MNI 301 J – Notes as per the preparation slides.

Slide 1- Globalisation:

What is Globalisation?

Globalisation can be seen from 2 perspectives the first being from a sociological perspective and the second from the economic perspective:

Sociological perspective suggests that a process of organizational transformation of social relations and transactions. The process that diminishes international borders across the globe thereby increasing global cultural homogeneity.

From an economic perspective it can be seen that globalisation is a historical process, the result of progress of human innovation and technology. It’s the integration of economies around the world through the movement of goods, services and capital across borders.Also refers to the movement of people (labour) and knowledge (technology) across international borders.

The types of Globalisation: ref pg 6

-The globalisation of Markets: refers to merging of distinguishable and separate national markets into one global marketplace

-The globalisation of Production: refers to the sourcing of goods and services from locations around the globe to gain location-specific advantages in labour, resources and capital

DRIVERS OF GLOBALISATION:

Changes in the political environment / Changes in the technological environment
  1. Creation of global economic/trade regulatory bodies
/
  1. Advances in transportation technology

  1. The collapse of communism
/
  1. Company Intranets and Extranets

  1. Email and videoconferencing

  1. Internet and WWW

Changes in the POLITICAL ENVIRONMENT:Changes took place because of 2 developments: the creation of global economic trade bodies- GATT- general agreement on trade and tariffs, and the collapse of communism. Governments around the worlds restricted access to their local markets and used tariffs and quotas to restrict imports and exports of goods and services. GATT was established in 1948 to reduce protectionism, until 1994 when it was replaced by the WTO (now covering trade in services and intellectual property rights). WTO also safeguards innovation, invention and entrepreneurship.

The collapse of communism signalled a shift in the global business landscape as the fall of theSoviet Union acted as a catalyst for the spread of capitalism and the realisation of trade liberalisation across the globe.

Changes in the technological environment: 2 main contributors- that of invention and innovation. 4 main components of technological innovation contributed immensely to the global exchange of ideas, research, education products and services- those components are:

  1. Email & video conferencing has made it much easier for MNE’s to communicate, transmit and share large volumes of information. This saves costs as well as travel time.
  2. The internet and the WWW provide manufacturer’s with the opportunity to monitor and respond to competition, but also to provide consumers with products at reduced prices. The modern culture of consumerism would not have been possible without the internet.
  3. Company Intranets and Extranets: intranet being an internal organisation wide communication network which enables the fast distribution of a large volume of information throughout the organisation. Access to the organisations data is facilitated, reducing administrative paperwork and frustrating bottlenecks. Extranet allows the suppliers to replenish inventory as and when it is required which ensures the efficiency of the supply chain.
  4. Advances in transportation technology: Air travel and high speed rail innovations facilitate long-distance travel in a short time period.

Evolution of Globalisation:

Process – local firm develops into a multinational- fig 1.2 pg14 (I.A.E.E.O.O.I)

7 Phases:

.

Phase 1: International or overseas enquiries

The company receives an enquiry directly from a foreign business person or from an independent domestic exporter. If the product sells in the foreign market at a profit the company the company executives may look favourably at the prospect of exporting.

Phase 2: Appointment of an export manager

As exports continue to expand, the company may decide to assume a more proactive than reactive approach by appointing an export manager with a small staff to search actively for foreign markets for the company’s products.

Phase 3: Establishment of export department and direct overseas sales

As export sales increase, a fully-fledged export division is established at the same level as the domestic sales department.

Phase 4: Establishment of overseas branches and subsidiaries

Sales branches are established abroad to handle sales and promotional work. The branch sell directly to intermediaries in the foreign market.

Phase 5: Overseas Assembly

Assembly occurs for 3 main reasons: cheaper shipping costs for disassembled products, lower tariffs and cheaper labour.

Phase 6: Overseas manufacturing

There are three methods available as per “modes of entry” below:

Phase 7: Integration of overseas subsidiaries

One MNE system is created, top management makes all the strategic decisions and operations are controlled from a global perspective.

Modes of Entry:

When a MNE finds a potentially lucrative market and wishes to participate in its potential for financial benefits, it will face challenges of that host countrys steep and tough tariff quotas. That host country could even have a total ban imposed on a product if that product is already being locally produced. In this case, the MNE that is trying to penetrate the market will use the following modes of entry:

-Contract manufacturing: under contractual agreement the foreign producer sells the companys product in the foreign market but the company continues to promote and distribute it.

-Licensing: the foreign company pays a royalty to the international company for its patents, trademarks and trade secrets.

-Direct investment in manufacturing facilities: after establishing a manufacturing facility in the foreign country, there is an entire business to run with all the relevant units.

Chapter 2- PESTEL Model:

In order for companies to remain competitive in the global market,it’s not only the understanding of market demands and competitors, but also of the changes in society and the economy.

The PESTEL is a good framework for a company to analyse the following factors: - like Macro Environment.

  1. Political- The broader economy is influenced by polotics and government policy. The degree to which government gets involved in the economy has implications for business.Political factors include tax policy,labour laws, environmental legislation, trade restrictions and political stability.
  2. Economic- A growing economy is essential for successful business. Factors include economic growth, interest rates, inflation and exchange rates
  3. Social- This includes demand and tastes related to the characteristics of the population. Factors include population growth, age distribution, attitude towards work, religions and languages
  4. Technological- Technology can create new industries, or destroy existing ones, can raise or lower the cost of production and influence outsourcing decisions.
  5. Environmental- Environmental consciousness can affect how business is conducted. Issues such as climate changes, emission taxes of company’s
  6. legal– various laws and regulations affect the cost of doing business. Strict consumer laws, antitrust laws and labour laws while providing protection for the locals do impose costs on the business and becomes very complicated whilst having many companies in different countries.

A Political Spectrum:

Democracy vsTotalitarianism :

DEMOCRACY: is based on the belief that citizens should get directly involved in the decision making, obviously when dealing with millions of people it becomes impossible to run this, so instead the people elect an individual to represent them and so this is called representative democracy. These representatives then form a government. Should the representatives fail, they can be voted out and a new representative can be voted in.

Democracy meets the following conditions:

meaningful and extensive competition amongst individuals and groups for all effective positions of government at regular intervals

a high level of political participation in the selection of leaders and policies through free and fair elections so that no sector is excluded

Civil and political liberties - freedom of expression, freedom of press, freedom to form and join organisations sufficient to ensure the integrity of political competition and participation.

TOTALITARIANISM: the most common type of totalitarianism was

1.communism. But this has collapsed since 1989. The

2.second type of totlitariansim is THEOCRATIC- found in states where political power is monopolised by a party or individual who governs by religious principles such as Saudi Arabia.

3. third type is TRIBE totalitarianism where the political party represents the interest of the tribe monopolises power

4. fourth type is that RIGHT-WING totalitarianism which allows some economic freedom but restricts political participation.

THE LEGAL ENVIRONMENT:

It is vital that management understand the legal relationships and policies that exist within the country they operate. The legal environment has close ties with the political climate of a country.

3 LEGAL DIMENSIONS TO BE CONSIDERED BY THE MNE:

  • laws of the domestic country: these govern marketing within a country designed to protect consumers. They may also constrain marketers in the areas of product packaging and labelling.
  • laws of the foreign country:
  • international law: buyers and sellers are subject to international law which governs relationships between countries. The sources are treaties and conventions and are created when several countries agree to certain matters.

THE IMPACT OF THE LEGAL ENVIRONMENT ON INVESTMENT STRATEGIES:

Companies deal with legal and political issues at different levels as they become more international. If a company selects exporting as a mode of entry, companies would not be too concerned with the legalities or the political process as much as it would do with FDI.

In difficult contracting environments where the legal framework for protecting investors is weak, entrepreneurs and managers find it tough to convince investors their money will have high returns. Investors lack the confidence to invest in a country that does not offer legal transparency and thereby raises the cost of doing business in those countries. For example – a MNE would be reluctant to invest in country where the property rights are unclear.

THE TECHNOLOGICAL ENVIRONMENT:

Technology can be defined as ‘ the method or technique for converting inputs to outputs in accomplishing a specific task’. Technological innovation refers to the increase in knowledge, improvement in skills or new and improved way of doing things/product/ service etc.

Technology is classified under : hard technology- equipment; soft technology- know how of systems and processes.

In the global arena- technology is important for the following reasons:

  1. it has the facilitated the process of globalisation and has allowed companies to go international through sales and production
  2. MNE’s facilitate intercompany and inter-country transfers of technology
  3. A country’s lack of technological advancement can act as a hinderence in its attraction of FDI.

The transfer of technology is vital for industrialised and developing countries. The transfer of technology is essential for maintaining a high level of capabilities and competitiveness.

THE GLOBAL ECONOMIC ENVIRONMENT

CONCEPT OF economic integration:

Means the grouping of countries by agreement or treaty usually on a regional basis, to form a trade bloc that benefits participating members through reducing or getting rid of tariffs and non-tarriff barriers in the cross-border movement of goods, services, capital and labour.

TYPES OF ECONOMIC INTEGRATION  3 TYPES:

GLOBAL, REGIONAL & BI-LATERAL:

Global:is facilitated by the rules and regulations of the institutions such as the WTO and IMF and the World Bank. They establish rules and adjudicate trade related disputes. They promote global trade and investment through treaties that are ratified by the member nations – this provides a platform for fair trade and investment.

Regional: countries that are on the same geographical region. Membership is enabled through a treaty also ratified by members. It benefits the nations by having the trade barriers removed between member states, however members can still apply trade barriers to third party’s

Bi-lateral: trade relations and agreement between 2 countries, this facilitates preferential treatment between the 2 states.

4 stages of economic integration:

fta- FREE TRADE AREA -Is a regional econonomic grouping of countries within which all tariff and non-tariff barriers are abolished. There is no common policy towards non-members i.e. no internal tariffs and each country imposes its own tariffs on non-member countries

CUSTOMS UNIONS – Is a FTA that not only eliminates internal tariffs, but also establishes a common tariff and trade policies towards non-members. Tariffs are also pooled and revenue shared as per an agreed formula

COMMON MARKETS – Are CU established to liberalise movement of regional production factors such as people and capital. This facilitates the movement of goods and services and aids the production process resulting in better economic productivity. i.e. it is a CU that allows factor mobility

ECONOMIC UNIONS–A common market that aims to harmonise the economic policies of member nations. Fundamental policies such as fiscal and monetary policies that affect macroeconomic variables are the main focus.

++BENEFITS OF ECONOMIC INTEGRATION++

  • Static / Short term effects
  • Dynamic/ Long term effects

Static/ short term effects:

-Shift of production in the form of:

- Either Trade diversion or Trade Creation

Trade creation occurs when production shifts to more efficient member countries from inefficient domestic or outside countries. It could also occur as imports from a lower cost producer in another member country instead of domestic production orimports from another higher-cost non-member producer country.

In other words, trade creation involves a shift in domestic consumption from high-cost domestic source to a lower-cost partner source as a result of getting rid of tariffs.

Trade diversion occurs when production shifts to inefficient member countries from more efficient outsiders. As a result , countries tend to import from a higher-cost producer membercountries instead of importing a lowest-cost producer in the international market.

Trade diversion involves a shift in domestic consumption from a low-cost world source to a higher-cost partner source as result of the elimination of tariffs on imports from members and the erection of trade barriers against non-member countries

DYNAMIC/LONG TERM EFFECTS:

Results in cost reductions due to the benefits of economies of scale production. Positive effects of the learning curves and experience help with reduction of costs. Members achieve an increase in efficiency and economic growth by:

Increased competition among member nations that produce similar goods and services.

Exploiting the economies of scale

Improved market size which increases consumer spending power.

Attracting FDI from outside countries.

Major Trade Blocs

Europe: EU

27 member states, geographically close, good transport network, considerable natural resources, substantial labour and manufacturing capacity, entrepreneurial culture, formal treaties, FTA with 17 states using Euro as common currency

America: The north american free trade agreement – nafta

USA, Canada and Mexico.

central american common market – cacm

Guatemala, Honduras, Nicaragua, El Salvador & Costa Rica

southern common market – mercosur

Argentina, Brazil, Uruguay, Paraguay

african, caribbean ans pacific – acp

79 states covering 3 continents – 48 from Sub Saharan Africa, 16 from caribean

association of south east asian nations – asean

Indonesia, Malaysia, Philippines, Singapore & Thailand etc.

central african customs and economic union – udeac

Cameroon, CAR, Chad, Rep of Congo, Equitorial Guinea and gabon

southern african development community – sadc

RSa, Namibia, Angola, Botswana, Lesotho, Malawi, Mozambique, Swaziland, Tanzania, Zambia, DRC, Madagascar, Mauritius, Zimbabwe

sadc- south african development community

Created to foster closer cooperation among the government and people of Southern Africa.

objectives:

Objective is to create a Southern African common market. It is dedicated to the ideals of free trade, free movement of people, a single currency, democracy and human rights.

IMPORTANCE OF THE ECONOMIC ENVIRONMENT:

The business dictionary defines an economic environment as the totality of economic factors such as :

Employment

Income

Inflation

Interest rates

Exchange rates

Productivity

Wealth, consumer buying power and behaviour.

Political, legal, cultural environments and economic systems determine the opportunities, costs and risks of that country. The political system usually dictates the economic system of that country.

The economic environment which an international business operates is important for a number of reasons and considerations: level of economic development, extent of economic freedom, current wealth of the population, economic policies and strategies.

The potential of doing business is determined by the 3 factors:

Market size

Current wealth

Future economic prospects.

Some important risks of doing business in other countries:

Political instability

Government attitudes toward nationalisation

Expropriation of assets and private property

Potential social unrest

Absence of rule of law and the inefficiency of law enforcement

International business must therefore identify and evaluate policy issues, economic trends, industry trends, trends in the relevant market segments for that business in that particular country.

The purpose of economic analysis is to evaluate the overall outlook of the economy of the country both in the short and the long term and then assess how political changes can affect them.

A variety of factors must be considered but I have chosen 6 from the 12 mentioned:

  1. Availability of credit
  2. Purchasing power and disposable income of the population
  3. Interest rates
  4. Exchange rates
  5. Inflation
  6. Employment levels.

ECONOMIC SYSTEMS:

A COUNTRY’S ECONOMIC SYSTEM can be defined as the structure and processes a country uses to allocate resources and conducts its commercial activities. Economic systems encompass all the mechanisms and institutions that have been established concerning:

Production and consumption

Income and expenditure

Simply, an economic system could be regarded as a set of principles, processes, techniques.