Factors causing Globalization of Business

FACTORS CAUSING GLOBALIZATION:

Meaning:

Globalization of the economy means reduction of import duties, removal of Non-Tariff Barriers on trade such as Exchange control, import licensing etc., allowing FDI and FPI, allowing companies to raise capital abroad and grow beyond national boundaries and encourage exports. Both Foreign Trade and Foreign investment volume have grown rapidly over the last few years.

The IMF defines globalizations as “the growing economic interdependence of countries worldwide through increasing volume and variety of cross border transactions in goods and services and of international capital flows, and also through the more rapid and widespread diffusion of technology.”Saturday, December 08, 2012 Dr. S. Jain 18

Trade Liberalization and Globalization:

First, When Tariffs are lowered and QRs are removed, relative prices change and resources are reallocated to production activities that may raise output. However, increased import of manufactured products will have adverse impact on domestic production.

Second, larger long run benefits due to the free flow of technology and new production structures.

Exports and Imports - most dynamic factors in the process of economic growth after 1995.

1 VIEWS ON GLOBALIZATION:

Those stress the Virtues of Import Substitution and limited openness ie, View against Free Trade and Globalization

Those emphasize the importance of Free Trade. Arguments

       Achieve International Competitiveness

       Reduce the price level

       More choice for consumers

Globalization in different ways:

Concept of Multinationals MNCs now account for over 33% of world output, and 66% of world trade Capitalist Approach Privatization + Deregulation + Globalization = Turbo-capitalism = Prosperity Homogeneity Price, Product, Quality, Interest Rates Etc. Spread and connectedness of production, communication and technologies Branding Brands like Coca Cola, Nike, Sony, LG, Intel, Microsoft etc

Globalization:

Lowered the cost of Transportation Reduced the cost of Communication Revolution in Information and Communication Technologies Change in political systems Collapse of Soviet Union Fall of Berlin Wall China’s Economic Reforms Saturday, December 08, 2012 Dr. S. Jain 24

Stages of Globalization:

Ohmae identify five different stages in the development of a firm into a global corporation.

The first stage is the arm’s length service activity of essentially domestic company which moves into new markets overseas by linking up with local dealers and distributors.

In stage two, the company takes over these activities on its own.

In the next stage, the domestic based company begins to carry out its own manufacturing, marketing and sales in the key foreign markets.

In stage four, the company moves to a full insider position in these markets, supported by a complete business system including R & D and engineering.

In the fifth stage, the company moves toward a genuinely global mode of operation.

Essential Conditions for Globalization • Business Freedom• Facilities• Government Support• Resources• Competitiveness• Orientation-Saturday, December 08, 2012 Dr. S. Jain 26

2 Problems in Globalization:

Global competition and imports keep a lid on prices, so inflation is less likely to derail economic growth.

An open economy spurs innovation with fresh ideas from abroad. Export jobs often pay more than other jobs.

Unfettered capital flows give the US access to foreign investment and keep interest rates low.

Millions of Americans have lost jobs due to imports or production shifts abroad. Most find new jobs that pay less

Millions of others fear losing their jobs, especially at those companies operating under competitive pressure.

Workers face pay cut demands from employers, which often threaten to export jobs.

Service and white collar jobs are increasingly vulnerable to operations moving offshore U S employees can lose their comparative advantage when companies build advanced

factories in low-wage countries, making them as productive as those at home.

Globalization of Indian Business:

India’s economic integration with the rest of the world was very limited because of the restrictive economic policies followed until 1991. Indian firms confined themselves, by and large, to the home market. Foreign investment by Indian firms was very insignificant.

With the new economic policy ushered in 1991, there has, however, been a change. Globalization has in fact become a buzz-word with Indian firms now, and many are expanding their overseas business by different strategies.

Factors Favoring Globalization:

Human Resources

Wide Base• Growing Entrepreneurship

Growing Domestic Market• Niche Markets Expanding Markets

Trans-nationalization of World Economy NRIs

Economic Liberalization• Competition

3 FACTORS CAUSING GLOBALIZATION OF BUSINESS:

More and more companies are seeking to internalize or globalize their economics for a number of reasons.

           Developing markets have huge markets

           Many MNC’s are locating their subsidiaries in low wage countries to take advantage of low cost production.

           Changing demographics also adds to increasing globalization

           Regional trading blocs are adding to the pace of globalization. WTO, EU, NAFTA, MERCOSUR and FTAA are major alliances among countries. Trading blocs seek to promote international business by removing trade and investment barriers.

           Declining trade and investment barriers have vastly contributed to globalization.

           The most powerful instrument that triggered globalization is technology.

           The Boston consulting group (2005) has identified five currents of globalization. These currents are;

            Growth of rapidly developing economics (RDE’s)

            Continuing cost and capital advantages of RDE’s

            Development of talent and capabilities in RDE’s

            Migration of customers to RDE’s

            Emergence of RDE based global competitors.

          There is money in international business and no organizations would wish to miss the opportunity.

        Resource seeking is another motive for firms going international.

10.Globalization is triggered world bodies and institutions. WTO is the international organizations that regulates and promotes business across nations. The main purposes of WTO are a) help free trade b) help negotiate further opening of markets c) settle trade disputes between members.

                  Ripple effects of globalization:

Globalization and management

Globalization and jobs

Globalization and wages

Globalization and child labor

Globalization and women

Globalization and developing countries

Inequalities

Disadvantages of globalization:

The negative drivers of globalization included culture which is a major hold back of globalization. An example of how culture can negatively affect globalization can be seen in the French film industry. The French are very protective of this part of their culture and provide huge grants to help its development. As well as government barriers market barriers and cultural barriers still exist.

A negative aspect to a countries development is war e.g. tourism in Israel fell by 40% due to the latest violence. Corporate strategy can also be a negative driver of globalization as corporation may try to locate in one particular area.

Another negative driver of globalization is “local focus” or “localization” as it is termed in Richard Douthwaite’s book “Short Circuit”. Douthwaite (1996) believes that globalization can and should be reversed.

He also believes that localization is the way to do this. He defines localization as “not meaning everything being produced locally but it means a better a balance between local, regional, national and international markets and thus brings less control to multinational corporations”.

Another step to reverse globalization would be for governments to club together to curb the power of multinational by negotiating new trade and treaties that would remove the subsidies powering globalization and give local production a chance.

Douthwaite also states that the global economy is itself nothing less than a system of structural exploitation that creates hidden slaves on the other side of the world and also that the North should allow the South to produce for it and not just for us (North). So it

can be seen that Douthwaite is very opposed to globalization especially that part of it exploited by multinational corporations.

Further arguments put forward against globalization by Mr. Lawton include that it actually destroys jobs in wealthy advanced countries. This is due to the lower costs of wages in developing countries. Multinationals will move to areas of lower wage levels at the drop of a hat e.g. Fruit of the Loom. Also this ability to relocate has meant that wage levels of unskilled workers in developed countries have actually fallen relatively speaking. This is down to the fact that one now needs skill and knowledge in developed economies to survive.

Causes the flow of ideas, services, and capital around the world Offers consumers new choices and greater variety

Allows the mobility of labor, capital and technology Provides employment opportunities

Reallocates resources and shifts activities to a global level

TERMINOLOGIES IN INTERNATIONAL BUSINESS:

Concept of International Business & International Trade:

Exports of goods and services by a firm to a foreign-based buyer (importer)

International Marketing:

It focuses on the firm-level marketing practices across the border, including market identification and targeting, entry mode selection, and marketing mix and strategic decisions to compete in international markets.

International Investments:

Cross-border transfer of resources to carry out business activities.

International Management:

Application of management concepts and techniques in a cross-country environment and adaptation to different social- cultural, economic, legal, political and technological environments.

International Business:

All those business activities which involves cross border transactions of goods, services, and resources between two or more nations

Global Business:

Conduct of business activities in several countries using a highly co-ordinate and single strategy across the world.

REASONS FOR INTERNATIONAL BUSINESS EXPANSION:

Market-Seeking Motives

Marketing opportunities due to life cycles Uniqueness of product or service

Economic Motives - Profitability Achieving economies of scale

Spreading R&D costs Strategic Motives

Growth

Risk spread

TYPES OF INTERNATIONAL BUSINESS:

Export-import trade, foreign direct investment, Licensing, Franchising, Management contracts

International Business vs. Domestic Business:

International business can differ from domestic business for a number of reasons, including the following: – The countries involved may use different currencies, forcing at least one party to convert its currency into another. – The legal systems of the countries may differ, forcing one or more parties to adjust their practices to comply with local law. – The cultures of the countries may differ, forcing each party to adjust its behavior to meet the expectations of the other. – The availability of resources differs by country; the way products are produced and the types of products that are produced vary among countries.

Liberalization:

In general, Liberalization refers to relaxation(s) of government restrictions, usually in areas of social or economic policy. In some contexts this process or concept is often, but not always, referred to as deregulation. Most often, the term is used to refer to economic liberalization, especially trade liberalization or capital market liberalization. Although economic liberalization is often associated with privatization, the two can be quite separate processes. The economic liberalization in India refers to ongoing economic reforms in India that started on 24 July 1991.Saturday, December 08, 2012 Dr. S. Jain 10

Privatization:

Privatization means transfer of ownership and/or management of an enterprise from the public sector to the private sector. It also means the withdrawal of the State from an industry or sector, partially or fully. Another dimension of privatization is opening up of an industry that has been reserved for the public sector to the private sector. Saturday, December 08, 2012 Dr. S. Jain 11

Ways of Privatization:

There are different ways of achieving privatization.• One of the important ways of privatization is divestiture, or privatization of ownership, through the sale of equity.• Another way of privatization is contracting.

Another option for the government is to withdraw from the provision of certain goods and services leaving them wholly or partly to the private sector.• Privatization may also take the form of privatization of management, using leases and management contracts

The important ways of privatization are the following:

        Divestiture

        Denationalization

        Contracting4. Franchising

        Government withdrawing

        Privatization of management

        Liquidation

Benefits of Privatization:

Privatization benefits the society in several ways. Some of them are

        Reduces the fiscal burden

        Enables the government to mop up funds

        Result in better management of the enterprises

        Encourage entrepreneurship

Managing Business in the Globalization Era Global strategies adopted by business enterprises may include:

Global conception of markets

Multi-regional integration strategy

Changes in external organization of multinational firms Changes in internal organization