Benefits of Government Participation in Global Business - Example

Running Head: INTERNATIONAL BUSINESS Student Name Course Code Name of Institution Date of Submission Introduction With most countries still struggling to recover their economies from the financial crisis, governments are skillfully using some tactics in international trade rules to protect their local firms against unfair competition from powerful international corporations. Most countries and governments use to defend their economic policies quite vigorously (Ball et al, 2008). To maximize its advantage, governments across the globe are exploiting a fundamental difference in major international institutions such as the World Trade Organization an International Monetary Fund. The World Trade Organization wields strict, enforceable restrictions to governments that impede trade while on the other hand, the International Monetary Fund acts like a global watchdog for international trade policies, though it has no power over superpower economies such as the US and China that does not borrow grants from it. Governments engage in such trade activities through various methods that are aimed at limiting the quantity of imports and making business for foreign firms difficult in the local business environment. Such methods include the use of tariffs that involves high tax on imports, the use of quotas that regulate physical quantity of imports, the application of embargos that means a total ban on specific products, subsidizing local firms with loans, and application of administrative barriers to impose minimum environmental standards. In times of economic downfall, most governments actively engage in protecting their local firms as a way of winning political popularity. This is possible through encouraging citizens to purchase locally manufactured and produced goods to spur the local job market and greatly avoid high levels of unemployment that may be quite damaging in the political dimension (Harrison, 2010). Governments also participate in international business on behalf of their local firms in order to protect strategically important industries such as firearms, petroleum, and medical products. Such industries are too delicate to be left in the hands of foreign companies that may not to be interested in ensuring quality in expense of profitability. However, government participation in international business in place of their local firms comes with both benefits and disadvantages to local and global economy as well. Most arguments have it that government participation can inhibit economic growth while other arguments indicate that it protects employment (Verbeke, 2010). However, without considering its benefits and pitfalls, government participation in business plays a major role in the global business and their policies and most governments still impose trade barriers on imports to protect their local firms. Benefits of Government Participation in Global Business Protect sunrise industries Government protection of infant firms from unfair competition from superior international firms helps protect firms that are still on their feet in the local environment. This allows these companies to grow, develop, and become more competitive at international levels. Protection of domestic firms may make them develop a comparative advantage. When protected from foreign competition, infant firms are offered a great opportunity to expand and thus benefit from economies of scale (Ball et al, 2008). As these firms expand in their operations, they will be able to invest in real and human capital, thus offering them the opportunity to develop new skills. After development of new skills, such firms will be able to compete with its own and therefore no need for more protection from the government. Protect sunset industries There are also sunset industries, otherwise known as declining industries that may need government support and protection to decline smoothly and thus avoiding the negative impacts of such decline (Harrison, 2010). For instance, in the UK, every generation is fond of throwing up a declining business such as ship building in the 1950s and the UK steel production in the 1990s. Protect strategic industries As mentioned earlier, government participation in global business is useful in protecting strategic industries such as energy, water, steel, and food. A good example of such measure is attested by the EUs Common Agricultural Policy that is aimed at bringing about food security in the European Union region through the protection of its agricultural sector (Verbeke, 2010). Protect non-renewable resources In the case of protecting non-renewable energy sources such as oil, it is a fact that WTO rules of free trade are abandoned. For instance, countries that rely on long-term export of oil, such as the Middle East, impose production quotas to conserve the resource. Deter unfair competition Government participation in business is also important in preventing local firms from unfair competition that may include damping by foreign companies. Damping at very low prices may render locally produced goods less consumed as local consumers may choose to buy cheap products. Save jobs Although it is unlikely that jobs can be protected indefinitely, protection of the industry can protect the job market in the short term (Wild et al, 2008). Help the environment Increased productivity and transportation is likely to increase the amounts of carbon emissions to the environment. Governments may limit trade in their countries to protect their environment and avoid some penalties of carbon emissions. Limit over-specialization Taking the theory of comparative advantage to some extreme limits can easily result in overspecialization, which also has quite some negative impacts on the economy. Specialization can result in serious risks of global downturns, and an over-reliance on foreign industries. Therefore, it is important for governments to participate in business in order to take care of over-specialization. Disadvantages of Government Participation in Global Business Inhibits Economic Growth Most economists argue that government acts of putting barriers on imports and trade in general can hinder economic growth. Governments that impose trade barriers to certain governments are likely to face the same trade barriers since international organizations are likely to retaliate in the same manner (Ball et al, 2008). This will restrict growth in the economy. Can Lead to Inflation Encouraging local consumers to purchase local products can artificially inflate market prices. This will also limit consumers from accessing a variety of goods to make their choices from. Allowing free trade is likely to create a healthy competition among firms and thus reduce prices to the advantage of the consumers (Wild et al, 2008). Inhibits Movement of Labor Government intervention in global trade is also likely to reduce hindrances and free movement of labor of people seeking employment opportunities in foreign countries. This will most likely lead to shortage of skilled labor in some other countries (Ball et al, 2008). Can result in Trade Wars Most governments intervene in global business for political reasons and for them to penalize other governments. This can most likely result in increased conflict and ‘trade wars’ among various countries as a result of implementing embargoes. Methods of Government Participation in Global Business Tariff Tariff as a measure of government to protect its local firms from foreign competition means implementation of taxes on imports to make them expensive ad of less demand in the local markets. However, tariff is just effective when dealing with products of elastic demand (Ball et al, 2008). This is because inelastic demand will have less impact on demand even if its prices increase. Quota The use of quota means determining a certain minimum quantity of imports. This implies that no one is allowed to import more than the minimum physical quantity set by the government. This will ensure that the quantity of imports in the local market is low and therefore their prices increase, thus making local products the choice of consumers (Harrison, 2010). The use of quota is more effective than tariff in the sense that it does not matter whether the demand is elastic or inelastic. At times, imposing tariffs and minimizing quota can prove more effective in light trade policies. However, imposing a quota or tariff will greatly depend on the accuracy of information collected by the government. The information must correctly reflect consumption patterns in the country and the available stocks. Ban or Embargoes Ban or an embargo is a government measure to completely deny the importation of certain goods to its local market. Goods banned are usually those with a surplus in the local country that can adequately meet the needs of consumers (Verbeke, 2010). Other countries also impose ban on some goods assumed to be harmful to people and the environment as well. Subsidies This is government provision of grants and loans to local firms to subsidize their production and thus reducing their production costs hence reduced prices. With reduced costs of production, local products tend to be cheaper than foreign products, thus increase the demand of the former (Wild et al, 2008). Setting Certain Packaging and Quality Standards As a measure to protect their local firms from foreign competition, some governments set high quality and packaging standards for all imports. This will make imports expensive to produce and hence increased prices aimed to gather for the production costs. Increased prices will likely reduce demand of imports. Administrative problems Administrative procedures such as setting the process of importation very rigorous, complicated, and time consuming is among the methods used by governments to discourage imports. These procedures see importers using a lot of finance and other resources before they finally import products. The procedure also involves many processes that in the end discourage importers (Ball et al, 2008). Exchange Control This involves government engaging in types of controls aimed at restricting the amount of foreign or local currency that can be traded or purchased in the market. Such measures include banning the use of foreign currency in the local market or restricting the amount of local currency to be exchanged with foreign currency. Conclusion The main reason behind government involvement in global business is to protect their local firms from the competition of foreign firms and regulation of strategic industries. Imports tend to be of high quality and reduced prices as well. This will most definitely reduce the demand of locally produced products. In that event, local firms are likely to suffer a lot and may fail to grow. With decreased demand for local products, unemployment is likely to result since some firms are unlikely to survive. This will also mean that the government will earn substantially lower taxes, hence low GDP, and poor economic growth in the end. To tackle this, governments employ some measures such exchange control, quota, tariff, subsidies, embargoes, and administrative measures to control its local market. However, although such measures have some advantages, they also come with some disadvantages as well. List of References Ball, D., Geringer, J.M.. Minor, M. & McNett, J. (2008). International business: The challenge of global competition (11th ed.). New York: McGraw-Hill/Irwin. Harrison, A. (2010). Business Environment in a global context. Oxford: Oxford University Press, Great Clarendon Street. Verbeke, A. (2010). International Business Strategy: Rethinking the foundations of global corporate success. Cambridge: Cambridge University Press, the Edinburgh building. Wild, John J., Wild, Kenneth L. & Han, Jerry C.Y. (2008). International business: The challenges of globalization (4th ed.). 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