International Business: Globalisation - Literature review Example

International Business – Globalisation The term ‘globalisation’ has been coined within the last half century and more specifically gained momentum from late 1970s onwards (Bagchi, 1999). Modern globalisation is a post-World War II phenomenon, as colonialism declined in many parts of the world; it was felt that domination through military power was not a sustainable option and thus economic domination became an increasing focus of countries (Haynes et al., 2013). However, this view comes from those who believe that globalisation is detrimental to the socio-economic profile of the world, those favouring globalisation suggest that it will bring equality among nations through technological exchange, providing better products to the global mass and developing global society as a closely woven cocoon of equal opportunity (Mouhammed, 2007). This has been facilitated by cheaper, faster transportation and telecommunications (Saylor, 2012). This paper considers the issue of globalisation on the basis of the CAGE model (relating to cultural, administration, geographical, and economic distance), PESTEL analysis (political, economic, socio-cultural, technological, environmental and legal), foreign direct investment (FDI) and its role, special economic zones (SEZs) and green field investments, multinational corporations (MNCs), and the associated costs and benefits within these (Anastasova and Nenovski, 2011). An effort has also been made to address the integration of different national economies into a single global economy. In addition to theoretical models, the paper emphasises on case studies to portraythe aforementioned aspects. The CAGE Model As illustrated by Ghemawat (2007) the CAGE Model takes into consideration four kinds of distances, namely cultural, administrative, geographic and economic. The CAGE model might emerge in bi-lateral or unilateral and multilateral country relations. The cultural difference might arise from, differences in languages between two or more countries, different ethnicities, lack of connective ethnic or social networks, different religions, lack of trust, different values, norms and dispositions, difference in insularity and traditionalism (Ghemawat, 2007). Difference in language between two countries has made enough marketing problem especially when it came to advertisement; as an example “Frank Perdue’s advertising tagline, “It takes a tough man to make a tender chicken” into the Spanish equivalent of “it takes an aroused man to make a chicken affectionate” (Ghemawat, 2007, p.42). Some other reasons behind less economic exchange between two or more countries might be “difference in ethnicity and religion, a lack of trust, and variations in egalitarianism (defined as societal intolerance for abuses of market and political power)”. Yet “cultural attributes are highly idiosyncratic (e.g., preferences for certain colors) or subtle in the sense of being nearly invisible even to those whose behavior they guide” (Ghemawat, 2007, p.42) The Chinese are infamous for their copyright infringements. On one hand it is crime but on the other the same might be a display of Confucianism that encourages the reproduction of past if it possess any intellectual merit (Ghemawat, 2007). Long before the Chinese heydays of economic growth and development, the experience that Merriam-Webster faced in that country while trying to publish a bilingual dictionary in Chinese, might be considered as an illustration of the aforesaid fact (Ghemawat, 2007). Prolonged interaction between countries might reduce these differences and encourage mutual economic exchange between countries (Ghemawat, 2007). The Cultural difference some examples Some of the global business bullies like McDonalds and Walmart yielded mixed results following the CAGE model; some came out successful and other fell entrapped as discussed below. McDonald stressed on maintaining a global standard regarding the global fast food chain they run. They emphasized on their quality as well their quality and unlike other global food chains they have never sacrificed one for the other. This has a two way problem, first each country has its own brand of skilled or unskilled labour and to train them up to the standards of McDonalds service to its customers is a tedious job. Again the quality of food depends not only on the cooking but the ingredients that have been used in the same. To solve both these problems the concerned company arranged a vast training schedule for it’s about to be employees. Again they have started producing some of the ingredients that they used in their products to produce indigenously. All these together with their one price one quality scheme all over the world brought them immense success that is beyond imagination before that (Smart, 1999). The way McDonald’s each food and beverage passes through multiple scrutiny before getting served in the plate of its customers makes it hard enough to be caught under any food and beverage authority of any country and that leads to less spoil of the same leading to cost saving and goodwill for the company (Ritzer, 2010). The company kept a unique balance while framing its operations. Cooking is automated to bring out the best in it together with homogenous test and on the other part the serving is manual to add flexibility depending upon the customer and keeping the option open for personalization depending upon the consumer. However, it is worth mentioning that the company has managed to retain its customer with minimum variability in food products and that without any major complain on behalf of them (Smart, 1999). They would never serve beef in India (Misra and Yadav, 2009). This portrays they believe in living in cultural harmony. Ritzer (2010) and Alfino (1998) expresstheir sceptic on the long run ability of McDonald’s to keep up the present success rate. They both opined in the same line that McDonaldisation might be a temporary phenomenon that might perish one day following the rejection by a group of consumer. As with time the preference of the consumers might change and there might be other fast food retailers like Kentucky Fried Chicken and Subway emerging at a fast rate. Owing to their claim of less calorie food they might enjoy an edge over the McDonalds (Alfino, 1998; Ritzer, 2010). If McDonald’s global success is an enticing one, then Walmart might just be the opposite. The global retailer expanded from America to Mexico and Argentina experiencing significant gains (Knorr and Arndt, 2003). However, when it came to its expansion in Europe, the company made some catastrophic decisions leading to its downfall regionally (Knorr and Arndt, 2003). The trained sales staffs of the concerned company are well praised in the shops of the previously mentioned three countries. Whenever it came to Germany the same method faltered. Germans like to pick up or choose their own products mostly without assistance; however the constant within the shop assistance that they became subject to in Walmart Germany; added to their dissatisfaction (Knorr and Arndt, 2003). Walmart believes in a lean structure that often compels the employees to share rooms; such concept was not accepted by the German employees (Knorr and Arndt, 2003; Christopherson, 2007). Furthermore under most circumstances a German CEO would have understood the inherent lacunas of the company. At last when a German CEO was entrusted with the job then it was too late for him to rescue the company from its peril (Knorr and Arndt, 2003). The administrative differences As explained by Ghemawat (2007) administrative differences might evolve from “laws, policies, and institutions that typically emerge from a political process and are mandated or enforced by governments, international relationships between countries, including treaties and international organizations, are included as well, on the grounds that these relationships are sustained by the countries that create or support them” (Ghemawat, 2007, pp. 42-43). Colonial ties, belonging to same regional trading block and the presence of common currency area can boost bilateral or multilateral trade. Cultural as well as legal similarities can also work as positive catalysts in promoting trade between two or more countries. Preferential trade agreement, followed by rise of risk in certain port might boost up trade elsewhere. The term transnational barrier might be introduced now. The two governments with friendly attitude to each other might indulge in mutual trade relation. Once again two governments might not find it comfortable enough to trade between them. Another important aspect that requires special attention is that too fragile or too rigid government intervention might be detrimental to trade relations (Ghemawat, 2007). To foster trade relations among countries or among countries and any particular company depends upon the kind of respect that the country show for the laws and regulations of the concerned nation (Ghemawat, 2007). McDonald considered the administrative differences between two countries or among countries and took them into consideration. As previously mentioned, that the strict vigilance that they impose on their each and every beverage and food products almost always provides a positive outcome. The authority in charge on behalf of the government to look after the qualitative aspects of a food usually ranks McDonalds as a company of repute (Smart, 1998, Misra and Yadav, 2009, Ritzer, 2010). On the other hand Walmart almost in each step ignored the German law governing the retailing industry. First of all the area required for Walmart to set up a shop is much larger than the German permissible level and secondly the company never gave ear to the German law that a company who sells packed food and beverages has to keep a sum of money deposited to the government. These things added to the bad publicity of the company (Knorr and Arndt, 2003; Christopherson, 2007). Geographic distance Ghemawat (2007) rightly explains that physical distance between two countries does not always determine the trade relation between them. The ease of the journey might set the trail of trade at significant volume. Physical distance is in fact important considering the cost of travelling and opportunity cost rises between two trade points with distance, however seldom it becomes a barrier to trade. For perishable commodities distance between two trading places is particularly important (Ghemawat, 2007). McDonald is well versed with the fact that they are selling perishable commodities and it is impossible for them to carry all the ingredients required for their final products. Furthermore, the locals might have a special liking for the indigenous ingredients while taking their food. Considering this aspect, the company “has also developed products with a regional flavour in particular markets” (Johnson and Turner, 2010, p.315). This signifies the companies understanding, adaptability and flexibility. Walmart lacked this foresight and tried to impose its time tested lean and mean formula on a market absolutely different from the ones he had operated so far (Knorr and Arndt, 2003; Christopherson, 2010). Economic Difference Ghemawat (2007) proceeds further to opine that economic strength of two nations are often the determiner of cross border trade. Though trade between rich and poor country is common nowadays, yet trade between two rich countries still dominates the trade scenario (Ghemawat, 2007). When Walmart entered the German retail industry was a wrong one. Consumption expenditure of the German people on retail goods is historically low and even declined further after the reunification of both the Germany (Knorr and Arndt, 2003). The profit margin was quite low as well in retail goods (Knorr and Arndt, 2003). Considering this background Germany was a wrong choice for Walmart. Walmart’s unique selling point that everyday lowest price was demystified by German retailers like Aldi and that again came as a surprise to Walmart (Knorr and Arndt, 2003). The company also forget that unlike America, Mexico and Argentina in Germany the bargaining power of the company is much less and they cannot force other companies to agree to the price they set (Knorr and Arndt, 2003). PESTEL model – Some examples PESTEL analysis is used widely and paints a bigger picture of a business’ external environment, especially related to foreign markets. It considers the political, economic, socio-cultural, technological, environmental and legal background where a company operates. This helps in providing a vision of the opportunities and threats faced by managers and the model is especially useful when a firm enters new markets because they need to align their strategies with the business landscape (Carpenter and Dunung, 2013). This paper examines trade opportunities in China and Switzerland from the perspective of PESTEL analysis. Deng Xiaoping’s ‘Open Door Policy’ brought foreign investment into the country and he successfully impressed the West that China had a long term vision and was willing to globalise at a fast pace (Chen and Yao, 2006). Thus the political ambience for foreign institutional entrepreneurs (FIEs) and MNCs increasingly lured foreign investors and China became a part of the global economy through increased trade, investments and mobility of workforce (Meng, 2010). Owing to its huge population China continues to demonstrate potential untapped demand. The country has abundant land and cheap labour that also makes it a favourable destination for foreign nations and companies to establish businesses and industries, and conduct economic transactions with China (Nataraj and Tandon, 2011). Coming to the social aspect, Chinese society is somewhat averse to foreign income flow as they are apprehensive this might demean the indigenous producers and make it a nation dependent on foreign industries. However, Chinese exports are also growing at fast pace that comforts both the Chinese consumers and producers (Meng 2010; Alon, 2003). China is not highly technologically advanced; hence the technical aspects of the FDI enhance the technological base of the country. China has already announced that by 2020 they would be reducing their external technological dependency by 50% of the present level (Yue, 2012). This shows the positive effect of FDI to the host nation. The environment might be the biggest concern for China as its resilience might soon be at risk. Foreign and local companies as well as the government have taken little care of the environment amid the country’s growth and development frenzy (Zhang, 2011). Water contamination, deforestation, and greenhouse gas emissions are some of the problems that might in long run become severe impediments for China to keep up its present growth rate; foreign companies might also become averse to investing therein for the same reason (Zhang, 2011). The legal framework governing the business and industrial sector of China has not yet fully matured. Technology theft and piracy, preferential treatment to foreign companies over indigenous ones, and corruption are common allegations that are often raised against China (Chen, 2011). These might act as a deterrent to foreign investments. Switzerland, on the other hand, has a stable government that welcomes foreign investment but only after careful consideration of its pros and cons. The economy of the country is stable and prosperous (OECD, 2006). Switzerland’s political orientation is neutral and hence it is attractive to foreign investors (OECD, 2006). The country is technologically advanced and can support investments coming from not so technology abundant country. The country is renowned for ecological awareness, and this might make it hard for some foreign companies to obtain approval to set up businesses (OECD, 2006). The country displays a mature legal system and any non-adherence to the law governing any sector of the economy is treated with utmost importance and fast action. This might pose a challenge to the potential investors (OECD, 2006). Hence it might be concluded Switzerland could be the home of peace loving, eco-friendly foreign business entities, but not for an entity whose business ethics are against the law and environment of the country. FDI and its role “Given its shaping potential, the impact of foreign direct investment on future opportunities for catching up by developing countries is much greater than its importance as a source of capital. Indeed, the ‘capital flow’ element in FDI is hardly its most significant attribute, nor from a dynamic perspective is it the major contribution that FDI might make to development in the context of knowledge-intensive production whether it is based on a natural resource, such as oil and gas, or on so called high-tech sectors, such as electronics” (Narula and Lall, 2013, p. 107). Hymer’s biggest contribution to the theory of FDI is to move away from the conventional classical and neo-classical doctrine of FDI that states FDI moves from zone of low return to that of high return to seek profit. He related FDI with industrialization (Jones and Wren, 2012) and later along with Kindleberger (1966) (Blomstorm and Kokko,1977) associated FDI with market imperfection. Harry Johnson (1970) related FDI with welfare a knowledge transfer from developed to under developed or developing countries. Calvet(1981) praised these early contributors to the theories of FDI but diverged a little to state “market disequilibrium hypothesis…government imposed distortions…market structure imperfections…market failure imperfections” (Calvet, 1981, p.44). The market disequilibrium hypothesis of FDI stipulates that international segmentation prevents supply and demand forces from achieving price adjustmentsand this lures FDI into a country. The process continues until the price level in both the countries reach the same level. This can also happen through stock market (Adhikary, 2011). Under the market structure imperfection hypothesis (Rugman, 2002) the market is imperfect and considers FDI on the basis of the volume of profit it might generate or whether it is willing to face barriers to entry. Vernon (1966) in his life cycle hypothesis states that a firm suffering from the fear that its product might become obsolete in its own country might venture abroad (Jones and Wren, 2006; Adhikary, 2011). The industrial organization hypothesis originates from the market structure imperfection hypothesis. Market failure imperfection hypothesis (Rugman, 2002) regarding FDI inflow originates from outside effects, welfare, public goods and decreasing cost industry. Similar to Johnson’s (1970) theory this one also deals with knowledge transfer among developed and developing or less developed countries (Halley, 201, p.20). FDI has therefore got two important role for the host nation – enables capital inflow and technology upgradation. Special economic zones (SEZs) and green field investments Though there are several other government-imposed distortions to attract FDI, SEZs and green field investments are particularly common because these are sectors where the concerned country lacks the expertise to establish certain industry (Lane and Stadtmueller, 2005). SEZs are special economic zones created to boost the export-oriented sector and at times to boost import substituting sectors. The local government provides several advantages to MNCs and (Foreign Institutional Entrepreneurs) FIEs who want to invest in these sectors, such as low or zero tax for a specific time period, preferential tax rates, low cost land and other benefits that would be beneficial for setting up secondary or tertiary sectors (Lane and Stadtmueller, 2005). This practice is extremely prevalent in China, where provinces compete fiercely on the basis of the added advantages offered in such areas (Meng, 2010). Multinational corporations and their associated cost and benefits The benefits associated with MNCs are important. Inflows of fund to bridge the gap between desired and actual investment are ensured. They end up tapping the otherwise untapped potential of a nation because they employ the skilled unemployed people and bring in new technology which optimally uses the existing resources. If the incoming MNCs are export-oriented, this earns valuable foreign currency for the recipient country (Miller and Pisani, 2007). The costs associated with MNCs might be described as follows. Absolute dependency on the MNCs in any sector might create a void once they leave the country (Miller and Pisani, 2007). Thus self-sufficiency may remain a distant goal if a country remains dependent on MNCs. Since most governments seek to create a favourable ground for MNCs in comparison with indigenous sectors, the domestic business entities might find it hard to compete (Miller and Pisani, 2007). Some MNCs might consider their operating country as a provider of raw material only and show little concern for the environment of that country. China again is an excellent example of this (Cypher, 2011; Meng, 2010). Conclusion The increased mobility of capital and financial liberalisation (a part of the process of globalisation) has transformed the international economy to a large extent. Globalisation has encouraged competition which begets efficiency in production and performance as well as innovation in technology and strategy making. Considering the previous situation when most of the world liked to live in a cocoon globalisation should present advantages for an investing firm and the economy where it is investing. However, implementing the business plan in line with the analysis requires fast adaptation to technology, culture, communication and flexibility of the political and legal environment where the firm invests. 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