Globalization and Its Major Challenges - Assignment Example

Globalization and its major challenges Table of Contents Table of Contents 2 Introduction 3 Question 3 Question 2 5 Question 3 7 Opportunities for MNE’s 7 Threats for MNE’s 8 Question 4 8 Conclusion 12 References 13 Introduction Organizations across the world have moved their business across domestic boundaries. Businesses have moved from local to global. Business and trade have changed owing to such transition. This has helped organizational growth, but has also posed many challenges that have led businesses to strategically design their operational processes. Globalization witnessed the rise of transnational and multinational companies. Transnational companies have their business functions in different regions, but sell products and render services across the globe. For example raw materials are procured from Africa, assembly is done in Middle East and the final products are sold in Europe, UK, Asia, etc. A multinational company produces and sells in the country in which it operates. This has led organizations to leverage cost advantage. Though this is one of the important factors why firms want to expand their presence beyond national boundaries, but other reasons might be greater market access, new market opportunities, saturated domestic market, etc (Jones, 2010). Question 1 Firms have internationalised owing to various market opportunities and trade facilitators. Firms have moved to a global platform owing to internal and external factors. Internal factors are firm specific i.e. it refers to internal reasons why firms expand their business operations across domestic boundaries. External factors are market opportunities and factors that have facilitated the globalization process. Firms would globalize if such external factors complement its internal reasons. The external factors that facilitate firms to internationalise are: Reduced trade barriers – Some countries provide tax breaks and special subsidies to foreign companies that invest in other countries. Such perks are provided as the domestic companies and the economy are benefitted from foreign investment. Capital and labour mobility – After the formation of World Trade Organization, trade across nations was simplified that allowed greater access to foreign capital and labour. The increased mobility of such factors of production has led firms to internationalise. Improved transportation – The transportation cost over the years have decreased owing to large cargo ships and air transport. This has led to rapid growth in air travel that facilitated greater movement of goods and people globally. Large shipments benefit firms from low cost of transportation. The transportation cost per unit will reduce with the volume of transport. Lower transportation cost will lead to low operating cost for firms. Technological innovation – Improvements in technology like the advent of internet and mobile telephony has facilitated free flow of information and integrated trade through effective communication. Countries have better access to products and services of foreign companies through web media that serves opportunities for foreign investment (Martell, 2010). The internal factors that are firm specific are as follows: Greater access to resource and competitive advantage – Cheap labour and low interest rate influence firms to set up businesses in such countries that provide such opportunities. The domestic country might have high wage rate and cost of capital that will provide competitive advantage to firms that will benefit from low labour and capital cost. Developed nations like UK and US outsource labour for their products and services. Major software service exporters are the developing countries and the importers are the developed countries. This increases the foreign exchange reserve of the domestic country. Economies of scale – Better opportunities in the foreign market leads to increased production owing to high demand for foreign and high value products. Increased production will lead to lower per unit cost. Thus, this will allow companies to expand the scale of operations. Increased growth – The domestic market might be saturated owing to increased competition. Firms seek newer markets where there are business opportunities. Opportunities can influence strategic decisions which include high demand of goods and services, cheap labour, low cost capital, low cost of technology, etc. Such factors complement the growth opportunities for firms under globalization (Campbell, 2004). Question 2 The term globalization may be coined in this century, but similar characteristics were observed in trade and business earlier. It is believed that globalization started when Christopher Columbus discovered America in 1492. Though the name Globalization was unknown to many, but in the modern world it has positively and to some extent negatively affected individuals and economies. Division of work in to small jobs enhanced the productivity that influenced the search for specialization. This led to the expansion of trade and brought various communities and civilizations together. The primary concept of Internationalization dates back to the ear of civilization. Earlier specialized jobs led to trade. Carpenters were specialised in building house and wooden items, armourers made bows and arrows, tailors or seamstress produced cloth traded their items for food from shepherds and hunters. With rise of such pattern of trade the barter system was formed which integrated towns, cities, villages, etc. Though earlier facilitation of trade was not as easy as today, thus trade was restricted to small geographical area. Gradually with technological innovation transportation improved that led artisans to access resources of other countries for a better living. Though earlier the method of accessing better resource was primitive i.e. one nation conquered another for power and political reasons that allowed them access to abundant resources. It is also believed that globalization existed in the ages of Sumer and Indus valley civilization in the third millennium. The medieval or the pre-modern age was characterised more by trading ideas and knowledge which has become the most dominant form of trade in today’s world i.e. services export. Trade integration was observed between China and Europe in the sixteenth century when the transportation cost fell that led to the convergence of the global market. This was followed by rapid expansion of global trade. This led to the formation of Silk Route that opened trade doors between Central Asia and Europe (The Economist, 2013). It is found that the basic premise of trade was similar in earlier context and even today. Today firms and companies i.e. collection of people and resources working towards a common goal, want to access better and cheap resources to increase effectiveness that will help them gain cost advantage. Similarly earlier civilizations would grow followed by discovery of new trade routes and lands that were fertile and conducive for harvesting crops. The concept is similar, but the growth rate of trade and speed has witnessed rapid change. Technology holds the key for such change. Rapid technological innovation and international policies have led to increased growth of trade and business. Technology has been the facilitator of change that has provided firms and business with opportunities. It simplified the process of trade and made it cost effective across national borders. International policies also led to open economies that led to better trade practices where trade became mutually beneficial (Stearns, 2009). Question 3 Currency fluctuations have impacted the business of transnational companies and Multinational companies. As there is no uniform currency or standard of exchange that is accepted by firms across the globe, thus demand and supply situations will affect the exchange rate. Exchange rate fluctuations influence the real earnings of international firms. Currency devaluation will lead to decreasing transaction value of subsidiary companies. Subsidiary companies usually import value added items from its parent company at the market exchange rate. Currency devaluation will make the import expensive and reduce the earning. This will result in the fall in group earnings. US based Mc Donald sales grew in Europe in the year 2011, but its annual profit was low owing to weak Euro. Thus, currency zones influence the business of TNC’s and MNC’s. The new monetary regime has led to economic integration i.e. monetary union that has facilitated trade across national boundaries and has also witnessed major challenges that has affected the multinational companies (Holroyd, 2002). Opportunities for MNE’s Single currency area under the new regime of economic and monetary union benefits the MNE’s from various factors that lead to increased trade facilitation. There is uniform interest rate across the member countries that eliminate the risk of high cost of capital. This influences the borrowing of firms that is needed to fund their expansion plans. It leads to increased transparency as firms can compare the goods and services of other international firms operating in the currency zone. International firms enjoy low transaction costs owing to single currency. The currency risk is eliminated that gives greater flexibility for firms to operate in the currency zone. This will lead to increased trade volume between the member countries of the monetary union. Currency union will allow increased mobility of labour and capital across the member countries. This will benefit the MNE’s from increased trade relations between the member nations (Molyneux, 2001). Threats for MNE’s New monetary regime will result in greater cost for firms. It will incur additional cost in the form of product packaging changes, informing customers, training costs, implementing new system, etc. Fiscal policies might affect other members of the currency zone. The currency union comprises a few major or dominant members and fiscal and monetary policies are taken in respect of these members. The fiscal policies might target the inflation of the dominant member country as a result this would increase the interest rate across the currency zone that would result in reduced investments and inflow of foreign capital. Members of the monetary union do not have same economic, political, technological and legal environment thus policies taken to target growth and inflation will have repercussions in the member nations. This will affect the trade and MNE’s operating in the less developed member nations. Another important threat to the MNE’s owing to the new monetary regime is the language and cultural barrier. Language differences discourage the movement of labour from one member nation to another (Molyneux, 2001). Question 4 Different countries have different industry structures that influence the R&D cost. MNEs operating in various regions have different economic, political, social, technological and legal environments that influence various strategic decisions of such firms. The size of the country is another key determinant in the R&D decisions of international firms. Firms prior to setting up operations in foreign countries perform R&D to analyse the market metrics. The initial cost of setting up business units might be high and firms will lose heavily if they do not perform R&D. They need to know the market externalities and other factors that will prove to be beneficial for its business. They are mutually inclusive i.e. R&D is done to map the various external factors with the firm’s internal core competencies, whereas the external factors of a country influences the R&D itself. The cost of R&D varies greatly with the size of the country, whereas the nature of R&D depends on the type of the industry structure in which the firm operates. Per capita income and the GDP are two critical factors that influence the strategic decisions of MNEs. Higher per capita income might be because of two factors i.e. low population or increased earnings. The R&D cost would rise owing to the country size that is measured by the value of the output of goods and services. It is also incumbent on the cultural factors. Country with high cultural diversity will require extensive R&D and vice versa (ONS, 2015). Figure 1: Total R&D value and R&D as a percentage of GDP of EU-28 (2012) The above figure represents the total R&D value and R&D as a percentage of GDP of EU 28 in 2012. UK’s business R&D was the third highest in EU 28 and stood at €21,096. Germany topped the list of business R&D with a value of €53,790, followed by France with €30,071. Figure 2: Industry wise R&D value of top EU8 (2012) The above figure shows the R&D value based on industry type. The top eight countries are selected from the EU28 and the value of their business R&D is categorised under different industry types i.e. motor vehicles, computer and electronic goods, scientific R&D, machinery and equipment, pharmaceuticals and consultancy services. The different characteristics of nations based on the above discussed factors influence MNEs to develop strategic functions that will meet the desired standards and regulatory requirements of that nation. Different nations have different cultures and social norms that shape their values and beliefs. This shapes their perception and influences their behaviour. Firms have to take decisions after considering all the factors in producing and goods and services in emerging nations. Customer personality and buying behaviour are different this serves an opportunity for international firms to create more value for its goods and services. Firms in order to be globally competitive have to leverage low cost or economies of scale. This will be achieved only when they are able to stimulate demand of their goods and services in foreign nations that will lead to increased production (Heinecke, 2011). Conclusion Globalization has increased the risk exposure of firms. Firms are subject to market risk, foreign exchange risk, and environmental risk, economic, political and technological risks. Social and cultural diversity are other two critical factors that influences the strategic decisions of firms that want to access the foreign market. Globalization has not only benefitted businesses, but has also increased capital inflow in emerging economies, developed local communities, generated employment, etc. Firms can internationalise in many ways i.e. strategic alliance, merger and acquisition, wholly or partly owned subsidiary. Merger and acquisition are inorganic growth strategies of a firm, whereas having its own subsidiary leads to organic growth. Though the benefits of globalization outweigh the negatives, it can be detrimental for various economies. It might lead to increased competition that will drive the small firms out of business. This will lead to unemployment problems and further create other macro economical imbalances (Tiplady, 2003). References Campbell, L. J., 2004. Institutional change and globalization. USA: Princeton University Press. Heinecke, P., 2011. Success factors of regional strategies for multinational corporations: appropriate degrees of management autonomy and product adaptation. USA: Springer Science & Business Media. Holroyd, C., 2002. Government, international trade, and laissez-faire capitalism. Canada: McGill-Queens Press. Jones, A., 2010. Globalization: key thinkers. UK: Polity. Martell, L., 2010. The sociology of globalization. UK: Polity. Molyneux, G.T.C., 2001. Domestic structures and international trade: the unfair trade instruments of the united states and the european union. USA: Hart Publishing. ONS., 2015. Business Research and Development (R&D) across the European Union (EU). [online] Available at:< http://www.ons.gov.uk/ons/rel/rdit1/gross-domestic-expenditure-on-research-and-development/2013/sty-gerd-2013.html. > [Accessed on 5 May 2015]. Stearns, N.P., 2009. Globalization in world history. USA: Routledge. The Economist., 2013. When did globalisation start? [online] Available at:< http://www.economist.com/blogs/freeexchange/2013/09/economic-history-1. > [Accessed on 5 May 2015]. Tiplady, R., 2003. One world or many: the impact of globalisation on mission. USA: William Carey Library. Read More