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CHAPTER 1: Globalizing Business1.1 European and Global Business
International business1 (IB) is about (1) firms engaging in international (cross-border) economic activities and/or (2) the
activity of doing business abroad. The most important actors in international business are multinational enterprises2
(MNEs), defined as firms that engage in foreign direct investment3 (FDI) by directly investing in, controlling and
managing value added activities in other countries. Also domestic firms engage in IB when working with foreign MNEs.
The international dimensions of business are increasingly important for all businesses, especially in Europe, because
most national markets have opened to international competition.
With the creation of the common market in the European Union, the definition of home market is ambiguous. For most
European businesses, the EU member countries account for more than half of their international activities. However,
even the biggest MNEs do most of their business in their home region. Within their own region, businesses face
different kinds of challenges than when expanding beyond their home region.
Emerging economies4 (or emerging markets) are economies that only recently established institutional frameworks that
facilitate international trade and investment, typically with low or middle-level incomes and above average economic
growth. The largest four emerging economies are Brazil, Russia, India and China (BRIC). About 85% of the people in the
world live in an emerging market, but they collectively Terms to measure economic development:
contribute only about 30% of global gross domestic - GDP: sum of value added by resident firms, households and
product5 (GDP), the most common measure of the government operating in an economy.
economic power of an economy. However, their - GNP: GDP plus income from non-resident sources abroad.
participation in the global economy is increasing. Together, - GNI: GDP plus income from non-resident sources abroad. Term
emerging economies account for almost half of all goods used by the World Bank instead of GNP.
exports and a quarter of all service exports. - PPP: a conversion that determines the equivalent amount of
goods and services different currencies can purchase. This
conversion is usually used to capture the differences in the
1.2 Why Study International Business cost of living in different countries.
International competences are needed for the manager
profession, and they are necessary also for a career development that involves expatriate assignments6.
1.3 A Unified Framework
The big question addressed throughout thus course is “what
determines the success and failure of firms around the globe?”
One Fundamental Question
Overall, firm performance in all their operations around the
globe is, more than anything else, of concern to managers in
internationally operating firms. Numerous other questions all
relate in one way or another to this most fundamental
question. This broader perspective is part of what constitutes the ‘success’ of firms looking beyond profits. In this spirit,
the primary focus of the field of IB is: what determines the success and failure of firms around the globe?
First Core Perspective: An Institution-Based View
Institutions are the ‘rules of the game’ and they come in many forms. Doing business around the globe requires
intimate knowledge about the formal and informal rules of doing business in various countries. In a nutshell, an
institution-based view suggests that success and failure of firms are enabled and constrained by the different rules of
the game.
Some formal rules of the game, such as the requirements to treat domestic and foreign firms as equals, would enhance
the potential odds for foreign firms’ success. Hong Kong is well known to treat all comers the same as it treats
indigenous Hong Kong firms Hong Kong attracts a lot of outside firms. Other rules of the game, which
may discriminate against foreign firms, would undermine the chances for foreign entrants.
In addition to formal rules, informal rules such as culture, norms and values play an important part in shaping the
success and failure of firms around the globe.
1 IB: a firm that engages in international (cross-border) economic activities and/or (2) the activity of doing business abroad.
2 MNE: a firm that engages in foreign direct investment and operates in multiple countries.
3 FDI: investments in, controlling and managing value added activities in other countries.
4 Emerging Economies: economies that only recently established institutional frameworks that facilitate international trade and
investment, typically with low or middle-level incomes and above average economic growth.
5 GDP: the sum of value added by resident firms, households and government operating in an economy.
6 Expatriate assignment: a temporary job abroad with a multinational company.
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, Overall, an institution-based view suggests that the formal and informal rules of the game, known as institutions, shed a
great deal of light on what is behind firms’ performance around the globe.
Second core perspective: a resource-based view
The institution-based view suggests that firms’ success and failure around the globe are influenced by their
environments. However, insightful as this perspective is, there is a major drawback. If we push this view to its logical
extreme, then firms’ performance around the globe would be entirely determined by their environments.
This is where the resource-based view comes in. While the institution-based view primarily deals with the external
environment; the resource-based view focuses on a firm’s internal resources and capabilities.
It starts with a simple observation: in harsh, unattractive environments, most firms either suffer or exit. However,
against all odds, a few superstars thrive in these environments. Also, in countries with a business environment generally
hostile to business, some firms succeed. Some firms then must have certain valuable and unique firm-specific resources
and capabilities that are not shared by competitors in the same environments.
Doing business outside one’s home country is challenging. Foreign firms have to overcome a liability of outsidership7,
which is the inherent disadvantage that outsiders experience in a new environment because of their lack of familiarity
(differences in regulations, languages, cultures and norms). The liability of outsidership increases the more a firm’s
origins differ from the host environment, the less the firm has experience
in the host country and the further away its nearest prior affiliate.
Against such significant odds, the primary weapon of foreign firms is
overwhelming resources and capabilities that after offsetting the liability
of outsidership, still result in some significant competitive advantage.
Firms must possess some powerful firm-specific resources that enabled
them to attain these leadership positions around the globe.
1.4 Understanding Globalization
Those who approve of globalization praise its contributions to economic growth and standards of living, sharing of
technologies and more extensive cultural exchange. Critics argue that globalization undermines wages in rich countries,
exploits workers in poor countries and gives MNEs too much power.
Views on globalization
Many people talk about globalization, yet they do not necessarily mean the same thing (see Table 1.1). For young
people, globalization is often first and foremost the internet and all the information and communication technology
that comes with it. Digital technologies not only enable instant communication but entirely new types of business
models. At the same time, mature businesses have to reassess their manufacturing operations and supply chains in
view of potential disruptions through digital technology, a trend often discussed as Industry 4.08. The accelerated pace
at which technologies spread around the globe is an important aspect of globalization.
A second view associates globalization primarily with the rising power of MNEs and the growing inequality in the world.
Many people feel that they are losing control over their lives as a result of forces unleashed by globalization, and
beyond the control of even their elected representatives. MNEs have grown big, and have attained considerable
bargaining power when negotiating with national governments. Nations appear to have less control over what happens
within their borders, and politicians have lost some of their power to shape events.
Third, unskilled workers appear to have lost out, at least in relative terms. In developed countries, international
competition creates pressures on the welfare state, while low skill workers fear that their job is offshored to India,
China, Poland or Romania. At the same time, the poorest nations seem to fall further behind. The share in world GDP of
the poorest fifth of the world has dropped from 2.3 % to 1.4 % between 1989 and 1998.21 Many economists
acknowledge such concerns, but point to the fundamentally positive effects. In particular, increased
global trade allows greater specialization and greater synergies of pooling resources, which increases productivity and
thus creating potentially more wealth that should eventually benefit all. Advocates of this view thus argue
that fine-tuning of regulations – rather than wholesale rejection of globalization – would be the appropriate way to
ensure benefits of globalizations are shared more broadly.
Fourth, some interpret globalization as a force that makes us all more similar, and that eliminates the distinctiveness of
our national cultures and identities. Some scholars argue that the world is on a path of convergence where consumers
become more alike, and companies thus sell the same products everywhere on the globe. This expectation has created
substantial anxieties, especially in more traditional communities.
7 Liability of outsidership: the inherent disadvantage that outsiders experience in a new environment because of their lack of
familiarity.
8 Industry 4.0: disruptions of operations and supply chains through advances in digital technologies.
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,Yet such strategies have their limits, and in fact almost all products are in one way or another adapted to local contexts.
Thus, we may see some convergence – especially among the middle class – but there is little evidence to suggest that
globalization would create a homogenous ‘global culture’ any time soon.
The following definition by sociologist Mauro Guillén sums up this discussion: globalization 9is ‘a process leading to
greater interdependence and mutual awareness (reflexivity) among economic, political and social units in the world, and
among actors in general. Globalization has created unprecedented contacts between cultures, but it has only
marginally reduced clashes between them.
Trends of globalization
Globalization is not new. People have been trading over long distances for more than five millennia, with early traces of
internationally operating businesses going as far back as the Assyrian and Phoenician Empires. From 50 B.C. to 500 A.D.,
the Roman Empire ruled the Mediterranean region and created road and shipping infrastructure as well as political and
legal structure, notably a common currency, that facilitated trade, while the Silk Road connected Europe to Asia. In the
Middle Ages, the Hanseatic League created a trading network of cities in Northern Europe that stretched from Russia to
England. The League established common rules (or institutions) that applied to merchants in member cities, and thus
overcame the fragmented political structures at the time. Technological progress, in shipping and navigation
techniques, has been advancing the speed and scope of international trade throughout the Middle Ages and into
modern times.
Globalization accelerated in the 19th century following major innovations in manufacturing, communication and
transport, as well as legal changes. Industrialization took off with the invention of the steam engine, which powered the
new railway networks and steam ships as well as mechanized mass production. Communication accelerated by faster
transport, and by the invention of the telegraph in 1838. These technological changes were accompanied by major
liberalization10, the removal of regulatory restrictions on business, such as the abolishment of guild system for trades
and crafts.
The introduction of the limited liability company permitted new forms of ownership and thus larger companies, while
new patent laws encouraged entrepreneurs to innovate. Many countries adopted the gold standard, which provided
stable exchange rates, and allowed unrestricted transfers of capital. Migration was uninhibited by passport controls,
visas or work permits. The wave of globalization of the 19th century peaked with the outbreak of World War I. While
technological advances continued, politics interfered with a lot of the benefits that our grandparents might have
enjoyed. Tariffs started to be introduced from the 1850s; by 1914 only Britain, the Netherlands and Denmark were
committed to free trade. During the 1920s, many countries raised tariffs to
record levels, and new quotas and trade barriers were created as countries aimed to protect their domestic industries.
During World War I, many MNE subsidiaries were expropriated, and all foreign investors lost their assets in Russia after
the revolution of 1917. Many developing countries nationalized natural resource investments
between the 1930s and 1960s. New FDI was made less attractive by restrictions on foreign ownership and by exchange
controls that inhibited the repatriation of profits. Migration has become more restricted since World War I. The stable
exchange rate system broke down when Britain abandoned the gold standard in 1931, and others followed with
competitive devaluations, thus raising the costs and uncertainty of trading across currency areas. In
consequence, international trade declined during World War I, recovered moderately during the 1920s, and then
collapsed in the depression of the 1930s. In globalization there have been quite substantial and costly setbacks.
Following business historian Geoff Jones, waves of globalization 11may appropriately describe the world economy.
What is Globalization?
The current wave of globalization gradually evolved since World War II. A new fixed exchange rate system was created
and provided stability until the late 1960s. However, in the 1950s and 1960s barriers to trade and capital
movements were pervasive, even among the countries that had embraced the principles of a market economy. Many
developing countries focused on fostering and protecting domestic industries, while socialist countries sought to
develop self-sufficiently. Even in Western Europe, trade barriers were substantial – not only shielding European
businesses from outside competition, but also inhibiting companies operating across borders within Europe. However,
barriers to global trade and investment ended up breeding uncompetitive industries that focused on domestic markets.
Gradually, international integration gathered pace. At a regional level, initiatives, such as the European Communities,
created an institutional framework for intra-regional trade, while global agreements such as the GATT aimed to
9 Globalization: a process leading to greater interdependence and mutual awareness among economic, political and social units in
the world, and among actors in general.
10 Liberalization: the removal of regulatory restrictions on business.
11 Waves of globalization: the pattern of globalization arising from a combination of long-terms trends and pendulum swings.
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, liberalize trade globally. However, in the 1970s and 1980s, globalization remained largely a matter for the developed
economies in the Triad12 (North America, Western Europe and Japan).
Globalization accelerated dramatically in the 1990s. While world output grew by 23 % over the decade, global trade
expanded by 80 % and the total flow of FDI increased fivefold. A major contributor to the acceleration were emerging
economies that joined the global stage. More and more countries, such as China, Latin America, Central and Eastern
Europe, and India, realized that joining the world economy was a must. As these countries started to emerge as new
players in the world economy, they become collectively known as ‘emerging markets’ or ‘emerging economies’.
The active participation of emerging economies in international business has
created new awareness of the pyramid structure of the global economy. The
top consists of about one billion people with per capita annual income of €15
000 or higher. However, the vast majority of humanity, about four billion
people, lives at the base of this pyramid making less than €1500 a year. These
people at the base of the pyramid 13provide new resources, and new demand.
Globalization has become more controversial in recent years. Opposing
pressures arise from two sources:
1. Globalization creates fear among people in Europe and North America
because emerging economies seem to compete away many low-end manufacturing jobs and appear to threaten some
high-end jobs.
2. Some people complain about the increasing power of MNEs, which destroy local companies but also cultures, values,
and the environment.
The inter-connectedness of the global economy was evident in the global financial crisis (2008), when it spread from
the US around the World. Global output, trade, and investment plummeted, while unemployment start rising.
After unprecedented government intervention, the global economy turned the corner. However, economic recovery
was slow in some developed economies, whereas some emerging economies rebounded faster. The recession
reminded all firms and managers of the importance of risk management 14– the identification and assessment of risks
and the actions taken to minimize the impact of rare, unfortunate events. Considerations of risk are central for how
firms develop their strategies on the global stage and specifically for management of global supply chains.
Some aspects of globalization are continuously advancing (transport and communication technology). Other aspects –
politics – are more like a pendulum swinging back and forth. Thus, the world economy may best be described as a
combination of continuous technological advance and pendulum swings in government policies, resulting in waves of
globalization. This view suggests possible temporary reversals of some aspects of globalization, though communication
technologies, and thus the intensity of cross-border interfaces, is unlikely to roll back.
1.5 A Glance at the Global Economy
The global economy is driven by the competitive interplay between nations and firms. Who are the biggest players in
the global economy?
The USA accounts for €10 trillion or about 25 % of world GDP, followed by Japan with €3.4 trillion. China has risen to
the 3rd largest economy achieving a GDP of €3.0 trillion, and its weight in the global economy is continuously growing.
The EU as a whole is however bigger than any of these countries; its combined GDP adds to about €12 trillion. Looking
at other indicators of economic power, however, quite different rankings emerge. Four of the five most populous
countries are emerging economies: China (1.34 billion people), India (1.18 billion), Indonesia (226 million) and Brazil
(192 million). The biggest exporters in 2008 were Germany (€1.0 trillion) and China (€980 million). The countries of the
EU together export about €6.0 trillion, most of which is traded within the EU. Yet, exports to the rest of the world still
account for €1.5 trillion, more than any country of the world.
The country with the largest number of MNEs is again the USA with €2.3 trillion of assets overseas, followed by the UK,
France and Germany. However, note that some smaller countries also are major homes to MNEs, notably the
Netherlands and Switzerland.
A frequent observation in the globalization debate is the enormous size of MNEs. The size of these leading MNEs is
indeed striking: the largest MNE, Walmart, generated more turnover than the GDP of Sweden in 2013.
Many of these big companies do most of their business overseas, as indicated by the transnationality index (TNI), which
measures the share of activities outside the home country. Most of the largest firms do more than half of their business
abroad, especially those originating from a small country. In general, 80% of the 500 largest firms used to come from
the Triad.
12 Triad: three regions of developed economies (North America, Western Europe and Japan).
13 Base of the pyramid: the vast majority of humanity, about four billion people, who make less than €1500 a year.
14 Risk management: the identification and assessment of risks and the actions taken to minimize their impact.
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