module7 - global perspective

7/30/2019 Module7 - Global Perspective

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GLOBAL ENVIRONMENT


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GLOBALIZATION - IMF

The growing economic inter-dependence of countries through

increasing volume and variety of cross-border transactions in goods &

services, freer international capitalflows, and more rapid & widespread

diffusion of technology


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GLOBALIZATION World Bank

Freedom and ability of individuals

and firms to initiate voluntary

economic transactions with residents

of other countries


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GLOBALIZATION

Process of international integration

of products, technologies, humanresources, capital, information and

cultures.


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ECONOMIC GLOBALIZATION

4 different flows:

Flow of goods/services (free trade)

Flow of people (migration)

Flow of Capital (FII & FDI)

Flow of Technology (Technology Transfer)


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WORLD ECONOMY

in recent years Capital movements, rather than Trade, as

driving force of World Economy

Production uncoupled from Employment

World Economy dominates not the

macro-economics of individual countries

Growth of e-commerce has madegeographical boundaries irrelevant


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LEVELS OF GLOBALIZATION

World-level

Country-level

Industry-level

Firm-level


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World-level Globalization

Highest level at which perceived

Theoretically, no globalization if each

county was self-sufficient Process begins with international

economic, social & political relations

From business environment point of view,focus is on economic & business relations


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Indicators of world-level..

Share of world trade in World GDP FDI in the world as % of world investment

Foreign output of MNCs as % of world GDP Global transactions in foreign exchange as a

proportion of world GDP

Aggregate turnover in forex markets

Total BoP receipts of all countries as a

proportion of GDP


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World Trade Organization

an organization that intends

to supervise and liberalize

international trade.


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Objectives - GATT

Raising the standard of living

Ensuring full employment

Ensuring a large & steadily growingvolume of real income & demand

Developing full utilization of resources

Expansion of production andinternational trade


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GATT - Principles

NON DISCRIMINATION

PROHIBITION OF QUANTITATIVERESTRICTIONS

CONSULTATION


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Country-level Globalization

EXTENT TO WHICH A COUNTRY ISINTEGRATED WITH THE WORLD


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Indicators of Country-level Globalization

Share of foreign trade in national income Foreign investment as % of national income

Emigrant & immigrant population as a % oftotal population

International tourism traffic as a % oftotal population

Share of (foreign output of domesticMNCs + domestic output of foreign MNCs)as a % of national income


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Globalization level of a country can also beassessed in terms of its sensitivity tochanges in economic or social conditions inother regions of the world. Followingcorrelations can be viewed:

World price index & home price index Key stock price indices world & home

Mean level of rate of interest

World growth rate & home exports World growth rate & home growth rate

Exchange rate variations leading world

currencies & home currency


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Industry-level Globalization

A few industries may be operating atglobal level while others are home-oriented

Such industries have: high degree of tech advancement &

competitive advantages and can compete

large presence of MNCs Better access to foreign markets, suppliers,

finance & tech expertise


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Indicators of Industry-level.

Industry exports+ imports as % of output Foreign investment in industry + foreign

investment by cos in industry as a

proportion of total investment in industry

Total forex transactions by firms inindustry as % of total transactions

Total foreign output as a proportion oftotal output


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Firm-level Globalization

Individual firms operating globally

Foreign collaborations or global

operations Have high tech development,

competitive advantages,outsourcing connections & access toforeign markets


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Globalization in India

Economic reforms-economy haveopened up

Various sectors open to foreigncompetition directly


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Factors influencing Globalization

1. Integrating role of Technology,Computing, Communication &Transportation

2. Dynamics of Capital flows

3. Production sharing

4. Strategic Alliances & globalCompetition


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Impact of Globalization

Designing in global environment

Production location selection

Rationalised Production


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MNC

A Multi-National Company is an

enterprise headquartered in onecountry but having operations in more

than one country


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Multi-National Company

BY SIZE

BY STRUCTURE

BYPERFORMANCE

BY BEHAVIOUR

B Si


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By Size

Many dimensions:Turnover used most often

Profits

Market value


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By structure

Coca Cola operates in more than

200 countries and has

widespread share holdings.


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By performance

Earnings

Sales & Assets

B b h i


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By behaviour

It is the behavioral characteristics

of the top management which

decides whether a company is an

MNC or not


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Multi-National Enterprise

MNE is a company that takes a global

approach to foreign markets and

production;Willing to consider locations of market

and production anywhere in the world

Not all MNEs are MNCs since not all

companies are organized as Corporations


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Trans-national Company

A Company that:

tries to achieve economies of

scale through global integration of

its functional area while

being highly responsive to

different locational environment


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Global Company

A Global company is one which basically

treats the whole world as a singlehomogeneous market.

It also sources products, raw materials,

financing, human resources worldwide.


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Multi-Domestic Company

A company that operates in several

countries, but treats each different

country as a different domestic market,

and each of its country units as a separate

profit centre.


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Impact of MNCs

Play a pivotal role in global economy

Link rich & poor economies

Transfer of capital, knowledge, ideas andvalue systems across borders

Their interactions with institutions,

organizations & individuals generate both

+ve andve impacts among stakeholders

f C


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Impact of MNCs

On Trade balance they influence

both imports and exports

Promotion of small scale and ancillaryindustries

Knowledge transfer

Level of technology of local firms

I t f MNC


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Impact of MNCs (contd)

Utilization of resources

Development of infrastructure and

economic development

Inter-industry linkages

Forward & backward linkages

Employment

Trade balance


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Trade balance

OUTFLOWS

Intermediate goods

for local assy

M/cery for local prodn

Global products for

local sale

Equity investment

Loans from parent to

affiliate

INFLOWS

Final goods for global

markets

Intermediate goods

for global markets

Profit remittance

Interest payments

Repayment of loans

SSE & A ill


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SSE & Ancillary

MNCs catalyse export of

complex, tech-intensive products

made by SMEs located in host

countries

Knowledge Transfer


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Knowledge Transfer

Host countries especially developing

economies aim to create an indigenouscapability technical, managerial &

institutional to improve efficiencies in their

own companies Foreign cos a potential source can

transfer info, also stimulate new knowledge

Knowledge transfer raises productivity levelin the host country

Level of Technology


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Level of Technology

FDI importance lies less on transfer of

money than transfer of technology

Tech & best practices transfer improves

productivity and international

competitiveness

Because of above, host country govts

encourage formation of JVs

Above transfer also takes place because

of transfer of labour and manpower


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Utilization of Resources:

For eg: in India, rich mineral resources

were not properly utilised till MNEs cameand helped utilization

Infrastructure:

FDI is more long term than portfolioinvestment

De merits of MNCs


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De-merits of MNCs

MNCs become too powerful by

themselves + as compared togovernments

Put Profits before People

Exploitation of workers

Oligopoly formation because of MNCs

M & As may proliferate


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INTERNATIONAL BUSINESS


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International Business Environment refer

to the conditions which affect exporters &

importers by influencing their export

performance, import behaviour,

competitiveness, cost structure and thus,

profitability


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International business

Has Costs & Benefits that are veryattractive

Also adds new challenges like productlife-cycle management

Intensifies some existing problems such

as protecting Intellectual PropertyRights

EXIM POLICY


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EXIM POLICY

Performance of Exports, and, the

environment of Imports are bothpredominantly set by the Exim

policy


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A no. of global concerns:

Bio-diversity; environmental protection;

poverty; sustainable development;

international security &

cooperation

Cheap Thai


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Appreciation of YenCheap Thai

labour

Rise in labour

cost

Over- building of

Industries

OVER-HEATING

OF THAILAND

ECONOMY

Short-term

funds

Portfolio

Investment

High Return in Thailand

Japanese FDI

Weak financial

system

Indiscriminate lending by

fund-flush banks

Real-estate

bubbleInflation

Imports

Rise

Exports

suffer

Cheap

Chinese

exports

Large current-

a/c deficit

Real estate crash

Bank failures

Run on

Baht

Panic

Depreciation

of Baht


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FOREIGN DIRECTINVESTMENT


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Foreign Direct Investment occurs whena firm directly invests in facilities to

produce and / or market a product in

a foreign country


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FOREIGN DIRECT INVESTMENT Green-field Investment

Mergers / Acquisitions

FOREIGN PORTFOLIO

INVESTMENT

LICENSING


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GREEN-FIELD INVESTMENT

Establishment of a wholly

new operation in a foreigncountry


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M & A

Mergers or Acquisitions involve

acquiring or merging with anexisting firm in a foreign country


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FDI

HORIZONTAL FOREIGN DIRECTINVESTMENT: FDI in the same industry

in which a firm operates at home

VERTICAL FOREIGN DIRECT

INVESTMENT: FDI in an industry that

either provides inputs to the firm at

home, or, sells products of domestic

operations in a foreign country

Benefits of FDI to Host Country


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Benefits of FDI to Host Country

The Resource transfer effect

The Employment effect

The Balance of Payment effect

Effect on Competition & Economic

growth

Benefits of FDI to Home


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Country

3 Sources:

1. Capital A/c of the home country benefits:

I. from inward flow of foreign exchange frominvestments in another country

II. If foreign subsidiary creates demand for

home-countrys exports of Capital equipment,

intermediate goods or complimentary products



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Country

2. Employment in home-country improves

when demand for related products

from host- country is generated

3. Home-country MNC learns valuable

skills from its exposure to foreign

markets, that can be transferred backto home country

FOREIGN EXCHANGE


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FOREIGN EXCHANGE

MARKET

2 MAIN FUNCTIONS:

Currency Conversion

Provide Insurance against foreign

exchange risk

Uses of Foreign Exchange for


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Uses of Foreign Exchange forInternational Businesses

Inward payments for exports

Payments for foreign companys

products

Investments in short-term moneymarkets

For Currency Speculation (George


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Insurance against Forex Risk

Spot Exchange Rates (based on

demand & supply)

Forward Exchange Rates

Currency Swap

module7 - global perspective

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