International Business Environment - Term Paper Example

 «International Business Environment» Gobalization has altered the way companies operate and the resultant impact has been an area of controversy. Globalization has changed the way people live, think and act. It has changed the livelihood and the mode of existence. It has affected the rich and the poor in different ways and global capitalism has faced resistance because the process has ignored the transition that the world is going through. In fact till date there is no consensus on the definition of globalization although it implies the process of consolidation of the world as one society. The well known economist, Friedman, interprets globalization as the integration of markets, nation-states and technologies that has enabled the individuals, the organizations and the nations to reach round the world faster, cheaper and deeper than before (Lechner, 2001). Overall the impact of globalization is not negative and neither has competition harmed people round the globe. MacPherson (2001) contends that globalization has led to the formation of a big commercial enterprise where the industrialized nations are favored at the expense of other nations. Singer (2004) however insists that multinational corporations (MNCs) may have had a significant role in the process of globalization but they are not the sole beneficiaries of globalization. It has also led to a remarkable growth in small and mid-size companies that participate in the international economy. MNCs are the most powerful institution today. A multinational corporation can be defined as a corporation that engages in international production and that bases its management decisions on regional or global alternatives (Savitsky & Burky, 2004). They recognize the emerging economies and the transition economies as oppurtunities fro expansion across borders and foreign markets. To compete and to attract the MNCs, countries and regional political districts offer incentives such as tax holidays or they pledge government assistance by way of improved infrastructure or better environmental and labor standards (Fatima, 2007). This has been considered by some as competition among nations to attract the MNCs but this has definitely allowed the multinationals and the transnational companies to hold strong positions in different channels of globalization. They account for the FDI, they are very active in trade, and one-third of world trade takes place within and not between companies. These MNCs are responsible for the transfer of technology and knowledge across border. Global firms penetrate and grow in markets that show potential for success. In short they have brought about the development of the third world. This has been viewed by some from a different perspective. When MNCs enter a developing country, they are considered a threat to the local industries. While multinationals bring with them cutting-edge technology and huge amount of funds, there is stiff resistance from domestic competitors (Savitsky & Burky, 2004). There is a general assumption that liberalization of trade benefits big business houses at the cost of the consumers. They do not take into consideration the boost that it gives to the development of the local economy. The local manufacturers, due to threat from the MNCs improve their product quality and lower their prices, which ultimately benefits all. Reconciling with the local government is important for the success of an MNC in the developed countries. When the developed nations like China opened up to reforms and were attracting the MNCs, Motorola of the US took advantage of this. Motorola had clearly defined investment and insiderization policies (Hara & Nakanishi, 2004). This is an example where the local government offered incentives and Motorola established joint committee with the government Electronics Department. It set targets for local content, carried out philanthropic activities including construction of elementary schools. It concentrated on high-end users in mobile phones sector to handle local competition. It could capture the sophisticated, wealthy, and young users due to its innovative design. Now, while they did take advantage of the government incentives, they helped the local economy to grow. They provided philanthropic services to the local people. They do get the best deal but they do not cause harm to the people. International trade does pose certain challenges and one has to seek to balance it in some form. For instance, after the Uruguay Round the developing countries expected to benefit out of agriculture and textiles but the reverse took place (Daly, 2002). The domestic subsidies in the OECD countries increased instead of declining. USA and Europe subsidized agriculture in their own countries which harmed the farmers in the developing countries as it prevented them from attaining self-sufficiency in food. This is how the rich nations became richer. This of course has been countered by Singer (2004) who, with reference to standard economic model contends that no one’s welfare can be improved without reducing the welfare of at least one other person. Daly also agrees that when world production shifts to countries that do the poorest jobs, it reduces the efficiency of global production. Daly argues that the rich countries use high standards with the intention of keeping the poor countries from competition. This may be his contention but this is the only way that global standards can be maintained. In fact this is the only way to prevent an equally inhuman form of uncontrolled global capital, according to Singer (2004). Thus enforcing global standards would raise the efficiency of the developing countries as they would seek to work harder to fight competition and hence cannot be said to harm people. It is very often argued that the rich have become richer and the gap between the rich and poor has widened. In this there are three different issues – cross country inequality, within-country inequality and global inequality (Loungani, 2003). Cross-country inequality has definitely increased but this does not mean that inequality within a country has increased. If the average income in the advanced countries is compared with the average income of the developing countries, it has been found that it has risen in the advanced countries. At the same time, the average income in the sub-Saharan Africa may have fallen but inequality within the country has been stable in many countries. Global inequality has been compared between person and not between countries and based on this it has been said that the rich have become richer. World income distribution in fact has become equal which has largely been due to the growth of countries like India, China and Vietnam. Income is just one measure of well-being but the United Nations uses per capita income, longevity, and literacy as the three critical measures of well-being to calculate Human Development Index (Loungani, 2003). Egypt’s per capita income compared to United States may not be impressive but it has made huge gains in life expectancy both in absolute and relative terms to the US. All the poorer countries have gained more in longevity than the richer countries. This implies that extra income is added because of the extra years added to the life of an individual. Economic progress improves the living standards of everyone. Income inequality is not always bad for the society although income disparity has been considered to be the major failings of capitalism. Hence welfare cannot be based on average income alone. Many believe that the widened gap between the rich and the poor has led to increase in poverty but it is difficult to prove this. Globalization has led to increased borrowing between nations; it has increased competition between workers and affected the FDI inflow in developing countries (Loungani, 2003). Each of these variables has an impact on the economy and affects the poverty level. Countries that did not adopt a protectionist attitude but opened up their economies and allowed FDI flow through the MNCs experienced faster growth. Poverty reduction was rapid as free trade led to higher incomes amongst the poorer section of the people (Moore, 2002). Employment opportunities increased which in turn led to increased standards and improved the status to middle class. According to Moore 35% of the people in the developing countries were starving in 1970, which fell to 18% in 1996 and the UN expects this to fall to 12% by 2010. Number of people in absolute poverty declined by over 120 million between 1993 and 1998, which evidences that globalization and trade liberalization has been good and effective. Hence globalization alone cannot be said to adversely affect or harm people or increase poverty. As far as the developed countries are concerned, there is a belief that since the developed countries have cheaper labor availability, outsourcing adversely impacts the developed countries. Outsourcing has become a major political issue in the US as the developed nations are able to offer cheaper labor with better service. One has to understand the types of jobs that are outsourced are routine clerical jobs, which the local natives are not willing to perform. Study by Forrester predicts that by 2015 roughly 3.3 million service jobs including 1.7 million ‘back office’ jobs would have moved offshore like payroll processing and accounting in addition to 473,000 jobs in the information technology industry (Otterman, 2004). Such reports are fed by the consultants but the economists disagree with the interpretation of the figures. According to a McKinsey analysis, over the past ten years, despite the economic downturn, the US economy has created an average of 3.5 million new private sector jobs a year. Besides, it is not because the business environment in other countries is conducive to investment but the technological advances have made jobs obsolete in the US. There is no evidence that outsourcing has caused recession or that it is making it worse or has caused harm to the people in the US due to job losses. On the other hand, it is good for the US economy because they are able to supply the same product or service at a cheaper cost. Kirby (2006) clarifies that outsourcing started from Europe because their labor forces simply did not work the number of hours needed to reach the required production level. Besides, McKinsey Global Institute has calculated that for every dollar of cost offshored to India, the US gains as much as $.14. This comes from lower costs and improved labor at home. France has already lengthened its work week and it is generally felt that in doing so they have empowered one of the world’s most productive workforces. There is a general consensus that European labor laws need to be amended if they want economic progress. The current laws stifle growth and dampen productivity. Thus, every nation seeks growth and progress and one has to move with the times. France has accepted the extended working hours and in fact the workers feel empowered. Workers benefit monetarily as well and nothing comes without a price. It is not the nation that grows - after all the people make the nation. Next, we discuss the issue of exploitation of labour. Many think that globalization has forced nations to alter their labour laws and workers have to work longer. On the contrary, flexible labor laws benefit the country as well as the workers. In India for instance, globalization has brought about a major shift in employment forms – from permanent to temporary, casual and contract employment (Suri & Dubey, 2008). People are compensated if they opt for voluntary retirement and this has become a major tool for reducing the workforce. People would take voluntary retirement because they see benefits in it – it is ‘voluntary’ and not mandatory. For the economic development, the developing nations have to comply to make the business environment investor-friendly. In this pattern, the worker too is benefited as the charges for contract labor is higher than permanent labor. They also enjoy flexibility in hours of working and attain better work-life balance. One has to accept that growth and development do not come without a cost – and flexible labor laws have benefited the society as well as the nation. True, there are companies like Nike have violated laws about working conditions, working hours, and forced overtime. It came under heavy criticism over working conditions and employee wages in Asia. Physical and verbal abuse of workers, hazardous working condition, extremely low wages and anti-union efforts throughout Indonesia, China and Vietnam were reported (O’Rourke, 1997). When it first opened in Vietnam, the wages they paid was even lower than Vietnam standards. Nike was accused and abused for this act of theirs but they merely shirked the responsibility saying that workers and working conditions was not their responsibility. They set up their factories in the third world countries to avoid US labor laws and the onus lies on the country of production. Ever since the scandal, they have amended their wage structure and the working conditions. They also receive overtime as per local laws (Connor, 2001). This does not mean the governments demanded that they work harder and longer for less pay. It was the company that was taking advantage but had to give in and be fair to the workers. Besides, those employed at the Nike factories in the third world countries had been unemployed, so there is no question of extra hours being enforced on them. International companies play one government against another to get the best deal possible. This is true of several MNCs but it has always been in mutual interest of the company and the country where they ventured. For instance, General Motors (GM) wanted to act aggressively and start a joint venture in Japan. They did not succeed there but were invited by the Chinese Government to start R&D functions in China. GM capitalized on this offer because at that time most automobile companies were reluctant to drain technology and quality control and hence confined themselves to assembly of finished cars. At this juncture, GM started PATAC (Pan Asia Technical Automotive Center), which is a joint venture R&D center (Hara & Nakanishi, 2004). Growth is what all companies seek to have economies of scale and for comparative advantage. They do to take into consideration various factors like the macro environment, which include government regulations and policies and demographics. Hence, GM’s acceptance of China’s offer was in mutual interest. GM benefited through expansion but the country too gained through technology and knowledge transfer. It has not harmed anyone and the people have become more educated and disciplined. Hence there is absolutely no harm when companies try to get the best deal from any country. Countries round the world reduce corporate taxes in order to attract the MNCs. The developing countries are mostly cash-strapped and offer such incentives. It is beneficial to the MNCs as it reduces their future tax burden. For instance, Costa-Rica gives eight-year tax holiday on investments (Jensen, 2006). Other countries like Alabama offer grants and subsidies in addition to the tax holidays as they have offered to Mercedes-Benz. The MNCs naturally are attracted as such industries do not require proximity to the market. The governments lure them as it generates and keeps domestic jobs. The developing nations need to attract foreign capital and promote the investments of the MNCs. It is an important development strategy because one such unit gives rise to several local units as ancillary or support units. This not only creates jobs but also promotes entrepreneurship amongst the local people. The infrastructure in the region is developed and the local people benefit through better education system. The country gains by technology that is introduced along with investments. Besides, they do not compete with the local industries and hence do not cause harm to anyone in the process. When Intel produces chips in Costa Rica or Seagate produces drives in Malaysia, they do not compete with the local market. At the same time they provide job oppurtunities with growth to the local people. China and especially Shanghai is luring the MNCs even when they are short of capital. They offer rent subsidies if over 1000 sq meters are rented for over three years. In addition, the local government covers up to 30% of the training fee for three years running if the headquarters are in Shanghai (Ying, 2005). The local people need to be trained to continue in their jobs and since the MNCs are in slump, the government is offering such incentives. It is evident that it is in the interest of the country that they are offering such incentives. They do not want their employment levels to go down. On the other hand, such practices keep their people abreast of the latest technology and developments. Shangahi has taken such a step because the rentals in the city had become steep and MNCs were avoiding the city. Hence it was in their personal interest that they devised such offers and succeeded as well. Such offers by governments do not harm anyone while benefiting the people and the MNC. Hence a study of the effects of globalization indicates that if the world is to be viewed as one economy, if the world is one global market, exchange of people and processes is inevitable. MNCs started venturing overseas to achieve economies of scale but in the process they benefited the other nation as well. Globalization has not exploited people or any nation. Countries that have responded to the call of globalization and opened up their economies have benefited through liberalization. This is precisely the reason why several underdeveloped countries are now ‘developing countries’ like China and India. There is no exploitation of labour either. All of these countries benefited as employment levels went up. These people were hitherto unemployed and hence it cannot be said that the working hours increased for less pay. Of course several European countries like France have increased the working hours per week but that again is in the face of stiff competition or jobs being outsourced. Hence again it is in the larger interest of the people and the nation but it does not really harm anyone. Overall globalization has enriched the lives of many, increased the per capital income in several countries, improved the living standards and hence cannot be said to cause harm to anyone. 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