What Is Globalisation and How Does It Affect the Multinational Enterprises - Essay Example

Effects of Globalization on Multinational Companies Introduction Globalization has been defined as the process through which isolated regions of the world become more integrated as a result of increased international cooperation in the exchange of knowledge, cultural values, political ideas, and economics. This process has largely been made possible by technology advances with special attention to the internet. Indeed, as the world has become more connected by the internet, people across the world have increasingly become interdependent in such activities as political policy, travel, communications, and trade (Yaprak & Tütek, 2013: p45). However, while contemporary assumptions are that globalization is a fairly modern phenomenon as a result of ICT inventions, it has actually been taking place for hundreds of years. For instance, the Silk Road that spanned from East Asia into Europe is early evidence of international trade and cultural exchange, as is the invention of railroads and steamships. What has made globalization especially salient in the last one hundred years is that the invention of road vehicles and airplanes has dramatically eased international trade and exchange. Moreover, digital communication tools invented in the late 20th century have made globalization in the modern sense a reality (Yaprak & Tütek, 2013: p46). One organization that owes much of its success to globalization is Wal-Mart, which has been able to take advantage of cheaper imports, cheaper labor, and improved logistics and ICT capabilities in previously isolated regions like East Asia to gain a comparative advantage. Globalization The term globalization is derived from the verb “globalize” that encompasses the aspect of international influence and interdependence between diverse economic and social systems. The concept of globalization has several definitions and interpretations, which range from such diverse disciplines as anthropology, philosophy, sociology, and business. According to Dehesa (2012: p39), there are four fundamental aspects from a business perspective that define the concept, which are trade and transactions, movement and migration of people, investment and capital movements, and knowledge dissemination. Globalization, in essence, is a natural phenomenon that enables for synergy in both markets and cultures through the process of specialization. As a result, domestic economies and enterprises are empowered to leverage external markets by accessing a broader array of knowledge, investment, human capital, services, and products. As this natural development evolves over time, enterprises involved in international trade are provided with interesting options as to how to capture value via international trade (Dehesa, 2012: p39). This underlines the critical role that globalization has come to play in economic development around the world. The process of globalization, especially in relation to economic integration of world economies, has dramatically accelerated in the past twenty years. As noted by Taggart et al (2011: p64), there has been a dynamic development in three major economic globalization channels, which are foreign direct investment, trade, and international transfer of technology and knowledge. Of these channels, the most interesting has been the drastic rise in foreign direct investments, although the increase in international transfer of technology has become increasingly important. Moreover, there has been continued growth international trade, which has grown even faster than world output. Multinational enterprises have come to stand at the center of all three major developments mentioned above. Indeed, MNCs are the major contributors to foreign direct investment across the world. In addition, MNCs are also the main vector of technology transfers to other regions of the world, which is best evidenced by the record payments in license fees and royalties between parent companies and their foreign affiliates (Taggart et al, 2011: p65). Finally, MNCs are also a major player in international trade, especially with regards to their role in the trade of intermediate products, as well as increasing intra-enterprise trade. Globalization and Wal-Mart Not only is Wal-Mart the world’s largest retailer, it is also the world’s largest corporation and has also been proposed as the largest corporation in the history of the world. The organization began its international operations in the early 90s with discount stores in Puerto Rico and Canada, before opening supercenters in Germany, China, Brazil, Argentina, South Korea, Mexico, and the UK all with differing levels of success. Moreover, Wal-Mart has acquired stakes in several domestic retail enterprises like ASDA in the UK, Todo Dias in Brazil, Amigo in Puerto Rico, and Seiyu retailers in Japan. In fact, according to Hood & Young (2010: p29), approximately 25% of all Wal-Mart stores are located in countries other than the United States. As such, Wal-Mart is widely regarded as corporate globalization’s poster child. One way in which globalization has affected Wal-Mart is by revolutionizing the international supply chain. ICT advances and economic globalization are at the core of the corporation’s supply chain and logistic operations. By taking advantage of enhanced international supply chain integration as a result of globalization, Wal-Mart has been able to enhance their bargaining power with manufacturers and suppliers (Hood & Young, 2010: p31). Moreover, Wal-Mart has been able to hinge its strategy on low pricing, which has been aided by their ability to import cheaper products from countries with low costs of labor such as China. In turn, this has forced North American suppliers to lower their costs by achieving cost and operations efficiency, further helping Wal-Mart to maintain their low pricing strategy as a competitive advantage (Jones, 2012: p55). Wal-Mart has also modified their philosophy to be a leading company in technology, transportation, distribution, and logistics, which they have termed “The Wal-Mart Way”. It is important to note that the business model currently pursued by Wal-Mart would be in trouble of failure without the advances brought by globalization in their supply chain and technological capabilities. Advanced technology is at the core of the company’s successful supply chain, as is their ability to purchase products at lower costs from countries around the world, all of which are mainly driven by the process of globalization (Jones, 2012: p55). Globalization has also enabled Wal-Mart to increase their operations in international procurement, which the company has used to achieve cost efficiency. As a result of globalization, Wal-Mart has been able to facilitate the direct buying of products from their country of production across the world (Jones, 2012: p56). By pursuing this strategy, the company can now buy the best quality products at the lowest possible price. Of course, without the advances in economic liberalization and ICT that continue to bring developing countries into the world economy, Wal-Mart could not have achieved their current level of success. Global procurement has played a leading role in enhancing the sourcing of products from numerous supplier factories from across the world. For instance, Wal-Mart has been able to outsource its operations to China. By exploiting the integration of the international economy and advances in ICT, the corporation has been able to change the power balance with manufacturers dramatically (Jones, 2012: p56). Today, at least 80% of the company’s suppliers are situated in China where they can get goods at the cheapest price since the labor costs are low. As a result, majority of products sold at Wal-Mart are either manufactured in China or have components manufactured in China, which is a good example of Wal-Mart’s ability to use outsourcing as a competitive advantage (Sullivan, 2012: p71). Moreover, globalization has also given Wal-Mart greater leeway in where they locate their operations. For example, a problem in China regarding currency re-evaluations that may make China’s products more expensive has seen Wal-Mart opt to move some of its operations to India. At present, at least 30% of all apparels sold at Wal-Mart are from India and this is expected to continue rising as India has cheaper raw materials than China. From this evidence, it is quite clear that the ability to outsource production to countries like India and China with low production costs as compared to the United States is central to Wal-Mart’s overall strategy (Sullivan, 2012: p72). This ability to outsource production has been facilitated by the irresistible forces of globalization. However, globalization may also have had several negative impacts on Wal-Mart’s operations. For example, economic globalization has uncoupled Wal-Mart’s persona from its initial local roots, which has, in turn, weakened the traditional loyalty bonds between Wal-Mart, the country of origin, and local communities (Jones, 2013: p40). In addition, globalization has led to increasing coordination challenges for Wal-Mart. Wal-Mart is facing difficulties in coordinating their operations and activities in an increasingly globalized economy. For instance, any MNC that wishes to operate in America, Europe, and Asia has to ensure that their operations are led by people who understand the culture of the new market. However, this is not as easy as it sounds and Wal-Mart has suffered as a result in Germany and South Korea where its operations have failed to a lack of cultural understanding. Indeed, operating in a globalized economy requires Wal-Mart to employ a diverse range of employees, which makes it more difficult to ensure that the entire workforce is on the same page mission and vision-wise (Jones, 2013: p41). Other issues of coordination may arise from differences in business norms, cultural norms, and language barriers.   References Dehesa, G. (2012). Winners and losers in globalization. Malden, MA: Blackwell Pub. Hood, N., & Young, S. (2010). The globalization of multinational enterprise activity and economic development. New York: St. Martin's Press. 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. Sullivan, J. J. (2012). The future of corporate globalization: From the extended order to the global village. Westport, Conn: Quorum Books. Taggart, J. H., Berry, M., & McDermott, M. C. (2001). Multinationals in a new era: International strategy and management. New York: Palgrave Macmillan. Yaprak, A., & Tütek, H. (2013). Globalization, the multinational firm, and emerging economies. Amsterdam: JAI. Read More