November - 2000 - issue > Cover

The popular media often credits the Internet as fueling globalization that will eventually lead to a global village – an idyllic situation in which everyone is effortlessly connected to everybody else, without language or cultural barriers, a world in which everyone has access to the world market and resources. Although the reality is far from this utopian global village, it is true that the Internet is influencing globalization in a significant manner.

To start way back, global trade was in existence even before the times of Marco Polo. Trade across national borders increased significantly in the sixteenth and the seventeenth centuries when European colonial empires expanded and prospered. During this time, primary products such as minerals and agricultural goods constituted the bulk of the transactions. Thanks to the Industrial Revolution, countries like the United Kingdom prospered greatly, a situation that led to demand for foreign goods that were either unavailable or expensive at home. The modern multinationals emerged in the late nineteenth and early twentieth centuries when they started investing in foreign operations and exerting management control over these operations. Since then, we have first seen the dominance of American manufacturing and consumer products from 1915 to 1970, followed by the emergence of Japan and European multinationals in the ’70s, the rapid rise and slowing of new economies such as Korea, Taiwan, Hong Kong and Singapore in the ’80s and early ’90s, and finally the waking of the giants China and India in the final decade of the twentieth century. Simultaneously, in the last few years we have noticed an increase in the usage of the Internet for global trade.

Global Operations:

Challenges and Opportunities

The primary motivation for global operations can be traced back to the simple supply-and-demand equation. An imbalance in demand and supply could occur in either the resources or the market — that is, global operations result when there is either an abundance of certain resource in one country and a demand for the same resource in another country or when there is a great demand for a particular product or service in one country and scarcity in terms of firms producing that product or service. Demand for software professionals in the US was countered by an abundant supply in India. This has led to more software multinationals setting up operations in India and more software professionals of Indian origin in the US. Similarly, the demand for automobiles from the upper middle class in India has led to an increased investment by foreign automobile manufacturers such as Ford, Hyundai and Daewoo in India.

In addition to reaping the benefits a new marketplace and additional resources, firms may decide to have global operations to capitalize on government subsidies, coordinated logistics, competitive pressures and operational hedging. The key benefits of global operations include utilization of scope and scale effects over a larger market size and efficient exploitation of variations in cost, productivity and patterns of demand that exist across borders. Challenges, however, include differences in language and culture, diversity in business and financial regulations, and simply, geographical distance. These difficulties have this far discouraged most of the small to medium sized businesses from becoming global because they often do not have sufficient resources to overcome the challenges encountered while serving multiple markets.

Myths and Reality

The Internet has made it very easy to exchange and share information. As a result, business transactions can easily be conducted the world over. The Internet has made it possible for suppliers from remote parts of India to bid on business auctions conducted by large firms on market sites such as FreeMarkets Online — and actually go on to win those virtual auctions. Individuals far apart physically are able to trade with one another on sites such as eBay. Bacheldor (2000) reports that one of the first transactions on GlobalFoodExchange.com, an Atlanta-based E-marketplace in the food industry, was between a company in Uganda that sold $60,000 worth of perch to a fish-processing company in Colombia. This transaction clearly indicates that the Internet is becoming a critical enabler for global operations. Fundamentally, the Internet has made it inexpensive in terms of time and money for firms to get access to markets outside of its own country.

However, the media has noted these changes and stretched their significance to encompass two popular myths: More small businesses will become global and reduce the dominance of multinationals, and second, because fixed costs associated with global operations (such as setting up overseas offices, training global workforce, and so on) are dramatically reduced, any and every firm will eventually take part in global operations, resulting in complete globalization. The underlying notion behind these myths is that since the Internet allows virtual contact, all the traditional obstacles related to global operations will evaporate. However, the reality seems to be somewhat different.

A recent study by researchers at the University of Washington reports that only 26 consumer Web sites in the US have any international revenue at all; on average, their nondomestic revenue is only 2 to 3 percent (Davenport 2000). This small statistic clearly indicates to what extent consumer sites (many of which can be classified as very small-to-medium) have global sales. Further, several firms that have attempted to become global using the Internet have encountered all kinds of obstacles typically associated with traditional global operations. Diversity in language is still an issue. For example, just about the time that logistics firm Logigo.com was wrapping up its research to verify that their name was culturally acceptable worldwide, they discovered that their name would mean “dirty old man” in a Chinese dialect. Lands End recently ran into problems with their refund policy abroad, as the German government declared that a lifetime guarantee on its products is illegal in Germany. The difference in onscreen “clutter” between the sites of bokus.com (a Scandinavian bookseller) and Amazon.com or barnesandnoble.com clearly demonstrates local preference of Web site design. Finally, completing fulfillment of an order to a remote village in China or India that doesn’t even receive regular postal service is no less challenging than logistics difficulties encountered in traditional global operations.

These examples illustrate that challenges related to global operations do not vanish with the Internet. Instead, they are merely encountered in a different manner.

Going Global with the Internet

New economy companies that have gone global with the Internet are beginning to recognize the need for a host of strategies in order to establish dominance. These can be primarily classified into three different categories: Partnerships and acquisitions; overcoming language, legal and cultural barriers through technology; and technological solutions for global logistics. For example, Lycos and European Internet firm Terra network decided to merge because each does not possess the competency to be successful outside their regional domains. Similarly, E-Steel (a US online steel marketplace) has created an alliance with Ispat International, as well as with Mitsui and Mitsubishi, to enter the Japanese marketplace. Partnerships also allows companies to compete better. For example, QXL (from Britain) and Ricardo.de (from Germany) are joining together to compete with eBay. In terms of utilizing technology to overcome language, legal and cultural barriers, the market is beginning to see the initial generation of products (such as the one from Uniscape) that can provide suite of application for translation services.

However, overcoming the cultural or legal differences that exist could be extremely challenging because of their context-sensitive nature. Finally, in terms of technological solutions for global logistics, we are seeing a plethora of new applications that range from routine tasks such as shipment tracking, customs clearance and customized pricing to more value-added services related to global supply chain coordination and planning provided by firms such as GlobalCommerceZone, myCustoms, Syntra, GoShip, TNT, UPS and FedEx. The Internet has certainly helped in a big way in this third category related to global logistics management.

Although firms are following the above strategies as well as new ones, it’s not yet clear if there is one standard potion that would solve everyone’s problem. It is becoming clearer day by day that although the Internet certainly has increased the momentum and interest in terms of globalization, it is by no means an easy enabler of globalization. Firms still need to overcome the traditional issues related to global operations.

Jayashankar M. Swaminathan is an assistant professor at Walter A. Haas School of Business, UC Berkeley and a visiting associate professor at Kenan Flagler Business School, UNC-Chapel Hill.