Text Book Notes- BSB119 Global Business
Chapter 1 -Globalisation
Globalisation- The merging of national economies into an interdependent, integrated global economic
-firms can expand revenue by selling around the -Unemployment in developed countries
world -Poverty in developing countries,
-reduce costs by producing goods where -environmental problems
resources are cheap
Example – Ikea buying parts and furniture from all over the world in order to maintain the lowest price
Offshoring- a form of outsourcing it is when a task previously performed in one country is now
conducted in another country.
Outsourcing- tasks that were previously conducted in-house are now purchased from another firm.
Example- Indian accountants trained in US tax rules performing work for US firms.
Globalisation has several facets including the globalisation of markets and production
Globalisation of Markets- the merging of historically distinct and separate national markets into one
huge global marketplace.
In Australia 77% of the firms exporting are small firms.
Example- Gekko systems- an innovator in mining technology.
Globalisation of Production- Sourcing goods and services from locations around the world to take
advantage of national differences in cost and various quality of factors of production.
- national differences in cost/ quality of - formal and informal trade barriers between
- therefore can compete more effectively -barriers to foreign direct investment
against rivals. -transportation costs
-issues associated with economic and political
Factors of production-Components of production such as labour, energy, land and capital.
Example – Boeing 777 outsources a lot of production to foreign suppliers because the suppliers are the
best in the world at their particular activity
Institutions are needed to help manage, regulate and police the global marketplace and to promote the
establishment of multinational treaties to govern the global business system. General Agreement on tariffs and trade- an international treaty that committed signatories to lowering
barriers to the free flow of good across national borders, a predeccesor to the WTO
WTO- the organisation that succeeded the GATT and now acts as to police the world trading system.
IMF- the international institution set up to maintain order in the international monetary system
World Bank-the international organisation set up to promote economic development by primarily giving
low interest loans to developing countries.
United Nations – an international organisation made up of 191 countries charged with keeping the
peace, developing cooperation between nations and promoting human rights
Environmental factors facilitating globalisation:
- Liberalization- reduction in the barriers to trade and foreign investment
- Political environment- changing ideologies, privitisation and emerging market economies
- Rising disposable incomes- demand for more products
- Technological change-transportation, communication internet, information processing.
- Virtual organisation- virtual workforce (global outsourcing)
Two Drivers of Globalisation- Declining Trade and Investment Barriers and Technological Change
Declining Trade and Investment Barriers
International trade- when a firm exports goods or services to another country.
FDI- when a firm invests resources in business activities outside its home country, giving it some control
over those activities.
The removal of tarrifs and restrictions on trade from many countries for international business, has
driven the globalisation of markets and globalisation of production.
Foreign Direct investment
FDI flow- the amount of FDI undertaken over a given time
FDI Stock- the total accumulated value of foreign-owned assets at a given time.
FDI Outflow- the flow of FDI out of a country
FDI In flow- the flow of FDI into a country
The lowering of trade barriers made globalisation of markets and production a theoretical possibility.
Technological change made it a tangible reality.
Most important innovation- development of microprocessor- high power, low cost, increasing amounts
of information processed by individuals and firms.
Moores Law- the premise that the power of the microprocessor technology doubles and its cost of
production drops by half every 18 months.
Global communications revolutionized- satellite, optical fire, wireless technologies, internet, WWW. Internet-
Growing number of cross border trade
Rolls back constraints of loacation, scale and time zones
Makes it easier for buyers and sellers to fine each other
Allows business, small and large to expand sales at a lower price than ever before
Example – Dell computers – internet and aircrafts, outsource customer service operations- india
Development of commercial jet aircraft
Introduction to containerization
Multinational Enterprise MNE-any business that has productive activities in two or more countries.
The Globalisation Debate
Falling barriers to international trade destroys manufacturing jobs in wealthy advanced
economies. Example- Blundstone boots- moved jobs from AUS to Asia
Free trade encourages firms from advanced countries to move manufacturing to less developed
countries that lack adequate regulations to protect labour and the environment from
Globalisation shifts economic power away from national governments and towards
supranational organisations such as the WTO. EU and UN.- national sovereignty
Over the past 100 years of globalisation, the gap between the rich and poor has gotten larger.
International business- any firm that engages in international trade or investment
Does not have to be a MNE
Must export or import products from other countries
Managing an international business is different from managing a purely domestic business because:
Countries are different
The range of problems confronted by a manager is wider and problems are more complex
International business must find ways to work within limits imposed by government
International transactions involve converting money into different currencies. Chapter 2 Theories of Trade, Investment and Internationalisation
New Trade Theory-
-Suggests that because of economies of scale and increasing returns to specialization, in some industries
there are likely to be only a few profitable firms
- Firms with first mover advantages will develop economies of scale and create barriers of entry for
Free Trade- the absence of barriers to the free flow of goods and services between countries
Economies of Scale- cost advantages associated with large- scale production
Three Main Implications for international Business –
Location implications, first mover and policy implications
Eclectic Paradigm- argument that combining location-specific assets or resource endowments and the
firm’s own unique assets often requires FDI.
Exporting- Sale of products produced in one country to the residents of another.
Licensing- Occurs when a firm licenses the right to produce its product, use its production processes,
brand name, trademark to another firm, in return for a royalty fee on every unit the licensee sells.
Reasons for investing abroad
Find new markets and access resources
Improved efficiency due to cost related advantages, investment incentive or science and
Invest abroad to seek strategic assets by investing in local firms to gain access to distribution net
works, gain local knowledge and other ownership advantages.
Internalisation theory – Marketing imperfection approach to foreign direct investment
Limitations of Exporting
Trade barriers- tariffs and import limitations
Limitations of Licensing
May give away valuable technological know-how to a potential foreign competitor
Example- RCA to Sony and Mistubishi- colour tv- may not be protected by a licensing contract.
Licensing does not give a firm tight control over manufacturing, marketing and strategy in a
country that may be required to maximize its profitability.
Firms competitive advantage is based not on products but on management, marketing and
manufacturing capabilities- firms skills and know-how are not amenable to licensing
Oglipoly- An industry composed of a limited number of large firms.
Multipoint competition- arises when two or more enterprises encounter each other in different regional
markets, national markets or industries Ownership Advantages- Advantages that arise from the accumulation of intangible assets, technological
capacities or innovations.
Internalisation Advantages- Factors associated with a firm deciding to keep the production of a good or
service within the firm rather than outsourcing it to other firms.
Location-specific advantages- advantages that arise from using resource endowments or assets that are
tied to a particular foreign location and that a firm finds valuable to combine with its own unique assets
Externalities- Knowledge Spillovers
MNC- multinational corporations
SMEs- small to medium sized enterprises
The Uppsala Models
Stage 1- no regular export activity
Stage 2- export via independent representatives (agents)
Stage 3- establishment of an overseas sales subsidiary
Stage 4- overseas production/manufacturing units
Born Global- a firm that internationalises rapidly, within a few years of inception.
An OLI Synthesis (dunning)
Choose FDI when 3 conditions exist:
(O)- possesses ownership advantages – owns a valuable asst to provide an international competitive
advantage eg. Technology, trademark, political connections
(L)- Location Advantages- specific to the location where the O advantages can be complemented,
created, acquired or exploited.
(I)- internalization Advanteges- high transaction costs of control- internalize and control its O advantages
Small firms target niche markets which are culturally and psychologically close eg. Aus and NZ
Because of limited resources they need to tap into easy markets and hopefully avoid going head to heap
with established players. Chapter 7 - Economic Environment
Measures of the size of an economy:
Gross National Income (GNI)- the total value of income accruing to a nation’s residents
GNI per capita – the average income of a nation derived by dividing GNI by the total population
GDP- Gross domestic Product- the value of production an dthe income earned from that
Population distribution- information on how a population is divided into various categories such as
gender, age and location.
Income distribution- information on what proportion of the population receives what proportion of the
Sufficient people with a sufficient income to spend are the foundations of a potentially viable market for
a firm’s product.
Population density- where people live within the country- influences market potential
Infrastructure- The collection of the nation’s assets and institutions that facilitate and support economic
Key element of the commercial infrastructure is a well developed financial system
Rule of Law- when behavior and processes are regulated by a system of laws that are consistently and
transparently applied and enforced.
Competitiveness- the quality possessed by a nation or a business that enables it to maintain an
economic advantage in a market place
External Economies- cost efficiencies in production and marketing that a firm enjoys as the result of the
action of others external to the firm
Productivity- the ratio of output to the factors of production
Main obstacles for developing countries
Macroeconomic stability- occurs when an economy grows without persistent and major fluctuations in
the levels of economic activity, inflation rates, unemployment and balance of payments imbalances.
Business cycle- the tendency of economies to move in sequence through phases of expansion and
contraction of economic activity in a somewhat regular pattern. Generally Governments have 4 main stabilization goals:
Low level of unemployment
Positive economic growth
Balance of international payments and receipts.
Instruments used by governments:
Fiscal policy- a form of macroeconomic policy that uses changes in government expenditures and taxes
to stabilize the economy.
Monetary Policy- a form of macroeconomic policy that uses changes in interest rates and money supply
to stabilize the economy.
Economic Growth- an increase in the productive capacity and national output of a country, measured by
the rate of increase of GDP.
Real GDP- a measure of the dollar value of GDP after account has been taken of the changes in value
due to price changes.
Sources of economic growth are both quantitative and qualitative- increases in the quantity and quality
of resources and increased productivity.
Inflation- an increase in the general price level
Measures of inflation:
Consumer Price index (CPI)- a measure of a change in the average price of a sample of consumer
GDP Deflator- a measure of a change in average price based on the changing money value of
Balance of Payments (BOP)- The national accounts that summarise both payments to and receipts from
International investment position (IIP)- records a nation’s stock of foreign assets and liabilities at a
particular point in time.
Current Account Deficit- the amount by which payments to foreigners exceed receipts from foreigners
for current account items.
Foreign Debt- the amount owing by both the private sector and government to foreigners.
Economic development- the increasing capacity of an economy to improve and sustain the standards of
living of the entire population.
Purchasing Power Parity (PPP)-an adjustment in GNI per capita to reflect differences in the cost of living.
Human Development index (HDI)- an attempt by the UN to assess the impact of a number of factors on
the quality of human life in a country. Economic system- the set of arrangements and institutions by which the decisions are made on basic
economic questions of what, how and for whom to produce.
3 Broad Types of Economic Systems:
Market Economy-an economic system in which the interaction of individual decision makers on
questions of supply and demand determines the quantity in which goods and services are produced.
used by all major industrialized countries. However, large corporations, trade unions and governments
limit the freedom of the market in entering a market a MNC needs to assess the impact of these factors.
Emphasizes private ownership and free market activity. Example: Australia, America.
Command Economy- an economic system where the allocation of resources, including determination of
what goods and services should be produced , and in what quantity, is planned by the government. the
assumption is that the government is a better judge of how resources should be allocated than is the
market. China is the foremost example of a centrally planned economy, but has moved to introduce
market forces to revitalize the economy. – Recently Australia recognized China as a market economy.
Example: North Korea, Cuba.
Mixed Economy – an economic system where certain sectors are left to private ownership and free
market mechanisms, while other sectors have significant government ownership and government
planning. in some cases, the degree of government intervention is difficult to quantify. For example in
Japan the ratios of government revenues and expenditures to GDP are lower than in many other
countries, but the government has a prominent role in national economic planning. Example: Japan and
Privitisation- the process of selling state-owned enterprises to private investors.
Emerging market economies- economies that are transforming their economic systems to market-based
systems: also known as transition economies.
Shift towards market-based economic system- number of steps:
creation of effective institutions including a legal system to safeguard property rights
a viable financial sector
a credible government
Deregulation- the process of removing legal restrictions to the free play of markets, the establishment of
private enterprises and the manner in which private enterprises operate.
Institution development- the development of institutions such as the legal and financial systems that
underpin a market-based economy.
First Mover Advantages- advantages accruing to firms that enter markets early. Chapter 5– Differences in Culture
Culture- a system of values and norms that are shared among a group of people and that when taken
together constitute a design for living.
Values- abstract ideas about what a group believes to be good, right and desirable.
Norms- the social rules and guidelines that prescribe appropriate behavior in particular situations
Society- A group of people who share a common set of values and norms.
Values and norms of culture do not emerge fully formed; they are the evolutionary product of a number
the prevailing political and economic philosophies
the social structure of a society
the dominant religion
Material Culture- economic (material), logistics , urbanisation and technology: why, what and how
material things are made- products acceptable in one country are not acceptable in another because of
different levels of development. Example- digital cameras in Russia
Social Strata- the hierarchical categories within a society, defined on the basis of such elements as
family background, income and occupation.
Social Mobility- the extent to which individuals can move out of the strata into which they are born.
Caste System- a closed system of stratification in which social position is determined by the family into
which a person was born, and change out of that strata is usually not possible during a persons lifetime.
Class System- a less rigid social stratification system, in which mobility is possible depending on a
person’s achievements or even just luck.
Culture and the Workplace
High context culture- a culture in which the context of a discussion is as important as the actual words
spoken. Example- Asia, Middle East, Latin America and Africa.
Low context culture- a culture in which the speaker’s message is conveyed explicitly by the spoken
words. Example-western cultures- Australia, US, NZ .
Power Distance- Extent to how much a society allows inequalities of physical and intellectual capabilities
between people to grow into inequalities of power and wealth. USA, Aus-low Asia - high
Individualism vs collectivism- extent to which a society teaches individuals either to prize personal
achievement or conversely to look after the interests of their collective first and foremost.
Uncertainty avoidance- extent to which cultures socialize members to accept ambigiguous situations
and to tolerate uncertainty. Japan-strong
Masculinity vs femininity- extent to which a society differentiates and emphasizes traditional gender and
work roles; a masculine characterization means there is more differentiation, whereas a feminine level
means there is less. Japan, Australia, Germany -masc, fem- Sweden Long-term orientation-extent to which a society adheres to values about time, persistence, ordering by
status, protection of face, respect for tradition and reciprocation of gifts. High- Hong Kong, low-US
High context – Japan, China, Arab Countries
Communicate as much by the context as the content- non verbals, implicit roles.
Preferences: interpersonal relations, long-lasting relationships, verbal agreements, face-saving criteria,
distinguishable insider-outsider demarcations, ‘Who will be at the meeting?’.
Low Context- Germany, Scandinavia, Australia- differences exist
Communicate explicitly and more overtly via the content of the message
Preferences: explicit communication, written agreements, cost-benefit criteria, porous insider-outsider
boundaries, individualistic, “Whats the agenda for the meeting?’
4 types of Culture
Learned- acquired by learning and experience: culture is cumulative and passed from one generation to
Shared- members of groups, organisations share culture, not specific to a single individual.
Adaptive- based on the human capacity to change or adapt.
Integrated- a change in one part brings changes in other parts. eg, technology, industrialization and
culture, education and social status.
Competitive advantage- the practical outcome of cultural understanding and competency.
- Cost savings
- Access to quality staff
- Marketing advantage
- Different problem solving approaches
- Effective management control
Individualistic society’s categorized in 2 ways
Horizontally individualistic countries- Australia, Sweden, Denmark- emphasis is on independence of
action and equality with others.
Vertically individualistic countries- tend to be mainly wealthy western countries- USA, UK –
independence of action and standing out from others in emphasized. Chapter 3- the political economy of trade and investment
Political Economy- the political, economic and legal systems and forces that govern the economy and
Free trade- the absence of barriers to the free flow of goods and services between countries.
-Static Benefits; IB and consumers can locate or source production in countries where products can be
produced most efficiently- source from all over the world
- Dynamic benefits- larger market access and competition stimulate best practice, investment and
innovation.- flow form, bigger market.
- More competitors
- Online is a digital free trade zone.
Governments need to be seen as doing something.
Instruments of trade Policy- Barriers to Trade:
Tariffs- a tax levied by governments on imports or exports
Specific tariff- levied as a fixed charge for each unit of good imported
Ad Valorem Tariff- a tariff levied as a proportion of the value of the imported good.
Domestic producers- those in industry- protection against competitors, lower cost
Consumers- higher price
Producers using imported product lose due to increased costs
Tariffs are pro-producer and anti-consumer.
Import tariffs reduce the overall efficiency of the world economy
Subsidies- Government financial assistance to a domestic producer
May take the form of
Cash grant, low interest loan, tax breaks, and government equity participation in domestic firms
Subsidies help domestic producers by lowering costs in two ways
Allowing them to compete against foreign imports
Allowing them to gain export markets
Import Quota- a direct restriction on the quantity of some goods that can be imported into a country
Tariff rate quota- the process of applying a lower tariff rate to imports within the import quota than
those over the quota Voluntary Export restraint (VER)- a quota on a trade imposed by the exporti