What is globalization? What modes of international business are used by firms that want to globalize? Briefly describe each method.
Answer: Globalization refers to the widening set of interdependent relationships among people from different parts of a world that happens to be divided into nations. The term can also refer to the integration of world economies through the elimination of barriers to movements of goods, services, capital, technology, and people. Firms have many options available when they want to globalize their operations including licensing, franchising, turnkey operations, management contracts, and direct/portfolio investment.
a. Licensing and franchising—Licensing agreements are used when companies allow others to use their assets, such as trademarks, patents, copyrights, or expertise under contract. Franchising is a mode of business in which one party allows another party the use of a trademark that is an essential asset for the franchisee's business.
b. Turnkey operations—Refers to business operations, performed under contract, that are transferred to the owner when they are ready to begin operating.
c. Management contract—Refers to arrangements in which one company provides personnel to perform general or specialized management functions for another company.
d. Direct and portfolio investment—A direct investment is one that gives the investor a controlling interest in a foreign company. A portfolio investment is a non controlling interest in a company or ownership of a loan to another party.