The Effects of Globalization and Foreign Direct Investment - Essay Example

? The Effects of Globalization and Foreign Direct Investment The Effects of Globalization and Foreign Direct Investment Background The term ‘globalization’ is no new in the corporate world and is growing in prominence since the last couple of decades (Intriligator, 2003). In the march towards been globalized, many companies have acquired great advantages by outsourcing skills and technology which is better in other countries (Ghemawat, 2011). A common practice these days is to have separated units of a company’s operation, where the designing, production and assembling are all done in different locations or in different countries, and then brought to the prime location (Click & Duening, 2005). This has served many companies in producing cheaper goods by taking use of the low cost of labor and machineries involved, from different countries. The other side of globalization that is also prominent is the decline in product quality, by outsourcing cheaper equipments and low cost of the unskilled labor (Pragmatic Outsourcing, 2012). Employing the trend of globalization has increased significantly in the industrial sector of the European countries. The increase in population and global competition has narrowed the profit margin of many industries and has ignited the need of producing more volume of products, to beat other competitors (Isidro, 2011). Hence, many European industries utilize the cheap labor, fuel and low government taxes of under developed nations to produce bulk quantity of their products within the limited budget for it. A flashback of the European industries would lead to the fact that globalization started from the textile industry in the early 20th century and then it was adopted in electronics, furniture and books publishing sectors (Blass, 2005). With the change in policy by Markets in Financial Instruments Directive (MiFID) of trade tariffs and eradicating the concentration rule in Europe, monopolization in industrial sectors was broken to a great extent. It allowed several new companies to enter into the corporate market and intensify the business competition (Blass, 2005). In this respect, the Italian footwear industry is considered to have gone through considerable changes in its managerial and production strategies, by implying globalization in its system. Historical trade data of Italy suggest that its footwear sector that has a prominent contribution in its overall GDP and has a high impact on the international footwear market (Milan, 2010). However, present market position and sales figures present a different scenario of prominence of the Italy’s footwear industry. Pressure of the international market and emerging entrants has forced Italy’s footwear industry to delocalize their resources, which has resulted in losing their distinct image. The vertical integration methodology of these industries was replaced with a global supply chain network, which resulted in less flexibility and control over the finished product. This paper aims to provide hypotheses of the effect of globalization on Italian footwear, based on the understanding and evaluation of sales figures and current standing in national and international market. The will use the academic and theoretical data to compare other footwear industries with the Italian, to justify the hypothesis presented (Larch, 2005). Theoretical Overview The pattern followed in the Italian footwear industry involves foreign direct investment in the production cycle. Since, Italy footwear sector is largely delocalized several of its resources are involved in production and designing is being outsourced (Amighini & Rabellotti, 2003). This brings the ownership of foreign investors in different production units carried out in other countries. One essential thing to consider is the formation of several business groups, which is the result of market fragmentation. Such business groups act as the middle man between the actual producer and the company been outsourced. Therefore, there are several factors which then come in the control of these business groups like arranging a proper location and technological resource for carrying a production process, which fulfills the need of the company. This leads in dependency of the main producer on these groups, which many times results in not meeting strict deadlines or quality standards of the company (Click & Duening, 2005). Analysis of shoes industry shows that it is comprised of several functioning units including market segmentation, research and manufacturing, which are all carried out in an orderly manner before a final product is made. In vertical integration, all these units or processes have a defined critical path and slag time. In Italy, footwear is more reliant on horizontal expansion these days, where the processes are done in different locations. This satisfies the cost effective production need of the company and so as the requirement from the global business world. Research in this domain, highlights the weakness of Italian footwear industry where the reliance is more on horizontal expansions instead of vertical integration (internal knowledge) (Cohen E. , 2006). According to the contemporary literature there are several drivers of globalization, especially when we talk about Italian footwear and its collision with the foreign investment. There are two major factors, one technology and second institutional modification that have brought influences of globalization (Blass, 2005). The swift technological change has brought cross national business administration which means inclusion of outsourced production facilities, low cost manufacturing, international standards on goods, and exchange manufacturing (Ritzer, 2011). The institutional change has also been influential especially if we talk about international trade institutions (EU, NAFTA, MERCOSUR) which have standardized international trade policies, for example, the currency of exchange “EURO” (University of Iowa, 2012). All of these are consequences of globalization where Italian companies first became cross national to outsource processing and then international to come on across the board services. Moreover, when Italian footwear became global there came opened foreign investment which was for the hype of Italian footwear and fashion made brands. This brought pressures from foreign investors as they wanted to see their investment flowing and in a good return from the shoemakers. This was a strategic influence as the investors expected the companies to be more prepared and planned according to international business standards (Cohen, 2006). In the present context, where Italian footwear is showing decline there are multiple factors that have affected industry’s annual growth rate. Factors are associated to globalization just like competition which is part of globalization system and its disturbance (Alberti, 2008). When Italian companies join international route of business, they have to meet competition from emerging markets including China, India, Malaysia and Taiwan which produce low cost shoes in high volumes of production (Enderwick, 2012). This poses competition threat to Italian made brands as they are expensive and cannot show much unit volume to distribute on the international business domain. The pressure is raised as Italian footwear has to follow the codes of globalization, which force it to outsource production and adapt new technological methods for low cost operation. Adding to rivalry threat, China being the largest shoe seller and the top member of the EU trade has shown dominance in the European shoe market. This has added challenges to Italian footwear which is already in a downstage and not in a position to face such deep globalized market competition. Here are the figures projecting the lowest production rate of Italian footwear in all sides of the Europe: (Data Monitor, 2010) On the further side, it has been seen that due to the dominance of emerging shoe market “China”, it has become must for Italian footwear brands to receive competitive advantage, which is possible by having low cost production facilities, low wage labor access or more distribution facilities to support international footwear demand. China having the largest production capacity by having lower wage labor is immense in dominating such globalized low cost position (Enderwick, 2012). This is the core influence which Italian market has received as it does not have much access to support such huge production volumes (Gindling & Terrell, 2004). Outsourcing, which is a part of globalization, is not that easy for Italian brands to sustain as there are issues of trade legislation and protectionism in it. Meanwhile, the challenges are on the production side as many of the Italian brands have delocalized their production processes and started to rely on outsourcing more than internal side of production (Amighini & Rabellotti, 2003). One consequence of outsourcing in Italian footwear is that companies are more delocalized and have become highly fragmented. This has reduced vertical integration (internal knowledge) and has promoted horizontal expansion of the business, by which many of the firms are all on the outer side of production instead of strong internal processing and operation (Kerswell, 2011). Globalization have imposed outsourcing activity in the Italian footwear as without this none of the firms can receive true competitive advantage, which is based on high valued diversification. To meet international standards and diversified shoe market, Italian brands are to be more sophisticated and controlled in the production side of the business. This is further to exceed challenge on Italian brands which are mainly on one specific side of the market and that is luxury and fashion respectively (Anzivino & Lazzaro, 2011). Another dimension of reviewing the effect of globalization on Italian footwear sector is by understanding the nature and phases involved in the production of shoes and other foot wears in Italy. As mentioned in several reports on this topic, Italy’s footwear majorly uses leather as the raw product for its foot wears. In the cutting of leather according to the specified design, sewing, and the finishing of the leather product, requires advance equipments that can maintain design and cutting accuracy (Martinez, 2008). Tough, Europe was emerging in its technological development, but Italy remained behind in this aspect (Cohen & Federico, 2001). Rather than improving its technological knowledge and implementation, it used the strategy of vertical disintegration, by taking help from other firms for the specialized tasks. This worked well initially, when there were a small number of firms the footwear companies were relying on. With globalization taking place rapidly, several new firms entered in the market, which provided similar resource which Italian footwear companies required. Although this opens more options for companies to outsource the resources, but the selection criteria was mainly based on the low cost grounds (Brenton, Pinna, & Vancauteren, 2000). It greatly changed the framework of these companies and a supply chain system was incorporated in these companies. Because of this strategy of saving money a negative image about the quality and competency of Italian footwear companies was created by media and other international competitors. The managerial styles were changed completely in transforming the system from vertical integration management to supply chain management. Moreover, ensuring proper utilization of company’s outsourced and self produced resources became further complex (Schmitz, 2004). According to Jose study (2008), it was the period of 1990 when some of the Italian shoemakers realized the importance of footwear outsourcing (Martinez, 2008). As per the stage wise procedure of shoemaking which is complex and time taking, the makers identified the importance of delocalized production (Martinez, 2008). As soon as time revolved, things started to change especially at the production side where Italian shoemakers mainly recognized the problem in outsourcing. According to Alessia study (2003), the footwear firms after evolving with delocalization process got onto quality differences in shoe making. The study projects data of Italian footwear market, which shows that most of the brands which outsourced shoe making activity faced quality issues and relatively production issues as well in the entire side of production system. As per the study, exporting units showed higher quality with respect to the outsourced and imported ones which were relatively low in quality but more in the volumes. On judging the data of the study, it can be argued that outsourcing which is one major part of globalization has raised the influence on Italian footwear. The impact is on the production side and hence retrospectively on the growth and prospect of the footwear market (Amighini & Rabellotti, 2006). According to modern literature, globalization is highly influential for SMEs especially in Italian footwear where large firms are quick to adapt globalized trends and smaller ones are left behind in order to adjust separately with the change (Harman, 1996). With globalization, the variations are obvious like relocation of manufacturing units, creation of the oligopoly market, the upcoming trends (fashion), and the fluctuating demand which are influential factors for small business units more than the large business firms (Gindling & Terrell, 2004). When countries set back in SMEs which are important parts of economies then there is a definite chance that sectors dissolve (the Italian footwear market). This is what has been seen in Italian footwear, where international brands stood fast on trends, and SMEs kept slow due to a slower rate of adaptation. Overall, this influenced Italian footwear market as the growth slowed down just because of slow progress of SMEs in the region. On further it has been seen that to internationalize firms there is a need of high investment which is quite impossible for starting off firms or SMEs. The same is the case in Italian footwear where oligopoly firms are holding market capitals, and small shoemakers are fragmented just to keep the market competition low and stagnant (Cutrini, 2011). Empirical analysis Researches done on the Italian footwear sector depict the increasing rate of outsourcing in the last 5-8 years (Data Monitor, 2010). In this respect, the districts of Puglia and Barletta are indicated to take use of services, for intermediate processes more than other districts. The district of Veneto in Italy has intermediate ratio of delocalizing the intermediate parts and but has a larger ratio using outer sources for the finalizing and testing of the finished product. In addition to this, state of Marche outsources raw materials more than the other states of Italy. This has been a growing trend in the footwear sector, whose impact on the growth in inevitable (Amighini & Rabellotti, 2006). (Data Monitor, 2010) The above data extracted from the Italian industrial profile presents the contemporary growth issues in the footwear sector (Data Monitor, 2010). This is a serious issue for Italy as it impacts the overall GDP of the country as footwear is one domain in which Italy used to have a monopoly some decades back. Therefore, it is clear that the outsourcing of resources strategy has not benefited this sector, but has resulted in a visible decline in its growth and value. On the contrary to this, other European countries including Germany and France have equipped themselves with advance technology that saves their labor income, rather than outsourcing it. Furthermore, they provide intermediate services to many Asian footwear countries, which enable them to earn more revenue. This is the reason that Italy lags behind in the total market share of the European footwear market (Data Monitor, 2010). (Data Monitor, 2010) Hypothesis On the basis of analysis made and literature evaluated there are different globalization factors that have influenced Italian footwear market. The most influential factors include market competition and process outsourcing which have created direct affects on Italian footwear market (Blass, 2005). The hypothesis will include all the respective variables including market competition and process outsourcing to test the statements further derived. Here are the statements of null and alternate hypothesis: Market competition and process outsourcing have posed a negative effect on the growth of Italian footwear. Market competition and process outsourcing have posed a positive effect on the growth of Italian footwear. In the context of literature and empirical evidences, market competition and process outsourcing are the most influential factors for Italian footwear market. According to the literature, Italian footwear has persistently been opened to market competition where majority of the rivalry is from the emerging markets. “China” a standing member of EU trade has derived a place in the shoe market which is directly influential for Italian shoe brands (Enderwick, 2012). The brands know that they are expensive and hence require low cost labor in order to meet the method of Chinese low cost manufacturing. This is one driving force that has brought Italian shoe brands on process outsourcing “low cost production” (Gindling & Terrell, 2004). Process outsourcing opening the barriers of trade has brought challenges at the managerial side of Italian footwear. Shoe making which is a complex process and requires vertical integration has become fragmented because of process outsourcing. Many of the Italian firms relying on process outsourcing have sighted quality issues on finished goods. According to Alessia study (2003), there are several Italian firms that found low quality in imported shoe wear whereas the shoes produced domestically were of high quality and according to the market standards. These were some of the evidences that projected the high influence of process outsourcing (Amighini & Rabellotti, 2003). The method which will further test hypothesis statements is correlation method. The method is based on quantitative analysis which interprets statistical data in order to drive relationship between dependent variable Y and independent variables X respectively (Mcnabb, 2010). The method includes regression equation Y = ? + ? (X) which is to represent a relationship between derived independent variables and consequential dependent variable “Y”. Based on the analysis made and evidences collected on Italian footwear, “market competition” and “process outsourcing” are two of the derived independent variables (Mcnabb, 2010, pp.195). The variables are sub-influential factors of globalization giving an overall impact on Italian footwear growth, which is a hypothetical dependent variable. By applying correlation method both the statements can be tested in order to bring accurate results on the findings (Mcnabb, 2010). Conclusion In a nutshell, it can be said that the Italian footwear has been highly subjected to the effects of globalization, which has changed its outlook and survival strategies to a certain extent. The factors of surviving in the market competition and satisfying the needs of an increasing number of customers has forced the industry to leave their sole proprietorship and product control and move towards delocalization. This move of the footwear industry has allowed other countries to get benefits from their products, which are owned by Italian companies. However, it also took away a major portion of the overall revenue of such companies, as it is now divided into several units which are being processed in various countries. Moreover, the growth of many small companies in this sector was restricted due to increase in options available in the footwear market, and many companies failed to attract people towards their brand in the presence of several big brands. The emerging footwear industries of China and India has also pushed back the standing of Italian footwear as labor and government tariffs are far less in these countries, allowing them to produce cheaper products. It is therefore, a matter of high concern for Italian footwear sector to face these challenges occurring as a result of globalization. These industries need to come up with techniques for better implementation of their delocalization and low cost techniques, to better implicate their value chain management in their footwear sector. Reference List Alberti, F. (2008). Entrepreneurial Growth in Industrial Districts: Four Italian Cases. Northampton: Edward Elgar Publishing. Amighini, A., & Rabellotti, R. (2006). How Do Italian Footwear Industrial Districts Face Globalization? European Planning Studies, 485-502. Amighini, A., & Rabellotti, R. (2003). The effects of globalisation on industrial districts in Italy: Evidence from the footwear. 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Italy's Weak Export Performance and Unfavorable Product Specialization. ECFIM Country Focus, 2 (9), 1-6. Martinez, J. (2008). Differences in survival strategies among footwear industrial districts: The role of International Outsourcing. European Planning Studies, 16 (9), 1230-1248. Mcnabb, D. (2010). Research Methods for Political Science: Quantitative and Qualitative Approaches. New York: M.E. Sharpe. Milan, C. (2010). Italy: Major Business Sectors. Milano: Business Network Switzerland. Pragmatic Outsourcing. (2012, May 21). The Pros and Cons of Outsourcing. Retrieved January 8, 2013, from Pragmaticoutsourcing.com: http://pragmaticoutsourcing.com/resources/pros-cons-of-outsourcing/ Ritzer, G. (2011). Globalization: The Essentials. Chichester: John Wiley & Sons. Schmitz, H. (2004). Local Enterprises in the Global Economy: Issues of Governance and Upgrading. Cheltenham: Edward Elgar Publishing Limited. University of Iowa. (2012). NAFTA, FTAA, and the Global Economic Justice Movement. Retrieved January 7, 2012, from www.ebook.law.uiowa.edu: http://ebook.law.uiowa.edu/ebook/issues/globalization/perspectives/nafta-ftaa-and-the-global-economic-justice-movement Read More