The Influence of War on International Business - Assignment Example

 International Business Student Name Instructors Name Business University Date of Submission Question 1 The world, post-world war II, is a complex web of increased global co-operation, marked by increased inter-regional trade and commerce. While international trade has been a prevalent phenomenon for over two centuries, there has been a change in patterns with regard to the players involved. There has been a shift from colonialism to liberalism, a feature of which is decreased intervention of states and the rise of private business entities that are known to us as corporations. The pioneers of increased economic trade have been the nations that had policies tilted towards industrialization. The regions that harbored this paradigm shift are the United States, Japan and Europe; which have been deemed as the Triad. After establishing a strong industrial base, many corporations in this region have expanded globally, particularly dispersing operations across the globe where economies of scale could be achieved in a cost-effective manner. A main feature of the past few decades has been the shift from labor intensive industries to capital intensive industries, consequently, labor activities have been shifted to less developed regions where labor cost is law and there is relatively less restraint posed by labor regulations. (Ohmae, K., 1983) While some scholars deem this transfer of functions as neo-colonialism, since most of the profits gained by virtue of these activities are diverted towards the operating MNE’s, our focus remains on the peculiar relation between multinational enterprises and small-medium enterprises that operate locally. Since Greenfield ventures are a rarity in the current sociopolitical environment, trade activities are spearheaded by focus on usage of factors of production, in particular, labor. Most of the major global corporations make use of ‘outsourcing’, delocalizing certain operational functions to push their costs down. This symbiotic relationship is possible due to particular philosophies that are distinct to the two major players here: MNEs have a focus on product innovation while local SMEs have a focus on process innovation. MNEs provide the financial and technological capital required, while SMEs facilitate production with an optimal production process. Inevitably, the SMEs, which are mostly situated in LDCs, are forced to specialize in the particular function that they are catering to. MNEs provide SMEs an opportunity they wouldn’t otherwise have in the form of markets that demand products requiring their services. It is usually the lack of local demand that inhibits many SMEs from growth and expansion. This notion is also supported by Porter’s diamond model, which suggests that in order for an industry to flourish in a national context, the local demand must be anticipatory of foreign demand. Since such is not the case in most LDCs, MNEs provide an opportunity for SMEs to expand and grow by increasing volumes of operation. Exposure to newer markets is also accompanied by the advent of newer technologies, capital and managerial skills.( Wright, R, W., & Russel, C, S., 1975) This in turn not only effects the SMEs in contact, but the local community involved as well in terms of employment. Ironically, the necessary technological capital required for SMEs is provided mainly from the Triad region. This obviously entails a certain monopolistic relation that is a feature of MNE-SME cooperation. What is deemed as an inequality, automatically translates to social indicators and economic factors as well. Some scholars label this relation as the dependency theory, which states that countries within the core are capital intensive nations that are able to maintain this superiority using their vast accumulated capital which focuses on innovation and technology, while lesser important functions are transferred to the peripheries which provide the necessary labor and raw material for industries to operate but are not allowed to accelerate beyond that. Lack of knowledge transfer is termed as one of the main reasons for this imbalance, while inequitable share of returns from profits is also another reason. (Guardo, C, D., & Valentini, G., 2007) MNEs from the Triad region are able to reinforce their strength as a result of huge investments in R&D which enables them to remain a step ahead in terms of creating newer products and services for which there is unmatched demand and unmatchable supply, particularly from the LDCs. Thus, such MNCs are able to regulate the ongoing demand and supply in the markets, while the SMEs remain mere labor suppliers. This is evident in the contrast of cities between the triad regions and the LDCs. London, Paris, New York and Tokyo are considered the knowledge capitals of the world with increasing focus on financial and consultancy services. These are also cities where most MNEs have situated their headquarters. While cities in the LDCs like Mumbai, Dhaka and Karachi are marked by an overflowing industry base with a large amount of population concentrated in these regions, with a majority of SMEs basing their operations here as well. SMEs are also in part, responsible for their own retardation of growth. Instead of focusing on more value-added products and services, their interest remains in producing more basic products which can be sold more readily. This relationship is bound to remain the same if there isn’t a considerable policy shift in the SMEs and if adequate capital isn’t accessible to them for the purpose of expansion and growth. Many economists argue that by virtue of their size and massive agglomerations of populations, regions hosting such SMEs should be involved in knowledge sharing activities with the MNEs so that they may be able to advance their operations and perhaps better be able to respond to local demand and focus on R&D activities. (Choi, C, J., Kim, S, J., & Kim, J, B., 2010) Question 2 During the start of the globalization process, there stood only two possible classifications for countries involved in global trade, Developed countries from the Triad region and LDCs from the rest of the world. But the prophecy of a greater ‘share of the pie’ for everyone as a result of liberalization did indeed materialize to a certain extent. This was marked by the emergence of NICs (Newly industrialized countries) such as India, China and Brazil. These are countries that eventually opened their markets for globalization and since then have been able to benefit from the increased Foreign direct investment, particularly in the form of MNE investments. (Goyal, K, A., 2006) While most SMEs were initially involved in more generic tasks which were determined by the MNEs requirements. The eventual accumulation of capital has led them to diversify their portfolios and expand to untapped areas within their own countries. (Chiao, Y, C., et al., 2006) This has been a result of the SMEs’ involvement in fostering R&D practices and investing in innovation. As a result a number of these SMEs have now become the concentrated centers of demand offering unique and distinct products and services that are able to fetch good value. The development of the IT sector of India is an archetype of this phenomenon which has been catalyzed by a mass ‘re-exodus’ of skilled human capital that had previously migrated away from the country. (Goyal, K, A., 2006) While many scholars argue that this process is often sparked by company specific policies, but such practices if seen bearing fruit, become a culture of the particular industry. The massive populations in a number of SME-based countries has evolved into an opportunity for many MNEs to expand their business and penetrate into such markets with market particular products. (Banalieva, E, R., & Athanassiou, A., 2009) Many SMEs have realized this opportunity as well and are now relying on local demand to stimulate growth rather than relying on foreign orders and investments. This eventually provides a more stable source of growth keeping in mind the volatile sociopolitical conditions of the 21st century. A particular transition that is evident among SMEs from these newly industrialized countries has been the shift from manufacturing related functions towards more service oriented functions. This automatically creates more room for value addition and specialization. And as a trickledown effect, automatically ensures the emergence of skilled human capital. This is also beneficial for many MNEs since geographical proximity has been made irrelevant by emerging technologies, thus the costs for outsourcing services are reduced drastically. Another issue has emerged very subtly is the frustration of the labor forces from the host countries of most MNEs that are demanding localization of work rather than creating jobs abroad. This has intensified as a result of the global market recession when unemployment rates are record high. This automatically puts a constraining force on MNEs who have to maintain a favorable image in their local markets, which are the main sources of profit. The key to an SMEs survival is constant responsiveness to market demands and process optimization. This can only be done through constant investments in R&D which can prove to be very costly. With the global credit crunch as a result of the economic meltdown, this presents a trying situation for many SMEs who are required to cut down their costs, but on the other hand also keep innovating in order to survive in a very dynamic market. The real boost for many SMEs can occur if they are able to expand their operations in the triad region where a massive concentration of capital exists. While the prospects are promising, the costs are very high as well. MNEs and SMEs are both exposed to the ‘‘liability of foreignness’’ which takes the form of rising initial investments. In this course, many SMEs are unable to survive against MNEs because of the inability to achieve the economies of scale. While WTO policies have helped many countries in providing markets to enhance an industrial base, they have also allowed stiff competition to rise among developing countries who are already working on a very thin profit margin since they often specialize in cost cutting. This automatically forces many industries to focus on a unique selling proposition other than cost, which automatically requires innovative practices and policies. This shapes into a particular challenge for many SMEs who are now being forced to offer much more than low costs to attract FDI from MNEs. Since knowledge sharing practices are rare between MNEs and SMEs, if efforts aren't made to intensify innovation, the SMEs from these NICs will eventually bow out to SMEs from LDCs who are able to offer lower costs and capital requirement. In conclusion, the emergence of new low cost economies poses a paradoxical situation for SMEs from developing economies because they are up against cost effective suppliers in an increasingly price sensitive market. While vying to cater to local demand, SMEs are also serving foreign MNE demands; this dual functionality requires constant innovation which can only be caused by increased R&D investments. While many SMEs have adapted well and are increasingly becoming a force to reckon with for the MNEs, specially in terms of local markets, the real task for SMEs from developing countries will emerge in the next coming decades when many new low cost economies will ultimately rise. Thus, only SMEs with optimal practices can survive in this situation and excel otherwise the SME will remain an intermediary for MNEs, and will continue simulating rather than innovating. Bibliography Wright, R, W., & Russel, C, S., 1975, ‘Joint Ventures in Developing countries: Realities and Responses’, Columbia Journal of World Business Ohmae, K., 1985, ‘Becoming a Triad power: The new global corporation’, The McKinsey Quarterly, Spring. 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