The Impact Of Economic Growth, Political And Economic Systems On The Internalization Of An Organization - Essay Example

? The Impact Of Economic Growth, Political And Economic Systems On The Internalization Of An Organization The Impact Of Economic Growth, Political And Economic Systems On The Internalization Of An Organization Globalization, privatization and liberalization have brought huge changes virtually in every areas of human life. Business is one area in which globalization has brought significant changes. Collective growth is the major slogan put forward by globalization. The concept of business has been changed from the domestic spectrum to the international spectrum as a result of globalization. It should be noted that many of the prominent organizations in the world were struggling to develop properly because of the lack of opportunities for expansion in the domestic market. For example, before the introduction of globalization American coffee maker Starbucks was struggling to expand properly since they had coffee shops virtually in every corner of America. In other words, American market was highly saturated for Starbucks before the introduction of globalization. However, globalization helped Starbucks immensely in expanding their business beyond the boundaries of America. Internationalization of a business or an organization depends on many factors such as the political, economic and cultural factors in the target country. Suitable business climate is essential in the target country, for an organization to think about offshoring their business to that particular country. For example, no organization would think about establishing a business in Syria at present because of the huge political problems going on there. Same way, only few organizations may think about expanding their business to underdeveloped countries such as Ethiopia or Somalia. On the other hand majority of the organizations are looking for opportunities in Asian countries or BRICS (Brazil, Russia, India, China and South Africa) countries because of the huge economic developments in those countries. In short, political and economic climates in a particular country play an important role controlling its ability to attract foreign direct investments. This paper analyses the impact of economic growth, political and economic systems on the internalization of an organization. What impact does a country's political and economic system have on its economic development?  China is often cited as the best example to prove how well one country can utilize the possibilities of globalization to stimulate economic growth. It should be noted that China was the number one critic of globalization initially. They believed that some hidden agenda is behind the introduction of globalization by capitalist countries. They argued that globalization is an attempt to loot the wealth of poor countries. Overholt, (2005) pointed out that China opposed the “global economic order, political order and the major global institutions such as the IMF and the World Bank before the reforms started in China” (p.3). According to Hersh & Schmidt (2000), China like socialist countries perceived globalization as the continuation of capitalism (p.3). However, they quickly realized the possibilities of global trade and globalization and started to make immense changes in its political and economic systems to attract foreign direct investments. It should not be forgotten that Deng Xiao Peng was the architect of modern China even though Mao Zedong is believed to be the father of modern China. Mao was adamant so that he never deviated from the policies of communism. He never allowed foreign organizations to invest in China and private capital in any form was unacceptable to him. On the other hand, Deng welcomed foreign capital and private capital with both hands. He has realized the fact that China cannot develop properly with the help of internal resources alone. Being the most heavily populated country in the world, internal resources of China were insufficient to meet the needs of the people. Chinese government was struggling to ensure proper living standards to its citizens before globalization. Because of the above fact Deng had no hesitation in implementing globalization in its territories. He opened Chinese economy widely for foreign direct investments and liberalized many of the rules for the establishment of foreign businesses in Chinese soil. The rest is history. China is currently the most rapidly developing country in the world. The following facts give a clear picture about the economic growth in China after the introduction of globalization, liberalization, privatization and other economic reforms. “During 1997–2005, China’s average annual growth rate in real GDP was 8.9%. During the forecast period of 2005–2010, it was assumed that the PRC continued its historical growth trend of 8.9% per year” (Mai et al, 2010, p.5). Moreover, “the PRC’s exports increase by about 46%and imports by about 45% relative to their respective baseline levels in 2010”(Mai et al, 2010, p.7). According to Albert Keidel (2008), China’s economy will surpass that of the United States by 2035 and be twice its size by midcentury (Keidel, 2008). At present most of the prominent companies in the world have business units in China. India is another country which exploited the possibilities of globalization for its economic growth. According to UN agency, “the Indian economy is likely to expand by 8.1 per cent in 2011, the fastest growth rate in the world after China” (India's GDP to grow 8.1% in 2011, second only to China: UNCTAD). Compared to India’s neighboring countries such as Pakistan, Myanmar, Sri Lanka, Afghanistan and Bangladesh, India’s political systems are much stable and attractive to foreign investors. Religious fundamentalism or terrorist activities are much lesser in India compared to its neighboring countries. Moreover, India is giving more importance to foreign direct investments than its neighbors. These favorable business climates are definitely attracting more international companies towards India. Mexico is another country which succeeded in utilizing globalization for their economic growth. Mexico was a very weak exporter at the beginning of the 1980s. At the present time, Mexico has become the eighth exporting country in the world and the first in Latin America. Exports have grown steadily; in 1981 there were a mere 6.5%, in 1990 they were already 27%, in 1996 they were an impressive 66%. Manufactured goods represented 33.8% and in 1993, they already represented 71.9% in 1993. Productivity has increased very significantly since the opening of the Mexican economy, while at the beginning of the eighties it was decreasing at a rate of 0.7% and 0.8%, in 1982 and 1983 respectively, in 1987, 88, 89 it started growing at rates of 2.5, 3.2 and 4.1%, and at the end of the nineties it was reaching rates of 9.0, 2.7, 8.7% in 1994, 1995 and 1997 respectively (Bizberg, n. d, p.16-17) Mexico’s political and economic systems are much better than some of its counterparts in Latin America such as Argentina so that international companies looking for expansion can definitely think seriously about Mexico. “Per-capita income in many sub-Saharan African countries, such as Chad and Niger, is less than 1/30th of that of the United States. Most economists and social scientists suspect that this is in part due to institutional failures that stop these societies from adopting the best technologies” (Acemoglu & Robinson, 2000, p.1). It should be noted that many of the African countries were in the hands of dictators until recent times. These dictators tried to block the progress of these countries since they calculated that their dictatorship is difficult to sustain if these countries develop properly. Economic progress may definitely result in better education to the people of these countries and hence it would be difficult for the dictators to stay in power for a prolonged period. The above awareness prevented dictators in African countries to do everything possible to slow down their country’s progress. Thus, even globalization failed to make an impact in these countries. These facts clearly suggest that better political and economic systems are essential pillars of a country’s progress towards prosperity. Why should organizations seeking locations for internationalization consider a country's level of economic development in their decision making process?  Holst (2007) has pointed out that “economic interpretations of globalization cantered around three forms of capital; financial, productive and commercial (Holst, 2007). On the othe hand, Dharam Ghai (1997) mentioned that “free market and private enterprise were the principal mechanisms for promoting economic activities in the sphere of economic globalization” (Ghai, 1997, p.1). Better political situation alone may not help a country to attract foreign direct investments. There are plenty of countries which failed to attract foreign direct investments even though they have better political situations or systems in place. This is because of the fact that these countries do not have the necessary infrastructure facilities to attract foreign direct investments. For example, Bangladesh is a country with comparatively good political situations. However, they failed to attract enough foreign direct investments because of lack of economic developments and infrastructure developments. One of the major criticisms against globalization is that it failed to keep its initial offers. In other words, at the time of introduction of globalization, America and UK like capitalist economies argued that poor countries may be better benefited from globalization. However, globalization failed to make any noticeable economic growths in poor countries. This is because of the lack of infrastructure facilities in such countries. According to Dreher (2003), “those countries with the lowest growth rates are those who did not globalize. Countries like Rwanda or Zimbabwe insulated themselves from the world economy. They have poor institutions which repress growth and promote poverty” (Dreher, 2003). Another important factor taken into the consideration of the foreign companies trying to internationalize is the economic policies of the target countries. Free trade is the essence of globalization and hence companies are looking for countries which are offering less barriers to their entry. Some countries are reluctant in liberalizing their economic policies to attract foreign direct investments. Such countries cannot exploit the opportunities of globalization. For example, North Korea and Cuba are two communist countries which are less interested in diluting communist principles and to encourage private capital. These countries are less developed compared to China. In other words, readiness to cater the needs of international companies plays an important role in a country’s ability to attract foreign direct investments. India and China are selected as the destination for expansion by many foreign companies because of the availability of cheap labor there. It should not be forgotten that these countries are the most heavily populated countries in the world and hence manpower costs in these countries are extremely low compared to that in the western countries. In fact these countries are providing the necessary manpower needed in the critical sectors in western countries. A job which may costs $ 10000 in America could be completed in India or China only for $ 2000 or 3000 because of the availability of cheap labor there. Amidst the abundant nature of manpower, economic policies in these countries are favorable to foreign companies. As mentioned earlier, single window clearance is provided for the foreign investors in these countries. Is there one political and economic system that is more attractive to organizations seeking to internationalize? Definitely, democratic political systems are more attractive to organizations seeking to internationalize because of the freedom and liberties offered by such political systems to business. Some of the recent statistics and facts show that China’s current policies are not much favorable at least to some of the international companies. “Business Week recently published an article reporting that China is becoming hostile to foreign capital and that China’s policy on foreign investment will change to reflect that attitude” (Xianrong, 2006, p.17). Unlike many other countries, China is not ready to accept FDI in all sectors. It opens its economy only in some particular sectors. It never allows foreign companies to operate in some critical sectors. That is why Google like big companies are currently facing trouble in China. China never allows companies to operate against their political ideologies. Google was recently forced to withdraw its operations from China because of the restrictions imposed upon it by China. Google Inc.’s recent withdrawal from China marks an important event: human rights activists have attacked Beijing’s controversial censorship policy for years but Google’s decision to shut down google.cn is one of the first actions by a major corporation to boycott China’s large internet market. With nearly 400 million users, China has the largest internet market in the world, seen as an untapped market by many American companies hoping to get their share of the pie. Google, Microsoft’s Bing, and Yahoo have all been operating in China for several years but have been unable to beat out Baidu, a Chinese search engine that has maintained the majority of the market share. All of these search engines have censored their searches in accordance with Chinese law, with the exception of Google in the past two months (Shi, 2012). It should be noted that Google is an American company which values human right issues more than other companies. It is difficult for Google like companies to put restrictions upon the contents spread through its search engines. China on the other hand does not like any political messages passing through any of the companies operating in its soil. Protection of communism at any cost is the number objective of Chinese political leaders. They may not allow policies which has the potential to go against the interests of communist party. On the other hand, stable and true democratic political systems are more attractive to organizations which are going for international business. Pakistan and India can be taken as examples to learn more about the importance of better democratic political systems in attracting foreign companies or foreign direct investments. Pakistan and India are two neighboring countries with entirely different political systems. Even though democracy is prevailing in both the countries, foreign companies are reluctant in investing in Pakistan whereas they are looking for every opportunity in India. Pakistan is a country with troubled political systems even though democracy is prevailing there. Democracy is on papers alone in Pakistan. In fact military has strongholds in Pak politics and the president or the prime minister cannot do anything against the will of Pak military. In other words, undeclared military rule is prevailing in Pakistan. On the other hand, India is a country with stable democratic political systems. In fact India is the largest democratic country in the world. Judiciary, parliament and Executive are working properly in India and hence foreign organizations do not need to worry about the freedom and liberties in India. Many foreign companies are currently operating in India. Toyota, Honda, Mitsubishi, Nissan, BMW, Coca Cola, Pepsi, Microsoft, Apple Samsung, LG, Nokia, Vodafone etc are some of the major foreign companies operating in India. “Toyota Kirloskar Motors Pvt. Ltd. on Wednesday (July 11, 2012) started exports from India, dispatching 247 units of its Etios sedan and hatchback vehicles to South Africa from Ennore Port in Chennai (Padmanabhan, 2012). In other words, foreign companies are using India as their manufacturing destination since cheap labor is available in India. Outsourcing is another business area in which Indian companies are making huge money. “In a recent survey, 80% of European and US outsourcing firms ranked India as their number one outsourcing destination” (Why Outsource to India?, 2012). India is the global leader in the outsourcing industry with half of the world's back office being located here. Indian outsourcing revenue at $59 billion for 2011, accounts for 51% of the global offshore market share, says a report from Tholons Research, a Bangalore based advisory firm. The report further notes that over the past decade, developing economies such as India and the Philippines have propelled themselves to become leaders in the global outsourcing industry - making them the top two countries in terms of global offshore revenue share and employment. The total direct employment by Indian IT-BPO sector (as of 2011) was 1.98 million and indirect employment was 7.5 million (Singh, 2012). The above statistics clearly proves the dominance of India in outsourcing industry. In short, India is successful in attracting foreign direct investments both in the form of outsourcing and offshoring of business. Better political and economic climate in India is definitely attracting foreign companies. It should not be forgotten that the current prime minister of India is more of an economist rather than a politician. So, he is aware of the country’s economic needs more than the political needs. On the other hand, Pakistan’s economic progress is extremely slow compared to that of India. This is purely because of the trouble political situations in Pakistan. Pak government has little freedom in shaping and implementing policies without taking the consent of the military. Nobody can say that true democracy is prevailing in Pakistan even though election is taking place with the help of multiparty politics. Religious fundamentalism is actually sinking Pakistan. It should be noted that Taliban terrorists are operating from the border villages of Pakistan. Dr. Mahbubul Haq, the leading economist of Pakistan, says that Pakistan has one of the poorest records on UNDP’s human development criteria in the region. External borrowings and defense spending in Pakistan have reached an alarming point. The continuing budget deficits due to the heavy spending on debt servicing, defense spending and the structural adjustment programs (SAP) of IMF and the World Bank have entangled Pakistani people into a vicious circle of poverty and hunger. (Pirzada, n.d., p.16). Pakistan spends more for military purposes than for economic growth. They do believe that country’s defence is more important than the prosperity of the people. This is because of the strong influence of military upon Pakistan’s political and economic systems. From the above discussion, it is evident that true democratic political systems are favourable to foreign companies trying to internationalize. Conclusions Political and economic systems in a country can influence the decision making process of international companies. Most of the international companies like to invest in politically and economically stable countries. Since the primary aim of all business organizations is to make profit, no organization would take unnecessary risks by investing in countries with trouble politics and economy. True democracy seems to be more attractive to international companies than communism or dictatorship. This is because of the fact that international companies are always like to work with freedom and liberties. Better infrastructure facilities in the target country are definitely a motivating factor for international companies while they take decisions about expansion of business. It is difficult for international companies to make profit in a country where the level of economic development is poor. So, international companies often give priorities to countries with higher level of economic progress and stable political systems. References Acemoglu D & Robinson, J.A.. (2000). Political Losers As a Barrier to Economic Development. 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