The Impact Of Globalization On The Multinational Corporations - Essay Example

? The impact of globalization on the multinational corporations Introduction Reich (1998) defined globalization as a process through which the activities done in one part of the world affects people on other parts of the world (Reich, 1998, p. 5). It is difficult to define globalization in few words because of the complex parameters involved in it. Plenty of definitions were given to globalization by different scholars. In any case, it is a fact that globalization has influenced most of the life segments of human being at present. The things happening in one part of the world has the capacity to affect the life of people in other parts of the world because of globalization. According to Lieber and Weisberg (2002), globalization helps people all over the world in the creation of a stronger and stable world (Lieber and Weisberg, 2002, p274).Global wealth is currently shifting from less heavily populated American and European regions to the more heavily populated Asian region at present because of globalization. The world's tallest building is now in Dubai. The largest publicly traded company is in China. The largest passenger airplane is built in Europe. The biggest movie industry is India's Bollywood, not Hollywood. And in the most recent Forbes rankings, only two of the world's 10 richest people are American (Zakaria, 2008, p.198). Business is one segment in which globalization brought revolutionary changes. Current market is heavily globalized because of globalization. Most of the prominent organizations in the world are currently operating internationally or cross culturally. Politics, economics, and religious or cultural beliefs are not causing any barrier in preventing the growth of international business. Offshoring and outsourcing like business concepts evolved out because of globalization. Multinational companies are utilizing these business concepts judiciously to make profits. The concepts such as Free trade, regional trade blocs etc are helping MNC’s immensely in spreading their business to overseas countries. Foreign Direct investment or FDI is encouraged by all countries as part of their economic reformation activities. All these favourable business climates are helping MNCs in operating cross culturally at present. This paper reviews the literatures to know the impact of globalization upon MNCs. Literature Review: The impact of globalization on multinational corporations Globalization has impacted MNCs both positively and negatively. Most of the prominent companies in this world were struggling for expansion before the introduction of globalization. For example, Starbucks is a company which is struggling to expand in America because of their excessive number of coffee shops everywhere in America. American market was saturated for Starbucks and they were looking for opportunities in global market. “While Starbucks was very successful in its domestic market, the leaders of the company knew they would have to exploit globalization and expand the company to foreign markets to fully utilize the potential that the company had.  In 2003, Starbucks quickly expanded into foreign markets and began to evolve into the world-wide company we know today”(Hart, 2011). At present, Starbucks is accumulating more revenue from international market than from American market. Robinson (2003) has pointed out that globalization helps the world to develop transnational capital (Robinson, p.12). The presence of transnational is operating globally with the help of transnational capital. Prominent automobile manufacturers are currently offshoring their manufacturing operations to cheap labour oriented countries such as India and China to reduce manufacturing cost. It is difficult for an American made vehicle to compete effectively with a Korean or Indian made vehicle in terms of price. Price wars are getting intensified in the automobile sector in recent times and hence the profit percentages of the automakers are coming down drastically. Governments in different countries have already formulated implemented different strategies to help domestic automakers. In the case of the automobile industry in Korea, prices were surveilled by the Ministry of Finance to bolster price stability. Because assemblers could not initially compete internationally at world market prices (owing to their small production scale), they were allowed to set domestic prices high enough to offset losses in export markets. If assemblers exported, the government allowed them to produce high-margin luxury cars equipped with six cylinder engines for the domestic market. When a new model was first introduced, Korean assemblers were also allowed to overcharge customers (by world standards), but then were pressured to reduce prices over time. This policy inadvertently helped assemblers recoup their initial investment costs and also forced them to increase productivity to remain profitable (Amsden, 2001, p.157). America and Europe are regions which experience huge manpower shortage whereas manpower is abundant in Asian countries such as India and China. The success and failures of MNCs in international market depends on the abilities of these companies in exploiting the cheap manpower from Asian countries. Therefore prominent America and European countries are currently trying to shift their manufacturing like high labor oriented activities to India and China. “India has for long been associated with cheap labor” (Thakur, 2011). Most of the prominent car makers such as Toyota, Honda, Mitsubishi, Nissan, and BMW have manufacturing units in India now. These companies are using their Indian manufacturing units for making vehicles even of overseas countries. “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). The evolution of modern business principles such as outsourcing and offshoring as part of globalization are helping MNCs immensely. “In a recent survey, 80% of European and US outsourcing firms ranked India as their number one outsourcing destination” (Why Outsource to India?, 2012).It should be noted that India is a country in which supply of employment is less compared to the demand. Even though majority of the Indian youths are well educated, employment opportunities are less for them. On the other hand, America and Europe like countries or regions are struggling because of lack of manpower. Lack of manpower made the labour highly expensive in these countries. Therefore American and European companies are struggling to compete effectively in international markets. Outsourcing helps these companies to exploit the cheap labour opportunities in India and China like countries and compete effectively in international markets Apple Inc. is one American company which established business units in China recently even though America and China are not in good relations. “China is Apple’s second-largest market after the U.S.” (Apple Plans Further Investment in China as Cook Visits, 2012). “Steve Jobs-less Apple Inc is likely to see its sales growth nearly double in greater China this year”(Apple sales rocket in China, but..., 2012). America’s political differences with China are not causing any hindrance to American companies in exploiting cheap labour from China. Xianrong, (2006) quoted a business week article and argued that China’s policy and attitudes towards foreign direct investment is a hostile one. In his opinion, a marked difference is evident in recent times with respect to China’s attitude towards FDI compared to that in the past (Xianrong, 2006, p.17). Peixin (2003) mentioned about the economic cooperation agreement reached by China with ASEAN countries. In his opinion, China is trying to establish a China-ASEAN Free Trade Zone by 2010 (Peixin, 2003). In short, China’s readiness to welcome FDI and private capital is serving as a blessing to international companies. It should be noted that before globalization, China was adamant on communist principles. However, globalization helped China to realize the problems in their economic policies. Dharam Ghai (1997) has mentioned the importance of free market and private enterprise in promoting economic globalization (Ghai, 1997, p.1). China is currently trying to open up its market as much as possible to attract FDI. They have realised that FDI is vital in the development of China. China believes in mass production. Chinese companies producing goods on a large scale. It is necessary for these companies to find market for the goods they produced. Chinese market is not sufficient enough for selling the products produced in China. So they are establishing trade contracts with foreign countries to sell their products. “More than 80% of toys produced in China are currently selling in America” (McEachern, 2009, p.270). At the same time, some American companies already faced setbacks in China. For example, Google Inc. recently announced its withdrawal from China because of China’s strict censoring policies. “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) Baidu is the local search engine provider in China. Baidu works in line with the governmental policies. However, Google is an American company which always respects human rights and free flow of information. China cannot allow Google to spread messages which are going against the interests of communist of China. China does believe that Google is trying to spread democracy in America with the blessings from American government. Therefore they tried to put restrictions upon the freedom of Google which finally resulted in its withdrawal from Chinese soil. China is believed to be the number one exploiter of globalization. China definitely tries to attract at much as FDI; however they are not ready to dilute any policies which serve against the interests of the administration. China knows very well that allowing Google like companies to spread information freely in Chinese soil is suicidal. In short, Mourshed (1999) pointed out the strategies implemented by Indian government to help pharmaceutical companies to overcome the competition from foreign companies. “India’s pharmaceutical exports rose from 46 in 1980–81 to 2,337 in 1995–96 (rupees crore), a fifty-fold rise. Innovativeness was encouraged because those local firms that manufactured new drugs (using indigenous technologies) were exempted from price controls for five years” (p.107). Since small firms are exempted from price controls, MNCs subcontract their works to small firms and thus they are escaping from the tight price control measures enforced upon the big pharmaceutical companies by Indian government. The expansion of global trade and free trade beyond the borders, helped MNCs to access better technologies available in overseas countries. Indian company, TATA Steel has recently acquired British Steel Company Corus. “TATA acquired Corus on the 2nd of April 2007 for a price of $12 billion making the Indian company the world’s fifth largest steel producer” (TATA & CORUS: A Case of Acquisition, N.d., p.2). The major reason for this acquisition is to access the superior technologies of Corus in Steel making. TATA believes that the huge reputation enjoyed by Corus in European market may help them to cement their place in European steel industry. “Globalisation and the entry of the MNCs into the Indian economy are also leading to the virtual decimation of India’s small-scale industrial sector” (Destruction of Third world Agriculture, N.d., p.133). Therefore Indian government is trying to safeguard the interests of small scale industries by imposing restrictions upon the MNCs. Indian clothing industry is the best example for such restrictions imposed by the government. “The government aimed to expand the handloom sector by discouraging the growth of the larger textile mills. The expansion of weaving capacity in mills was not permitted unless textile producers undertook to sell a large proportion of their output at controlled prices, which were very low’’ (Kumar 1988, p. 122). Concepts such as sustainable development, corporate social responsibility and environmental protection were introduced in the corporate world by globalization. It is duty of the MNCs to give something back to the communities in which they operate. Moreover MNC’s should make sure that they are working in line with the needs of the environment or nature. Otherwise they may face severe problems. Surendranath, (2004) mentioned an incident from India’s southernmost state Kerala. American company Coke tried to exploit the under water resources of Plachimada village in Palakkad district, Kerala state. Public near Plachimada village faced severe water shortage and they started agitations against Coca Cola. As a result of that Coke forced to stop its operation at Plachimada from February 21, 2004 onwards (Surendranath, 2004). In short MNC’s are facing setbacks not only in China but also in India as well. If Google was the sufferer in China, Coke was the sufferer in India. However Google can argue that they have a genuine case whereas Coke cannot argue so. In short, MNCs are tasting success as well as failures in overseas countries. Another important impact of globalization upon MNCs is the strategic business alliances. Many of the prominent American and European companies have already established strategic alliances with other companies in emerging economies. For example, Wal-Mart has already established an alliance with Indian retail company Bharti. The alliance of Sony with Ericsson helps Sony to function well in European market. “These kinds of partnerships minimize costs and maximize quality by playing to the strengths of teams all around the world” (Button, 2013). It is difficult for MNCs to stay in the market with the help of existing products alone. Since competition is getting stiffer, MNCs forced to diversify their business as much as possible. For example, Apple Inc has changed its attention from computer business to consumer electronics industry because of globalization. As a result of that consumers got many innovative products such as iPad, iPod, iPhone etc. In the absence of competition, Apple might have still persisted with computer business. “On one hand, MNCs may have varied products and business strategies to invoke and culture to practice in order to conform and maintain its income or profit generating status, yet on the other hand, MNCs contribute significant development and growth to the national economy” (Effects of Multinational Companies in Globalization, 2008). The development of cross cultural business as part of globalization forced MNCs to keep a diverse workforce. It should be noted that an American company operating in China cannot function properly with the help of American employees alone. Only Chinese people known the Chinese market well and hence it is necessary for the American company to employ some Chinese people in their company. Development of diverse workforce in international companies brought so many problems with respect to cross cultural communications and human resource management. The importance of culture in communication is unquestionable. The way in which Americans communicate each other would be entirely different from the way in which Chinese people communicate each other. Not only language or verbal means of communication, but also nonverbal means of communication such as body language, gestures, facial expressions, body movements, greeting styles etc could be different among different cultures. For example, Chinese people bow their head to greet others whereas Americans shake hand with others to mark their respect. “Cultural settings not only determine much of behaviour, but also require varying avenues for success within the diverse environments. Thus, due to cultural differences, one cannot take for granted that practices in one country will bring about the same results in another (Preda, n.d., p.2). Even though globalization has good and bad effects upon MNC’s, it has only negative impacts upon small companies. Small scale industries do not have the necessary resources to compete effectively with the MNCs. For example, it is difficult for the small scale industries to set prices in the market whereas MNCs can control the price mechanisms effectively. MNCs can produce their goods in cheap labour oriented countries and sell it in international market. Small scale industries on the other hand forced to produce the goods domestically and hence their manufacturing cost could be higher. “Multinational corporations, such as Wal-Mart, tend to exploit this business model to the fullest, creating extremely cheap goods in China, marking them up only slightly and only earning only a slim margin on each product”(Sun, n.d.). Various incidents can affect global business. For example, terrorism is causing big problems in conducting global business successfully. No MNC would like to establish its business units in a country which is vulnerable to terrorism. For example, India and Pakistan are two neighbouring countries. MNC’s establish plenty of business units in India whereas they are not considering Pakistan as a business friendly country because of terrorism. “Major terrorist attacks, natural disasters, the outbreak of disease, and the recent global financial crisis, all negatively affect global business (Li & Tallman, 2011, p.1119). The problems in one part of the world can affect other parts of the world because of the heavily globalized nature of the current world. It should be noted that the financial problems in America have affected other countries drastically. At the time of writing this paper, President Obama has signed bill which warding off fiscal cliff. “President Barack Obama has signed into law a bill to avert the fiscal cliff, a day after the House and Senate approved the much-debated legislation. World markets rose after the late-night vote. U.S. stocks jumped, too, with the Dow Jones Industrial Average rising nearly 2% by mid-afternoon”(Smith, 2013). Global MNCs were anxious before the signing of this bill by Obama. If this bill was not passed and signed by Obama, the chances of another global recession were on cards. However American Congress decision helped MNCs to relieve a lot. Knowledge is increasingly seen as the key competitive advantage of today’s multinational enterprises. Although the benefits derived from successful international management teams are great, the complexities arising from divergent backgrounds, culture and language barriers, ethical differences, all make sustaining successful global workers a challenge for multinational enterprises (Millar & Choi, 2010, p.57). Knowledge management is another challenge faced by MNCs as a result of globalization. It should be noted that knowledge is bursting out from all corners virtually in every second. Heavy competition forced MNCs to innovate new things to increase their competitive power. Along with the knowledge of local market, it is necessary for the international companies to know the trends in international market to fine tune their business policies. The success and failures of a MNC depend on its ability to know the market trends and fluctuations properly and take remedial actions. In short, globalization has brought many opportunities and challenges to MNCs. . References 1. Amsden A.H. 2001. 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