Business History Analysis of Globalization - Essay Example

? BUSINESS HISTORY ANALYSIS OF GLOBALIZATION Introduction 3 Multinationals and Global Capitalism 3 Multinationals 4 Globalization of Markets 5 Historical Evolution of FDI 6 Pattern of FDI 6 The Role of Multinational Enterprises in Globalization 7 Impact on Host Countries 8 Case study of Globalization 8 Total Global Strategy 9 Conclusion 9 References 11 Introduction Globalization has become the buzz word in today’s world but what does it actually means and what does it imply? We have observed the evolution of the big national companies into multi nationals in the twentieth century with ever increasing boundaries for business and this trend of transcending national boundaries grew even stronger in the twenty first centuries and resulted in global companies. Is globalization restricted to the business world only? The concept of globalization has entered almost in all areas of our lives be it business, language, education, culture, lifestyle and other psychological and social behavior patterns. It is argued that we are fast losing our unique identity and sense of belonging and are moving towards globalized identity. This paper aims at studying the historical background of multinationals and the creation of global capitalism. It will also study the pattern of its growth that is believed to be non linear and will try to find if the global firms and global capitalism really is inevitable. Multinationals and Global Capitalism Multinationals are firms that operate in more than one country. They are the main source of flow of investment, trade and knowledge that transcends boundaries, which is the essence of the globalization process. Multinationals only proved to be the beginning of the globalization process. Globalization in the last two decades has entered every aspect of our lives in unimaginable way. Yet its extent and background is still debatable. Globalization is referred to as a process of increasing integration in the civilized world (Gills et al. 2006). There are differing opinions about the history of globalization ranging from world war two to as old as sixteenth century. The extent of globalization today is also debatable some regard world as fast becoming borderless while others regard it just as a fallacy. The impact and consequences of globalization is also two tongued sword. On a positive note it has lead to convergence between countries but on a negative note it has resulted on more inequalities between countries and leading to erosion of sovereignty of nations. There are differing viewpoints about causes of globalization as well. Some believe that developments in the communication and transport technology is responsible for globalization while others regard businesses and governments as the main force behind globalization. According to this viewpoint multinationals has proved to be the forerunners of globalization (Toyne et al, 1997). Multinationals The role of multinationals in globalization cannot be fully understood without the sound understanding of multinationals and its historical background. The term multinational enterprise was used in the latter half of the twentieth century although firms had started to invest offshore in the nineteenth century. A multinational is an organization that has its control operations and income generating assets in more than one country. Home country of multinationals is called home economy and the other countries where they invest are called host economies or host countries. Usually the no of host economies should exceed five or six and they should be of considerable size as well for an organization to be called multinational. If a firm’s international operations are very extensive then it is called global organization. A multinational firm makes two types on investment in the host economy, portfolio investment and foreign direct investment (FDI). Portfolio investment is the acquisition of securities with no involvement in the management of the host economies. FDI involves control over the management as well. FDI gives ownership and control of assets to the multinational. There are different types of options available for a multinational to invest in home country depending on the degree of involvement and equity and non equity arrangements such as joint venture, licensing, franchising, cartel and strategic alliances. FDI is the most commonly used quantitative measure for multinationals. The basic reason for existence of multinational firms is the maximization of profits by the capitalist firms. However some industries have more multinationals as compared to others and even some countries have more multinationals operating than others. According to Heckscher-Ohlin theory a country’s trade is determined through its comparative advantage which explains the above phenomenon (Jones, 2005) Globalization of Markets When the markets of the host economies became saturated it lead to the search of new markets. But doing business in new countries and host economies with the same approach of customization was not profitable. Hence it led to the concept of standardization of products, that are advanced, functional, reliable and low priced. Multinationals companies who concentrated on consumer preferences failed and only global companies with their standardized value chain emerged as successful in the long run. One of the major driving forces behind this globalization is the technology. It has transformed communication, transport and travel and has paved the way for commonality leading to globalization. Multinationals operate in a number of countries and adjust their product and practices according to the demand and environment at a high cost whereas global organizations operate as a single entity in many regions with resolute constancy (Levitt, 1983). Historical Evolution of FDI The two important features that characterized the late nineteenth century and the late twentieth century. The twentieth century saw rapid globalization with unprecedented flow of capital and information whereas nineteenth century saw the convergence of living standards (O'Rourke et al. 1999). It is believed that this convergence and capital inflow or globalization are connected hence FDI has played a vital role in globalization. The flow of FDI can be divided into era. Pre 1945 FDI was originated in the developed world and saw investment in the developing host countries in the form of primary products and services. Post 1945 era saw flow of FDI between the developed economies emphasizing on the manufacturing sector. The major evolution of multinationals has taken place in the last three decades. Manufacturing pioneers like Siemens and Singer were the pioneer multinationals in the mid nineteenth century. Multinationals was a well known phenomena by the time of the First World War but it saw some decline in the great depression and during Second World War. German, British and other European multinational played a significant role in the growth of economy in the early twentieth century. However the level of FDI could not be estimated properly until very recently. Cleona Lewis estimated that early FDI of 1914, 1938 and 1960 was by home and host countries (Jones, 1994). Pattern of FDI The FDI has a long history. It started with the manufacturing companies like Singer and Siemens in the mid nineteenth century. US investment was the first to penetrate in the world economy with a wide range of products ranging from engineering to consumer products, chemicals, pharmaceuticals and food processing in the 1920’s. This trend did slowed down a bit with great depression and Second World War but continued after Second World War. However after Second World War the monopoly of US was somewhat diluted by Japanese and some European companies. This trend of growth has been nonlinear with its ups and downs but it grew faster in 1960’s and 70’s. However the term globalization was coined in the 1980’s (Edwards, 2003). Not only the flow of FDI has been changing over the period and hence nonlinear pattern but the shift has also been in the countries that were the source of inflow. Common wealth countries like Australia, Canada and South Africa has been the main focus in the period 1945-1960’s. The focus shifted in 1960’s to Europe and USA mainly due to improved technology of communication and transport 1970’s and 80’s saw the reversal of flow to USA. This resulted because of deterioration in the competitive advantage of UK and the growing strength of the US economy and multinationals (Jones et al. 1991) The Role of Multinational Enterprises in Globalization Since 1980’s the era of multinational enterprises (MNE’s) some changes has occurred in the economic forum which has resulted in greater integration of world economy and hence the term globalization. Trade between countries has increased remarkably (Bartlett et al. 2002). Capital, knowledge, technology and even trade shocks are transmitted from one country to another. This era of globalization is different from multinationals in its extent of economic integration and the number of countries involved. An empirical analysis revealed that MNE’s has a very important role to play in globalization. MNE’s are responsible for the bulk of FDI which is an important factor of globalization. One third of the world trade takes place within and not between companies. They are also responsible for transfer of technology and knowledge. The process of globalization is actually built on the decision taken by MNE’s (Kleinert, 2004). The decisions which multinational take have five parameters. It includes opportunity in markets, raw materials etc, political and government policies of the host nations, familiarity with the host nation, influence on countries choice and corporate experience and style (Mucslinski, 1999). Hence globalization is inevitable in a way. Impact on Host Countries The impact on host country is different for developed and underdeveloped countries. The different aspects include transfer of technology, increase in employment, even restructuring of the industry of the host country. However the rewards may vary and may not be as expected. It is argued that globalization may even lead to inequalities (Benyon et al 2000). Case study of Globalization All aspects of globalization its drivers, it implications and impact on host countries etc can be understood with the help of a case study. Food system has been greatly affected by the globalization all over the world. This has resulted in greater diversity and availability of food although access to food is not universal by any standard. Many of the changes in the food system are greatly linked with factors like urbanization, increasing income levels, market liberalization and FDI. Competition in the food industry has greatly intensified because of the multinational and global fast food chains. In this scenario the aggrieved party is the traditional food, small local agents and the street food. Global firms have changed the food production, procurement, distribution system and the food environment. This has brought a gradual shift in the food culture, dietary consumption patterns etc making it more universal. The supermarkets and the international chains have brought improvement in the quality of food at competitive prices. The main drivers of change in the food market are dietary patterns, urbanization, increased income, Capital inflow and market liberalizations. These factors has been observed from studying the patterns of change in Latin America( Brazil, Chile and Columbia), Asia which includes India, Bangladesh, China and Philippines and some African countries which include Nigeria, Tanzania and South Africa (Food and Agriculture organization of United Nations, 2004). Total Global Strategy It is not easy for companies to manage global strategy and global forces. Defining of successful strategy and worldwide business initiatives is a big challenge for multinational companies. It requires a unique balance and combination of company’s successful core strategy of the home country with the competitive advantage of the host country. It is not an easy task to follow that is why most global organizations follow a global value chain (Yip, G, 1995). Conclusion The history of multinationals and globalizations dates back to the early nineteenth century. Its progress has been non linear with many ups and downs not only in its growth in terms of FDI but also in different countries. Globalization is based on the many decisions taken by the MNE’s. it has many implications on the host countries both negative and positive. Due to changes in technology, flow of knowledge, flow of capital and many modes of communication we can say that globalization is inevitable. The capitalist approach of the organizations led to globalization after the saturation of home economies. References Benyon, J., Dunkerley, D. (2000) Globalization: the reader, New York, Routledge Bartlett, Christopher A., Ghoshal S.(2002) Managing Across Borders: the transnational solution, USA: Harvard University press Edwards, P. (2003) Industrial relations: theory and practice, Oxford: Blackwell Publishing Food and Agriculture organization of United Nations, 2004, Globalization of food system in developing countries, Rome, UN Publications Gills, Barry K., Thompson, William R. (2006) Globalization and global history, New York: Routledge Jones, G. (2005) Multinationals and Global Capitalism: From nineteenth century to twenty first century, New York: Oxford University Press Jones, G. (1994) The Making of Global Enterprise, London: Routledge Jones, G., Kirby, M. (1999) Competitiveness and the state: government and business in the twentieth century Britain, UK: Manchester University Press Kleinert, J. (2004) The role of multinational enterprises in globalization, New York: Springer-Verlag Berlin Heidelberg Levitt, T. 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