Drivers of Globalization, Decline in Trade and International Barriers - Essay Example

1030157 - INTERNATIONAL BUSINESS 212 Introduction In the days before the last three decades, sovereignty was a term that most countries took so much pride in. This is because each country wanted to take advantage and fully benefit from the fact that it was an independent state whose way of doing things were highly subjected to their personal interest. In those days, Hill (2009) observed that national economies were so much isolated from each other by barriers to cross-border trade and investment that countries that opened up their borders easily for international trading to take place were considered to be weak. Apart from the fact that most countries wanted to protect their sovereignty and independence, there were other factors that Hill (2009) noted as being a cause to reasons countries were not opening up to each other in terms of trade. Some of these factors have been named to include geographic distance, time zone differences, language, differences in government regulation, culture, and business systems. With time, there seemed to be two major causes of trade revolution, which was going to lead to an eventual state of international trading opportunities for most countries. The first of this was the fact that most of the factors listed by Hill (2009) seemed to have had their solutions. For example there became more rapid means of transport cross geographic learnt and the learning of foreign languages increased (quote). The second issue was that countries started appreciating the benefits they would derive from trading freely among themselves (quote). Today, trade liberalization seem to be a more popular and preferred term to sovereignty. As countries started opening up their doors to each other for international trading to begin, the need to ensure that such international trade were taking place in a state of perfect organization of trade was necessitated. Quickly, technology would be employed for most of the processes and acts of international trading, making integration, regularization of trade and non-physical commerce even easier. At the point that technology was merged into international trade was the point that quote (year) argues that the wake of globalization was born. In this essay there is a discussion on globalization, which is today used as a term not only to define the notion that countries trade among themselves but that countries are now moving towards a world in which national economies are merging into an interdependent global economic system. By global economic system, reference is being made to the fact that the kind of economic relations that exist among nations is one that is well calculated, accurately planned and adequately resourced to ensure that it becomes a phenomenon that serves as the solution to the world’s commonest economic problems that are faced. Again, by global economic system, reference will be made in the paper to the fact that all nations are involved in this era of globalization and that everyone is taking due advantage. In line with this, a pentagonal approach to the topic of globalization shall be taken as depicted in the figure below. The main drivers of globalization The successes of today’s globalization story can be traced to a number of factors that can be described as drivers of globalization. Without these drivers, the story of globalization would not have existed in the manner it exists today. Two of these drivers are the decline in trade and international barriers and advancement in technology. Decline in Trade and International Barriers Quote (year) noted that before the Second World War, most countries instituted very rigid barriers to international trade and foreign direct investment. Because of this, international trade, which is the process by which firms export products and services to other countries to earn foreign exchange, was virtually not in place (quote). Foreign direct investment, which also refers to the situation whereby a company invests resources in business activities in a country outside of its parent country, was also not common (quote). The trade and international barriers took several forms including the use of high trade tariffs and the refusal of host countries to enact laws to protect foreign companies engaged in foreign trade (quote). By implication, there was an absolute apathy towards international trade and foreign direct investment. In the opinion of quote (year), such actions that were taken by host countries could be explained and justified to some extent, noting that most of them had the idea of protecting their local firms. After the Second World War however, several advanced countries in the West went into agreements to remove most of the barriers to trade and international commerce, having realized the degree to which they could not depend on their own resources forever (quote). This was backed by the General Agreement on Tariffs and Trade. With time, other regions in different world blocks such as the Africa, Asia, Australia and America started having similar agreements. As the different regional agreements were linked to one another, it made it possible for a global economic network to be created. Massive Technological Change The discussion on globalization without mention of technology will be highly inadequate. This is because most forms of international business that have been run since the 1990s have happened on the wings of technological advancement. Up to now, the debate as to whether those in the technology industry took advantage of globalization (decline in trade and international business) to expand itself or globalization took advantage of the technology industry continues to rage on. But there is a very perfect understanding of the fact that both have benefited from the other and that technology remains a major driver by which globalization is carried (quote). Three major areas of advancement in technology that have tremendously benefited globalization are advances in information processing, advances in communication, and advances in transportation. Quite interestingly, most of these advancements started taking place at the very point after the Second World War when most forms of trade and international barriers were removed (quote). Today, as firms engage in international trade and foreign direct investment, the means to effectively communicate, process information and transport resources have been made so easy. What seem to have added icing on the cake are the World Wide Web and the Internet. These two phenomenal advancements in technology have simply created a new paradigm where geographic barrier is no longer a word in international business. How globalization has affected the state of global economy One major impact of globalization is that is has created a new world order where the state of the global economy has become highly balanced and relatively fair for companies and countries that were otherwise not part of global economic activity. This is because there is now a new trend to foreign direct investment and the creation of multinational enterprises. The New Picture of Foreign Direct Investment In the days leading up to the 1960s, quote (year) gives account of how the United States and British firms dominated the discussion on foreign direct investment. This is because they seemed to be the only countries that could adequately penetrate the robust international barriers in place. Even between the United States and Britain, the difference was so vast that whereas the U.S. controlled 66%, Britain controlled 10.5%. The fact that these two countries allowed owned 76.5% of foreign direct investment (FDI) meant that FDI was controlled by developed economies. With the birth of rapid globalization, a new global economic order will be created that will adequately absorb developing countries as much as it would for developed countries. As of 2013, the World Investment Report noted that of 20 largest FDI recipients, 9, representing an impressive 45% were from developing economies. Source: Zhan (2013, p. 4) From the chart above, it will be noted that globalization has indeed brought about a new state of global economic wave in terms of foreign direct investment, whereby the door has now been opened for every other country to be part of the economic liberation that is being enjoyed. Indeed, there could be nothing more impressive than the fact that the 2nd to 5th positions on largest recipients of FDI are developing economies. If gradually these countries attain the levels of developed countries, FDI could be counted as one of the major causes. A new wave for Multinational Enterprises Since 1960 when globalization took a trend that most economists described as a takeoff mode (quote), there have been two major trends that have been experienced by way of multinational enterprises. Quote (year) has explained a multinational enterprise as a firm with operating activities in two or more countries (quote). The first wave that has blown among multinational enterprises is that there has been a surging rise in non-U.S. multinational enterprises. Again, there has been a new twist with the opening of several mini-multinational enterprises. Comparing figures in 1973 to 2008, quote (year) noted that the number of multinational enterprises that originated from the U.S. far outnumbered those from other countries put together. What this implied for the global economy was that business development was one-sided and unbalanced. With time however, due to globalization and the merger of national economies, the trend will change to create a new paradigm where every other country has a fair share of the global economic numbers in multinational economies. This situation is clarified in the chart below. Source: McGraw-Hill (n.d, p. 21). The other situation is that new and not-so-large companies are now and also being motivated to go into multinational entrepreneurial status. These are classified as mini-multinational enterprises (quote). This trend has strengthened competition, whereby the discussion is now not just on large companies but on smaller ones as well. Most especially through internet trading, names like Lixi, G.W. Barth, Hisense, and Lubricating Systems Inc have all found very firm grounds through which they make millions of dollars each year through foreign trade and openings. Role of host countries 1 creating conducive international atmosphere 2 protection of local businesses How globalization offers opportunities to businesses [focus on technology] Challenges posed to business managers as a result of globalization Conclusion From the pentagonal approach from which the topic on globalization was discussed in the essay, it can be concluded that indeed the whole world is rapidly evolving into a global network where national economies are emerging into an interdependent global economic system, where every other nation wants to gain from this. The essay has established three major stakeholders in the concept of globalization, which are businesses, nations and the larger global economy. In a very spiral approach, business keep playing their part through phenomena like foreign direct investment so as to ensure that there is the transfer of businesses, products and services from one international border to the other. Nations are also playing their part by ensuring that every needed atmosphere that makes international trade for the multinational companies is created. By extension, the entire global economy has now become affected so much so that local businesses across the globe continue to face stiffer competition from international companies, whether these companies are located in their countries or not. For example through electronic commerce, a person may bypass local car companies to buy cars from international companies. By and large, doing business in today’s world is no longer confined by geographic borders but highly liberated through a global economic system, commonly referred to as globalization. We are moving towards a world in which national economies are merging into an interdependent global economic system,commonly referred to as globalization. Ref J.J.Wild and K L.WILD, International Business, Pearson, London,2014, Chapter 1 J.H.Dunning and C.N.Pitelis, Stephen Hymer\s Contribution to International business Scholarship, Journal of international business Studies, Vol39, No 1, 2008 J.J.Wild and K.L.Wild International business, Pearson, London, 2014, Chapter 8 S.Wall, S . Minocha and B.Rees, International business, Prentice-Hall, London, 2010, Chapter 6 J.J WILD AND K.L WILD, International Business: The challenges of globalization, Pearson, Boston, 2012, Chapter 1. Zhan J. (2013). World Investment Report 2013: “Global Value Chains: Investment and Trade for Development” Accessed February 14, 2014 from http://unctad.org/Sections/dite_dir/docs/diae_stat_2013-06-26_en.pdf McGraw-Hill (n.d) Globalisation. Accessed March 12, 2014 from http://highered.mcgraw-hill.com/sites/dl/free/0078029244/935561/Chapter01.pdf Hill C. W.L. (2009). International Business: Competing in the Global Marketplace. Accessed March 16, 2014 from http://enbv.narod.ru/text/Econom/ib/str/003.html Read More