Multinational Businesses - Essay Example

?Introduction Ever since the onset of the “Great Recession” of 2008, there has been a marked decrease in the volume of international trade and movement of capital and goods across the world. Considering the fact that Globalization was identified as one of the prime movers of the global economy in the last two decades, the ongoing economic slowdown has indeed hurt the prospects of many companies that were globalized in their operations in the world economy. Questions are now being raised as to the impact that the great recession would have on globalization given the fact that global trade has contracted by almost 15% since the onset of this recession. This has prompted many companies to revaluate their strategies with respect to their international operations and consider closing down some of their operations overseas. (Veseth, 2010) This paper examines the phenomenon of globalization and analyzes the effect of the phenomenon by taking the example of a company (Coca-Cola). The paper is divided into sections on globalization and what it means as well as detailing the pros and cons of the process. Further, the issue of globalization in terms of whether it is consistent with economic theory is also examined. The other section is the case study of a company that has long been regarded as one of the prime beneficiaries of globalization and this section looks at the way in which globalization has benefited the company and the impact of the current recession on the prospects of the company. Globalization and the forces driving it There are many definitions of globalization depending on the way in which the phenomenon is viewed. For the purposes of this paper, it would suffice to state that globalization means the integration of markets across the world and the movement of people, goods and services across national boundaries. The phenomenon of globalization is closely tied with that of free trade and the theory of comparative advantage as proposed by one of the founding fathers of modern economics, David Ricardo. Whether the current practice of globalization is consistent with the economic theory would be examined in detail in the later paragraphs. (Bhagwati, 2004) If we examine the question as to what is globalization, we find that the term encompasses a broad range of activities that range from a) multinational companies seeking to setup operations in countries like China and India to take advantage of the lower costs of labour and the exchange rate differential that promotes exports from these countries to the Western world b) the free movement of people and ideas across countries in search of the best markets for their services because of the deregulation of the economies of the West as well as the East. (Friedman, 2005) The case for globalization seems pretty straightforward. If a company enjoys substantial cost advantages in production because of wage and exchange rate differentials, then economic theory states that the company is better off producing in a country where the costs are low and selling in a country where the margins on its products are more. Hence, this simple notion of free trade theory underpins much of the discussion on globalization. Further, economists like Jagdish Bhagwati have shown that the countries like the United States gain in terms of having cheaper goods as well as outsourcing of jobs. The gains are in the nature of capital saved by relocating production and outsourcing functions that can be gainfully employed in the home countries for more productive purposes. The argument here is that the US gains in terms of moving up the value chain and investing in Research and Development while the activities at the bottom of the value chain like manufacturing can be done at lower costs. (Bhagwati, 2004) The case against globalization is that the process involves the movement of capital to the countries where costs are low and hence these countries build up huge reserves of foreign exchanges that lead to global imbalances in the way in which current account deficits in the US are offset by current account surpluses in China and Japan. These imbalances have been blamed for the current recession that is being seen as a consequence of one part of the world saving while the other part of the world lives beyond its means. The main case that is laid against globalization is that not everyone benefits from the process and it is not a “flat” world after all. The saying that the rising tide lifts all boats has not been the case as many countries in Asia and Africa have found income inequalities rising after they have opened up their economies. (Chua, 2007) In this context, the current practice of globalization does not seem to be consistent with economic theory. For instance, as discussed earlier, the theory of comparative by David Ricardo states that countries must trade with each other when they can produce a particular product cheaper than the other country and the other country can produce some other product cheaper and hence these two countries must trade with each other in these two different products so that both countries win in the trade exchange. However, globalization as it is being practiced now has witnessed protectionist measures by some countries that subsidize some sectors in their economies leading to loss of competitive advantage for the countries wishing to export goods to that country in that sector. Further, the depressing of exchange rates in some countries to make their exports competitive in relation to those of other countries goes against the grain of market determined exchange rates that are prescribed by economic theories. (Veseth, 2010) The current economic scene is affecting globalization in the way in which international trade has dropped substantially in the aftermath of the great recession. This has been pointed out earlier and it remains to be seen how much recovery is obtained as the recessionary effects in the global economy taper off. The main reason for the drop in international trade and consequently the process of globalization is that because of the credit crunch, businesses are not investing as much as they did earlier and due to the layoffs and retrenchments, consumers are not spending the high amounts that they were earlier because of easy availability of credit. (Shmick, 2008) The main forces driving Globalization in these times are the benefits that international trade brings to the countries involved in the exchange of goods and services along with multilateral institutions like the IMF and World Bank. Further, due to the insatiable appetite of the American consumer for quality goods at cheap prices, there has been a corresponding move towards sourcing the best possible goods at the best possible price from the suppliers who are willing to supply these goods to the Western consumers. The other forces that are driving globalization are the emerging economies of Brazil, Russia, China and India (the so-called BRIC’s) which have hitched their fortunes to the globalization bandwagon and are intent on capitalizing the opportunities available in the process. The opportunities that this process presents for multinational companies is tremendous indeed given the range of markets of varying sizes that can be tapped by these MNE’s in pursuit of profits. As the next section (the case study of Coca-Cola) shows, MNE’s stand to gain the most when they pursue the opportunities afforded by globalization. It is for this reason that many MNE’s are actively lobbying the United States government to push their case with the multilateral trading organizations like WTO (World Trade Organization). The net result is that there has been a movement towards opening up the markets of many developing countries to Western companies and the resultant win-win situation bodes well for the players involved. Ever since the onset of globalization of goods and services, the world economy has been integrated to a scale never seen before and this has had effects on almost every country in the global economy. Where some countries have adapted themselves well to the process, others have failed to capitalize on the benefits and hence have been left out of the process. The case study of Coca-Cola in the next section analyzes how the MNE has furthered its cause in countries which have welcomed it with open arms. Though there has been some criticism of the way in which MNE’s have sought to push their way into the countries, the recent events suggest that there is more to the story than the popular perceptions of rapacious MNE’s hell bent on exploiting the host countries. The Experience of Coca-Cola This section details the experiences of Coca-Cola Company worldwide before the onset of the great recession and in the aftermath of the great recession. I have chosen this company as contrary to other companies; this is one company that has benefited from globalization even during recessionary times as its main growth in the last two years came from the emerging market economies particularly China and India. The experiences of this company belie the usual rhetoric about the recession having a negative effect on globalized companies and the success of this company in the global marketplace is indeed something that other globalized companies can emulate. (Coca-cola, 2010) The company operates in more than 100 countries across the world and has long been considered as one of the poster companies for globalization. The company has a presence in almost all countries where there exists a market for caffeinated and carbonated beverages. Further, the fact that the coca-cola company creates markets where there are none add to the legends surrounding this company. However, it is not all hunky dory as the company has had to face resistance in many markets where it operates due to the anti globalization sentiments in these markets that saw the Company as a symbol of American imperialism. However, as detailed below, the company has successfully overcome many of these challenges due to innovative and adaptive business practices. (Coca-Cola, 2010) The experience of the company has been that if it follows a process of “Glocalization” (a term coined by the celebrated votary of globalization, Thomas Friedman) wherein it adopts global brands to the needs of the local conditions and hence blends global with local resulting in “Glocal” practices, then the company is assured of a loyal customer base even in those countries where the market is not as Americanized as the other markets it operates in. (Friedman, 2005) To give an example, the Coca Cola brand in India is marketed by targeting the local consumers in innovative marketing strategies that integrate local practices with the global brand image. Further, the portfolio of brands that the company maintains is made of local and regional variants that appeal to the tastes of the local consumers. (Coca-Cola, 2010) Globalization has helped Coca Cola in terms of leveraging its global brand image and marketing to the Westernized segments of the societies in which it operates. Added to this has been the distinctive brand appeal that Coke utilizes to make its products attractive to the youth who aspire to Western Lifestyles in countries like China, Philippines and India. The past experience of Coca-Cola indicates some resistance to global brands that was ultimately won over because of sustained efforts by the company. The present experience of the company has been that it has benefited enormously from globalization as the sales in the emerging economies grew at rates averaging 13-15% whereas the sales in US and Europe fell to the single digits in terms of growth. Hence, the company can be said to have leveraged the processes of globalization to beat the current economic downturn much more than the other companies that have globalized. (Coca-Cola, 2010) Conclusion I would definitely consider globalization, with all its shortcomings to be a force for good. As numerous studies have shown, Globalization has resulted in massive numbers of people getting lifted out of poverty and one estimate is that nearly a billion people have benefitted from the process. However, the question as to which category of people benefit from globalization is relevant as the process benefits those who have the necessary skills and expertise to compete in a global economy. However, globalization can benefit more numbers of people if the sectors in which they are traditionally employed in can be thrown open to free trade and if there are no protectionist measures in place in the countries which these sectors export to. (Micklethwait & Wooldridge, 2005) The very nature of globalization is such that it demands some form of “access” that can be achieved with some governmental support and the forms of access can be knowing English (for people in the IT and Knowledge sectors in India) or having skills in manufacturing (for those in the industrial belt in China). And for those who do not have these skills, globalization can only result in the deterioration of their living standards as prices of goods go up due to increased demand from the first category whereas the second category operates at the depressed wages. (Chua, 2007) Hence, it is in the interest of MNE’s to actively encourage the host governments to invest in education and infrastructure so that the quality of the human resources is good. Research has shown that countries that invest in the “human capital” are better placed to take advantage of the opportunities thrown up by Globalization. Turning to Coca-Cola, it can be said that the company would definitely prosper globally as markets in the US and Europe get saturated and the main drivers of demand would be from the emerging economies. And Coca-Cola is well positioned to take advantage of these opportunities since it is already operating in a global environment and hence can transfer the learning’s that it has gathered in the markets it operates to the other markets where it proposes to enter. (Coca-Cola, 2010) In conclusion, it is a bit dicey to comment upon the future prospects of globalization at this juncture in the global crisis as many countries are threatening protectionist measures (including the US that is contemplating measures aimed at reducing the current account deficit). It is hoped that a more measured process of globalization that takes into account the sum total of needs of the global economy instead of narrow and parochial national interests would evolve from the present impasse and this is the only way out for the global economy. (Veseth, 2010) It is only when the countries of the world work together for the common good can substantiate results being achieved. In conclusion, globalization needs to be a win-win game instead of a zero-sum game and it is up to the business and political leaders in the economies of the world to encourage this aspect of cooperative competition instead of threatening each other with tariffs and exchange rate interventions. It remains to be seen how successful the G-20 would be when they meet this week to resolve some of the thorny issues surrounding globalization. References Bhagwati, Jagdish. 2004, In Defense of Globalization, Oxford, London. Chua, Amy. 2007, The World on Fire, Penguin, New York. Coca-Cola company information from the company website, Available from: http://www.coca-cola.com/index.jsp (Accessed Mar 13, 2011) Friedman, Thomas. 2005, The World is flat: A brief history of the Globalised World in the 21st Century, Allen Lane, London. Micklethwait, John & Wooldridge, Adrian. 2005. A Future Prefect: The challenge and promise of Globalization. Random House. London. Shmick, David, 2008, The World is Curved: Hidden Dangers to the Global Economy, Simon and Shuster: New York. Veseth, Michael, 2010, Globaloney 2.0: The crash of 2008 and the future of globalization, Rowman & Littlefield, London. Read More