How Have Changes in the World Economy since 1945 Affected the Strategies of Multinational Firms - Essay Example

? How Have Changes in the World Economy Since 1945 Affected the Strategies of Multinational Firms Introduction The most common denominator of changesamongst multinational businesses is the increased sophistication of the market and the intense competition due to the expanding number of players in every industry. The growing population is a significant factor in the direction and focus of the world economy. Captured market in the international economy is slowly decreasing due to the breakdown of trade barriers that is being torn down by international agreements imposed by international organizations such as the World Trade Organization. The General Agreement on Tariff and Trade have not only made it equitable for all international players to be in equal footing with local businesses in a large market but it also made the complicated taxation and tariff levies more simple and standard. The agreement enabled international organizations or entities to sell products at competitive prices that are comparable to the locally produced items. Market discrimination will not be dictated by price but will be governed by the sophistications of the buyer’s taste and preference. Other changes in the last sixty years include added protection of the patents of multi-national corporations. Harmonisation of International Laws that would include the New York Conventions on Arbitrations that applies to contracts between parties of different nationalities and the Cape Town Treaty that specifically governs international assets of multinational companies. The increased presence and respect of the international business community to the International Court of Arbitration have made conducting business in the international market safer and more secure. The available mechanisms and remedy to attain justice if not an equitable settlement is now simpler and straightforward. World Trade Organization The World Trade Organization over the past decades have endeavoured to break down trade barriers that impedes the free flow of goods from one country to another or even between several countries in an emerging market. Its sole aim is to liberalize and supervise international train to ensure that every member country trade and transact equitably and fairly amongst its other members. It provides a framework in the negotiations and also provides an arbitration mechanism to disputes between countries. One of the basic tenets of the World Trade Organization is the Most Favoured Nation Clause that ensures that a country transacting or is engaged in commercial trade in a particular country is given the same treatment as that of its local industry and even its traditional trading partners. To illustrate: Products of multi-national companies dealing in China should have the same treatment as far as its regulation, governance and taxes are concerned with products manufactured within the China. This means that the shelf prices of imported goods should not be far from that of the locally produced products (Bossche, 2005). Multinational companies have capitalized on the new opportunity to expand its market to include the one provided by the other countries where their host or home country has a trade agreement with. The onus of the strategies of multinational companies therefore is to reach a wider market as possible to ensure that market presence for their products includes these new markets. Increased visibility as far as media exposure is concerned to ensure that goodwill and name recall is associated to positive information about the company and the product they manufacture. General Agreement on Tariffs and Trade The General Agreement on Tariffs and Trade is a multilateral agreement regulating international trade through the “substantial reduction of tariffs and other trade barriers and the elimination of preferences, on a reciprocal and mutually advantageous manner” (Barton, et al., 2008). This translates to the reduction of prices or the equality and standardization of tariff and tax rates to all products. The impact of which is the reduction of prices of individual items since the tax component is the same as that of their competitors. It is hoped that the General Agreement on Tariffs and Trade would make all products available to everybody wherever they are. Multinational companies capitalize on this by making sure that their price component has little or insignificant effect on the production and transportation costs. Since a lower priced product would translate to a wider market segment, a deeper customer demographics and an increased market preference over the other brands. Unlike the years prior to nineteen forty two where higher taxes are levied against foreign brands to protect the local industry, the General Agreement on Tariffs and Taxes have broken down this particular trade barrier to ensure the availability of their products in the market. The strategy therefore that is normally adopted by multinational organization is to increase their production to meet the demands of the new market. However, the missing component that is often forgotten is the ability of the target market’s purchasing capacity. Thus the second onus of multinational company is to provide livelihood to the population so that they will be able to afford the increased level of lifestyle. Intellectual Property Rights and Trade Related aspect of the Intellectual Property Rights (TRIPS) The Trade Related Aspect of the Intellectual Property Rights or TRIPS mandates that aspect of the protection of intellectual property is included in any trade agreement. Another aspect of the TRIPS is the universal adoption of its provisions to ensure that every signatory nation have a definitive plans of legislating the intent and aim of the TRIPS. Related to this is the schedule in which every member nation have committed to have the entire provision of the TRIPS incorporated in every members’ set of commercial laws (World Trade Organization, 1995). The enhanced protection of the intellectual property of every multinational company has encouraged the growth in the development of new products and innovations of old ones. TRIPS guaranteed the protection of intellectual property over a specific amount of time. The protection given over the intellectual property over a finite amount of time allows the multinational company to recoup their research and development investments. With the increased sophistication of the market that includes the additional complication of cultural and racial preference, multinational companies are pressured to tailor fit their products according to the preferences of the most profitable market. The changes often translate to billions of dollars in reformulations if not provisioning of allied products to service its original products. The increased capitalization or investment in this area used to be met with scepticism because of the inherent fear that the product can be copied by competitors for their own benefit. However, the increased protection made is safer for multinational companies to invest on new products. Harmonisation of International Laws Harmonising international commercial laws forms an equitable and singular cohesive set of laws that should not only be acceptable to all countries, jurisdiction or parties but more importantly, it should be responsive to the demands of the changing global economic, industries and trade landscape. The harmonised international commercial law could either breakdown trade barriers that will force all players to adopt in full the harmonised law or achieve the impossible of embracing the cultural, governance and economic reality of each of all the parties concerned. The very basic tenet of harmonisation is the creation of a symmetrical dimension in the implementation of existing laws that will allow for congruent interest but divergent principle in application to seek a common ground to agree (Falkner, et al., 2005). The General Agreement on Tariffs and Trades, Trade Related aspect of the Intellectual Property Rights or TRIPS as well as the New York Convention on Arbitration and the Cape Town Conventions that aim to protect international assets are several of the harmonized laws that have provided additional protection to multinational corporations. The additional protection encouraged multinational companies to expand beyond their borders to provide goods and services in countries they have hardly heard before. In retrospect, the increased economic activity has also expanded the world economy. However, the increased activity made it necessary to amplify governance efforts to protect not only the consumers but also the multinational companies. The harmonisation efforts of governments to have a coherent and singular framework in terms of laws have lowered the risks for investors of multinational companies. Multinational company have therefore been more aggressive in pursuing markets and cultivating more markets from the traditional ones. Globalization Globalization is a term most often used by economist in the last sixty years and not prior to nineteen forty two. Although the term have been coined in eighteen ninety seven, its use have been most prominent in the last sixty years. Globalization simply means maximizing the economic benefits of a company in optimizing the capabilities of its partners from overseas. In other words, while products are being branded and sold in the United States, its manufacturing and design is made elsewhere normally where the cost of labour is cheaper (Kumar, 2000) (Basel Committee on Banking Supervision, 2009). Globalizing the operations of multinational companies is the most efficient way to expand the market of goods. It is also the most efficient way to ensure that the other parts of the world reap the benefits of the natural resources of other countries. International organizations that include the World Trade Organization have made globalization its primary objective. These organizations have made it possible for more countries to open its market as its membership expanded. The new opportunity provided by the World Trade Organization made multinational companies to go global to save on cost while taking advantage of the fresh market. Globalization also shifted the job market to other countries instead of localizing it. The shift have put extra pressure on the job market to churn out more qualified if not overqualified employees since the competition is not anymore limited to the local job market. As a result, multinational companies have become more sophisticated in terms of their needs in their employees. The increased pressure is a requirement in order to ensure that multinational companies respond to the level of quality demanded by a diverse but sophisticated global market. Banking and the BASEL Accords The international banking industry has long recognized its inter-relationship with each other even if they are separated by various jurisdictions, distance and economic system. Their supposed influence in the economic stability of the global economic system is actually rooted to their sensitivity and fragility (Heffernan, 2005). Prior to nineteen forty two particularly during the depression in the nineteen twenties the impact of economic instability in one part of the globe takes time to reach the other countries. The lag normally takes months if not years. In today’s reality, any economic instability in one small country in the Pacific can affect other countries in a matter of minutes due to the continued reliance to electronic transactions (Basel Committee on Banking Supervision, 2009). The Basel accords mandates increased accountability from bankers including increased transparency in the transactions made by banks be it local or offshore. Transparency is also mandated in the ownership structure of banks including the nature and sources of its capitalizations. The purpose of the increased transparency finds its roots from the economic meltdown that happened in the nineteen eighties and nineties (Monroe, 2010). Multinational companies’ response to the strict financing rules that now governs the financing institution is the appropriate compliance to all requirements that would include assignment of specific accountabilities and transparency in the sources of funds. The full compliance is rooted on expediency and public image. Multinational companies tend to avoid inquiries with regards to its ownership structure to protect its investors. However, due to the present realities it is better to be transparent than be branded a multinational company who is suspected of funding terroristic activities if not military dictators or juntas. Internet Transactions Immediately after nineteen forty two, telephone marketing has started to bud all around the contours of the industries in developed countries. The returns for the effort has been more than modest however, the cost to build such infrastructure may require a longer rate of return. Thus only large companies who can afford to build the infrastructure are the only ones engaged in telephone marketing. The disparity in terms of technology is more pronounced in the use of automated systems because of the cost involved in setting up large computer system only the large companies can afford to set them up (Sindell, 2002). The internet drastically changed the face of the market economy and virtually levelled the playing field in terms of visibility. Not only did the internet provided an avenue for potential clients to know the product line of even the smallest company, the internet virtually eliminated the need for large investments spent on showrooms and actual stores. The internet made it possible for large companies to compete in the same level as that of smaller companies in terms of reaching and communicating with potential clients through emails and through the use of their respective websites (Sindell, 2002). Multinational Companies have met the challenge by going the distance of outsourcing to cheaper countries which became the back room operation of their company to save on cost and infrastructure. Not only did the internet revolutionize the concept of telephone marketing, the internet managed to spread the operation of a multinational company across several geographic locations that will enable the company to save on cost. The internet also provided avenues for multinational companies to capitalize from the information that can be gathered from the various websites of its competitors to its own advantage. Information Technology Information technology’s development over the last sixty years have not only made it possible for historical data to be preserved and used in everyday operation, information technology have made it possible to learn from historical data to project possibilities and probabilities of events. A batch of data is converted to records and records are converted to information in the form of reports and in conjunction with other information, reliable knowledge can be formed and formulated that can be part of the business intelligence of a particular multinational company. The intelligence gathered can be used in making key strategic decisions in the company in its operation or even its corporate directions (Fink, 2009). The development in information technology made it possible to process enormous amount of data within a small amount of time. This made it possible for sophisticated applications to be created that will summarize, group, and analyze data according to a specific pattern in a shorter amount of time. Such sophistication has been built in to a Supply Chain Management System and other systems that are used mainly as a tool in a large multinational companies’ operation (Hevner & Chatterjee, 2010). By way of example Supply Chain Management Systems made it possible for multinational companies to provide goods and materials to their trading partners automatically and efficiently. The multinational’s strategy in this context is to reduce cost to maximize the investment made to the information technology infrastructure. In an industry that requires fast decision to respond to the economic climate the use of information technology is not only essential but vital for the survival of the company (Kumar, 2000). Common Markets Boasting of more than half the population of the entire planet, Asia is an emerging market that could potentially be fertile grounds or market for emerging economies. The European Union that boasts of its economic strength even in the face of economic down turn in other parts of the planet can be the source of investment to expand the business of multinational companies to explore and develop new technology using the rich natural resources of the African continent. The European Union, Asia and African economies are in the verge of unification that makes their combined market promising, and their economic strength formidable (Watkins & Morecroft, 2000). Most multinational companies find their roots from these unified or common markets. The most common denominator amongst these companies is their search for fresh market to sell their products or services. Therefore the strategies employed by most multinational companies is to increase their presence in the emerging economies to ensure that they gain a foot hold in the emerging economy as it experience its rise. The common market’s aim is to break down trade barriers between countries within the same region. As an example the European Union’s aim is to create a single unified economy using the Euro as its primary currency. Multinational companies in order to capitalize on this ensure that most of their hard investments are based on the European currency for its strength (SerdareviAa & Teply, 2010). Conclusion The last sixty years also saw the rationalization and increase protection in the international the financial industry. Local and International banks are mandated to conform to the requirements of BASEL I, II and III accords that call for stricter financial control to ensure that investment are not only protected but are secured by actual assets. The same accords call for increased transparency in financial dealings that makes it hard for multinational companies to funnel funds to gain an edge over their competitors. The enhanced protection and transparency have also expanded the investment of multinational corporations to include investments made to smaller countries or market (Basel Committee on Banking Supervision, 2009). The enlarged presence and reliance of the market in the power of the internet have shift the effort of multinational companies not on providing a foothold in the actual market but in making their internet presence more pronounced. The visibility of a multinational company in the internet could increase market presence that can be translated to sales and actual profits. The same can be said about small companies and players, since the internet has levelled the playing field as far as marketing and visibility is concerned. To respond to this most multinational companies have made their website interactive and as another conduit to making an actual sale. The role of information technology in all of the changes experienced over the past sixty years cannot be gainsaid. Another strategy has emerged due to the use of the internet in marketing and sales. Most multinational companies have increased their use of business intelligence and are developing new strategies to make their organization capitalize on the wealth of information available now than sixty years ago about their core competency and their competitor. Bibliography Barton, J. H., Goldstein, J. L., Josling, T. E. & Steinberg, R. H., 2008. 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