Globalization and Its Effects on Multinational Companies - Term Paper Example

Globalization and Its Effects on Multinational Companies GLOBALIZATION AND ITS EFFECTS ON MULTINATIONAL COMPANIES Globalization isdefined as the integration of markets, such as commodity markets, product markets, insurance markets, credit and money markets, and financial markets in the global economy. Globalization has increased in pace for several reasons, including developments in information and communication technology and transport that has enabled global communication and vast use of containers to transport huge quantities of products at very low cost across the world (Dunning, 2012: p13). In addition, globalization has also been stimulated by increasing mobility of capital across countries that enables firms to relocate and invest overseas and repatriate their profits, while the development of derivatives and other complex financial products have enabled the rapid growth of global credit markets. Moreover, as trade increasingly becomes freer with economic liberalization after the fall of Communism, which has increased the rate of imports and exports between industrialized and emerging economies. Finally, the growth of multinational companies and brands like Apple has also driven the process of globalization (Dunning, 2012: p14). This paper will discuss globalization and its effects on multinationals with Apple being a case study in the latter discussion. Globalization refers to the process through which the world is increasingly becoming interconnected due to a massive increase in cultural and trade exchange (Dunning, 2012: p33). In turn, this process has increased services and goods production with the largest companies today being multinationals, rather than national firms. Although this process has been occurring for centuries, its pace has increased dramatically over the last fifty years. This has been as a result of reduced differences between different economies, leading to increased trade between and within different countries. One important aspect of globalization is that of integration where, while economies in the past were mostly ‘self-contained’ and export and imports occurred almost co-incidentally, economies today are more closely dependent on one another for markets and raw material (Dunning, 2012: p34). Today, when one economy, like Japan, is in recession, many other economies also suffer the effects of recession. The process of globalization has been greatly influenced by improved transportation with transportation costs for MNCs like Apple decreasing, specifically as larger cargo ships and planes can transport more products (Rugman, 2014: p28). Moreover, economies of scale have led to a reduction of costs for each item produced by Apple as they operate on a larger scale. Freedom of trade, advocated for by the WTO, has also promoted free trade internationally, helping to remove inter-country barriers for MNCs like Apple. In addition, improvements in communication have also helped Apple to become more globalized as mobile technology and the internet have allowed people in different countries to communicate better. Finally, availability of cheap labor and skills in countries like China and India has meant that MNCs like Apple can take advantage of reduced legal restrictions and cheaper labor to become global companies (Rugman, 2014: p29). Zylla-Woellner (2013: p55) identifies MNCs as agents of globalization, noting that, on the other hand, the effects of globalization may either be positive or negative on the MNC, specifically since MNCs have several subsidiaries some that may benefit from the process of globalization while others do not. One effect of globalization on Apple Inc has to do with technology, in which for their products’ quality to be more acceptable, implied production technology plays an increasingly critical role. For example, Apple has given more importance to outsourcing as part of their corporate strategy, while also maintaining high control over the integrity of their products. Rather than produce their products in Apple-owned factories in China, the company contracts a third party and imparts their product specifications on them. Apple is also involved in sourcing quality products from other countries for assemblage by effectively fragmenting its chain of supply (Zylla-Woellner, 2013: p56). Failure to monitor their strategy in one country successfully runs the risk of destroying Apple’s reputation. The implementation of an international strategy at Apple subtly has seen the company attempt to leverage their products to maximum utility, which requires sophisticated R&D through international investments. Trade theory provides a means to discern the proportion of different input factors required at every production stage, as well as provides a means to compare costs between these inputs, which influence the MNCs investment proposal (Zylla-Woellner, 2013: p60). Because of technology’s importance in the process of production for Apple, it has to be accounted for in their international strategy as they invest in foreign nations like China. Comparative technology costs are critical for Apple’s production since they are a major contributor to international pricing strategy. Thus, Apple finds that Chinese-generated technology has a bigger advantage than implementing similar technology in the US. Skilled labor is also important in ensuring quality production. The high labor costs in the US can be a disadvantage for Apple’s operations in the country, which they have surmounted via foreign direct investment (Zylla-Woellner, 2013: p60). As a result, they have derived an advantage in countries like India and China in terms of implementing technology at low cost using skilled labor. Globalization also influences MNCs like Apple in terms of geographical dispersion, which means that they cannot concentrate their activities in one country but, rather, have to disperse their activities across different countries. Production in other countries can either be conducted through foreign direct investment or mergers and acquisitions, which will either involve setting up new assets and plants or merging/acquiring existing firms in foreign countries respectively (Jones, 2013: p62). Geographical dispersion has costs for MNCs like Apple at the plant level, the firm level, and foregone economies of integration. Approximately 54% of Apple’s market is located in the US, while manufacture and supply of components is sourced from Korea, Germany, the US, Taiwan, and the Netherlands. However, the main assembly of Apple’s products is conducted by outsourced third party vendors in China, which means that Apple has had to divide input production into various sub-categories located in different countries as a result of globalization (Jones, 2013: p62). Apple benefits from this geographical dispersion by reducing primary input costs, enabling the company to lower their costs of operations. In addition, they are also able to lower their costs of trade and increase market share as a result, for example by increasing their presence in Asia through their operations in China and India (Zylla-Woellner, 2014: p61). Moreover, Apple also gains a competitive advantage through economies of scale since production costs are reduced due to dispersion and the ability to employ skilled, cheap labor. However, it is uncertain what effects geographical dispersion as a result of globalization will have on Apple in the long-term. Diminished control over their operations may affect their product quality, as well as their ability to respond flexibly to challenges. In turn, this could harm Apple’s reputation on the global and domestic market. In addition, where manufacturing or logistical services in an important country like China are disturbed as a result of financial crises, political issues, or natural disasters, this may affect the entire companies operations and financial condition (Zylla-Woellner, 2014: p62). Finally, globalization also influences MNCs like Apple with regards to the government policies in countries where they open operations. For example, Apple’s operations in China are influenced significantly by the government trade policies on outsourcing and supply chain management (Jones, 2012: p29). As an MNC, Apple’s strategy insulates itself from risks of foreign exchange, especially since the price Apple has to pay for input items in particular countries under the influence of currency exchange rates at the time. However, as the dollar becomes more expensive, Apple’s gross margin and net sales will be affected negatively in terms of American dollars. The fiscal and monetary policies of governments greatly influence financial innovations, which determine economic performance stability. As the American government continues to maintain low rates of interest to revive the economy and support housing demand, it becomes possible to increase international capital flows, as well as a weaker dollar (Jones, 2012: p29). Therefore, a weaker dollar will result in higher earnings in foreign currency for Apple. Apple seeks to outsource its operations to countries that have minimal legal regulations and lighter tax burdens to maximize on their profits. In conclusion, globalization has had a profound impact on how multinational companies operate, especially as countries and their economies become increasingly interconnected through exchange of culture and trade across borders. In globalization, commodity, product, insurance, credit, and money markets have become more integrated within a globalized economy. For a multinational company like Apple, one of the effects of globalization has been the spread of technological innovations across the world, which has increased the quality that consumers across the world now expect from Apple. In addition, geographical dispersion of operations as a result of globalization has enabled Apple to take advantage of lower labor costs in Asia, although it has also diminished their overall control over the company’s operations. Finally, government policies, especially monetary and fiscal policies, in countries where Apple operates have impacted on Apple’s ability to leverage differences in foreign exchange rates to increase their profit margins. References Dunning, J. H. (2012). Regions, globalization, and the knowledge-based economy. Oxford: Oxford University Press. Hitt, M. A., Ireland, R. D., & Hoskisson, R. E. (2013). Strategic management: Competitiveness & globalization: cases. Mason (OH: South-Western Cengage Learning. Jones, G. (2013). Entrepreneurship and multinationals: Global business and the making of the modern world. Cheltenham: Edward Elgar Jones, G. (2012). Multinationals and global capitalism: From the nineteenth to the twenty-first century. Oxford: Oxford University Press. Rugman, A. M. (2014). The regional multinationals: MNEs and "global" strategic management. Cambridge, UK: Cambridge University Press. Zylla-Woellner, J. (2013). Business Analysis of Apple Inc. Munich: GRIN Verlag GmbH. Zylla-Woellner, J. (2014). Global economic Development within the Scope of Apple Inc. Munich: GRIN Verlag GmbH. Read More