9.2 Importance of International Leadership

Globalization Factor 1: Lowering Trade Barriers

The first critical factor is the lowering of trade barriers through trade agreements and government policies through which countries agree to eliminate cross-border barriers to trade and promote global integration. To understand the importance of trade agreements, it is necessary to note that countries have long used tariffs to protect local industries and companies. Tariffs are taxes that are added to the price of imported international products. Because these tariffs are usually passed along to the consumer in the form of higher prices, imposing tariffs on imported goods gives domestic companies a price advantage and protects them from foreign competition. (Divesh, 2017).  The goal of most trade agreements has been to reduce or eliminate tariffs and other barriers to make cross-border trade easier.

One of the more significant worldwide trade agreements is the rules members of the World Trade Organization (WTO) agree to.

Globalization Factor 2: Foreign Direct Investment

Foreign direct investment (FDI) refers to the deliberate efforts of a country or company to invest in another country through the form of ownership positions in companies in another country. In 2017, global FDI flows amounted to USD $1.52 trillion.

Figure 9.2.1 shows the top 15 recipients of FDI in 2016. As you can see, many of the world’s developed economies, such as the U.S., Germany, Canada, and France, are among the top recipients of FDI. However, it is also important to note that many emerging markets, such as China, Brazil, Mexico, and India, figure prominently on this list. Emerging markets, defined as those markets in non-developed countries that present tremendous potential for multinationals, have played a critical role in the global business environment for the last decade. Countries such as Brazil, India, China, and South Africa have all experienced tremendous growth and are driving business trends.

An important consequence of the rise of emerging markets has been the growing importance of emerging market multinationals. Emerging market multinationals are influential companies from emerging markets that compete head-on with established multinationals and rewrite the rules of competition by using new business models.

Consider the case of CEMEX, the Mexican cement manufacturer; Shoprite, the South African retailer; and WIPRO and Infosys, India’s leading software companies. These emerging market multinationals are industry leaders in their fields and are pushing more established multinationals to the competitive edge.

The lowering of trade barriers and the increase in foreign direct investment indicate that global trade will continue to stay strong and contribute to globalization. Such trends suggest that companies will need to continue to contend with and take advantage of global opportunities. The rising competition from emerging markets and emerging market multinationals means that companies will need to continue to understand and manage the global environment to compete.

Globalization Factor 3: The Internet

Thanks to the pervasiveness of the Internet today, any company in the world can sell its products to anyone in the world. In fact, the developments in information technology and the reduction in costs of technological equipment mean that any multinational can reach anyone in the world. Social media, such as Twitter and Facebook, also provide a means for multinationals to build relationships with customers worldwide.

What are the implications of this factor for international leadership? As mentioned earlier, companies located anywhere in the world will be able to find new markets and new ways to reach new customers. Consider the case of Russian entrepreneur Dmitrii Dvornikov, who was selling jewelry and table clocks made from Russian semiprecious stones.

Until 2013, Dvornikov was not able to expand beyond local markets. However, he decided to list his products on eBay. This has allowed his business sales to grow by 30%. Such success was spurred by the implementation of software by eBay’s operators in Russia. This software enabled smaller companies to sell anywhere in the world. Such factors have greatly expanded e-commerce, the buying, and selling of products using the Internet. With Russia’s current war on Ukraine, one would expect Dvornikov to see a very different effect of globalization due to consumer backlash and the many trade sanctions placed on Russian businesses.

E-commerce doesn’t necessarily have to be between companies and individual customers. In fact, there are many other forms of e-commerce, such as business-to-consumer (e.g., eBay), business-to-business (B2B, where companies sell to each other), consumer-to-business (C2B, where consumers can sell to businesses), and consumer-to-consumer (C2C, where consumers can sell to other consumers). These forms of e-commerce are all contributing to making the global business world more interconnected.

It is critical for multinationals to appreciate the importance of the Internet. Not only can companies reach new consumers, but they can also improve their business models. Additionally, the Internet provides the opportunity for companies to build relationships with consumers worldwide.