CHAPTER 1

Internationalization of Economies

Among all factors affecting businesses, internationalization or globalization of the economies has been found having the most profound impact on private business management since the World War II. Of course, cross-border mergers and acquisitions (M&As) is an essential component of the internationalization or integration of diverse economic systems. Accordingly, it is pivotally important to have a clear understanding of the internationalization of the economies. We elaborate this critical concept, in this introductory chapter, by examining the constituent parts of the internationalization process.

Internationalization of Product and Service Markets

It is common to use the sum of exportsand importsof goods and services as a percentage of the gross domestic product (GDP) of a country as a measure of the openness of the economy. Using this indicator of the openness of the economy is common even though capital flows across the borders, as well as global currency transactions, are considered the other leading indicator of globalization. According to this index, a rapid rise in international trade has occurred around the globe since World War II. Nevertheless, as Table 1.1 shows, the size of the two-way trade as a percentage of the GDP of the world and groups of the countries has remained relatively stable during 2005 to 2015. We present values of the exports plus imports of goods and services as percentages of GDPs by types of economies since 2005 in Table 1.1.

As can be seen from Table 1.1, the overall degree of openness for all economies shows a little over 1 percent increase during 2005 to 2015. During the same time, the two-way trade, as a fraction of the GDP of the developing countries, has decreased by almost 9 percent. The value of exports plus imports as a percentage of the GDP of the transition economies has declined by 5 percent. Finally, the ratio for the developed economies has experienced a 4 percent growth.

Table 1.1 Openness of the economies: Exports plus imports as a percentage of the GDP 2005 to 2015

Note: The authors calculated the percentages.
Source: UNCTAD Stat (2017).

To gain a better overall view of the global international trade, we present Figure 1.1, which shows the index of the value of exports calculated by the chain method.¹ The index shows that after rising to 121.7 in 2004, the value of trade dropped precipitously during the global financial crisis (The Great Recession) of 2007 to 2009 to 77.4 points in 2009, and again increasing to near its peak in 2011. The index shows the value of the exports in 2016 was 96.6, which is a little less than its value of 98.9 in 1981. These figures imply that despite an extensive fluctuation, the value of the global exports in 2015 remains roughly at the same 1981 level.

The world trade-in services has increased rapidly over the last several decades. The commercial services data indicate that between 2000 and 2016, the value of all commercial service exports increased from $1,491 billion to $4,807.69 billion, an increase of 222.4 percent. Furthermore, the value of imported commercial services worldwide rose from $1,463.8 billion to $4,694.09 billion during the same period (World Trade Organization 2013).²

Figure 1.1 Value index of exports

Source: World Trade Organization (2017).

Internationalization of Financial Markets

An important contributing factor to the rapid internationalization process over the last three decades is the removal of restrictions on capital flows across the national borders of many countries. With the removal of the restrictions on capital flows, the sum of the value of equity markets’ capitalization, corporate and public bonds, and loans globally has increased from 0.5 trillion dollars in 1980 to 11.9 trillion in 2007. Since then, however, the financial flows have plummeted to half of its peak value or 5.2 trillion dollars in 2014 (McKinsey Global Institute 2016).

International Transfers of Technology

International transfer of technology has increased through cross-border licensing agreements, cross-border M&As, joint ventures, foreign direct investment in wholly foreign-owned enterprises, and joint research and development (R&D) activities of multinational enterprises.

Internationalization of National Enterprises

An important aspect of internationalization of national enterprises, which began in the late 19th century and accelerated in the 20th century, is global operations of what Alfred Chandler, Jr. (1984) called integrated industrial enterprises. The first step in the development of integrated international enterprises was the formation of an administrative organization. Chandler best described the pattern of development of these industrial enterprises and creation of the administrative organization:

It was essential first to recruit a team to supervise the process of production, then to build a national and very often international sales network, and finally to set up a corporate office of middle and top managers to integrate and coordinate the two. Only then did the enterprise become multinational. Investment in production abroad followed, almost never preceded, the building of an overseas marketing network. (Chandler Jr. 1984, 491–492)

Multinational enterprises can fall into one of the two categories: multidomestic and global. The multidomestic enterprises operate on stand-alone, country-centered management strategy. The enterprise is present in many countries, but competes on a country-by-country basis. These enterprises operate in retailing, retail banking, insurance, and consumer packaged goods industries.

Global enterprises, on the other hand, adopt the strategy of integrating operations on a worldwide basis. The enterprise’s competitive position in one country significantly affects and is affected by its position in other countries. The global enterprises operate in industries such as an automobile, consumer electronics, semiconductors, and similar type of industries.

In addition to the rise of multinational enterprises, an increasing number of international coalitions and alliances among business entities for undertaking R&D, marketing, logistics, operations, and services have been formed in recent decades. These coalitions and alliances consist of joint ventures, licensing agreements, supply contracts, marketing agreements, and pooling of R&D activities.

Internationalization of the Labor Market

Internationalization of the labor market implies that the actors in the labor markets, that is, both the employers and suppliers of labor (workers), instead of entering the national labor markets, interact in the global labor markets. The second meaning for internationalization of the labor market refers to the consequences of cross-border movements of goods, services, and capital as well as implications of internationalization of production for the labor market. In short, internationalization of labor has taken place because of increased movement of work and labor across national boundaries. Specifically, internationalization of labor over the last several decades has increased through a rise in international trade, foreign investment, technology transfer, and increased mobility of workers across borders.

Not all immigrants enter the labor force of the host nation. The data for the number of working immigrants globally are not available. Hence, we cite the stock of world immigrants as an indicator of the size of immigrants participating in the labor forces around the globe. Based on this we see that, for example, the stock of world migrants in1990 is estimated to be 152,563,212. The number increased to 243,700,236 in 2015, according to the United Nations (2017). These figures imply an average annual growth rate of 2.3 percent in stock of total world migration. Since not all these migrants are of working age and do not enter into the labor force of the countries they migrate to, an unknown portion of the total stock of migrants constitutes labor force migration.

Internationalization of Communication and Transportation

Advances in communication and transportation technologies mostly brought about by innovations in information technology (IT) have facilitated transnational movements of goods, services, and capital. These technological advances had and continue to have profound impacts on business organization, the structure of the industry, internationalization, and cross-border trade of services as well as cross-border M&As.

Having a precise definition of IT, a term that is frequently used in the book, will prove to be useful. Information technology refers “. . . to the interconnected set of technological and organizational innovations in electric computers, software engineering, control systems, integrated circuits, and telecommunications, that have made it possible to collect, generate, analyze, and diffuse large quantities of information at a minimal cost” (Miozzo and Soete 2001, 160).

We note that internationalization of the economies to a large extent is made possible through services in general and via advances in IT and telecommunication services in particular, services that have been supplied with rapidly falling costs of production. Therefore, we find further discussions of the role services play in internationalization processes important, and we turn to the analyses of these developments next.

What is the definition of services? A useful definition of the term refers to services as goods that are consumed at the time and location of the transaction. However, services are heterogeneous, and the definition given here is not specific concerning the nature and categories of services. To have a clear understanding of which human activities constitute services and gain insights into the critical role these activities have played and are playing in the internationalization of the economies, we discuss categories of services.

Even though there is no consensus on how to classify services, a technology-based taxonomy of services might be useful (Miozzo and Soete 2001). The technology-based taxonomy of services views services based on their intra- and inter-industry linkages. According to this taxonomy, services consist of the following types. First, personal services (restaurants, laundry, and beauty) and public and social services (health, education, and public administration); second, scale-intensive physical networks (transport, travel, and wholesale trade and distribution) as well as information network sectors (finance, insurance, and communications); and third, science-based and specialized supplier sectors (electronics and pharmaceutical).³

What is the mechanism by which advances in IT, specifically telecommunication services, affect internationalization of the economies? To answer this question, we need to define two characteristics of services: storability and intangibility.

Nonstorability implies that services must be produced and consumed at the location and at the point of time the exchange is to take place. Intangibility refers to the uncertainty about the quality of services, which requires an ongoing interaction between the trading partners (Miozzo and Soete 2001).

Information technology increases transportability of services by eliminating or reducing the constraints of space and time of production and consumption, that is, by producing services at one place and consuming them simultaneously at another location. As an example, we may cite delivery of a lecture via the Internet, where the instructor and students are located at separate locations. Another example is an IT specialist who remotely connects to the network of a client in a perhaps faraway place to perform a service.

Along with the reduction in the storability characteristic of services, the growing complexity of production and distribution of goods in the manufacturing sector has increased the service content of products. These services include R&D, design, marketing, distribution, and after-sales services that are essential inputs for many globally competitive enterprises.

With the steadily decreasing costs of communication, computing, and IT; increasing relaxation of controls on cross-border capital flows; and deregulation of industries in many countries, cross-border transactions of services have increased drastically in recent decades.

As a result of these technological developments, an important international market for M&A has also emerged. In this expanding global market, firms aim to take full advantage of their competitive advantages. Mergers and acquisitions, mostly acquisitions, appear to be the most efficient, and some believe a less-expensive vehicle, for the global presence of many enterprises.

Understanding the internationalization of the economies as discussed above is an important task in the development of strategies for acquiring another enterprise in domestic or international markets.

Summary

This chapter dealt with the rapid pace of internationalization of economies over the last several decades. The discussions involve internationalization of products, services, financial markets, technology transfers, labor markets, communications, and transportation. It was stated that as a result of the changes in information and communication technologies, cross-border M&A is becoming an increasingly popular strategy for growth and profitability by many enterprises.