Lecture 5 bma2 b01 2017
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This document provides an overview of key concepts related to globalization and international trade. It discusses: 1) How the world of business is undergoing changes due to increased competition, disruptive technologies, and knowledge sharing as a result of globalization. 2) Several theories of international trade, including mercantilism, absolute advantage, comparative advantage, and factor proportions theory. 3) Concepts like internationalization, globalization, deterritorialization, and how businesses can expand globally through methods like sourcing, importing/exporting, licensing, and direct investment. 4) The impact of factors like endowments, demand conditions, and independence/interdependence between countries.
Lecture 5 bma2 b01 2017
- 1. BMA2B01 / BMA22B2 / BMX2B01 Lecture 5 – GLOBALISATION AND INTERNATIONAL TRADE 2017 – 08 – (21 to 25)
- 2. Summative Assessments It is compulsory to write Summative Assessment 2 Summative Assessment TWO Date: Thursday, 28 September 2017 For APK 17h00 BMA2B01 & BMA22B2 at D1Lab 208 and D1 Lab 308 For BMX2B01 venue to be confirmed
- 3. 3 Learning Outcomes Learn about globalisation and international trade Learn about international trade theories, how these developed and how they are implemented Study the impact of the digital economy and innovation, the subsequent complexity, and the impact of these on globalisation Understand and develop globalisation strategies Understand the role of Government in international trade and globalisation Understand the nature of trade and the dependencies or independencies between countries Develop an understanding of the role of globalisation and international trade in the world of business. Be able to apply the principles of globalisation and international trade on businesses.
- 4. 4 Businesses becoming more global and porous with respect to external conditions and global markets because of increased competition World of business is undergoing its own radical change – there are more changes due to disruptive technologies and profusion of knowledge Economic world has undergone changes based on needs of societies The linear world of cause and effect has made way for a digital economy based on new relationships and alliances The industrial wave of the mid-1900s has been replaced by the digital wave Industrial world embraced order & stability by focusing on rules & structure, Digital wave allows for rapid change and flexibility focusing on tech & info Context - Globalisation
- 5. 5 There is a shift from an industrial, machine-like structure to a non-linear alternative •brings about new rules for business and new drivers for growth. •presents opposing views about markets, business focus and collaboration. The Digital World of Work Industrial World Digital World Focus on the present Focus on the future Rules and laws Flexibility and openness Knowledge confirmation Knowledge development Authoritative Hypothetical Loyal customers Volatile customers Innovation is important Innovation is vital Technology is important Technology is critical Tribalism Global village Job preservation Job creation Status quo is important Flexibility, speed and change are vital
- 6. 6 Internationalization • the increasing geographical dispersion of economic activities across national borders Globalization: • is a more advanced form of internationalization • integrates economies, industries, markets, cultures and policy-making around the world. • describes the process by which national and regional economies, societies, and cultures become integrated • through a global network of trade, communication, immigration and transportation made possible • by technology, the fall of trade barriers and the building of international alliances • focuses on international market expansions, • but it impacts locally on jobs, health, education and the economy Globalisation & Internationalisation Take not of the definition of globalization on page 127, 2nd paragraph
- 7. 7 Deterritorialization: The eradication of social, political, or cultural practices from their native places and populations. In supraterritoriality, barriers to the flow of goods and services between countries are almost eliminated • Globalization in its current phase has been described as an unprecedented compression of time and space reflected in the tremendous intensification of social, political, economic, and cultural interconnections and interdependencies on a global scale • In a world before globalization: • Distance matter and territorial boundaries kept things in and out of countries • But now, in a world of deterritorialization and supraterritoriality: • Distance becomes almost irrelevant (the end of distance) • Boundaries are increasingly permeable. • Groups and cultures increasingly don’t have a territorial basis • A new kind of non-physical “place” is emerging
- 8. 8 Domestic Business • Conducts business only in its home country. International Business • Is based primarily in one country but transacts business outside its boundaries. Multinational Corporation (MNC) • Has significant operations in more than one country Classifying Business in the Global Village
- 9. 9 Taking a Business Global Global Sourcing • The use of worldwide resources (outsourcing). Importing & Exporting • A domestic firm buys products from foreign firms and sells them in its home market (importing) • A domestic firm sells its locally-made products to foreign buyers in overseas markets (exporting). Licensing • One company allows another company to use its assets (intellectual property) for a fee. • Brand name, a trademark, a particular technology or a patent Contracting • A company has a foreign firm manufacture the goods that it sells as its own. Joint Venture • An enterprise that is created when firms agree to share in its ownership. Direct Investment • Investment that occurs when a company builds or purchases operating facilities (subsidiaries) in a foreign country.
- 10. 10 Globalization in a Business Context Businesses competing in a global market have to manage an array of new challenges including: • The adherence to the laws and regulations of the host country. • Including taxation, environmental laws, labour laws, charters, etc. • The extent of localisation of the business operations. • Measures the contribution to the local economy • Address any issues related to technology adoption in the area • The extent of social responsibility. • Look at social impact, not just profit maximization – CSR initiatives • Management of the culture gap between the host and parent countries and their respective markets. • Manage cultural differences between businesses & economies
- 11. 11 International Trade International trade is defined as the exchange of capital, goods, and services across international borders or territories. In most countries, such trade represents a significant share of the Gross Domestic Product Companies increase their profits through international sales because the same item often sells at a higher price, and therefore makes a bigger profit One reason for entering foreign markets is the opportunity for long-term growth Allows for the use of foreign resources to increase growth, and assists with economies of scale through cross-border trading Without international trade, nations would be limited to the goods and services produced within their own borders.
- 12. 12 Difference between International & Domestic Trade International trade is typically more costly than domestic trade borders imposes additional costs such as tariffs, time costs due to border delays and other costs Factors of production such as capital and labour are typically more mobile within a country than across countries Thus international trade is mostly restricted to trade in goods and services, and only to a lesser extent to trade in capital, labour or other factors of production
- 13. 13 Main Concepts of International Trade Factor Endowments Demand Conditions Independence, Interdependence and dependence between countries Obtaining advantage in the international trade arena
- 14. 14 Factor Endowments By factor endowments, we mean a nation’s position in factors of production such as skilled labour or infrastructure necessary to compete in a given industry • Distinguish between Basic and Advanced Factor Endowments • Basic Factor Endowments are factors present in the country, e.g natural resources, climate, geographic location and demographics • Advanced Factor Endowments are the results of investments by people, companies and govt’s – • likely to lead to competitive advantage. • Include communications, skilled labour, research, technology and education
- 15. 15 Demand Conditions Another concept that is fundamental to international trade is demand conditions. The demand creates capabilities and demanding consumers. The demand impacts on quality and innovation.
- 16. 16 Independence, Interdependence and dependence Independence The country stands alone and apart in regard to trade Interdependence This involves networks of mutual trade exchanges Dependence – There are 2 possibilities for 1 way dependence Monopolistic agreement single supplier and others will find a substitute Monopsonist agreement single buyer and others may lose interest in producing the goods Dependence is dangerous because dependent country is vulnerable and has no safety net in case of a problem
- 17. 17 Obtaining Advantage in International arena There are 3 ways to obtain the advantage Absolute advantage the ability to produce something more efficiently than any other country can Comparative advantage the ability to produce some product more efficiently or better than other products National competitive advantage an international competitive advantage stemming from a combination of factor conditions, demand conditions, related and supporting industries, and firm strategies, structure and rivalries
- 18. 18 7 Theories of International Trade Mercantilism • States that a nation’s wealth depends on its accumulated treasures, and requires that there should be a trade surplus • In order to achieve a trade surplus, exports should be maximised through subsidies and imports should be minimised using tariffs and quota systems Theory of absolute advantage • The capability of one country to produce more of a product with the same amount of input than another country, gives absolute advantage • A country should only produce goods where it is most efficient and trade for those in which it is not efficient in itself Theory of comparative advantage • imports should take place even if the country is more efficient in the product’s production than the country from which it is buying
- 19. 19 Theories of International Trade Factor proportions theory • Proposed that goods that are locally abundant should be exported Product life cycle theory • Begin by exporting the product and at a later stage move to foreign direct investment New trade theory • In industries where there are high fixed costs, specialisation increases output and the ability to enhance economies of scale increases Theory of national competitive advantage • Attempts to analyse the reasons for a nation’s success in a particular industry • 4 major attributes that determine competitive advantage of a nation (Porter, 1998): • factor endowments, • demand conditions, • related and supporting industries, • and firm strategy, structure and rivalry
- 20. 20 Determining Trade Partners There are two major theories which explains how countries determine choice of trading partner. Country Differences Theory Country Similarity Theory • In this theory, the decision to trade is based on differences between the countries. • These differences refer to the various country and product factors, for instance, climate, factor endowments and innovation capabilities • The greater the differences in countries, the greater the amount of trade • The greater the similarities between two counties, the bigger the amount of trade. • Also known as the small leaps theory because, as a product is developed in one country, the next best place to sell it is the most similar country • E.g. Canada is the largest trading partner with USA because these countries are similar
- 21. 21 Four Enablers / Business Drivers of Globalization Outward Business Culture Culture is the set of values and beliefs that define how an entity lives and operates An outward business culture emphasises competitiveness with regard to other companies and focuses on market leadership. Technology Technology transforms relationships between suppliers, producers, retailers and customers. Information The result of processing, manipulating and organising data such a way that it adds value and gives meaning. Open Innovation The use of purposive inflows and outflows of knowledge to accelerate internal innovation and expand markets for external use of innovation respectively’. Seeks and develops ideas found outside business
- 22. 22 Legislation and Fair Globalization Role of Government all states should develop national competencies, regulate economic activity, promote labour equality and provide the relevant services for international alliances host government can take actions to protect the local business community, whilst at the same time benefiting from globalisation initiatives. Triple Bottom Line approach (3BL) defines a business’s ultimate worth in financial, social and environmental terms and, hence, assesses its strategy It improves good corporate citizenship as it takes into account social and environmental responsibilities along with financial ones
- 23. 23 Impact of Globalization Globalisation can change perceptions Improve the bottom line Open up new markets Drives competitiveness and lower cost
- 24. 24 Competing in international markets Host country should be evaluated in terms of: • different buyer patterns, • distribution channels, • potential for growth, driving forces, • political and economic stability, • competitive forces and some of the following considerations: • how govt strategy affects business • sound fiscal and monetary policies; secure property rights; level of corruption • the direction a country takes i.t.o its own development • Govt practices that may lead to a demise of business ventures
- 25. 25 Trade Blocs Type of intergovernmental agreement, often part of a regional intergovernmental organisation, where regional barriers to trade are reduced or eliminated among the participating states Members of successful trade blocs usually share four common traits: Similar levels of per capita GNP Geographic proximity Similar or compatible trading regimes Political commitment to regional organization
- 26. 26 Global Trading Agreements World Trade Organization Establishes and enforces world trade laws. Trade Alliances European Union Created a single market without national barriers to travel, employment, investment, and trade. Euro (€)… Single currency for the EU North American Free Trade Agreement (NAFTA) United States, Canada, and Mexico Association of Southeast Asian Nations(ASEAN) Asia-Pacific Economic Cooperation (APEC)
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- 28. BRICS Brazil-Russia-India-China-South Africa • Association of national emerging economies. It is not a Trade Bloc • With the entrance of South Africa, in April 2011, the BRIC became BRICS, with capital "S". • The BRICS Leaders agreed to the establishment of a New Development Bank • Partnerships fostered by BRICS expected to go a long way in boosting the growth of trade and industrialisation in the African continent.
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- 30. 30 Assessing Globalisation The globalisation paradox Globalisation is paradoxial as perceptions differ widely of who beneficiaries are. The fact is there can be benefits to both parent and host country. On the whole, countries gain more than they lose, although that does not necessarily mean individuals are always better off The most successful strategies find some balance between over- globalisation and under globalisation
- 31. 31 Development of a global business strategy 3 Stages Develop Core Strategy Usually developed in home country Identify the countries for potential global contribution and reasons why this is necessary Internationalise the core strategy. Done through the expansion and/ or adaptation of activities using the core strategy Globalise the strategy by implementing across countries This integrates the strategy worldwide to the countries identified in the first stage
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- 33. 33 Common mistakes in globalisation To assume that local and global markets are the same. No link between the global strategy, the business and the implementation (including resources). To assume that globalisation is a good imperative for success.
- 34. 34 Advantages of Globalisation Cost reductions by using economies of scale, lower labour and plant costs. Improved quality of goods or services because of a specific location, manufacturer or supplier. Customer satisfaction because of extended product offering, ease of access or localisation. Competitive position because of the global market share.
- 35. QUESTIONS