Macroeconomic Issues in Globalization - Essay Example

?Globalization has opened up different economies and enabled cross-border transactions and businesses. The emerging economies became attractive to the multinational enterprises (MNEs) as they offered several benefits to the MNEs. The drivers of globalization and the reasons for the MNEs opening up in emerging economies were low cost of skilled labor, reduced costs of transportation and communication, and reduced policy barriers in trade and investments (Franknel, 2006). Globalization is the integration of markets and services through international trade, in addition to foreign direct investment, international outsourcing of services and international movement of people (Franknel, 2006). As economies opened up MNEs were keen to invest in these economies. This was because liberalization of economies resulted in massive deregulation, privatization and reduction of trade and investment barriers (Narula & Dunning, 2000). However, opening up in emerging economies has its own challenges. The business environment is not only heterogeneous but also significantly different from the advanced countries. Since the business environment is rapidly changing they became attractive destinations for external FDI from advanced countries. The outflow of FDI to emerging economies has increased from 6.9% in 1988-89 to 12.3% of the world total in 2003-05 (UNCTAD, 2006). Nevertheless, the multinational enterprises (MNEs) have to identify, measure and manage the political risks before veneering into any emerging economy. These risks can range from being firm-specific, nation-specific or global-specific. Rivalry and collusion mar the relationship between the MNE and the host country. Protectionism is a country-specific risk where the national government attempts to protect its certain industries from foreign competition. However, protectionism interferes with the process of globalization as it limits the interplay of free markets (Fitoussi, 2007). Turkey for instance, offered nation-specific risks for the MNEs. Turkey became open to FDI since 1980 but the nation could not take benefit of inward FDI because of general mismanagement of the country’s economy. Bureaucracy, corruption and red tape in the country were responsible for the failure of attracting FDI as transactions cost of entry and operation of foreign investors were very steep (Erkilek, 2003). The country was economically unstable, did not offer of protection of intellectual property rights, and it did not have internationally acceptable accounting standards. The legal structure too was insufficient while political instability and internal conflicts gave way to insecurity from foreign presence. The import process too was complicated and the country maintained high tariffs on food and agricultural products to protect its domestic producers. Rodriguez, Uhlenbruck and Eden (2005) contend that laws and regulations set by the government determine the nature of commercial activity. These laws and regulations are not for the benefit of the general public but in pursuit of legitimate objectives by the presence of corruption. Public power is most often abused for private benefit. Contracts and rights are awarded not on merit but against exchange for bribes thereby stifling innovation and growth. However, corruption is an intrinsic part of international business and may also offer appreciable advantages to individual firms. Corruption occurs in every country but is more prevalent in the emerging economies, thereby impacting the MNEs as they choose to expand their horizons. The nature and characteristics of corruption vary across nations but then corruption poses challenges and opportunities. Despite this there is no meaningful framework describing the nature of corruption. Pervasiveness and arbitrariness are two dimensions of corruption and both are independent. Individually they are not sufficient to characterize corruption and hence both together create an environment that is not conducive to growth. The level of corruption determines the amount of inward FDI and also openness to international trade. Thus the level of corruption influences the mode of entry. MNEs hence try to choose the mode of entry that could mitigate the consequences of corruption because the success of the firm to a large extent depends upon the entry mode. When arbitrariness of corruption is high in the host country, an MNE would prefer to use a local partner to enter that country. This helps in gaining local knowledge and how to deal with the government and other institutions. When level of corruption is pervasive the incentive to use a local partner is reduced and firms would opt to enter as a wholly owned subsidiary. In the case of pervasive corruption the MNE knows where it would have to accede to corruption and compliance would lead to external legitimacy. Whichever route they choose to enter an emerging economy, MNEs can acquire competitive advantage through involvement with local corruption. The transition economies had a protectionist attitude earlier but reform measures were adopted as they wanted to enhance the efficiency of the state-owned enterprises and make their outputs competitive in the world markets (Filatotchev, Wright, Uhlenbruck, Tihanyi & Hoskisson, 2003). Reforms in the Central and Eastern Europe transition economies were not driven by macroeconomic factors but by political and institutional changes. Political pressures have also been responsible for chances given to “insiders”. However, this strategy did not really help the economies as managerial equity ownership was very high leading to managerial entrenchment. Moreover such firms always lacked in working capital as no new capital was introduced. These organizations did not have the capability of restructuring or the adaptability to adapt to the changing environment. The management was also unwilling to change. The management also had the power to prevent minority shareholders from outside to obtain board seats. When management and governance is poor, insider privatization can further undermine learning and reduce strategic flexibility as in the case of Gorky Automobile Plant (GAZ) in Russia. Founded with the support of Ford Motor Company, GAZ was privatized in 1993. By 1995 GAZ medium and large trucks and focused on small trucks and Volga cars. The Volga design did not meet the world standards and locally produced, it sold at half the price of the western imports of the same size. GAZ was listed in the Russian Trading system but 20% of voting shares were in the hands of the outsiders. The managers retained 13% while the balance 67% was with the employees. About 10% of the shares were in free float which made it easy for foreign investors to obtain a toe-hold stake in the company. The outsiders could acquire shares but the registration procedure being cumbersome, they were reluctant to make deeper commitments. The company thus faced low productivity and high country risks which deterred foreign investors, with GAZ’s social liabilities being the biggest hindrance for foreign investors. Since this became a major issue, GAZ had to seek political assistance for financial restructuring and also altered its Volga design. Despite these efforts the company did not achieve significant results in exports but the government supported these models over imported vehicles. Thus, this insider policy not only stifled growth but also did not encourage innovation. Nevertheless, in the case of Motorola, insiderization policy worked. Motorola had a clear vision and the amount it intended to invest, when it decided to enter China (Hara & Nakanishi, 2004). It identified telecommunications as a priority sector in which every emerging economy government would be interested. They then put the highest priority in reconciliation with the central government. Based on the insiderization policy, they established a joint committee with the government electronics department. They set up targets for local content, they engaged in philanthropic activities including construction of local schools. They did face resistance and competition from local companies but because they had the government support, Motorola adopted commodity strategies focused on high-end users. Its insiderization efforts paid off. A bargaining relationship exists between the MNE and the host country government which is based on the opportunity costs as they consider the ownership and locational advantages (Narula & Dunning, 2000). While nations have become interdependent, the differences between countries have become more noticeable. Globalization has brought about changes in the nature and composition of the core competencies of the firm. MNEs that pursue knowledge-intensive sectors focus on the quality and availability of the benefits of alternative sites. However, MNEs also pursue location advantages when it comes to reducing the pollution in their own home countries. Under the pretext of being ethical and transferring technical know-how to the developing economies, they might actually be doing so to evade stringent environmental standards in their home countries (Meyer, 2004). However, now there are arguments that emerging economies also have strict regulations and the costs of transaction for the MNE may be very high but the fact remains that many MNEs do engage in such practices. Apart from evading pollution norms, they also evade labor laws and take advantage of cheap labor in emerging economies, leading to exploitation of labor in those countries. Companies such as Nike have often been accused of such malpractices. Since price becomes the key competitive parameter, they do engage in such practices. The authors however argue that the transaction costs and the sunk costs are high and it would not be in the business interests of firms to do so. MNEs do influence the local environment even through child labor and slavery which is quite prominent in the textile sector. The ethical principles and guidelines also differ across nations and cultures which could render certain practices ethical in Russia but not so in the USA. Ethical aspects of business have become a major issue among the MNEs in emerging economies. Many MNEs try to enter economies that are at the base of the economic pyramid. While informal economy exists in the developed as well as the developing economies, it is much smaller in the developed economies. MNEs need to have an understanding of the emerging economy and cross the bridge between the formal and informal economy. They must have strong social orientation because informal social boundaries dominate over formal legal documentation (London & Hart, 2004). In these environments formal legal property ownership may not exist but boundaries are recognized and protected. This requires that the MNEs understand and appreciate the benefits of the existing social infrastructure. Another tendency of the MNEs is to partner with the minority of individuals that fall under the formal economy. Thus they tend to partner with large domestic firms or state-owned enterprises, which provide them security against theft of intellectual property. The emerging host economies offer limited support towards such protection The transition economies overall have not performed well and there is much that the host country governments could do in mutual interest. All emerging economies had tight macroeconomic policies, they suffered from credit crunch as state subsidies were reduced and besides, there was rise in real interest rates. Czech Republic, Russia and Ukraine went in or mass privatization but they did not have any legal system in place due to which there was negative impact on performance (Svejnar, 2002). However, for accession to the European Union legal system became a prerequisite, which forced many emerging economies to develop a proper framework within which to function. The foreign exchange policies of the emerging economies were also at fault. They devalued their currency and adopted a fixed exchange rate but as domestic inflation increased the fixed exchange rates became devalued and often led to current account deficits. However, the fastest growing economies did not go in for privatization. Privatization, if accompanied by institutional reforms, speeds up the process of growth. China did not support privatization and nor did they encourage foreign MNEs from setting up office. However, General Motors, unable to enter China through the direct route adopted an innovative mode of entry. The CEO of GM visited China and decided to enter into joint venture with Shanghai Automotive Industry Corporation Limited (SAIC). They did not get into assembly of finished cars as the government was keen on new technology being brought into China (Hara & Nakanishi, 2004). Thus, when all other auto makers were reluctant to share their technology, GM took this route at the request of the government and brought R&D into China in association with Pan Asia Technical Automotive Centre (PATAC). The research thus suggests that the emerging economies including the transition economies have been making efforts to have high growth rates. However, there has been lack of strategic planning on their part and the risks and fears on the part of the MNEs, which has hampered growth. The business environments in the emerging economies are significantly different from the business environment in the developed economies. However, FDI flow has been much more in the developing economies than the developed economies as a result of globalization. While the opportunities are high in the emerging economies, they pose several challenges. These economies are besieged with corruption and weak legal frameworks which discourages investments. Rodriguez, Uhlenbruck and Eden (2005) however, contend that MNEs must involve with local corruption to achieve the desired objectives which is certainly not a positive attitude. This may work in informal economies but not in formal economies and when an MNE wants to make a significant contribution. Instead, the MNE should attempt in discharging social responsibility in various ways. A positive contribution would be recognized in due course and not involvement with local corruption. Countries like India are now passing anti-corruption law and any MNEs found engaging in such practices would have an adverse impact. However, the government infrastructure and framework being poor, adds to the costs of setting up business, increases risks and forecast becomes difficult. The entire process lacks transparency and MNEs do not really benefit by forming alliance with informal economies. Thus, the governments have to provide an atmosphere congenial to the MNEs that would facilitate paperwork and enable them to obtain permits and licences through the formal and legal way. Most emerging economies do not have Intellectual Property protection mechanism and which forces MNEs to partner only with large domestic firms or state-owned enterprises. This limits the growth because the large firms become larger. On the other hand, the emerging economies too are apprehensive of the motives of the MNEs which may not always be profit-oriented. As has been suggested by Meyer (2004), MNEs may want to enter emerging economies to evade laws in their home country. This is particularly true in case of environmental laws and labor laws. The governments allow them to operate because they are in the early stages of industrialization but this is unethical on the part of the MNE. They take advantage of the weaknesses of the economies and exploit labor. In time, the emerging economies may even become dependent on the MNEs for sustained economic growth which is not a desirable situation for any nation. Thus, for sustained economic growth and to derive benefits from globalization, the relationship between the state and the MNE has to be congenial. The MNEs must have their motives and objectives clear before venturing into an emerging economy. On the part of the state, corruption and rivalry, and insider policies have to be eliminated if the state wants healthy growth. Once the host country is able to develop a proper legal and institutional framework, they would be able to attract higher FDI in relevant sectors thereby maximizing the potential benefits from the presence of the MNEs within their national boundaries. References: Erkilek, A. (2003). A comparative analysis of inward and outward FDI in Turkey, Transnational Corporations, 12 (3), UNCTD, Online May 14, 2011 from http://www.unctad.org/en/docs/iteiit35v12n3a3_en.pdf Filatotchev, I., Wright, M., Uhlenbruck, K., Tihanyi, L., & Hoskisson, R.E. (2003). Governance, organizational capabilities, and restructuring in transition economies. Journal of World Business, 38, 331-347 Fitoussi, J. (2007). Globalization and the twin protections, Online May 14, 2011 from http://policydialogue.org/files/events/Fitoussi_Globalization_Twin_Protections.pdf Frankel, J. (2006). What Do Economists Mean by Globalization? Online May 14, 2011 from http://ksghome.harvard.edu/~jfrankel/FRB-Globalzn&InflOct4.pdf Hara, S., & Nakanishi, K. (2004). The Asia Strateges of Japanese Corporation. AT10 RESEARCH CONFERENCE. Online May 14, 2011 from http://www.nomurafoundation.or.jp/data/20040203-04_Shoichiro_Hara_-_Kyoko_Nakanishi.pdf London, T., & Hart, S.L. (2004). Reinventing Strategies for Emerging Markets: Beyond the Transnational Model. Journal of International Business Studies, 35 (5), 350-370 Meyer, K.E. (2004). Perspectives on multinational enterprises in emerging economies. Journal of International Business Studies, 35, 259–276 Narula, R., & Dunning, J.H. (2000). Induatrial Development, Globalization and Multinational Enterprises: New realities for developing countries. Oxford Development Studies. 28 (2), 141-165 Rodriguez, P., Uhlenbruck, K., & Eden, L. (2005). GOVERNMENT CORRUPTION AND THE ENTRY STRATEGIES OF MULTINATIONALS. Academy of Management Review, 30 (2), 383-396. Svejnar, J. (2002). Transition Economies: Performance and Challenges. Journal of Economic Perspectives, 16 (1), 3-28 Read More