International Business: The Global Marketplace - Essay Example

 International Business: The Global Marketplace Introduction Globalization is a mere abstraction to some. For people who have been affected by it, globalization is a vital issue because of the broad scope and long-term consequences that it implies. Some trading businesses and the people they employ benefit from increasing volume of trade and foreign exchange earned. Others lose their jobs because their employer could not cope with the competition posed by cheap foreign imports. Some people have wondered what the Seattle protest demonstrations were all about. This paper seeks to study the origin, as well as the forces of globalization, and the contrasting views on the subject, with a view to determining their probable impacts on the people's lives everywhere. History of globalization The history of globalization may be divided into three periods that center around the Bretton Woods System. This system existed from 1944 to 1971. a. Pre-Bretton Woods. While the movement of goods and people across national borders had occurred for centuries before the Industrial Revolution, a major part of globalization activities may have taken place during the 50 years prior to World War I, according to the Economist. (Baumol & Blinder 345). Similar to the present one, globalization then was driven by the reduction in trade barriers and by the sharp falls in transport costs due to the invention of railways and steamships. Thus the present wave of globalization may just be a resumption of that period which was interrupted by the two World Wars and the period between them. b. The Bretton Woods era The United States and its wartime allies met in 1944 in Bretton Woods, New Hampshire, in order to build a new international economic structure, with the lessons of the Great Depression of the 1930s sharply in their minds. They intended to create the rules and institutions that would govern international economic relations after the war. The Liberal International Economic Order, otherwise known as the Bretton Woods system, would reduce barriers to the the free flow of trade and capital, and promote a tightly integrated political economy. An open economic system would be complemented by a commitment of states to limit government intervention. An international monetary system would be created characterized by stability, predictability, and orderly growth. (See Wittkopf and Kegley). The Bretton Woods leaders created the International Monetary Fundk tasked with maintaining stability in the financial flows (balance of payments) and exchange rates. They also created the International Bank for Reconstruction and Development (World Bank) charged with assisting postwar reconstruction and development by facilitating the transnational flow of investment capital. A third body, the International Trade Organization (ITO) was proposed but this met resistance from the US Congress and was later set aside in favor of an arrangement called the General Agreement on Tariff and Trade (GATT). The Bretton Woods system was a fixed exchange rate system. Governments were to maintain the value of their currencies at a fixed rate relative to the currencies of other states. They were allowed to intervene in the monetary market by buying and selling other currencies in order to preserve the value of their own. By late 1950s, however, confidence in the monetary system's viability began to wane. With substantial amounts of dollars being held by foreigners, there was doubt about the U.S. government's ability to convert these holdings into gold. The government incurred huge balance of payments deficits, leading to fears of a possible dollar devaluation. At this time massive movements of capital across countries, the internationalization of banking, the development of ex-U.S. currency markets, and the expansion of multinationals gave an accelerated impetus towards interconnectedness (Keohane and Nye, cited in Wittkopf and Kengley). In 1971 U.S. President Nixon, faced with mounting deficit and inflation, decreed that his government would no longer exchange dollars for gold. This marked the end of Bretton Woods system, and in its place was introduced a system of free floating exchange rates, subject only to market forces rather than government intervention. Other countries reacted with shock and anger (Wittkopf and Kengley). c. Post-Bretton Woods up to the present In the 1970s two oil shocks induced by OPEC caused an inflationary impact on the United States economy and on the rest of the oil-importing world. In the following decade the debt crises experienced by by some developing countries such as Mexico and other Latin American countries created apprehension about the viability of the existing international economic order. [Lamborn and Lepgold. 207-10] By 1990s massive flows of capital across borders increased foreign direct investments, portfolio investments, credit, and other financial instruments to developing countries. In 1997 the Asian financial crisis caused by the collapse of the Thai bhat led to the massive outflows of funds that infected other Asian countries and triggered the collapse of their capital and currency markets. The International Monetary Fund had failed to foresee the crisis, and the measures it implemented to correct it was criticized by some quarters for being inappropriate, particularly in the case of South Korea. On the other hand the World Trade Organization, which replaced the GATT, has held several rounds of conferences to set the rules of international trading among member countries. The Seattle meeting in 1999 was aborted by raucous and violent demonstrations by activists. The protests have led to some self-examination on the part of the organization. The current Doha Round has been relatively unsuccessful in resolving some issues, particularly that of agricultural subsidies. The global financial crisis whose impact was most felt in 2009 has affected globalization, according to the IMF, as having "put globalization on hold, with capital flows reversing and global trade shrinking." The return to protectionism has also been observed. (Globalization & income inequality). Globalization: Concept and driving forces Globalization refers to a rapid integration of states' economies in terms of markets as well as ideas, information, and technology, with a profound impact on political, social and cultural relations across borders. (Lamborn & Lepgold 354). It is also described as a complex of forces that creates a trends towards a single world society. From the business or economic perspective, it may be defined as the trend towards a more integrated economic system wherein economies are moving progressively away from isolation caused by barriers to cross-border trade and investments, distance, time zones, language and national differences in government regulations, culture and business systems, and toward a world in which national economies are merged into an interdependent global economic system.(See Hill 6). This integration occurs as it is being propelled by technological advances that expedite the flows of trade, capital, and people across borders. From the economic viewpoint, globalization has increased the opportunities of businesses to expand and diversify revenue sources worldwide while reducing labor and input costs. Regulatory and administrative barriers to trade and investment have come down. State-owned enterprises have been privatized, markets deregulated, and competition promoted through product pricing and differentiation strategies. More and more foreign investments are being welcomed through more liberal investment rules and incentives. Even giant retailers such as Wal-Mart and Carrefour have joined in expanding their scope globally in order to take advantage of potential markets in other countries (ibid). The Drivers of Globalization Underpinning the trend towards globalization are two major factors, namely, 1) the decline in the barriers to the free flow of goods, services and capital since the Second World War, and 2) technological change – i.e., the dramatic developments in communication, information processing, and transportation technologies (Hill 8; Baumol and Blinder 345) The significant lowering of the barriers to the free flow of goods, services, and capital has eased the trend towards the globalization of production and of markets. In the 1990s up to the present decade, world trade has accelerated at faster speed than world production. Exports from both developed and developing countries have reached new heights. Competitive pressures among companies and industries have intensified. Foreign direct investments particularly to such emerging economies as China and India, have grown by leaps and bounds. The entry of multinational companies into new markets have enabled their populations to buy the kinds of goods and services not hitherto accessible and have changed their tastes and preferences towards an integrated global culture (See Hill 8). The advances in the development of the microprocessor and in communications and information processing technology have helped companies to link their worldwide operations through sophisticated information networks. The growth of the air transportation industry has reduced travel times with the advent of bigger and faster commercial jet aircrafts that make the operations of international businesses to become more efficient. By tightly coordinating their worldwide operations, businesses have progressively transformed the world into a single marketplace. The Impact of Globalization There is no doubt that globalization has significantly affected the lives of peoples in both developed and developing countries. It is therefore necessary at this juncture to consider globalization with regard to its impact in terms of the dimensions of trade, finance, foreign direct investment, income distribution, labor, and the environment. a. Impact on trade The benefits that producers and exporters derive from comparative advantage have been a major incentive to engage in international trade. Businesses with cost advantages and accessibility to resources and skills can sell their products abroad at competitively low prices, while buyers buy these products at good prices that improve their welfare. Overall productivity due to specialization increases with international trade compared to a policy of self-sufficiency. Through the General Agreements on Tariff and Trade (GATT) and the successor body World Trade Organization (WTO), and through the growing number of regional trade agreements in the major continents of the world, international trade has been promoted to a degree never seen before. The World Trade Organization oversees the trade liberalization in goods and services, and also regulates investment, information technology, communications, and intellectual property rights. The scope of its regulatory and oversight functions has expanded gradually in recent years and now includes agriculture and textiles, areas that had been the subject of protectionist measures of governments. The impact of globalization on trade has been considerable for many countries. For the United States, to cite an example, the volume of trade in relation to manufacture has risen from 6 per cent to about 20 per cent during the four decades the free trade regime under GATT and WTO has been implemented. (See Lamborn and Lepgold 354) b. Impact on finance and financial markets. Several trillions of dollars of foreign exchange are being traded in the international markets daily. Currencies which respond to international changes in interest rates and and other factors cross national boundaries through electronic means with transactions effected instantaneously. The power of governments in pursuit of domestic policy to counteract currency transfers by the private sector is often not adequate, as proven by futility with which the Bank of England tried to support the UK pound in 1992 against the attack by currency speculators. The use of credit has also intensified across national boundaries with transactions in large volumes being carried out electronically every day. The recent financial crisis triggered by failure of US subprime mortgages caused massive losses of banks in Europe, Asia, and and elsewhere. The dominance of the global capital market is so overwhelming that governments have no power to affect or change trends using domestic monetary policy. The Asian financial crisis highlighted the role of footloose capital (hot money) in collapsing the equity markets and currency values of several Asian countries. The inevitable consequence of state impotence before these forces is that governments can no longer set the pricing and availability of money when attempting to finance budget deficits or long-term investments through foreign sources. If domestic interest rates are too low, money will flow outward to other countries seeking better returns. If they are high, foreign money comes in to take advantage of the interest differentials, but domestic businesses suffer because of higher interest expense. With the increasing the demand for local currency, exports are less able to compete, thus adversely affecting the trade balance and creating a trade deficit. c. Impact on foreign direct investments Owing to the relaxation of controls and the provision of investment incentives by governments, foreign direct investment has increased considerably in recent years. Investment inflows have helped the economies of China, India, Southeast Asia, and many other countries in registering high annual economic growth rates as measured by the gross domestic product (GDP) and in reducing unemployment. The easing of currency controls since the 1980s has also helped investors to borrow in one currency and invest in another currency abroad. With the location of manufacturing facilities by multinationals in different countries, trade occurs not only between different businesses but also between subsidiaries. d. Impact on income distribution When policy makers think in aggregate terms, they harbor the illusion that a good GDP growth means improved general welfare. For the developing countries, their improved GDP growth and per capita incomes can be given a boost by the increased volume of trade they are conducting with other countries. They even relish the fact that when translated into buying power by using the Purchasing Power Parity formula, such per capita income is actually higher than the nominal figure because the same amount of money can buy more goods and services than when spent in developed countries such as the United States. But they forget that averages can be misleading because the impact on individuals differs. For industrial countries the import of cheaper consumer goods from developing countries has caused unemployment or reduced wages at home. At the same time, immigrants increase as they can take the place of local workers at lower wages. This outcome has helped worsen the income inequality within the country. Income inequality as measured by the Lorenz curve and gini coefficient would show that a greater proportion of the population own just a small portion of the national income pie. However, not all income inequality can be imputed to trade, as there are other contributory factors. For example, workers can be replaced by those with computing skills whether are local workers or immigrants. Developing countries also suffer when their import-substituting industries are encroached upon by products of developed countries that have more efficient production processes and cheaper cost structures. Evidently, developing countries suffer in the same way and sometimes worse. Whereas in the United States workers displaced or made redundant on account of international trade can avail themselves of the trade adjustment allowance - whereby they get financial assistance and free retraining -- from the government, developing countries normally do not have the resources to implement a similar program. e. Impact on labor and welfare programs Governments tend to favor domestic firms that are internationally competitive because they increase production and exports. In order to remain competitive, these firms may want to reduce cost through wage control or reduction. Labor unions have lost much of their bargaining power amid these circumstances. When local companies decide to relocate abroad or to outsource their services, labor unions have no choice but to accede. Union membership in the United States, for example, has declined considerably in recent years, having lost much of their bargaining leverage. In order to safeguard the bottom line of domestic firms, governments are also under pressure to reduce taxes. With reduced taxes, one of the first to go are welfare programs to help the poor and the unemployed. It will need some political will to continue to support social welfare policy despite the pressure to channel budgetary funds to help domestic firms survive the competitive assault of foreign products. f. Impact on the environment The adverse impact of multinationals on the physical environment of host countries is well known. Because these countries do not have strict regulations governing air and water pollution, multinationals tend to abuse by causing environmental pollution that is otherwise intolerable in their home countries. Together with the repercussions on labor and employment, the environment issue is the leading cause of protests and demonstrations against globalization. Reactions to and criticisms of globalization Globalization has had significant economic benefits in terms of increases in productivity and welfare for the economies and peoples involved. Increases in gross domestic product, employment, equity prices, and price stability have been reported widely - interrupted only by occasional credit and financial crises. But there are other aspects of globalization outcomes that hurt some segments of the populations of both developed and developing countries. Income inequality, which was mentioned earlier, has worsened. Even if aggregate incomes have risen, these have tended to benefit the middle and higher income groups at the expense of those at the lower rungs who have seen their wages drop as a result of competitive pressures of international trade. Another issue is the exploitation by multinationals of laborers in the developing countries. With low wages, multinationals can demand longer hours of work at low pay. They have also taken advantage of weak or unenforced environmental regulations in developing countries causing danger to the health and safety of workers and local communities. Exporter and importers benefit from globalization and will tend to continue in that way because policy makers are on their side. Those who are adversely affected want trade barriers to exist in some areas in order to protect employment. Those who have lost in the stock market and currency crises in Asia want to curtail the activities of hot money speculators. Those who have seen their retirement funds vanish and the taxpayer money being diverted to bailout programs because of the global financial crisis would like to have the activities of major international banks controlled. Capital controls would appear to be necessary in some cases. With regard to the Inter-Governmental Organizations such as the triad of the World Bank, International Monetary Fund, and the World Trade Organization, many activists would like to dismantle what they see as narrow corporate-led concerns and priorities. Protesters want their policies to be addressed to the alleviation of poverty, unemployment, and environmental degradation in developing countries that result from the practices of multinationals. They would like to see these organizations becoming transparent in their motives and decision making and being accountable to the people who are directly affected by their policies - not clandestinely serving the interests of some developed countries to advance their own interests at the expense of developing countries, a behavior that smack of neo-imperialism. Conclusion Globalization has gone a long way through the years. Despite several setbacks and reverses, it has continued moving forward. The institutions that are leading the movement towards further liberalization and integration should also look into the concerns propounded by developing countries and global interest groups. In this way implementation can proceed more smoothly and the issue areas of poverty and environment can be tackled fairly for the benefit of all concerned. WORKS CITED Arnold, Roger A. Microeconomics. 6th ed. Mason, OH: South-Western, 2004 Baumol, William J. & Alan S. Blinder. Economics: Principles and Policy. 8th ed. Orlando, FL: Harcourt, 2001 Hill, Charles W.L. and Gareth R. Jones. Strategic Management : An Integrated Approach. 6th ed. Boston, MA: Houghton Mifflin, 2004 Hill, Charles W.L. International Business: Competing in the Global Marketplace, New York: McGraw Hill, 2005. Lamborn, Alan C. & Joseph Lepgold, J. World Politics: Into the 21st Century. Upper Saddle River, NJ: Prentice Hall, 2005 Wittkopf, Eugene R, Charles W. Kegley Jr, & James M. Scott. American Foreign Policy. 6th ed. Belmont, CA: Wadsworth/Thomson Learning, 2003 Globalization & income inequality http://www.imf.org/external/pubs/ft/wp/2008/wp08185.pdf Read More