Internationalization of Trade - Essay Example

Internationalization of Trade China and India together were the drivers of the world economy throughout the 18th and early19th centuries and it is estimated that they contributed 80% of the then GDP of the world economy, based on purchase power parity (Woodall Pam 2006). The West took over in the 19th century reducing their share of world GDP to mere 9%. (Dicken P. 2007) Later in the 1980’s there rose what is called the Asian Tigers comprising of Taiwan, Korea, Singapore and Hong Kong. China joined in a big way in the 1990’s and India has arrived at the scene now with more emphasis on services sectors. Innovation has been said to be a reason why firms invest abroad. The eclectic paradigm of Dunning (1981, 1988, 1993, 2000) and the internalization perspective also point to the fact that while internationalizing their activity firms heavily depend on innovations of products. Finding skilled labour for research and development as well as production is a good incentive for Foreign Direct Investments (FDI) in host countries. FDI is vital in Internationalization of business as this provides both finance as well as technology for increasing production. In recent times there is agreement on the fact that investments are made abroad not only in pursuit of innovative capability but in order to enhance such capabilities (Cantwell, 1989; Cantwell and Janne, 1999; Kuemmerle, 1999; Peng and Wang, 2000). Sullivan and Bauerschmidt (1990) also found that innovative capacity creates a positive influence on internationalization, product development capacity and classification; while (Leonidou, 1995) opined that it may provide specific advantages that can be exploited at the international level. Q1. With reference to examples you have studied and relating your answer to relevant theories and models, outline and critically appraise the learning and capability development strategies used by East Asian emerging companies to become internationally competitive. A1. As East Asian economies join the world trading community they are causing a huge shift in relative prices and incomes of labour, commodities, goods and assets. Incomes now stand redistributed and more widespread. Costs of goods produced in emerging economies are falling due to cheap labour and capital but the quantum is increasing manifold. A big reason for this is the establishment of manufacturing in these emerging economies both by Western Companies and by local companies as well. New Foreign Direct Investments meant huge inflow of capital and technology to give boost to regional economies. Despite the financial crisis of 1977-78, the surge carries on. The new models of business and strategies adopted in these economies are based on their adoption of free market policies, liberalization and permission for FDI and of course abundantly available cheap labour. Tax incentives and lowering and removing of trade barriers not only opened these markets to the West but also offered them a gateway to the Western markets. The main feature of these economies was the entrepreneurship and deep understanding of competitive advantage. A prime example is that of Hyundai who started an international revolution building a shipyard business from scratch to become the biggest shipbuilders of the world even having their own R&D division. A more recent example from India is of the TATA group who have produced the world’s cheapest automobile entirely out of indigenous engineering. On the scale of the four level technological capabilities, the four East Asian economies plus China and the Asian India have been scaling the heights increasingly each year. In the knowledge and skills at shop floor level they have all reached high competency as they have by now acquired the technology, techniques and skills for competitive production. On the knowledge and investment levels too they are now showing capability by building new plants and upgrading existing ones. Koreans have shown exceptional engineering skills in innovative technologies and Indians are following the same path in adaptive engineering. Finally R&D especially in bio-medicines is scaling new heights and soon these economies will compete with their Western counterparts in this sector too. The participation or support of institutions, both government and non-government has also been instrumental in creating external environments conducive to the promotion of industry and exports of these countries. Today from late 1990’s onwards the tables are turning again and China and India are in prominence by contributing about half the GDP of the world economies put together. The Industrial revolution of the 18th century benefited only a third of the world at that time, but the current global revolution is affecting the whole world. The consequences are greater volumes of world trade and increasing share of the same by emerging economies. Q2. Explain how international competitive advantages in the cars, clothes and chips sectors are shaped by production features, market structure, nature of competitive rivalry and government policy. A2. A prominent feature of the emerging markets has been their outstanding success in three industries; cars, clothes and chip manufacturing. Overall institutional support coupled with liberalized and open economies and free flow of FDI are the general causes for this upsurge. Removal of trade barriers and availability of skilled and semi skilled labour force are other contributory factors. But specifically each sector has adopted its own growth path in view of its own adversarial conditions. Cars are a high end consumer product and attract a large middle class when they can be affordable for them. This industry requires high infusion of capital that has been available in the shape of FDI. Initially the Western companies were attracted in investing in the emergent economies by setting up wholly owned subsidiaries, but agreed to local participation due to some government interventions and partly seeing the capability of their local partners to rise to the occasion. Presence of entrepreneurial capability ensured a large growth of capable ancillary industry and a solid supply chain growth paved the way of large scale production. These countries then acquired technology on their own by forming partnerships and finally their own R&D produced cars that could not only compete with the west on price and fuel efficiency but on quality of engineering and comfort as well. Korea excelled in the field with China, Thailand and India following the same route. There were high entry barriers of investments and technology in this industry but the resilience of the emerging economies broke the barriers and the Western conglomerates that enjoyed the oligopoly were forced for economic reasons to shake hands with their Eastern partners and have invested FDI willingly and in huge amounts and have now turned to making Asian hubs of manufacturing to serve large Eastern markets. Clothes and Fashion was a speciality feature of the West and they produced a large variety and had developed mass production technologies and coupled with high productivity catered to their own growing lucrative domestic markets. Intense competition between them led some of them to turn to Eastern markets primarily to take advantage of cheap and abundant labour. It dawned upon them that it would help their cause enormously if they shifted production almost entirely to the East to cater not only to their own huge market, but also to a growing middle class market in the East as well. Since there were plenty of countries who were available to cater to their needs in very highly competitive conditions, and many with weak currencies, the West devised a Multi-fibre agreement and fixed quota’s based on country’s perceived capacity, quality and other parameters. They took advantage of competitive environment and very soon bulk of the manufacturing shifted to the East. China took the world by storm at that stage by producing incredible quantities at unbelievably low cost. The state took up the cause on behalf of the industry and it became the major player in the world market. R&D and technological need were not great and the only constraint this industry faces in short product cycles as consumer preferences and fashions change every few weeks. China specially rose up to the occasion and dominates world manufacturing of high quality low end mass consumption clothes. Another, Industry to make its mark in the world was of chip manufacturing. The entire Information Technology depends on Personal computers, laptops, mobiles and consumer electronics. All of them need chips for computing and holding memory on a scale that is getting larger in capacity and smaller in size. This industry needs high R&D, very aesthetic environment and highly skilled fabrication plants. The Korean and Taiwanese markets followed by the mainland Chinese have excelled in this industry to the extent that they now completely dominate it. Chip design is a highly skilled feature and beginning from technology acquisition, the emerging economies are veering towards in-house R&D development at a fast clip. Since the hardware into which these chips are used is also largely manufactured here for worldwide brands, it has attracted huge FDI and technology transfer and few oligopolies control the entire world markets. The four largest US companies have all invested heavily in this region and the support from local governments assures them of a level playing field. The local firms too are now giving them tough competition that is making this industry upgrade its technologies at a fast rate to keep ahead of competition. The emerging economies have ensured that they now occupy a place of prominence in all the three industries. Q3. Using examples you have studied, explain why and in what ways the retail, financial and telecommunications sectors are becoming more international. What is the role of information and communication technologies and deregulation in the internationalisation of these sectors? A3. International business has thrived for centuries based on enterprising ventures by old traders and trading houses in search for new markets and new products. However Globalization has given a new meaning and a new turn to International business. The world is now termed as a global village, there is free flow of people and information across the globe and cultures are being respected, understood and absorbed into local environments. The three sectors that make this possible on this grand scale are Retail, Telecommunication and Financial Services. Through retailing all kinds of consumer goods are now reaching the farthest corners of the globe. The widest range is still in the West and they have the benefit of obtaining goods and services produced in the East at their counters. Retail is making inroads in the East, particularly in the developed and emerging markets, and has given opportunity to the masses to possess world class goods. E-commerce is giving further impetus to this trade and both B2B and C2C are thriving. FDI in retails is getting bigger and the benefits of international sourcing and local selling is becoming apparent to all. For cost effectiveness joint ventures and direct entries to markets are equally adopted and widespread consumerism is fuelling the larger players to spread wider globally. Communication is a great equalizer. The great divide has almost disappeared geographically and exists only politically. The internet is practically free and accessibility is increasing by the day. Mobiles are more common than any other gadget in the world and are an inexpensive way to communicate. More than the personal level, international trade is benefiting from the extensive networks provided by both platforms of communication, that is so vital in exchange and for dissemination of information. Technology is changing fast. Apart from voice and mail the world now has video and data access of a high calibre and the rate of transfer of knowledge and information are assisting greater furtherance of both personal and business objectives. This is a direct result of liberalization and consequent industrialization of the world economies. Business integrations through joint ventures, mergers and takeovers have seen growth of giants like Vodafone which has by now become the largest mobile company having footprint over most of the globe. This is changing the way business is done across international borders. Growth in International business depends very largely on the availability of finances. Within the developed Western economies, financial companies are well regulated, and finances, although controlled and regulated, are available for carefully assessed projects. In the East however there is both paucity of funds and not enough capability to asses projects. FDI has solved the problem to a great extent as it is based on inter-firm deployment of financial resources that is based on sound rationale. Increased International business has lowered barriers for flow of capital and new financial instruments have been devised to help growth. IT technologies also help in faster and cheaper capital flow however there are still some national barriers that exist in emerging economies that limit the free flow of finance. China for instance does not allow financial institutions to set up wholly owned business in the country that is greatly resented by European financiers. Other countries too have restrictions in place as they fear a domination of Western financial clout in their respective comparatively immature markets. The cost of financial services are increasing and their margins are always under pressure since the interest rates, the main source of income for the finance companies in the developing countries, is either low or falling. To offset this they have adopted outsourcing of their administrative services to cheaper countries located in the East. The most outstanding example of this is India where back processing office (BPO) services are mostly destined due to its high calibre English speaking population and its well established IT credentials. Such services are contracted out at 10% of the normal costs and are highly cost effective for the financial service sector located in the West. Although highly resented, the finance sector has realized the importance of this benefit and the other emerging economies are also getting a larger share of this market and it has become a permanent feature in the international market. Bibliography Cantwell, J. A. (1989), technological Innovation and Multinational Corporations, Oxford: Basil Blackwell. Cantwell, J. A. and Janne, O. E. M. (1999), The internationalization of technological activity: The Dutch case, in R. van Hoesel and R. Narula, eds., Multinational Enterprises from the Netherlands, London: Routledge. Dunning, John H. (1981) International Production and the Multinational Enterprise, London, George Allen and Unwin. Dunning, J. (1988a). The eclectic paradigm of international production: a restatement and some possible extensions. Journal of International Business Studies, 19, pp. 1-31. Dunning, J. (1988b) Explaining International Production. Boston MA: Unwin Hyman. Dunning, J. (1993) Multinational Enterprises and the Global Economy. New York: Addison-Wesley. Dunning, John H. (2000), “The Eclectic Paradigm as an Envelope for Economic and Business Dicken, P., (2007) Global Shift: Mapping the changing contours of the world economy, Sage Pulbications, London, 5th Ed Kuemmerle, W. (1999), The drivers of foreign direct investment into research and development: An empirical investigation, Journal of International Business Studies, Vol.30, pp. 1-24. Leonidou, L. C. (1995), Export Stimulation: A Non-Exporter’s Perspective, European Journal of Marketing, Vol.2 no.8, pp. 17-36. Peng, M. W., Hill, C. W. and Wang, D. Y. L. (2000), Schumpeterian dynamics vs. Williamsonian considerations: a test of export intermediary performance, Journal of Management Studies, vol.37, pp. 167-184. Sullivan, D. and Bauerschmidt, A. (1990), Incremental Internationalization: A Test of Johanson and Vahlne Thesis, Management International Review, 30 (1), pp.19-30. Woodall, Pam, (2006) in The New Titans, Sep 14th, The Economist. Read More