEW NEW
AUSTRALIA AUSTRALIA
ZEALAND ZEALAND
100 acres x 6 bu/acre 75 acres x 2 bu/acre 300 bushels 300 bushels
Wheat 600 bushels 150 bushels
0 acres 100 acres x 6 bales/acre 300 bales 300 bales
Cotton 0 600 bales
Gains from Specialization
 Gains from Comparative
Advantage

Even if a country had a considerable
absolute advantage in the production of
both goods, Ricardo would argue that
specialization and trade are still mutually
beneficial.

When countries specialize in producing
the goods in which they have a
comparative advantage, they maximize
their combined output and allocate their
resources more efficiently.
Gains from Comparative
Advantage

The real cost of producing
cotton is the wheat that
must be sacrificed to
produce it.

A country has a
comparative advantage in
cotton production if its
opportunity cost, in terms
of wheat, is lower than the
other country.
Gains from Comparative
Advantage
 Gains from Comparative
Advantage
 To illustrate the gains from comparative
advantage, assume (again) that in each country
people want to consume equal amounts of cotton
and wheat. Now, each country is constrained by
its domestic production possibilities curve, as
follows:
YIELD PER ACRE OF WHEAT AND COTTON
NEW ZEALAND AUSTRALIA
Wheat 6 bushels 1 bushel
Cotton 6 bales 3 bales
 Gains from Comparative
Advantage
TOTAL PRODUCTION OF WHEAT AND COTTON
ASSUMING NO TRADE AND 100 AVAILABLE ACRES
NEW ZEALAND AUSTRALIA
50 acres x 6 bushels/acre 75 acres x 1 bushels/acre
Wheat 300 bushels 75 bushels
50 acres x 6 bales/acre 25 acres x 3 bales/acre
Cotton 300 bales 75 bales

 The gains from trade in this example can be

demonstrated in three stages.
 Gains from Comparative
Advantage
 Stage 1: Australia transfers all its land into cotton
production. New Zealand cannot completely
specialize in wheat because it needs 300 bales of
cotton and will not be able to get enough cotton
from Australia (if countries are to consume equal
amounts of cotton and wheat).
REALIZING A GAIN FROM TRADE WHEN ONE COUNTRY
HAS A DOUBLE ABSOLUTE ADVANTAGE
STAGE 1
NEW ZEALAND AUSTRALIA
50 acres x 6 bushels/acre 0 acres
Wheat 300 bushels 0
50 acres x 6 bales/acre 100 acres x 3 bales/acre
Cotton 300 bales 300 bales
 Gains from Comparative
Advantage
 Stage 2: New Zealand transfers 25 acres out of
cotton and into wheat.

REALIZING A GAIN FROM TRADE WHEN ONE COUNTRY

HAS A DOUBLE ABSOLUTE ADVANTAGE
STAGE 2
NEW ZEALAND AUSTRALIA
75 acres x 6 bushels/acre 0 acres
Wheat 450 bushels 0
25 acres x 6 bales/acre 100 acres x 3 bales/acre
Cotton 150 bales 300 bales
 Gains from Comparative
Advantage
 Stage 3: Countries trade
REALIZING A GAIN FROM TRADE WHEN ONE COUNTRY
HAS A DOUBLE ABSOLUTE ADVANTAGE
STAGE 3
NEW ZEALAND AUSTRALIA
100 bushels (trade)

350 bushels 100 bushels

Wheat
(after trade)
200 bushels (trade)
350 bales 100 bales

(after trade)
 Gains from Comparative
Advantage


Both countries are better off than they were
before trade. Both have moved beyond their own
production possibility frontiers.
 The Sources of
Comparative Advantage

Factor endowments refer to the quantity
and quality of labor, land, and natural
resources of a country.

Factor endowments seem to explain a
significant portion of actual world trade
patterns.
 The Sources of
Comparative Advantage

The Heckscher-Ohlin theorem is a
theory that explains the existence of
a country’s comparative advantage
by its factor endowments.

According to the theorem, a country
has a comparative advantage in the
production of a product if that country
is relatively well endowed with inputs
used intensively in the production of
that product.
 The Sources of
Comparative Advantage

Product differentiation is a natural
response to diverse preferences
within an economy, and across
economies.

Some economists also distinguish
between acquired comparative
advantage and natural comparative
advantages.

Economies of scale may be available
when producing for a world market
that would not be available when
 Trade Barriers

Protection is the practice of shielding a
sector of the economy from foreign
competition.

A tariff is a tax on imports.

Export subsidies are government
payments made to domestic firms to
encourage exports. Closely related to
subsidies is dumping. A firm or
industry sells products on the world
market at prices below the cost of
production.
 Economic Integration

Economic integration occurs when two
or more nations join to form a free-trade
zone.

The European Union (EU) is the
European trading bloc composed of
Austria, Belgium, Denmark, Finland,
France, Germany, Greece, Ireland, Italy,
Luxembourg, the Netherlands, Portugal,
Spain, Sweden, and the United Kingdom.
 The Case for Free Trade

The case for free trade is based on the
theory of comparative advantage. When
countries specialize and trade based on
comparative advantage, consumers pay
less and consume more, and resources
are used more efficiently.

When tariffs and quotas are imposed,
some of the gains from trade are lost.
The Gains from Trade

When world price is
$2, domestic
quantity demanded
rises, and quantity
supplied falls. U.S.
supply drops and
resources are
transferred to other
sectors.
 The Losses from the
Imposition of a Tariff

The loss of
efficiency from a $1
tariff has two
components:
1. Consumers must
pay a higher price
for goods that could
be produced at a
• Government revenue lower cost.
equals the shaded area. 2. Marginal producers
are drawn into
 The Case for Protection

Protection saves jobs

Some countries engage in unfair trade
practices

Cheap foreign labor makes competition
unfair

Protection safeguards national security

Protection discourages dependency

Protection safeguards infant industries
Modes of entry - Global Markets
There are some basic decisions that the firm
must take before foreign expansion like:
which
•markets to enter, when to enter those
markets, and on what scale.
•Which foreign markets?
•-The choice based on nation’s long run
profit potential.
•-Look in detail at economic and political
factors which influence foreign markets.
 Modes of Entry into GB

-Long run benefits of doing business in a
country depends on following factors:
- Size of market (in terms of
demographics)
- The present wealth of consumer markets
(purchasing power)
- Nature of competition


By considering such factors firm can rank
countries in terms of their attractiveness
 Timing of Entry
 It is important to consider the timing of
entry.
Entry is early when an international
business enters a foreign market before
other foreign
firms. And late when it enters after other
international businesses.

 The advantage is when firms enters early

in the foreign market commonly known as
 Timing of Entry
First mover advantage;-

1. it’s the ability to prevent rivals and capture

demand by establishing a strong brand
name.
2. Ability to build sales volume in that
country.so that they can drive them out of
market.
3. Ability to create customer relationship.
 Timing of Entry
Disadvantage:

1.The firm has to devote effort, time and

expense to learning the rules of the country.

2.Risk is high for business failure(probability

increases if business enters a national
market after several other firms they can
learn from other early firms mistakes
 Various Global Strategies

Exporting (Direct or Indirect)

Licensing

Franchising

Regional Distribution Agreements

Your own foreign presences

Home manufacture, and foreign assembly

Foreign manufacture
 Exporting

Exporting is the marketing and direct sale
of domestically produced goods in
another country.

Exporting does not require that the goods
be produced in the target country, so no
investment in foreign production facility is
required.

Most of the costs associated with
exporting take the form of marketing
expenses.
 Exporting
It means the sale abroad of an item
produced, stored or processed in the
supplying firm’s home country. It is a
convenient method to increase the
sales.
Passive exporting occurs when a firm
receives canvassed them. Active exporting
conversely results from a strategic decision
to establish proper systems for organizing
the export functions and for procuring
 Advantages of Exporting

Need for limited finance

Minimizes risk and investment

Speed of Entry

Maximizes scale; utilizes existing facility.
 Disadvantages of Exporting

Trade barriers & tariffs adds to cost.

Transport cost

Limits access to local information.

Company viewed as an outsider.
 Types of Exporting

Direct Exports

Indirect Exports
 Direct Exports

Direct exports represent the most basic
mode of exporting, capitalizing on
economies of scale in production
concentrated in the home country and
affording better control over distribution.
Direct export works the best if the
volumes are small. Large volumes of
export may trigger protectionism.
 Types of Direct Exporting

Sales representatives represent foreign
suppliers/manufacturers in their local
markets for an established commission on
sales.

Provide support services to a
manufacturer regarding local advertising,
local sales presentations, customs
clearance formalities, legal requirements.

Manufacturers of highly technical services
or products such as production
machinery, benefit the most form sales
 Types of Direct Exporting

Importing distributors purchase product
in their own right and resell it in their local
markets to wholesalers, retailers, or both.

Importing distributors are a good market
entry strategy for products that are carried
in inventory, such as toys, appliances,
prepared food
Direct Exporting - Advantages

Control over selection of foreign markets
and choice of foreign representative
companies.

Good information feedback from target
market.

Better protection of trademarks, patents,
goodwill, and other intangible property.

Potentially greater sales than with indirect
exporting.
 Disadvantages – Direct
Exporting

Higher start-up costs and higher risks as
opposed to indirect exporting

Greater information requirements

Longer time-to-market as opposed to
indirect exporting
 Indirect Exports

Indirect exports is the process of
exporting through domestically based
export intermediaries. The exporter has
no control over its products in the foreign
market.

Types of indirect exporting:

Export trading companies (ETCs)
provide support services of the entire
export process for one or more suppliers.
Attractive to suppliers that are not familiar
with exporting as ETCs usually perform all
the necessary work: locate overseas
 Indirect Exports

Export management companies
(EMCs) are similar to ETCs in the way
that they usually export for producers.
Unlike ETCs, they rarely take on export
credit risks and carry one type of product,
not representing competing ones. Usually,
EMCs trade on behalf of their suppliers as
their export departments
 Indirect Exports

Export merchants are wholesale
companies that buy unpackaged products
from suppliers/manufacturers for resale
overseas under their own brand names.
The advantage of export merchants is
promotion. One of the disadvantages for
using export merchants result in presence
of identical products under different brand
names and pricing on the market,
meaning that export merchant’s activities
 Indirect Exports

Confirming houses are intermediate
sellers that work for foreign buyers. They
receive the product requirements from
their clients, negotiate purchases, make
delivery, and pay the
suppliers/manufacturers.

An opportunity here arises in the fact that
if the client likes the product it may
become a trade representative. A
potential disadvantage includes supplier’s
unawareness and lack of control over
 Indirect Exports

Nonconforming purchasing agents are
similar to confirming houses with the
exception that they do not pay the
suppliers directly – payments take place
between a supplier/manufacturer and a
foreign buyer
Indirect Exporting - Advantages

Fast market access.

Concentration of resources for production.

Little or no financial commitment. The
export partner usually covers most
expenses associated with international
sales

Low risk exists for those companies who
consider their domestic market to be more
important and for those companies that
are still developing their R&D, marketing,
and sales strategies.

The management team is not distracted
 Indirect Exporting -
Disadvantages

Higher risk than with direct exporting

Little or no control over distribution, sales,
marketing, etc. as opposed to direct
exporting

Inability to learn how to operate overseas

Wrong choice of market and distributor
may lead to inadequate market feedback
affecting the international success of the
company

Potentially lower sales as compared to
 Licensing

Licensing is where your own organization
charges a fee and/or royalty for the use of
its technology, brand and/or expertise.

Licensing is the process of leasing a
legally protected (that is, trademarked or
copyrighted) entity – a name, likeness,
logo, trademark, graphic design, slogan,
signature, character, or a combination of
several of these elements.

The entity, known as the property or
intellectual property, is then used in
conjunction with a product. Many major
 Licensing - Advantages
1. Low investment on the part of licensor.
2. Low financial risk to the licensor.
3. Licensor can investigate the foreign
market without much efforts on his part.
4. Licensee gets the benefits with less
investment on research and development.
5. Licensee escapes himself from the risk of
product failure.
 Licensing - Disadvantages
1. It reduces market opportunities for both.
2. Both parties have to maintain the product
quality and promote the product .
Therefore one party can affect the other
through their improper acts.
3. Chance for misunderstanding between
the parties.
 Licensing - Disadvantages
4. Chance for leakages of the trade secrets
of the licensor.
5. Licensee may develop his reputation
6. Licensee may sell the product outside the
agreed territory and after the
expiry of the contract.
 Franchising

Under franchising an independent
organization called the franchisee operates
the business under the name of another
company called the franchisor under this
agreement the franchisee pays a fee to the
franchisor.

Franchising involves the organization
(franchiser) providing branding, concepts,
expertise, and infact most facets that are
needed to operate in an overseas market, to
the franchisee.

Management tends to be controlled by the
franchiser. Examples include Dominos
 Franchising
The franchisor provides the following
services to the franchisee.
1. Trade marks
2. Operating System
3. Product reputation
4. Continuous support system like
advertising , employee training ,
reservation services, quality assurances
program etc.
 Franchising - Advantages
1. Low investment and low risk.
2. Franchisor can get the information
regarding the market culture, customs
and environment of the host country.
3. Franchisor learns more from the
experience of the franchisees.
4. Franchisee get the benefits of R& D with
low cost.
5. Franchisee escapes from the risk of
product failure.
 Franchising - Disadvantages
1. It may be more complicating than
domestic franchising.
2. It is difficult to control the international
franchisee.
3. It reduce the market opportunities for
both.
4. Both the parties have the responsibilities
to maintain product quality and product
promotion.
5. There is a problem of leakage of trade
secrets
Reciprocal Distribution Agreements

This type of strategic alliance is more
trade-based, but in a very real sense it
does in fact represent a type of direct
investment.

Basically, two companies, usually within
the same or affiliated industries, agree to
act as a national distributor for each
other’s products.

The classical example is to be found in
the furniture industry. A U.S.-based
manufacturer of tables signs a reciprocal
 RDA

Both companies gain direct access to the
other’s distribution network without having to
pay distributor support payments and other
related expenses found within the distribution
channel and neither company can hurt the
other’s market for its products.


Without such an agreement in place, the
Spanish manufacturer might very well have to
invest in a national sales office to coordinate its
distributor network, manage warehousing,
inventory and shipping as well as to handle
administrative tasks such as accounting, public
 Turnkey Contracts

Turnkey contracts are major strategies to
build large plants. They often include a
the training and development of key
employees where skills are sparse - for
example, Toyota's car plant in Adapazari,
Turkey. You would not own the plant once
it is handed over.
 Turnkey Project

A turnkey project is a contract under
which a firm agrees to fully design ,
construct and equip a manufacturing/
business/services facility and turn the
project over to the purchase when it is
ready for operation for a remuneration like
a fixed price , payment on cost plus basis.

This form of pricing allows the company to
shift the risk of inflation enhanced costs to
the purchaser.

Eg nuclear power plants, airports, oil
refinery, national highways, railway line
Turnkey Projects - Advantages

One of the major advantages of turnkey
projects is the possibility for a company to
establish a plant and earn profits in a
foreign country especially in which foreign
direct investment opportunities are limited
and lack of expertise in a specific area
exists.
 Turnkey projects -
Disadvantages

Potential disadvantages of a turnkey
project for a company include risk of
revealing companies secrets to rivals, and
takeover of their plant by the host country.

By entering a market with a turnkey
project proves that a company has no
long-term interest in the country which
can become a disadvantage if the country
proves to be the main market for the
output of the exported process.
 International Agents

Agents are often an early step into
international marketing. Put simply,
agents are individuals or organizations
that are contracted to your business, and
market on your behalf in a particular
country.

They rarely take ownership of products,
and more commonly take a commission
on goods sold. Agents usually represent
more than one organization. Agents are a
low-cost, but low-control option.
 International Agents

If an organisation intends to globalize,
they have to make sure that the contract
allows them to regain direct control of
product. Of course they need to set
targets since one can never know the
level of commitment of the agent.


Agents might also represent an
organisation’s - so beware of conflicts of
interest. They tend to be expensive to
 International Distributors

Distributors are similar to agents, with the
main difference that distributors take
ownership of the goods.

Therefore they have an incentive to
market products and to make a profit from
them.

Otherwise pros and cons are similar to
those of international agents.
 Overseas Manufacture

A business may decide that none of the
other options are as viable as actually
owning an overseas manufacturing
plant i.e. the organization invests in plant,
machinery and labour in the overseas
market. This is also known as Foreign
Direct Investment (FDI).

This can be a new-build, or the company
might acquire a current business that has
suitable plant etc. Of course you could
assemble products in the new plant, and
simply export components from the home
 Overseas Manufacture (FDI)

The key benefit is that your business
becomes localized - you manufacture for
customers in the market in which you are
trading.

You also will gain local market knowledge
and be able to adapt products and
services to the needs of local consumers.

The downside is that you take on the risk
associated with the local domestic market.
 International Sales Subsidiary

An International Sales Subsidiary would
be similar, reducing the element of risk,
and have the same key benefit of course.

However, it acts more like a distributor
that is owned by your own company.
Foreign Direct Investment(FDI)

Foreign direct investment (FDI) or
foreign investment refers to the net
inflows of investment to acquire a lasting
management interest (10 percent or more
of voting stock) in an enterprise operating
in an economy other than that of the
investor.

It is the sum of equity capital,
reinvestment of earnings, other long-term
capital, and short-term capital as shown in
 FDI

It usually involves participation in
management, joint-venture, transfer of
technology and expertise.

There are two types of FDI: inward foreign
direct investment and outward foreign
direct investment, resulting in a net FDI
inflow (positive or negative) and "stock of
foreign direct investment", which is the
cumulative number for a given period.

Direct investment excludes investment
through purchase of shares. FDI is one
example of international factor movement.
 FDI - Types
A foreign direct investor may be classified
in any sector of the economy and could be
any one of the following:

an individual;

a group of related individuals;

an incorporated or unincorporated entity;

a public company or private company;

a group of related enterprises;

a government body;

an estate (law), trust or other social
institution; or any combination of the
 FDI - Methods
The foreign direct investor may acquire
voting power of an enterprise in an
economy through any of the following
methods:

By incorporating a wholly owned
subsidiary or company.

By acquiring shares in an associated
enterprise.

Through a merger or an acquisition of an
unrelated enterprise.

Participating in an equity joint venture with
 FDI – Investment Incentives

low corporate tax and 
investment financial
income tax rates subsidies

tax holidays 
soft loan or loan

other types of tax guarantees
concessions 
free land or land

preferential tariffs subsidies

special economic 
relocation &
zones expatriation

EPZ - Export subsidies
Processing Zones 
job training &

Bonded Warehouses employment
subsidies

Maquiladoras 
infrastructure

 FDI – U.S. Scenario

The United States is the world’s largest
recipient of FDI. More than $228 billion in
FDI flowed into the United States in 2010,
with Europe contributing 75% of the total.

The $2.1 trillion stock of FDI in the United
States at the end of 2008 is the equivalent
of approximately 16 percent of U.S. gross
domestic product (GDP).
 FDI – Chinese Scenario

Starting from a baseline of less than $19
billion just 20 years ago, FDI in China has
grown to over $300 billion in the first 10
years.

China has continued its massive growth
and is the leader among all developing
nations in terms of FDI.

Even though there was a slight dip in FDI
in 2009 & 2010 as a result of the global
slowdown, 2011 has again seen
 FDI – India Scenario

Starting from a baseline of less than USD
1 billion in 1990, a recent UNCTAD
survey projected India as the second most
important FDI destination (after China) for
transnational corporations during 2010-
2012.

As per the data, the sectors which
attracted higher inflows were
services,telecommunication, construction
activities and computer software and
hardware. Mauritius, Singapore, the US
 Strategic Alliances(SA)

Strategic alliances is a term that describes
a whole series of different relationships
between companies that market
internationally.

Sometimes the relationships are between
competitors.
There are many examples including:

Shared manufacturing e.g. Toyota Ayago
is also marketed as a Citrion and a
Peugeot.

Research and Development (R&D)
 Strategic Alliances

Distribution alliances e.g. iPhone was
initially marketed by O2 in the United
Kingdom.

Marketing agreements.

Essentially, Strategic Alliances are non-
equity based agreements i.e. companies
remain independent and separate.
 Joint Venture
Joint Ventures tend to be equity-based i.e. a
new company is set up with parties owning a
proportion of the new business.
There are many reasons why companies set up
Joint Ventures to assist them to enter a new
international market:

Access to technology, core competences or
management skills. For example, Honda's
relationship with Rover in the 1980's.

To gain entry to a foreign market. For example, any
business wishing to enter China needs to source
local Chinese partners.

Access to distribution channels, manufacturing and
R&D are most common forms of Joint Venture.
 Joint Venture

Two or more firm join together to create a
new business entity that is legally
separate and distinct from its parents. It
involves shared ownership.


Various environmental factors like social,
technological, economic and political
encourage the formation of joint ventures.
 Joint Venture

It provides strength in terms of required
capital. Latest technology required human
talent etc. and
enable the companies to share the risk in
the foreign markets.

This act improves the local image in the
host country and also satisfies the
governmental joint venture.
 JV

One very good reason why many joint
ventures only involve two parties is the
difficulty in integrating different corporate
cultures.

With two domestic companies from the
same country, it would still be very
difficult. However, with two companies
from different cultures, it is almost
impossible at times.

This is probably why pure joint ventures
have a fairly high failure rate only five
years after inception.
 JV

Joint ventures involving three or more
parties are usually called syndicates and
are most often formed for specific projects
such as large construction or public works
projects that might involve a wide variety
of expertise and resources for successful
completion.

In some cases, syndicates are actually
easier to manage because the project
itself sets certain limits on each party and
close cooperation is not always a
prerequisite for ultimate success of the
 Joint Venture - Advantages
1. Joint venture provide large capital funds
suitable for major projects.
2. It spreads the risk between or among
partners.
3. It provide skills like technical skills,
technology, human skills, expertise,
marketing skills.
4. It make large projects and turn key
projects feasible and possible.
5. It synergy due to combined efforts of
varied parties.
 Joint Venture - Disadvantages

It takes time and effort to build the right
relationship and partnering with another
business can be challenging. Problems
are likely to arise if:

The objectives of the venture are not 100
per cent clear and communicated to
everyone involved.

There is an imbalance in levels of
expertise, investment or assets brought
into the venture by the different partners.
 Joint Venture - Disadvantages

Different cultures and management styles
result in poor integration and co-
operation.

The partners don't provide enough
leadership and support in the early
stages.

Success in a joint venture depends on
thorough research and analysis of the
objectives.

Eg – Daimler Chrysler for making
 Mergers & Acquisitions

A domestic company selects a foreign
company and merger itself with foreign
company in order to enter international
business.

Alternatively the domestic company may
purchase the foreign company and
acquires it
ownership and control.

It provides immediate access to
international
 Mergers & Acquisitions -
Advantages
1. The company immediately gets the
ownership and control over the acquired
firm’s factories, employee,
technology ,brand name and
distribution networks.
2. The company can formulate international
strategy and generate more revenues.
3. If the industry already reached the stage
of optimum capacity level or overcapacity
level in the host country. This strategy
 Mergers & Acquisitions –
1. Acquiring a firmDisadv
in a foreign country is a
complex task involving bankers, lawyers
regulation, mergers and acquisition
specialists from the two countries.
2. This strategy adds no capacity to the
industry.
3. Sometimes host countries imposed
restrictions on acquisition of local
companies by the foreign companies.
4. Labour problem of the host country’s
companies are also transferred to the
 Wholly Owned Subsidiary

Subsidiary means individual body under
parent body. This Subsidiary or individual
body as per their own generates revenue.

They give their own rent, salary to
employees, etc. But policies and
trademark will be
implemented from the Parent body. There
are no branches here.

Only certain percentage of the profit will
be given to the parent body.
 Wholly Owned Subsidiary

A subsidiary, in business matters, is an
entity that is controlled by a bigger and
more powerful entity.


The controlled entity is called a company,
corporation, or limited liability company,
and the controlling entity is called its
parent (or the parent company).
 Wholly Owned Subsidiary

The reason for this distinction is that a
lone company cannot be a subsidiary of
any organization;

Only an entity representing a legal fiction
as a separate entity can be a subsidiary.
While
individuals have the capacity to act on
their own initiative, a business entity can
only act through its directors, officers and
employees
 Wholly Owned Subsidiary

The most common way that control of a
subsidiary is achieved is through the
ownership of shares in the subsidiary by
the parent.

These shares give the parent the
necessary votes to determine the
composition of the board of
the subsidiary and so exercise control.

This gives rise to the common
presumption that 50% plus one share is
enough to create a WOS.
 Wholly Owned Subsidiary
•There are, however, other ways that control
can come about and the exact rules both as
to what control is needed and how it is
achieved can be complex.
• A subsidiary may itself have subsidiaries,
and these, in turn, may have subsidiaries of
their own.
• A parent and all its subsidiaries together
are called a group, although this term can
also apply to cooperating companies and
 WOS

Subsidiaries are separate, distinct legal
entities for the purposes of taxation and
regulation. For this reason, they differ
from divisions, which are
businesses fully integrated within the main
company, and not legally or otherwise
distinct from it.

Subsidiaries are a common feature of
business life and most if not all major
businesses organize their operations in
 WOS

Examples include holding companies
such as Berkshire Hathaway, Time
Warner, or Citigroup as well as more
focused companies such as IBM, or Xerox
Corporation.

These, and others, organize their
businesses into national or functional
subsidiaries, sometimes with multiple
levels of subsidiaries.
 Greenfield Investment

A type of foreign investment in which a
parent company will begin a new venture
in another, usually developing, country.

This parent company will construct new
facilities as well as create new jobs when
they hire new employees for these
facilities.

These companies are typically offered tax
breaks and other incentives for setting up
green field investments.

Establishment of a WOS.
 GI

A Greenfield Investment is the
investment in a manufacturing, office, or
other physical company-related structure
or group of structures in an area where no
previous facilities exist.


The name comes from the idea of building
a facility literally on a "green" field, such
as farmland or a forest. Over time the
term has become more metaphoric.
 Greenfield Investment

Greenfield Investing is usually offered as
an alternative to another form of
investment, such as mergers and
acquisitions, joint ventures, or licensing
agreements. Greenfield Investing is often
mentioned in the context of Foreign Direct
Investment.

Examples of greenfield projects are new
factories, power plants, airports which are
built from scratch on greenfield land.
Those facilities which are
modified/upgraded are called Brownfield
 GI – Advantage

Can build subsidiary it wants.

Easy to establish operating routines.

More likely preferred where physical
capital intensive plants are planned.

An attractive strategy if there are no
competitors to buy or the transfer
competitive advantages that consists of
embedded competencies, skills, routines,
and culture.

It is able to provide full control to the firm
and has the most potential to provide
 GI - Disadvantages

Slow to establish

Risky

Preemption by aggressive competitors

A firm may need to acquire knowledge
and expertise of the existing market by
third parties, such consultant, competitors,
or business partners.

Takes much time due to the need of
establishing new operations, distribution
networks, and the necessity to learn and
implement appropriate marketing
strategies to compete with rivals in a new
 MNC’s

Create wealth and jobs around the world.

Their size enables them to Benefit from
Economies of scale enabling lower costs
and prices for consumers.

Large Profits can be used for research &
Development. For example, oil exploration
is costly and risky which could only be
taken out because they make high profits.
 MNC’s

Ensure minimum standards. The success
of multinationals is often because
consumers like to buy goods and services
where they can rely on minimum
standards. i.e. if you visit any country you
know that the Starbucks coffee shop will
give something you are fairly familiar with.
It may not be the best coffee in the
district, but, it won’t be the worst. People
like the security of knowing what to
 MNC’s

Companies interested in profit at the
expense of the consumer. Multinational
companies often have monopoly power
which enables them to make excess
profit. For example, Shell made profits of
£14bn last year

Their market dominance makes it difficult
for local small firms to thrive. For
example, it is argued that big
supermarkets are squeezing the margins
 MNC’s

In the pursuit of profit, Multinational
companies often contribute to pollution
and use of non renewable resources
which is putting the environment under
threat.

MNCs have been criticised for using
‘slave labour’ workers who are paid a
pittance by Western standards
 Evaluation

Some criticisms of MNCs may be due to
other issues. For example, the fact MNCs
pollute is perhaps a failure of government
regulation. Also, small firms can pollute
just as much.

MNCs may pay low wages by western
standards but, this is better than the
alternatives of not having a job at all.