International Business - Davos and the Globalization of Markets - Essay Example

Davos and the Globalization of Markets Fram and Ajami (1994) commented that as early as the post World-War II years, Republican presidential candidate Wendell Wilkie proclaimed that we were fast becoming “One World.” Sixty years after and despite growing regional nationalism, there is an unmistakable cultural convergence in such universal pursuits as music, feasting and ritual; though far from eroding nations’ cultural variety, the enrichment of the collective world culture, in individual and collective tastes and preferences, has created a strengthening bond in its markets, making market convergence, if not unification, a distinct possibility. Of the seven forces of globalisation, arguably it is the market forces that exert the greatest influence. Slowly, the global economy is shifting from a model of distinct nations separated by trade barriers and national policy, to a model of integrated markets and borderless trading. A distinct example is the European Union, unified in currency, labour markets, markets for goods and services, and eventually capital and technology. Its member-countries are already working under a common legislative and judicial framework, through the Treaty of Lisbon and the European Court of Justice, respectively. Globalisation triggers shifts in the business milieu that are dramatic in terms of both degree and swiftness (Czinkota & Ronkainen, 2005). The dislocations induced by it can be both source of opportunity as well as risks. Of late, the increasingly integrated global financial markets have been the center of critical thought reflecting upon globalization. For instance, Tobin and Sun (2009) investigated the benefits brought by international listing in the global capital markets as a source of national economic development. Their findings show that financial globalization brought about by the creation of direct financial channels (such as the listing of counters in the global capital markets) succeeds in overcoming domestic institutional constraints (p. 825). Not all promises of financial market globalization have been fulfilled. Theoretically, one of the principal advantages of globalization is the enhancement of efficient international risk sharing, a theory tested by Kose, Prasad and Terrones (2009). However, despite using different statistical tests, the study could only find evidence of a moderate level of international risk sharing, nowhere similar to the degree anticipated by the theory. Empirical proof points to the fact that only industrial countries improve their risk sharing outcomes in financial market globalization. Developing countries and emerging markets which, in the course of globalization, have lowered capital controls, despite witnessing large increases in cross-border capital flows, have hardly improved in risk-sharing, being instead exposed to contagion shocks and extreme volatility caused by the substantial inflow and outflow of portfolio funds. Another major concern is the financial contagion that wreaks periodic havoc on our capital markets. A phenomenon of emerging markets is the Sudden Stop, characterized by: (1) sudden reversals of capital inflows and current account deficits; (2) collapses in output and private absorption; and (3) large relative price corrections in domestic good prices and asset prices. The occurrence of Sudden Stops highlights the peculiar risks assumed by capital from abroad, particularly developed markets, that get invested in an emerging market. This spawned a theory by Calvo (2002) dubbed the “globalization hazard,” that states that an international financial organization could assist in alleviating or preventing Sudden Stops by providing global investors ex-ante price guarantees on the emerging asset portfolio. Such guarantees create an environment where asset prices are expected to remain above the crash levels that trigger Sudden Stops that are triggered by globalization hazards. On the other hand, it is a drawback of ex-ante price guarantees that they introduce moral hazard incentives for global investors. With the misperception of little or no risk, demand for emerging markets assets by foreign investors is whetted because the downside is expected to be absorbed by the guaranteeing IFO. Ex-ante price guarantees thus create a tradeoff between the benefits of eliminating globalization hazard, and the costs of international moral hazard (Durdu & Mendoza, 2006). Davos 2010 One globalisation initiative is Davos 2010, which is named after the Swiss mountain resort that is the designated venue of this five-day event. Davos 2010 is the 40th annual instalment of the series of sessions and workshops once called the European Management Symposium. Davos has come to attract the world’s most powerful political leaders, artists, businessmen, and free-thinkers of various persuasions, to do what BBC quite plainly called “some serious networking with more than 2,500 of the world’s movers and shakers” (BBC, 2010). The downplayed approach is well-indicative of the spirit of Davos. In the past, the strength of Davos’ drawing power emanated from the deference paid to the World Economic Forum (WEF), the Geneva-based independent non-profit organization that sponsors the annual event. The WEF is impartial, non-partisan, non-political, with no other agenda than to seek a common ground for improving the state of the world, by engaging world leaders in dialogue. Simply stated, Davos is a meeting place to discuss things that happen to be most important to the world at that time. Despite its high profile it makes no lofty promises. It means to create a venue conducive for talk among all countries as equals, in all pursuits, that may spark ideas, infuse energy, and initiate change to make life better for the world community. Critical assessment of contribution of Davos Despite its promise of affording an opportunity for world change, Davos this year appears to have fallen short of this expectation. Weber (2010) points to the fact that there were fewer political world leaders in the recent conference, and absent the people with the power to commit their countries to policies of change, there could be little consensus building that would yield real, tangible and actionable results. The comparatively few heads of state who were present appeared to have been prompted by the desire to promote their countries to investors and in line with a possible take over of the G20 leadership. According to review, the four themes that dominated the Davos 2010 conference revolved around banking reform, economic recovery, technology, and humanitarian aid. Of the four themes, it appears that banking reform became the principal topic, with economic recovery as a necessary adjunct to the subject of financial institution regulation. Technology and humanitarian aid would, as in most international venues, be staple topics for discussion because of the constant need to update technology transfer, and the pervasive need among countries on both sides of the prosperity divide to ask for and extend funds directed at the world’s poorest. Definitely, banking reform topped the agenda of serious concerns in light of the continuing effects of the U.S. subprime and financial crisis. The globalization of financial markets has been effected largely with the proliferation of multinational financial monoliths that channel investments and facilitate funds transfers across borders. In the course of their operations, conflicting policies on institutional and market regulation tilts in favour of the strength of free market forces and against what governments call regulation, but what market advocates term intervention. This issue lies at the crux of the globalization dilemma, the diminishing of national sovereign control in the face of multinational might and muscle. At the end of the day, the debate about the large rich international banks drowned out the more urgent concerns such as global food shortages (Weber, 2010). The somber atmosphere at Davos may be justified by the bleak economic environment currently prevailing internationally. Despite the absence of much of the glitz and glamour of previous Davos summits, the holding of the conference still plays a major role towards the advancement of the benefits of globalization. Even without reference to any of the seven forces of globalization, the very concept of globalization is anathema to many people when discussed in light of socio-economic progress. Clark and Knowles (2003) decries the lack of understanding with which many observers regard “globalization,” which in common parlance is seen as representing different, often contradictory ideas. Academics are particularly guilty of this by virtue of their academic isolation and the development of specialized jargons and theories, thus rendering the discussions “increasingly unintelligible, invisible, and inaccessible” to each other (p. 371). What is needed, argue Clark and Knowles, is a general definition of globalization, in order to build bridges to enhance cross-disciplinary dialogue. IB recommendations to Governments & Companies, Conclusion Through the past decades, previous Davos conferences may have been more successful and productive in comparison with the 2010 session. This may have raised the stakes, and expectations, not only of the participants but also the countries whose representatives attended the conference. However, change is not so easily attained, not without a conversion of will and conviction to support the conversion of thought. Goodwill and fuzzy feelings is not sufficient, and the road to perdition is often paved with good intentions, as the saying goes. It is not enough to say one is for the common good, but that “common good” must be explicitly agreed upon. Globalization gone awry is as destructive, maybe even more so, than national isolation. What one country may deem “common good” for its purposes may be considered contrary to the interests of another country. Davos then must be approached with an open mind to create bridges for dialogue, and the end of the conference should be the beginning of new prospects and continuing relationships. The courses of action are explored through time, but the seeds of Davos would have born fruit if such relationships prospered on a permanent basis. In the pursuit of globalization, it is important to always retain the broad perspective. The goal and purpose of any concerted initiative is the betterment of life of the human person. Akhter (2004) calls attention to the possible ill effects of globalization in pursuit of itself, and in the process losing sight of the ultimate goal. The study stressed the effect of economic globalization on human development, arguing that the relationship between them is tempered or mediated by the degree of economic freedom and corruption attendant. On the whole, the study found that when pursued according to established principle and well-founded directions, economic globalization affects economic freedom positively and corruption negatively, whereas in turn, economic freedom had a positive effect, and corruption a negative effect, on human development (p. 283). This is an insightful revelation, because the layman’s use of the word “globalization” has come to denote many things, some misleading. Akhter says that globalization does not automatically lead to human development. Where globalization efforts do not support economic freedom, then the interests of human development is not served. Where globalization programs tend to spawn corruption, then human development does not take place. Globalization, to support human development, must enhance economic freedom and stifle corruption. REFERENCES Akhter, S H (2004) Is globalization what it’s cracked up to be? Economic freedom, corruption, and human development. Journal of World Business, vol. 39, pp. 283-295. BBC News (2010) Q&A: World Economic Forum 2010. 26 January 2010. Accessed 25 February 2010 from http://news.bbc.co.uk/go/pr/fr/-/2/hi/business/8478974.stm Calvo, G.A (2002) Globalization hazard and delayed reform in emerging markets. Economia 2, 2 Spring Clark, T & Knowles, L L (2003) Global myopia: globalization theory in International Business. Journal of International Management, vol. 9, pp. 361-372. Czinkota, M R & Ronkainen, I A (2005) A forecast of globalization, international business and trade: report from a Delphi study. Journal of World Business, vol. 40, pp. 111-123 Durdu, C B & Mendoza, E G (2006) Are asset price guaranteees useful for preventing Sudden Stops?: A quantitative investigation of the globalization hazard – moral hazard tradeoff. Journal of International Economics, vol. 69, pp. 84-119 Fram, E H & Ajami, R (1994) Globalization of Markets and Shopping Stress: Cross-Country Comparisons. Business Horizons, Jan-Feb 1994, pp. 17-23 Kose, M A; Prasad, E S; & Terrones, M E (2009) Does financial globalization promote risk sharing? Journal of Development Economics, vol. 89, pp. 258-270 Tobin, D & Sun, L (2009) International Listing as a Means to Mobilize the Benefits of Financial Globalization: Micro-level Evidence from China. World Development, vol. 37, no. 4, pp. 825-838 Weber, T 2010 The year Davos meant business. BBC News Analysis. 1 February 2010. Accessed 25 February 2010 from http://news.bbc.co.uk/go/pr/fr/-/2/hi/business/8490278.stm World Economic Forum (WEF) (2010) About the World Economic Forum: Entrepreneurship in the global public interest. Accessed 25 February 2010 from http://www.weforum.org/en/about/index.htm Read More