GLOBALIZATIONGLOBALIZATION

ASST PROF. JONLEN DESAASST PROF. JONLEN DESA

GLOBALIZATION

Globalization is the integration of domestic markets with the world market.

In Globalization, the entire world is considered as a single market.

Such unification, calls for removal of all trade barriers among the nations.

Due to globalization, domestic companies can now compete with foreign companies.

Globalization is conducting business activities globally.

GLOBALIZATIONGLOBALIZATION

• Globalization implies the process whereby the entire world is integrated into one large market.

• A truly global corporation views the entire world as a single market- it does not differentiate between domestic market and foreign markets.

• There is no concept of home market and foreign market- there is only one market, ‘the global market’.

FEATURES

• New Markets

• New Products

• New technology

• New & Better tools of Communication

• New players

DIMENSIONS

• Economic Globalization• Political Globalization• Cultural Globalization• Ecological Globalization

GLOBALIZATION DEBATEGLOBALIZATION DEBATE

ADVANTAGES• Access to new markets• Access to new products• Access to new technology• Better standard of living• Good quality products• Keeps a check on inflation• More employment

opportunities• Increased welfare &

prosperity• Inflow of foreign capital

DISADVANTAGES• Exploitation of domestic labor

• Misuse of host nation’s natural resources

• Loss of cultural values

• Non-remittance of funds abroad

• Increase in imports

• Drainage of foreign currency

• Competition from MNC’s (Infant Industry)

• Rising Inequality

APPROACHES- EPRG FRAMEWORKAPPROACHES- EPRG FRAMEWORK

STAGES OF GLOBALIZATION

STAGE 1: DOMESTIC COMPANY

• A Domestic company limits its operations, mission, vision to the national boundaries. The firm focuses only on domestic production, opportunities, customers, suppliers etc.

• The domestic company never thinks of going global and is stuck within the boundaries of the nation. If it wishes to grow, it will adopt a diversification strategy. It does not seek global opportunities.

• Their motto is, “ if it is not happening in the home country, it is not happening”.

STAGE 2: INTERNATIONAL COMPANY

• Some domestic firms decide to exploit opportunities outside the home nation. Such companies are Stage 2 companies, also known as International Companies.

• The focus of such a company is domestic but it extends its wings to the foreign countries. They export their surplus production abroad after meeting domestic needs.

• It selects a strategy of locating a branch in the foreign market and extend the same domestic operations into foreign markets. All domestic practices are transferred to the foreign markets.

• There is no customization, but only standardization of products.

• It follows the ethnocentric approach.

STAGE 3: MULTINATIONAL COMPANY

• MNC is also known as multi-domestic. They formulate different strategies for markets. Thus their approach shifts from ethnocentric to polycentric approach.

• They enter foreign companies through different modes.

• They work like the domestic country in the host country, to meet the needs of the customers of that nation.

STAGE 4: GLOBAL COMPANY

• A global company is one, which has either a global marketing strategy or a global strategy. Global companies either produce in the home country or single country and focuses on marketing these products globally, or produce products globally and focus on marketing of the products domestically.

STAGE 5: TRANSNATIONAL COMPANY

• A Transnational company produces, markets, invests, operates & sells in all countries across the world.

• They are geocentric in their orientation.• They view the entire world as one market and hence

produce & sell their goods in different parts of the world.• It links global resources with global markets at a profit.• These companies have global vision, mission, scope &

operational activities.• They customize their products to meet the needs of the

diverse customers.

GLOBALIZATION & INDIAN BUSINESS

• Globalization in India has allowed companies to increase their scale of operations, expand their workforce with minimal investments, and provide new services to a broad range of consumers.

• Globalization has played a major role in export-led growth, leading to the enlargement of the job market in India.

• One of the major forces of globalization in India has been in the growth of outsourced IT and business process outsourcing (BPO) services. The last few years have seen an increase in the number of skilled professionals in India employed by both local and foreign companies to service customers in the US and Europe in particular.

• Notable examples of international companies that have done well in India in the recent years include Pepsi, Coca-Cola, McDonald’s, and Kentucky Fried Chicken, whose products have been well accepted by Indians at large.

• Indian companies are rapidly gaining confidence and are themselves now major players in globalization through international expansion.

• India had the distinction of being the world's largest economy and it accounted for about 32.9% share of world GDP

Factors Favoring Globalization in India

• Human Resources• Wide Base• Growing Entrepreneurship• Growing Domestic Businesses• Niche Markets• Expanding Markets• NRI’s• Economic Liberalization• Competition

Obstacles to Globalization

• Government Policy & Procedures• High Cost• Poor Infrastructure• Obsolescence• Resistance to change• Poor Quality Image• Small Size• Lack of experience• Limited R&D• Growing Competition• Trade Barriers

DIAMOND MODELDIAMOND MODEL• COMPETITIVE

ADVANTAGES OF NATIONS

• Factor Conditions

• Demand Conditions

• Related & Supporting Industries

• Firm Strategy, Structure And Rivalry

• Role of Government & Chance

MICHEAL PORTER

DECISIONS BEFORE ENTERING A FOREIGN MARKET

GLOBALIZATION STRATEGIES/ MODES OF ENTRY

EXPORTING

• Direct Exporting

• Indirect Exporting

CONTRACTUAL AGREEMENTS

• Licensing

• Franchising

• Turnkey Projects

• Management Contracts

• Contract Manufacturing

STRATEGIC ALLIANCES

• Joint Ventures

• Mergers

WHOLLY OWNED SUBSIDIARIES

• Green Field Venture

• Acquisition (100% Ownership)

I. EXPORTING

• Exporting is the most traditional, cheapest & common mode of entering foreign market.

The commercial activity of selling and shipping goods to a foreign country is exporting.

• The most common overseas entry approach for small firms.

• Many governments provide facilities and incentives for export production.

• Exporting forms an important part of a nations trade.

• Exports are of 2 types: Direct & Indirect Exports.

EXPORTING

Exporting is the appropriate strategy when one or more of the following conditions prevail:

1) The volume of foreign business is not large enough to justify production in the foreign market.

2) Cost of production in the foreign market is high.3) There are political or other risks of investment in

foreign country. 4) Licensing or contract manufacturing is not a better

alternative.

TYPES OF EXPORTS

1.DIRECT EXPORTSWhen a firm directly sells its goods to customers in foreign

countries, it is termed as direct exporting. There is no use of any intermediary in this type of exporting.

2. INDIRECT EXPORTSWhen a firm sells its goods to customers to a foreign

country through an intermediary it is termed as indirect exporting. The intermediary may be in the exporting or importing country.

Third Country Location is a form of indirect exporting.

ADVANTAGES OF EXPORTING

• Easy mode of entry into a foreign market• Most common mode of entry into a foreign market• Less investment required, hence it is cheap• Convenient for small firms• Minimal risks

DISADVANTAGES OF EXPORTING

• Imposition of trade barriers

• Logistical difficulties

• Less suitable for service products

• Susceptibility to exchange-rate fluctuation

• High transport costs can make exporting uneconomical especially bulk products

II.CONTRACTUAL AGREEMENTS

• Contractual agreements are long-term, non-equity associations between a company and another in a foreign market.

• A contract is an agreement enforceable by law. Hence both the parties are required to adhere to the terms and conditions of the contract.

• Approaches:– Licensing– Franchising – Contract manufacturing– Management contracting– Turnkey projects

A. LICENSING

• In licensing, one company leases or sells the right to use its intellectual property-patents, copyrights, trademark, brand names etc for a fee known as royalty.

• Both the licensor and the licensee enter into a contract for conducting business.

• The use of licensing is affected by the host country policies.

FEATURES OF LICENSING

• Agreement• 2 Parties- Licensor and Licensee• Compensation• Dispute Resolution• Duration of the Contract

PROCESS OF LICENSING

1. The Licensor leases the right to use the intellectual property to the licensee.

2. The licensee uses the intellectual property to produce goods.

3. The licensee pays royalty to the licensor for using his intellectual property.

4. The licensor receives royalty money.

ADVANTAGES OF LICENSING

• Little additional capital or time investment

• Licensor receive royalties for granting the rights to intangible property to licensee for specified period.

• Cost effective way of entering a foreign market.

• Low financial risk to the licensor.

DISADVANTAGES OF LICENSING

• Inconsistent product quality may effect product image negatively.

• Licensee is under the control of the licensor.• Conflicts and scope for misunderstanding.• Licensee may develop into a potential

competitor.• Leakage of trade secrets of the licensor by the

licensee.

B. FRANCHISING

• Franchising is a specialized form of licensing in which the franchisor not only sells intangible property to the franchisee, but also insists that the franchisee agree to abide by strict rules as to how it does business/

• In franchising, the franchisee uses the name of the franchisor to conduct business operations.

• Franchising is one rapidly developing form of international business.

• The franchisor provides all the required help and support to the franchisee for a fee known as royalty.

FRANCHISING

• Under franchising, an independent company called the franchisee operates the business under the name of another company called the franchisor.

• The franchisor is required to be strong in its business and should also have a good business reputation. It has to be successful in its home country. E.g.: McDonalds.

ADVANTAGES OF FRANCHISING

• Limited financial commitment.• Primarily used by service firms.• Lesser risks for both parties.• Franchisor gets knowledge about the culture

of other countries where the franchisee operates.

DISADVANTAGES OF FRANCHISING

• Risk of worldwide reputation if no quality control.

• Disputes among the parties.• Loss of reputation incase of substandard

products.• Leakage of trade secrets.

C. TURNKEY PROJECTS

• A product or service which can be implemented or utilized with no additional work required by the buyer, but just by turning the key to start business operations.

• The contractor agrees to handle every detail of the project for a foreign client, including the training of operating personnel.

TURNKEY PROJECTS

• A turnkey project is a contract under which a firm agrees to fully design, construct, equip business facilities, train employees and turn the project over to the purchaser when it is ready for operations for a remuneration.

• Hence, a well established firm in the host country takes care of all the details of the establishment of a firm, when the firm is ready for operations, it hands over the key to the new firm and it has in turn just have to turn the key to commence business operations.

• Remuneration includes a fixed price or a payment on cost plus basis.

D. CONTRACT MANUFACTURING

• Contract manufacturing is outsourcing part or entire part of manufacturing operations.

• The new firm outsources its manufacturing activities to another firm and it concentrates only on marketing and sales of its products.

• This is done when the new company is not able to produce goods cost effectively, hence it outsources its entire production department and gets the benefit of economies of scale.

CONTRACT MANUFACTURING

ADVANTAGES

• The client does not have to maintain manufacturing facilities, purchase raw materials, or hire labor in order to produce the finished goods.

• Helps to achieve benefits of economies of scale

• Can concentrate on marketing & sales.

DISADVANTAGES

• Potential security or confidentiality issues

• Less management control• Potential quality issues

E. MANAGEMENT CONTRACT

• A management contract is an agreement between two companies, whereby one company provides managerial assistance, technical expertise and specialized services to the second company of the agreement for a certain agreed period of time, in return for monetary compensation.

• Companies with low level of technology and managerial expertise may seek the assistance of a foreign company.

• The foreign company then agrees to provide managerial assistance and expertise. This agreement between these two companies is known ad management contract.

MANAGEMENT CONTRACT

ADVANTAGES

• Management contracts are often formed where there is a lack of local skills to run a project. This benefits the new company.

• Foreign company earns additional income without any additional investment.

• Better focus on other areas of operation.

DISADVANTAGES

• Loss of control • Time delays • Conflicts• Compliance

III. STRATEGIC ALLIANCE

• Cooperative agreements between potential or actual competitors.

• A strategic international alliance (SIA) is a business relationship established by two or more companies to cooperate out of mutual need and to share risk in achieving a common objective.

• It is a short term contractual agreement in which 2 co’s agree to co-operate on a particular task.

• It involves joint research efforts, technology sharing, joint use of production facilities, marketing one another’s products etc

STRATEGIC ALLIANCE

• Partner selection is very important.• Firms enter SAs for several reasons:– Opportunities for rapid expansion into new

markets– Access to new technology– More efficient production and innovation– Reduced marketing costs– Access to additional sources of products and

capital

3 FORMS OF STRATEGIC ALLIANCE

ADVANTAGES OF STRATEGIC ALLIANCEADVANTAGES OF STRATEGIC ALLIANCE

• Facilitates easy entry into foreign market.• Sharing of costs between the companies• Sharing risks of developing new products and

processes.• Brings together complementary skills and assets

that neither company could easily develop on its own.

• Competition is put aside and both work towards the achievement of a common objective.

DISADVANTAGES OF STRATEGIC ALLIANCEDISADVANTAGES OF STRATEGIC ALLIANCE

• Sharing of technology and knowledge with competitors.

• Break-up of alliance, leakage of trade secrets.• Conflicts among partners.

A. JOINT VENTURES(JVs)A. JOINT VENTURES(JVs)

• Two or more partners joining together to create a new business entity that is legally separate and distinct from its parents.

• JVs are established as corporations and are owned by the funding partners in the predetermined proportions.

• JVs are common in international business.

• JVs provide the required strength in terms of capital, technology, human resource and enables the companies to share the risks.

FEATURES OF JOINT VENTURESFEATURES OF JOINT VENTURES

• JVs are established, separate, legal entities

• These are partnerships between legally incorporated entities such as companies, chartered organizations, or governments, and not between individuals

• The purpose is to execute a particular venture or project

• The partners share profit and loss in the agreed ratio.

• During the tenure of joint venture, the co-venturers are free to continue with their own business unless agreed otherwise.

ADVANTAGES OF JOINT ADVANTAGES OF JOINT VENTURESVENTURES

• Smaller investment • Local marketing and production/ procurement of

expertise from local partner • More resources• Larger Capital Funds• Spread of risk among the partners• Diversification • Synergy

DISADVANTAGES OF JOINT VENTURESDISADVANTAGES OF JOINT VENTURES

• Shared ownership arrangement can lead to conflicts and battles of control between the investing firms.

• Slow decision making process.

• It takes time and efforts to form the right relationship.

• The objectives of each partner may differ. The objectives needs to be clearly defined and communicated to everyone involved.

• Lack of communication between the partners may affect the business.

IV. WHOLLY OWNED SUBSIDIARYIV. WHOLLY OWNED SUBSIDIARY

• The firm owns 100% of the stock.

• The firm has complete control over its operations & functioning.

• The 2 main forms/types are:

Green field venture or

Acquisition

WHOLLY OWNED SUBSIDIARYWHOLLY OWNED SUBSIDIARY

ADVANTAGES

• Tight control over operations

• Helps to achieve location economies

DISADVANTAGES

• Larger commitment and risk

• Most costly method

• Risk of national expropriation

1. GREEN FIELD 1. GREEN FIELD VENTURE/STRATEGYVENTURE/STRATEGY

• Greenfield Venture is a form of market entry strategy with establishment of a new wholly owned subsidiary in a foreign country by constructing its facilities from start.

• Greenfield is the process of expanding operations in foreign market from ground zero. It requires purchase of local property and man power.

• Through Greenfield Venture, a business enters a new market without the help of another business.

• The term green field refers to starting business from a green site and then building on it.

• A company starts its business in a foreign country from scratch.

• The company first conducts market survey, selects the location, buys the land, constructs building, installs machinery, trains employees and then starts business activities.

• Although this process is risky & expensive the firm benefits as it has complete control over its operations.

ADVANTAGESADVANTAGES

• The company selects the best location from all viewpoints.

• The company can avail the incentives, rebates and concessions offered by the host country.

• The company has total control over its operations and functioning.

• New jobs created in the local market.

• The firm builds its own structure and culture.

DISADVANTAGESDISADVANTAGES

• This strategy results in longer gestation period as the successful implementation takes time & patience.

• It’s a very expensive & costly as heavy investments are required.

• It is a very time consuming strategy as a firm starts from scratch( ground zero).

• The company has to follow all the rules regulations and laws of the host nation.

• It may have to fulfill Government's requirements and conditions.

• It is very risky. It may lead to failure if there is no proper research undertaken.

• The new firm faces competition even before it begins operations.

2. ACQUISITION2. ACQUISITION (100% OWNERSHIP)

• A company whose common stock is 100% owned by another company, called the parent company.

• A company can become a wholly owned subsidiary through 100% acquisition by the parent company.

• In contrast, a regular subsidiary is 51 to 99% owned by the parent company.

• One situation in which a parent company might find it helpful to establish a subsidiary company is if it wants to operate in a foreign market.

• This arrangement is common among high-tech companies who want to retain complete control and ownership.

• Mittal Steel’s Acquisition of Arcelor & Saudi Arabia’s Govt acquired Petron Corporation are some famous acquisitions.

ACQUISITION

ADVANTAGESADVANTAGES

• The company gets immediate ownership & control over the acquired firm’s factory, technology, distribution networks.

• It gets a ready made business.

• The company can formulate an international strategy and earn more revenues.

DISADVANTAGESDISADVANTAGES

• Acquiring a firm in a foreign country is a complex task involving bankers, lawyers, Govt rules and regulations etc.

• Requirements imposed by the host country.

ESSENTIAL CONDITIONS FOR ESSENTIAL CONDITIONS FOR GLOBALIZATIONGLOBALIZATION

Business Freedom

Facilities

Government Support

Resources

Competitiveness