Global Enterprise and Innovation - Research Paper Example

Globalization Globalization has led to integration through international trade of goods and services with the help of certain measures and regulations. It has brought about significant changes in the world economy and has been embraced by politicians, academics, journalists and commentators. When western and cultural interests dominate over the rest of the world, it is viewed as globalization (Brinkman & Brinkman, 2002). It indicates that capitalism has penetrated into every corner of the world. This in turn enables people to participate and reap benefits from the division of labor and market economy. Because of the extensive trade in goods and services, and because of the flow of capital and technology, the markets have become interdependent. This new structure, as a consequence of globalization is the result of the control measures and dominance adopted by the MNCs. Globalization has brought about tremendous changes in the ways that MNCs operate. Through innovation in various fields they have been able to generate new opportunities and challenges for the developing world. Globalization and Internationalization While globalization and internationalization are interchangeably used, they are distinctly different. Globalization is a worldwide process which implies that tastes, needs and wants become standardized across cultures. This occurs as technology, migration, and education become globally dispersed (McCabe, 2001). This suggests that globalization is the process of uniting the nations as members of one world, as the world shrinks. Internationalization, on the other hand, involves information of particular countries which in turn impacts the development of relationships in several sectors. These sectors include business, education, and social and cultural relationships. The concept of One World or globalization has driven innovation as companies like McDonalds have been accused of Macdonaldization of societies. While they export products and services, they are actually exporting American cultural identities. Economies are rapidly evolving and the effects of globalization are clearly visible; globalization is inevitable. Malaysia’s economic policy Among all the developing economies, Malaysia’s economic policy is considered worth emulating (Ritchie, 2005). The economic policies of Malaysia were liberal as it served to attract FDI. This drove a technological change, facilitated specialization and gave the nation comparative advantage. As the Malaysian policies liberalized, it helped in the reallocation and restructuring of resources in different forms of labor, capital and technology which also facilitated FDI-led growth. FDI is a special form of capital flow which is expected to generate tangible assets and brings with it technology to the developing countries (Michi, Cagatay & Koska, 2004). Intangible assets like managerial skills also come with FDI which is a necessity for the developing nations. FDI is also the transfer of organizational knowledge from one country to another (Zhang, Zhang & Liu, 2007). FDI motivation and risks The motivation for the MNCs to invest in a developing economy would include the local and the global factors (Albuquerque, Loayza & Servén, 2005). The local factors include the benefits from location and the cost factors while the global factors explain the dynamics of the cross-section of the FDI. By investing in developing countries, MNCs can take advantage of their marketing and technical know-how, and managerial expertise (Athukorala, 2009). FDI is based on long-term profit considerations and carries with it the advantage of influence and control. Nations must be able to offer comparative advantage when they attract FDI. The MNCs would like to achieve economies of scale when they decide on the location for FDI. However, FDI in developing economies is beset with risks and the MNCs must have the capabilities to mitigate these risks. MNCs can face significant adjustment costs but prior experience helps to overcome this (Goerzen, 2005). Economic uncertainties can pose other risks if the experts have not correctly anticipated the timing, direction and the magnitude of the possible crises. Political realities could also differ from the expected. In addition, differences in national cultures can adversely impact the collaboration and learning between alliance partners. Cultural distance, if too high, can make the situation unmanageable. Innovation Innovation may initially have been driven by globalization but today for economic growth it has become a strategic imperative. Innovation can lead to competitive advantage (Jantan, Nasurdin & Fadzil, 2003). In the fast-paced and interconnected economy, innovation and its related concepts – entrepreneurship, creativity and enterprise – are all essential components for individual and collective success (Bunnell & Coe, 2001). Innovation is not confined to the technical or technological arena. It should be seen as an incremental change to products, processes or organizational forms. Innovation takes place through webs of social relations and is not an isolated event of scientists or entrepreneurs. Innovation systems can function at three scales – global, national, and sub-national (Bunnell & Coe, 2001). At the global scales, the global corporations no more demonstrate home country affiliations or adhere to their national identities. At the national scale however, the home nation has great significance because this where their skills and technology provide them competitive advantage. In the words of Michael Porter, globalization of competition has served to make the nation more important. However, the economic activities remain coherent in the nation state. Political and economic processes are being rescaled both upwards (to the global scale) and also downwards (to the sub-national scale). In Malaysia however the scene differed. Malaysian liberalization policies and its impact A set of coherent policies was developed by the Malaysian government which was aimed at moving the economy away from manufacturing and towards higher value-added activities like research and development, marketing and distribution (Tidd & Brocklehurst, 1999). The Investment Incentives Act was introduced in 1968 in addition to the establishment of free trade zones in the early 1970s when incentives for export were also introduced (Karimi & Yusop, 2009). Foreign equity ownership was permitted in larger percentage which resulted in large flow of FDI. Moreover, Malaysia’s macroeconomic management was conducted well and they also demonstrated sustained economic growth. A well-functioning financial system in addition to these, have made the nation an attractive destination for FDI. The major sectors in which Malaysia receives FDI include the electronics and electrical products, chemicals, food manufacturing, plastic goods, and scientific and measuring equipments. However, the same policies later became stumbling blocks as no new knowledge and skills could be created (Ritchie, 2005). As the nation was not able to overcome the micro level rigidities, it could not attain the same success as some of the East Asian NICs (Newly Industrialized Countries). The policies did not allow the entrepreneurial small business class and labor to grow. For sustainable development technological upgradation is essential and growth alone cannot cope with this upgradation. The government policies at the national level should be favorable to start-ups and to financial systems; the institutional and regulatory framework should promote better coordination between science and industry; scientific research should be supported (Bunnell & Coe, 2001). It also requires necessary education and training of human capital. Authoritative knowledge shape policies and strategies, which leads to innovation in diverse fields such as education, administration and government, social welfare and infrastructure. While the government in Malaysia altered the policies to attract FDI, there was virtually no support extended to the small firms. Labor was suppressed and SMEs ignored as a result of coalitional politics that drove illiberal government interventions. As a result Malaysia could not be as price-competitive as China and could not compete technologically with Singapore or the East Asian NICs. Because of its focus on the manufacturing sector, Malaysia has demonstrated its success in “high-technology” manufacturing sector to which foreign firms have been attracted through FDI (Tidd & Brocklehurst, 1999). However, after further reforms, in 2007 the Malaysian economy was the 29th largest in the world with their GDP for 2007 estimated to be at $357.9bn (Karimi & Yusop, 2009). Standards of living have been transformed over the decades and the manufacturing sector has been the main source of growth due to which GDP increased to 31.4 percent in 2005. While the policies were in place, its implementation was not evident (Tidd & Brocklehurst, 1999). The Malaysian subsidiaries of the transnational companies confined themselves to manufacturing activities, even though they were in the high technology sectors, but the development and marketing functions were located overseas. This was due to the close-door policy of the government (Tidd & Brocklehurst, 1999) and because the incentives were not competitive (Karimi & Yusop, 2009). In fact, Karimi and Yusop empirically tested and found no long-run relationship between FDI and GDP growth in Malaysia. This implies that FDI does not have a direct effect on the economic growth in Malaysia. The quality of growth is essential along with the quality of human capital. At the sub-national level localized clusters develop high-intensity interactions which are characterized by both tangible and intangible elements. The tangible elements include social, economic, and political institutions while the intangible elements include tacit knowledge or conventions. Intense forms of creativity, learning and innovation can be found in the ‘global-city regions’ (Bunnell & Coe, 2001). Malaysia experienced rapid industrialization mainly because of the FDI in manufacturing industry which accounted for almost 45% of the GDP and 82% of total exports. The trends in FDI in the manufacturing sector are enclosed in Appendix A. Two reasons have been cited for the rapid industrialization of Malaysia – the export performance is because of the huge amount of FDI mainly from Japan and the USA Entrepreneurial activities of the overseas Chinese. The Chinese entrepreneurs exploited the advanced technology and market development which came along with the FDI. Inflow of FDI from 1990 provided valuable capital but the managerial expertise and the access to overseas markets gave the impetus to growth. However, the inward FDI performance index suggests that Malaysia has not been able to attract FDI as per potential in recent years (Appendix B). Lack of innovation – Malaysia There was no innovation-led growth during this period. This was because the Chinese entrepreneurs did not have the drive for innovation and they focused on cost-cutting and service delivery. A reputed company known as Pen Apparel was considered to be the most innovative garment manufacturer but it could not expand because of shortage of skilled labor (Tidd & Brocklehurst, 1999). Tight control over the labor process and performance-based payments has been the cause of innovative management. They still adhere to the principles of scientific management and have made no attempts to bring in innovation through employee involvement. To bring about innovation Malaysia pursued a hybrid strategy where efforts are made to combine FDI with direct government support and intervention. They started encouraging firms to take up marketing and development issues. The Malaysian Industrial Development Authority (MIDA) evaluates inward investments in manufacturing and also oversees technical agreements and licenses. The “high technology” companies receive special incentives if they have invested at least 1% of their total sales in R&D or if 7% of their workforce is science and technical graduates (Tidd & Brocklehurst, 1999). Incentives are allowed based on fulfillment of various criteria. The government has also developed the Multimedia Super Corridor (MSC) programme to promote information technology and multimedia sectors. However, technological innovation is lacking in Malaysia as is evident from the cases of Hitachi Semiconductors and Matsushita. In a workforce of more than 2000, Hitachi has just 14 design engineers while the requirement is up to 200 design engineers. Similarly, at Matsushita, out of a workforce of 30,000 the design department has just 60 people. The design, development or marketing capabilities remain the same as no efforts have been made to augment the skills. Some indigenous firms have entered into international alliances and joint ventures. Malaysia’s growth has been export led even though the domestic companies have taken advantage of labor costs and natural resources to advance in the manufacturing sector. However, there is no evidence of FDI leading to local design, development and research capabilities. There has been lack of strategic intent to exploit alliances. Moreover, there is lack of indigenous expertise. Malaysia has no comprehensive fair trade or competition policy law in place yet. Several government agencies exist concurrently in Malaysia but each has its own separate policy when they deal with privatisation and corporatization. Separate policies exist for industry-licensing, and domestic and international trade policies. Besides, foreign participation/ownership policies and sectoral regulators are dealt with other agencies (Mutebi, 2007). The Malaysian sports industry also suffers as most firms are medium or small-sized. The industry is still young but the competition they are exposed to in the industry from foreign brands is very high. The local companies risk losing control over the domestic market to foreign brands (Yusof & Shah, 2008). Being small, they are unable to lower the cost of production and achieve economies of scale. For small businesses, innovation and research and development are also a problem because of the costs involved. They also lack opportunity for networking and developing alliances. Government support for small business is lacking as a result of which they are unable to respond to the challenges of globalization. They find themselves incompetent to participate in the mega sporting events and develop relationship with government sport agencies. Thus, even though Malaysia has been receiving FDI inflow, the benefit could not be reaped by the local industries because of lack of governmental support, because of lack of innovative strategies. Even in the automobile sector, Malaysia has not been able to achieve success. The automobile industry is one of the most globalized industries today. Thed automobile industry went through outsourcing and restructuring and is now governed through different relationships by lead assemblers, and core automotive components and parts suppliers (Wad, 2009). Among the Asian developing countries, except for China and India, there is a pessimistic attitude towards the establishment and success of national automobile projects. This industry is R&D intensive and has high entry barriers. To be successful there must be economies of scope, scale, and speed. Malaysia pursued an import-substitution industrialized policy for the automobile industry since the 1960s but in 1980s Malaysia started its national automobile program while other nations such as Thailand were giving importance to MNCs. National protectionism in this sector cannot lead to innovation. As a result of Malaysia’s resistance the entire region suffered as free trade in the region had to be postponed. The national automobile manufacturers held 90% of the market share but they failed in export markets. This had an adverse impact during the Asian crisis when the local demand was reduced. Other ASEAN countries could export because of their liberal policies but Malaysia lagged behind. Even in tying up with foreign manufacturers the Malaysian government did not demonstrate innovation. To achieve economies of scale it tied up with Mitsubishi Motors, the weakest Japanese automaker, and entered into a majority controlled joint venture, Proton. Proton gained the market share because the government manipulated the protection and subsidies. Proton was then converted into a private limited company and had the backing and support of political institutions when an indigenous automobile manufacturer emerged. For the Proton project the government did not use the innovative industrial capabilities of the Chinese entrepreneurs. Since this project lacked high-tech capabilities, the domestic industries did not receive the support for growth and development. This was not a very successful strategy for technology transfer and learning, which is one of the benefits that a developing nation should gain from FDI or foreign collaboration. A nation’s system of innovation does not necessarily emerge because of its past or current industrial structure. Innovation can also influence future development of the nation (Tidd & Brocklehurst, 1999). The national factors that influence national innovation depend upon the national institutions such as the firms, universities and government agencies. The national market incentives and pressures also determine the level of innovation, apart from the nation’s competency in production and research. Malaysia has demonstrated none of these characteristics as there was no innovation and research in the automobile sector. The government had a protectionist attitude towards its own project thereby proving to be detrimental to other organizations in the domestic industry. Conclusion Globalization has brought about significant changes in the world economy but it has also resulted in the western and cultural interests dominating over the rest of the world. The economic policies of Malaysia were liberal as it served to attract FDI but its policies were restricted. For economic growth innovation has become a strategic imperative as it can lead to competitive advantage. Innovation should be seen as an incremental change to products, processes or organizational forms but Malaysia maintained a closed-door policy in industries such as the sports and the automobile sector. Its liberal policies became stumbling blocks as new creation of knowledge and skills could not take place. The small business class and the labor class could not grow because of the policies. For sustainable development technological upgradation is essential and growth alone cannot cope with this upgradation. The design, development or marketing capabilities were not aligned with the manufacturing operations. As a result even the domestic companies could not receive support as this was not a very successful strategy for technology transfer and learning, which is one of the benefits that a developing nation should gain from FDI or foreign collaboration. Malaysia, hence, is not conducive for FDI as it lacks innovation initiatives. 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