Chapter 6
The Challenges of
Globalization
McGraw-Hill/Irwin
Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
Ch. 6 Key Learning Objectives
 Defining globalization and classifying the major ways in
which companies enter the global marketplace
 Recognizing the major drivers of the globalization process
and the international financial and trade institutions that have
shaped this process in recent decades
 Analyzing the benefits and costs of the globalization of
business
 Identifying the major types of political and economic systems
in which companies operate across the world, and the
special challenges posed by doing business in diverse
settings
 Assessing how businesses can work collaboratively with
governments and the civil sector to address global social
issues
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The Process of Globalization
 Refers to the increasing movement of goods,
services, and capital across national borders
 Is considered a process – an ongoing series of
interrelated events
 International trade and financial flows integrate the world
economy, leading to the spread of technology, culture, and
politics
 Globalization is not simply a trend or a fad but, rather, an
international system
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Entering and Competing in the
Global Marketplace
 Develop global market channels
 First build a successful business in their home country, then
export products or services to buyers in other countries
 Establish global operations
 Locate manufacturing plants or service operations in other
countries as a way to cut costs
 Develop global supply chains
 Purchase raw materials, components, or other supplies from
sellers in other countries; work may also be subcontracted
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Major Transnational Corporations (TNCs)
 Defined by the United Nations as firms that control assets
abroad
 104,000 TNCs operate in the modern global economy
 They, in turn, have nine times that number of affiliates (suppliers,
subcontractors, and other entities with which they have some
business relationship)
 Most global commerce is carried out by a small number of
powerful firms
 Next slide lists top 10 non-financial transnational corporations,
ranked in order of the value of the foreign assets they control
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Figure 6.1 The World’s Top 10 Nonfinancial
Transnational Corporations
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Foreign Direct Investment
 Another important aspect of globalization is the
worldwide flow of capital
 Foreign direct investment (FDI) occurs when a company,
individual, or fund invests money in another country, for
example, by buying shares of stock in or loaning money
to a foreign firm
 In 2010, FDI was $1.24 trillion
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The Acceleration of Globalization
 The world’s economy is becoming increasingly
integrated
 Higher share of output is being exported across national borders
 One-fifth of all goods and services produced worldwide is sold to
other nations, rather than domestically
 This is almost double the percentage of 1960
 In earlier years, most exports were of goods. An
important recent trend is the globalization of services,
such as travel, insurance, financial, and information
services.
6-8
The Acceleration of Globalization
 Driven by several factors:

Technological innovation
• Easier to communicate with employees, partners, and suppliers
all over the globe in real time

Transportation systems
• Improvements enable the fast and cheap movement of goods
and services from one place to another

The rise of major transnational corporations
• Bigger, well-capitalized, firms are better equipped to conduct
business across national boundaries than smaller firms

Social and political reforms
• Rise of Pacific Rim growth economies, collapse of communism
in Central and Eastern Europe have opened new regions to
world trade
6-9
International Financial
and Trade Institutions
 Three institutions that set the rules by which international
commerce is transacted:
 World Bank (WB)
 International Monetary Fund (IMF)
 World Trade Organization (WTO)
 No business can operate across national boundaries
without complying with rules set by the WTO
 Many businesses in developing countries are dependent
on WB and IMF loans to survive
6-10
The World Bank
 Established in 1944
 Provides economic development loans to its member
nations
 Funds used mainly for roads, dams, power plants,
pipelines, and other infrastructure projects
 Funding provided by member countries and
international capital markets
 Negotiates “structural adjustment plans” with
countries it loans to
 Applies conditions on these countries
 Conditions are considered by critics to lead to unfair burden
on developing countries
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International Monetary Fund
 “Sister” organization to World Bank, created at same
time
 Purpose is to make currency exchange easier for
member countries so that they can participate in global
trade
 Lends foreign exchange to member countries
 Imposes conditions on governments that receive its
loans
 Has begun to offer debt relief to some nations
6-12
World Trade Organization
 Founded in 1995, successor to General Agreement on
Tariffs and Trade (GATT)
 International body that establishes the ground rules for
trade among nations
 Its major objective is to promote free trade; attempts to
eliminate barriers to trade (e.g. quotas, duties and tariffs)
 Conducts “rounds” of negotiations on various topics
 “Most favored nation” rule means members countries
cannot discriminate against foreign products for any reason
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The Benefits and
Costs of Globalization
 Globalization is highly controversial
 Clearly, some benefit from globalization, while others do
not
 What are some of the major arguments advanced by both side in
the debate over this important issue?
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Figure 6.2 Benefits and Costs of Globalization
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Comparative Political
and Economic Systems
 Nations differ greatly in their political, social and
economic systems
 First important dimension to consider is how power is
exercised and degree of democratic rights
 Past century has been marked by spread of democratic
rights to many nations for the first time
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Comparative Political Systems
 Democracy – The presence of political freedom
 Four defining features of democracy (according to
the U.N.)




Fair elections
An independent media
Separation of powers among the executive, legislative, and
judicial branches of government
An open society where citizens have the right to form their
own independent organizations to pursue social, religious,
and cultural goals
6-17
Comparative Political Systems
 Military dictatorships
Repressive regimes ruled by dictators who exercise total
power through control of the armed forces

Examples include Zimbabwe and Uzbekistan
 Rights of citizens to organize for cultural or religious
freedoms is restricted in others

Examples include Iran, Saudi Arabia
 According to United Nations estimates, 106 countries still
limit important civil and political freedoms
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Comparative Political Systems
 Degree to which human rights are protected differs
greatly among nations
 Several international codes of human rights exist


Most important one is United Nations Universal Declaration of
Human Rights of 1948
Over half world’s nations have adopted these human rights
covenants
 Still, many violations of human rights still occur:


Recent genocides in Rwanda, Sudan
Systems where minority groups and indigenous peoples lack
basic human rights, example of Nepal
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Comparative Economic Systems
 Free enterprise systems
 Based on the principle of voluntary association and
exchange
 Members of society satisfy most of their economic needs
through voluntary market transactions
 Central state control
 Economic power is concentrated in the hands of government
officials and political authorities
 The central government owns the property that is used to
produce goods and services
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Challenges of Global Diversity
 Diversity and complexity of systems that
transnational corporations face creates challenges
 If a company does business in a nation that does not grant
women equal rights, should that company hire and promote
women at work, even if it violates local laws and customs?
 Should a company enter into a business venture with a
government-owned enterprise if that government has a
reputation for violating its citizens’ human rights?
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Meeting the Challenges
of Global Diversity
 Notion of constructive engagement
 By operating with strong moral principles, transnational
corporations can be a force for positive change in nations
where they operate
 In some circumstances this is not possible due to
extreme conditions, provoking dilemma
 At what point do violations of political, human, and economic
rights become so extreme that a company cannot morally
justify doing business in that country?
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Collaborative Partnerships for
Global Problem Solving
 Emerging trend for development of collaborative, multisector partnerships focused on particular social issues
or problems in the global economy
 These partnerships have been termed global action
networks, or GANs
 Involves 3 sectors



Business
Government
Civil society
 Unique capabilities of each sector is presented on
following slide
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Figure 6.3 Distinctive Attributes of the
Three Major Sectors
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