{"id":11178,"date":"2017-04-17T21:57:25","date_gmt":"2017-04-17T21:57:25","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/introbusinesswmopen2\/?post_type=chapter&p=11178"},"modified":"2017-04-18T18:09:03","modified_gmt":"2017-04-18T18:09:03","slug":"globalization","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/suny-hccc-introbusiness\/chapter\/globalization\/","title":{"raw":"Globalization","rendered":"Globalization"},"content":{"raw":"

Globalization and Business<\/h2>\r\n\"Picture<\/a>\r\n\r\nThere was a time when consumers only had access to goods and services that were available locally. Their choices were limited by what they could access on foot, by horse, or by carriage. This is still the case for many people around the world, and in rural and remote parts of the U.S., it's still necessary\u00a0for families to make weekly trips to town to stock up on food, household items and other necessities. However, with the rise\u00a0of Internet-based business (think Amazon), there's been an explosion of international trade, and more and more consumers essentially have the world at their door. Of course international trade isn't just a twentieth-century phenomenon. Trade across borders and between cultures\u00a0has been a feature\u00a0of human civilization\u00a0for centuries\u2014there's evidence of this dating\u00a0back as far as the nineteenth century BCE. The Silk Road, one of the best-known and most enduring \"international\" trade routes, began\u00a0sometime around 200 BCE and for centuries was\u00a0central to cultural interaction from China through regions of the Asian continent\u00a0all the way\u00a0to the Mediterranean Sea.\r\n\r\nSo, if cultures and nations have been trading with one\u00a0other for four thousand\u00a0years, what makes today's business landscape different? The answer lies in the distinction between international business<\/em> and globalization<\/em>.\r\n\r\nInternational business <\/strong>refers to commerce in\u00a0which goods, services, or resources cross the borders of two or more nations. This is what the Egyptians were doing when they sent goods across the Red Sea to Assyria. Globalization<\/strong> is broader\u00a0than international business and describes a shift toward a more integrated world economy in which culture, ideas, and beliefs are exchanged in addition to goods, services, and resources. Globalization implies\u00a0that the world is \"getting smaller\":\u00a0As a result of new\u00a0transportation and communication technologies, people around the world\u00a0can more readily connect with one another\u2014both virtually and geographically.\r\n\r\nThe following video provides a good introduction\u00a0to the causes and consequences of globalization.\r\n\r\nhttps:\/\/youtu.be\/JJ0nFD19eT8\r\n

Impact of Globalization on Global Business<\/h3>\r\nThe video, above, provides a good bird's eye view\u00a0of the affect of globalization on\u00a0business\u2014from opening up new markets to increasing the level of competition within markets and\u00a0industries. Let's take a look at particular example, though, to think through the various implications of conducting business on a global scale. Consider McDonald's, which was started by\u00a0two brothers in San Bernadino, California, sixty-eight years ago. As a result\u00a0of globalization, nearly 69 million<\/em> people in 118 different countries eat at McDonald's every day. The first McDonald's outside the U.S. and Canada was established in Costa Rica in 1970, and since the 1990s, most of the company's growth has taken place in foreign countries. The process of building\u00a0a global presence, entering new markets, and capitalizing on growing international\u00a0demand for American fast food has enabled McDonald's to expand\u00a0from a single location to a global corporation with revenues in excess of U.S. $25.4 billion in 2015.\u00a0[footnote]https:\/\/en.wikipedia.org\/wiki\/McDonald%27s[\/footnote] However, entering\u00a0new markets\u2014whether at home or abroad\u2014means contending with increased competition in those markets, including competition with other globally minded companies. In 2010, Subway surpassed McDonald's to become the largest single-brand restaurant chain and the largest restaurant operator globally.\r\n\r\nWhat is it like for companies that decide to take advantage of global opportunities as McDonald's and Subway have? Return to the discussion of \"external forces\"\u00a0in module 1, but now consider\u00a0them from a global business perspective. Globalization certainly means that businesses\u00a0can reach consumers\u00a0around the word more rapidly and efficiently\u2014thanks to cell phones, airplanes, and the Internet, we are all so much more interconnected and \"accessible\" now. But globalization also means incredible complexity. The list below sketches out just a few of the complexities and challenges that an American fast-food company like McDonald's faces when it takes on the global business environment.\r\n\r\nThe Global Economic Environment<\/strong>: McDonald's is a corporation based in the United States, where all business transactions are conducted using the U.S. dollar, but there are 167 official national currencies in the world, each with a different\u00a0value and purchasing power. Imagine trying to balance the corporate checkbook at McDonald's when your deposits have been made in more than a hundred\u00a0different currencies.\r\n\r\nThe Global Legal Environment<\/strong>: In Greece, there is a $650 fine for eating ice cream at certain historic, artistic, and culturally important sites. If you are the operator of a McDonald's near the Parthenon, should you remove the ice cream cones and McFlurries from your\u00a0menu to protect\u00a0your customers against\u00a0being fined, or not?\r\n\r\nThe Global Competitive Environment:<\/strong>\u00a0How does McDonald's recapture the number-one position it lost to Subway in 2010?\u00a0The company\u00a0may need\u00a0to\u00a0make substantial changes to its operations, menu offerings, and\/or marketing tactics. This is\u00a0a steep, uphill climb in the United States alone, but consider trying to accomplish it in 118 different countries in 188 different markets\u2014where you are competing not only with other global U.S.\u00a0fast-food companies\u00a0like Subway and KFC but with local ones, like \"McKebab,\" as well!\r\n\r\n[caption id=\"attachment_6079\" align=\"aligncenter\" width=\"500\"]\"Photo<\/a> McKebab, a fast-food restaurant in Slovenia whose name and golden \"M\" bear\u00a0a striking resemblance to McDonald's.[\/caption]\r\n\r\nThe Global Technological Environment: <\/strong>What does technology have to do with fast food or\u00a0McDonald's? Consider the company's\u00a0presence in China, where there are nearly 1.3 billion mobile users, and say hello to \"McDonald's Next,\" a \"modern and progressive\" version of the restaurant that first opened in Hong Kong, featuring mobile-phone-charging platforms, free Wi-Fi, and self-ordering kiosks. This next generation of McDonald's is a response to increased\u00a0expectations around speed, service, economy, and availability across established and developing economies, mostly fueled by consumers'\u00a0growing\u00a0access to affordable\u00a0technology. As global businesses respond to demands created by<\/em> technology, they must also leverage technology to move products, people, and supplies around the globe in a cost-effective and efficient manner.\r\n\r\nThe Global Social Environment:<\/strong>\u00a0McDonald's has had to adapt in countless\u00a0ways to meet the demands of its customers around the world. While it prides itself on offering a\u00a0consistent, internationally recognizable menu and brand,\u00a0the company has also had to cater to\u00a0local\u00a0dining preferences and customs. In 1995, for example, the first kosher McDonald's opened in a Jerusalem suburb. In Arab countries, the restaurant chain offers\u00a0\"halal\" menus, which comply with Islamic laws governing the preparation of meat. In 1996, McDonald's entered India for the first time, where it offered a Big Mac made with lamb called the Maharaja Mac.[footnote]https:\/\/en.wikipedia.org\/wiki\/History_of_McDonald[\/footnote]\r\n\r\n[caption id=\"attachment_6080\" align=\"aligncenter\" width=\"500\"]\"Photo<\/a> McDonald's Maharaja Mac[\/caption]\r\n\r\nMcDonald's is not a complex business\u2014after all, it sells inexpensive burgers\u00a0and fries, not automobiles or airplanes or pharmaceuticals\u2014but clearly the global environment presents challenges even for them. You may be wondering why nations and businesses decide to take on such challenges, given the ongoing difficulty, risk, and uncertainty. We'll investigate this question throughout the remainder of this module.\r\n

Absolute and Comparative Advantage<\/h2>\r\n\"Photo<\/a>\r\n

Introduction<\/h3>\r\nConsider the humble banana. Even if you're not a big fan of this yellow fruit, you've surely\u00a0seen them in the grocery store or in a market somewhere. If you walked through a U.S.\u00a0city with a banana and asked people to identify it, it's unlikely you\u00a0would encounter anyone\u00a0who had no idea what it was. What if you did the same thing with a picture of a banana<\/em> tree<\/em>? How many people could identify it? Maybe some, but not all.\u00a0Why is that? In the United States, bananas are grown in Hawaii, and not everyone has been to Hawaii. In fact, most of the bananas in the world are grown in Ecuador. If we Americans love bananas and don't\u00a0live in Hawaii and can't get to Ecuador regularly, without global trade, we're out of luck: no bananas for cereal in the morning or as snacks during the day and, worse, no banana splits\u00a0at the local ice cream parlor. Why do Ecuador\u00a0and Hawaii trade away their bananas instead of keeping them all to themselves? Probably because, although bananas are delicious and nutritious, it's hard to build houses out of them. Instead, the state of Hawaii and nation of Ecuador\u00a0choose to trade their bananas for things they lack, while considering the cost and profitability of exporting their product.\r\n\r\nEcuador\u00a0and Hawaii offer an\u00a0example of comparative advantage. Because bananas are not grown or readily available everywhere\u00a0in the world, Ecuador and Hawaii\u00a0can profitably export theirs to\u00a0banana-less places like Iowa and Canada. At the same time, Ecuador\u00a0may need computer systems to keep track of all of those bananas they are selling, but Ecuador\u00a0is not a technologically advanced economy like the United States. The United States has a comparative advantage in computers, so we sell our computers to Ecuador\u00a0and let them concentrate on selling us bananas.\r\n

The Concept\u00a0of\u00a0Advantage<\/h3>\r\nIn order to understand why businesses are willing to operate in a complex global environment, we must first understand two fundamental concepts that drive almost all business decisions: absolute and comparative advantage. Countries\u00a0and companies\u00a0are willing to assume the risk of engaging in global trade because they believe that they have an advantage over the competition that they can turn\u00a0into profits. Not all countries have the same natural resources, infrastructure, labor force, or technology. These differences create advantages that can be exploited in\u00a0global trade, to a country's\u00a0(or company's) benefit.\r\n

Absolute Advantage<\/h4>\r\nAn entity (country, region, company, or individual) is considered to have an absolute advantage<\/strong> if either of the following\u00a0conditions\u00a0exists:\r\n\r\n(1) It\u00a0is the only<\/em> source of a particular product, good, or service. This kind\u00a0of absolute advantage is very rare and usually depends on a particular natural resource being available\u00a0only within a certain\u00a0region or country. An example might be the coveted edible red bird's nests<\/a> found only in\u00a0the caves of Thailand (and prized in Chinese cooking as the main ingredient in bird's nest soup). Similarly, if Ecuador were\u00a0the only place in the world where bananas could\u00a0be grown, it\u00a0would have an absolute advantage. However, suppose\u00a0some sneaky banana spy goes\u00a0to Ecuador and pilfers some banana tree seedlings and takes them back to her\u00a0home country and begins growing and exporting bananas. At that point Ecuador no longer has an\u00a0absolute advantage\u00a0on the basis of\u00a0the \"only-source\" condition.\r\n\r\n(2) An entity is also considered to have an absolute advantage if it is able to produce more<\/em> of something than another entity while using the same amount\u00a0of resources (factors of production). When the sneaky banana spy started growing bananas in her\u00a0home country, she didn't actually take away Ecuador's absolute advantage, because Ecuador can produce more<\/em> bananas using\u00a0the same amount of resources (labor, land, water, equipment, etc.). Put another way, Ecuador's direct cost of producing bananas is lower than the banana spy's. Assuming that the bananas can be grown in the new country, it will take that country a very long time to match\u00a0Ecuador's skill, efficiency, and output level, and until it does, Ecuador will retain its absolute advantage.\r\n

Comparative Advantage<\/h4>\r\nAn entity (country, region, company, or individual) is considered to have a\u00a0comparative advantage<\/strong> over another in producing a particular good or service if it\u00a0can produce the good or service at a lower relative opportunity cost.\r\n\r\nYou'll recall from the economic environment module that opportunity cost is the value of the next best alternative<\/em>. (The video, below, also includes a refresher on this concept.) Since countries\u00a0and businesses have limited resources, they are forced to make choices about how they allocate those resources. As a student, you understand opportunity cost better than you think. You have a limited amount of time, and you must choose between reading this module and going out with your friends, because you can\u2019t do both. If you choose to go out with your friends, then the opportunity cost might\u00a0be failure on your next exam because you did not use the time to prepare.\r\n\r\nEcuador has a\u00a0comparative advantage\u00a0in bananas over a long list of countries, including the United States. This comparative advantage is even better understood\u00a0when you consider that their next best alternative<\/em> product is oil. The Middle Eastern countries have been pumping oil from the ground for as long as Ecuador has been growing bananas. It makes as much\u00a0sense for Kuwait to attempt to\u00a0export bananas as it does for Ecuador to export oil. It's the reality of comparative advantage that encourages\u00a0countries and businesses to do what they do best\u2014leaving the production of other goods and services\u00a0to other countries or companies\u2014and in so doing, focusing on producing goods and services where they have advantage, thus maximizing their opportunities in a global environment.\r\n\r\nThe following video provides an excellent illustration of comparative and absolute advantage and explains why they are such\u00a0important considerations in how countries decide to specialize and\u00a0trade.\r\n\r\nhttps:\/\/youtu.be\/38hvvAzgXZY\r\n\r\nStill unsure about how these different kinds of advantages play out in the real, complex world of global trade? Up next: Try your hand at ruling\u00a0your own island nation and choosing trade partners on the basis of comparative advantage.\r\n

Game: Trade Ruler<\/h2>\r\nIt's one thing to talk and read about global business\u00a0and another to actually engage in global trade. You don't have the time or resources to set up your company, apply for permits, establish trade agreements with other nations, and manufacture your goods right now, but that's not a problem\u2014those things have already been done for you!\r\n\r\nThe link below will take you to the Nobel Prize Web site, where you will\u00a0participate in the simulation \"Trade Ruler\" and, as leader of your land, see how well you can leverage your advantage to increase the wealth of your island nation.\r\n

How It Works<\/h3>\r\n