Globalization and Technological Revolution - Term Paper Example

International Business Environment In today's global market place, organizations find it strategically necessary to engage in foreign direct investment in different countries all over world. The international business environment (IBE) is multidimensional - it covers political risks, cultural differences, exchange risks, legal and taxation idiosyncrasies - scholars seeking to understand the cross-border effects have been picking from different disciplines (e.g., marketing, finance, operations, strategy, organizational behavior) the relevant theories and methods. Business environment have been particularly influenced by factors such as Political / Legal, Economic Social / culture, Technological and Environmental. These factors are know as PESTEL analysis and are widely used by business enterprises to audit their environment and to help them establish a strategic approach to their business activities. Basically globalization and technological revolution create investment opportunities for organizations worldwide. The economic factors can range from big to small, from local to national to international, from current to future, from rising costs of raw materials to the market entry of a new rival, from forthcoming budget to the instability of international exchange rates, from the current availability of investment of funds to the likely future cash flow from a new product. Business must constantly take such factors into account when devising and acting upon its business strategy. It is normal to divide the economic environment in which firm operates into two levels. The micro economic environment that includes all the economic factors those are specific to a particular firm operating in its own particular market whereas the Macroeconomic environment includes the national and international economic situation in which business as a whole operates. Business in general will fare much better if the economy is growing than if it is in recession. In examining the macroeconomic environment, we will also be looking at the policies that governments adopt in their attempt to steer the economy, since these polices, by affecting things such as taxation, interest rates and exchange rates, will have a major impact on firms. Laws and government policies reflect social attitudes; technological factors determine economic ones such as costs and productivity; technological progress often reflects the desire of researchers to meet social needs and so on. Now looking at these factors if any country's business environment is conducive and encouraging then only it attract foreign direct investments. Foreign direct investment (FDI) represents the finance used either to purchase the assets for setting up a new subsidiary abroad (or expanding an existing one), or to require an existing business operation through either mergers or acquisition. Different countries are also competing within to attract more and more FDI inflow. Traditionally, FDI was a phenomenon that primarily concerned highly developed economies. Developed countries still attract a higher share of worldwide FDI than developing countries. In recent years, however, the increase in FDI flows to developing countries turned out to be higher than the increase in FDI flows to developed countries. Organizations in the international arena typically follow low cost, low risk entry strategies. Apart from low risk organizations always consider the political, legal and economic factors of national environments. Accordingly, the competition for FDI would be based increasingly on cost differences between locations, the quality of infrastructure and business- related services, the ease of doing business, and the availability of skills. Organizations are attracted to FDI when they offered a competitive advantage over locals, a lower cost for labor and/or physical resources, secure access to physical resources, proximity to major markets and increased market share,. Countries attract FDI if they provide certain facilities to organizations. In this regard UNCTAD (2002) developed a 12 point criteria, named the inward FDI potential index capture several factors apart from market size (Appendix -1). Now we will analyze the case study- Ireland 2004. Starting with the concept of GDP as it reflects the income of the people within the country; it also shows the capacity especially purchasing power of the people; it also reflects the demand for the commodities and services. As provided in the case study, the GDP per head (US$: market exchange rate) Ireland in 2003 is $ 37,911 and GDP per head (US$: Purchasing power parity) is 32, 916. Even the real GDP growth rate during 1999-2003 stood around 7.1%. Irish GDP grew at 9.9% per annum during the period 1996-2000. But the GDP growth has slowed down during 2003 due to weak global demand and several other factors. Now if we analyze Irish real GDP growth with most of the countries in Europe, US or Japan we find that GDP growth rate is much higher in Ireland in comparison to UK, France, Germany, US or Japan. So it shows that Ireland economy is expanding and income level of people are going up which may result in increase in demand. So companies have enough opportunities to invest in Ireland. Rate of growth of GPD over the last 5 years when the reforms actually started is around 7-8% which could be seen as a remarkable growth rate if we compare it with other countries in the vicinity. Major economies are growing at the rate of 2-3% per annum. So if Ireland grows at this rate it's a remarkable achievement and more firms and organizations will look forward for investment in Ireland. Even other financial indicators like government consumption as %of GDP hovering around 13% and even then govt. in Ireland is trying to cut it down so that in the recent years when budget balance as % of GDP showing negative trend could be restricted. Consumer prices have gone down and the inflation remained around 5%. So these economic indicators broadly show that Ireland economy is in great shape and government is trying to build FDI friendly atmosphere. Ireland industry, which accounts for 24% of country's GDP heavily dependent on exports. Around 80% of the industry earnings come from annual export. Industry of Ireland is employing nearly 27% of employable population. The share of export in GDP of any country shows its competitiveness in the world market. Any country's product and services are more acceptable then the quality of product and services can be treated as world class. It shows the openness of the economy. In that way export share is more relevant aspect of gauging potential FDI. As shown in the case, after induction of Ireland into European Union its economy and exports have been increased tremendously. Over the last 25 years the pace of technological change has quickened especially the communication technologies. World becomes a global village. These technological changes have a huge impact not only on how firms produce products, but also on how their business is organized. It has also created a wide range of new opportunities for businesses, many of which are yet to be realized. The information technologies revolution is also enabling much more rapid communication and making it possible for many workers to do their job from home of while traveling. Ireland became one of the leading countries in pharmaceuticals export, software, banking/finance, & telecommunications. Ireland becomes the hub of 90% output of MNC's, as a European localization and translation base. One of the examples that 60% of all PC package software sold in Europe each year was produced in Ireland. Virtually all the 20 largest multinational pharmaceutical companies are operating with in Ireland. Pharmaceutical and non bulk chemical manufacturing accounted for export sales equivalent to approximately one third of GDP. Ireland export to leading markets is increasing. Previously it was heavily dependent on United Kingdom but now apart from UK larger share goes to US and other European nations. As we see that now international business has been more and more dependent on information technologies and e-commerce is replacing general business distribution channels. Telecommunications especially broadband internet connection as well as density depicts important feature of economic development. Ireland still short of broadband connections more than 1% population uses broadband daily and more than 30% uses it weekly. Still these figures are at the lower side in comparison to other adjacent countries. Broadband penetration is only 0.25% in Ireland whereas EU average stood at 4.65%. Even the cost of these connections are higher than other countries. Geographical spread is not that much. Most of the connections are concentrated around capital and Dublin. Cost of international calls are at the average level and apart from France, Ireland have the lowest average cost per line per year. So there is lot of scope of growth in broadband connectivity geographically and in numbers also in Ireland. Expenditure in R & D plays a major role in attracting FDI'S more expenditure leads to more innovations and growth of high-tech industries. Technological development is one of the basic requirements for modern day business. But, Ireland is lagging behind in cutting edge R&D expenditure. In 2002, industry spending on R&D in Ireland stood at 1.01% below European average of 1.19% and will below the US (1.98%) and Japan (2.18%). So Ireland has to increase its R & D expenditure to develop new technologies which could innovate and improve qualities of products and services. The aspect like environment is making an effective impact on the business worldwide. The Kyoto protocol, Bali resolution have the potential to affect the overall business environment. Emission norms and CFC (Greenhouse) gases emission limitations affect the business environment. Finally the socio / cultural factors play a major role in deciding/ shaping any business environment. This includes attitude towards working conditions and the length of the working day, equal opportunities for different groups of people (whether by ethnicity, gender, and physical attributes etc.), the nature and purity of products, the use and abuse of animals, and images portrayed in advertising. The social / cultural environment also includes social trends, such as an increase in the average age of the population, or changes in attitudes towards seeking paid employment while bringing up small children. In recent times various ethical incuses, especially concerting the protection of the environment, have had a big impact on the actions of business and the image that many firms seek to present/. Now it is nevertheless important to recognize that there is a great overlap and interaction among all those factors. Another criteria/factor of development could be the energy consumption/per person. This indictor shows that infrastructural development within the country. But Ireland is charging one of the highest rates for electricity. In the field of basic infrastructural development, Ireland has to improve its performance and develop infrastructure so that companies must move in to the country with more investments. Manpower availability especially technically & professionally qualified manpower is one of the sic requirement to attract FDI. Ireland government has emphasized on tertiary education system. In 1998 govt. projected the need for technical experts/specialists and established a $ 300 million for Education in science and technologic find. In tertiary education sector government of Ireland has spending 3.6% of the total public expenditure which is one of the highest percentages in EU. This shows the urgency of Iris govt. towards tertiary education development with the development of high-tech industries with in the country. Organizations will be directly affected by the actions of government and other political events. Major events affecting the whole business community, such as the collapse of communism, the Iraq war etc. In general, political and macro economic condition of the Ireland is stable. Successive governments are taking FDI as the important agenda and framing the policies accordingly to promote FDI in the country. Risk of political uncertainties, frequent changes in economic policies always has been the deciding factors for FDI in any country. Investor found Ireland as an attractive destination for FDI. Ireland is one of the destinations mostly favored by MNC's all over the world. But in some quarters Ireland is facing problems due to its deficiencies in educational weaknesses as well as in training. Compared to US, Ireland faces great government regulations and workplace relations. A centralized wage agreement program for prosperity and fairness was entered into by representatives of government, labor unions, employers and farmers in 2000. Businesses will be affected by the legal framework in which they operate. Example includes industrial legislation, product safety standards, regulations governing pricing etc. The Irish legal system provides workers an upper hand and provided right to form and join labor unions. In these circumstances, employers strongly opposed trade union demands for greater partnership between employees and employers at an enterprise level, including workers participation in managerial decisions through German style work councils. An international comparison of adult literacy level reveals country's weakness. One of the important criteria for FDI is how imports of parts of components of automobiles and electronic product are increasing. Ireland is importing its major products from U.K. Machinery and transport is the major product in the Import list. During the last 5 years, services are the major part of economy. The hotels and restaurant sector recorded one of the highest levels of job creation with increase of 6.6%. The other sector i.e., health is growing at the highest level and increased 8.9%. Increases in other service sector are predominantly seen in the country. Overall, some other infrastructural and services sectors are growing with impressive rate. Agricultural employment is continued to shrink, and falling by 3.8% and employment in the transport, storage and communication decreased by 2.7%. This trend shows that high tech industries and services sector is growing and therefore economy is maturing. Finally Ireland offered one of the most attractive destinations for FDI in all parameters but need to improve certain quarters of its economy and infrastructural setup. References: 1. UNCTAD (2002). The Inward FDI Potential Index - Methodology, Accessed from the website http://www.unctad.org/Templates/WebFlyer.aspintItemID=2470&lang=1 on 06th March 2008. Appendix-1. The Inward FDI Potential Index captures several factors (apart from market size) expected to affect an economys attractiveness to foreign investors. It is an average of the values (normalized to yield a score between zero, for the lowest scoring country, to one, for the highest) of 12 variables (no weights are attached in the absence of a priori reasons to select particular weights): GDP per capita, an indicator of the sophistication and breadth of local demand (and of several other factors), with the expectation that higher income economies attract relatively more FDI geared to innovative and differentiated products and services. The rate of GDP growth over the previous 10 years, a proxy for expected economic growth. The share of exports in GDP, to capture openness and competitiveness. As an indicator of modern information and communication infrastructure, the average number of telephone lines per 1,000 inhabitants and mobile telephones per 1,000 inhabitants. Commercial energy use per capita, for the availability of traditional infrastructure. The share of R&D spending in GDP, to capture local technological capabilities. The share of tertiary students in the population, indicating the availability of high-level skills. Country risk, a composite indicator capturing some macroeconomic and other factors that affect the risk perception of investors. The variable is measured in such a way that high values indicate less risk. The world market share in exports of natural resources, to proxy for the availability of resources for extractive FDI. The world market share of imports of parts and components for automobiles and electronic products, to capture participation in the leading TNC integrated production systems (WIR02). The world market share of exports of services, to seize the importance of FDI in the services sector that accounts for some two thirds of world FDI. The share of world FDI inward stock, a broad indicator of the attractiveness and absorptive capacity for FDI, and the investment climate. Read More