Is the Global Economy Converging to one Form of Capitalism - Essay Example

?Do markets emerge or are they created by firms? Does ownership matter? Is the global economy converging to one form of capitalism? Mostly, economic analyses are based on the presumption that markets existed from the beginning (Williamson, 1985; Sarasvathy and Dew, 2005). According to Arrow (1974), “although we are not usually explicit about it, we really postulate that when a market could be created, it would be.” However, some scholars suggest that new markets do not emerge or arise, but are created by the activities and practices of firms. Whether by accident or design, when a firm appropriately guesses a latent need and develops novel offerings addressing unmet needs, new markets are created. Though innovative firms are not always profitable, new markets add value to society, and firm’s primary target is to capture some part of that value by exploratory strategies (Jacobides, 2003). The various mechanisms through which firms profit from their own activities associated with new product development include product features to attract buyers, price inelastic new markets, substitution of existing products with cheaper products, and development of capabilities for adaptation. Variation causes further variation, and the creation of product categories and process of organizational unbundling results in reduction of transaction costs setting grounds for new markets to be created (Anderson and Gatignon, 2005). Firms also create markets without developing new products through mere marketing and management activities, even for familiar products. For example, creation of outlets in disadvantaged regions creates new markets. The underlying principle to this concept is reducing transaction costs, and converting prospects into buyers (Anderson and Gatignon, 2005). For instance, research by Pawakapan (2000) shows the creation of new market by firms in a Thai village by sending sales force with branded products, which just preferred to speak national rather than local language. Local people quickly started to learn national language, and their buying habits changed not only creating new markets but also altering the market functioning. However, as costumer tastes and preferences are ill-defined and evolving, some critics argue that creation of new markets cannot take place in absence of well-articulated or abstract demand. The learning of consumers by using technologies or the change in consumption technology makes it very hard for firms to find or predict new markets on basis of merely abstract demand. Moreover, firms never rely on existing differences in tastes to develop markets, but strive hard to make tastes cohere transforming them into specific artifacts which may not always succeed eventually. Additionally, the arguments supporting creation of new markets through predicting demand are unable to justify the development of certain products and not others. Competition should result in firms converging to same product designs. Instead, there is enormous variation as observed in real markets (Sarasvathy and Dew, 2005). Firms own assets or have control over them, and ownership is the power which allows effective exercise of that control (Grossman and Hart, 1986). The major benefit of ownership is that it allows flexibility over decision-making and firm’s adaptability to changing environments (Madhok, 2006). Ownership is regarded as one of the key variables in determining the performance or outcome of a firm. Research reveals that a positive relationship exists between managerial ownership and performance until a certain threshold level of ownership concentration. Beyond the threshold, performance may decline as managers often take advantage of the shared benefit of control to pursue their own interests and strategies (Neumann and Voetmann, 2003). The performance of firms tends to decline when ownership and control are separated, and increase with competition. However, firms having employee managers usually show better performance than owner managers in various sectors because owner managers inherit estates and are often less talented than employee managers (Frick, 2004). Moreover, a study by Fleming and Goetz (2011) shows that locally owned small firms have a positive effect, while not locally owned large firms have a negative effect on per capita income growth. Thus, local ownership at smaller level matters to ensure economic growth. Foreign Direct Investment inflows are considered as key channels for international technology transfer, increasing the productivity of domestic firms. The acquisition of domestic firms by foreign investors has also given rise to a number of issues including increase in outsourcing of opportunities and decrease in national control. However, productivity advantage of foreign owned firms increases the productivity of domestic firms through competition and dispersion of technical and commercial knowledge (Karpaty and Lundberg, 2003). In order to address deficiencies such as poor productivity and unmet demand of basic services, countries are encouraging privatization and competition (Ros, 1999). The ownership and control of public assets is shifted by the government to private investors to improve performance of state-owned firms. Though it is not clear that how shifting state ownership affects firm’s outcome, research suggests that private ownership yields far better performance. However, analysis of the long, slow privatization process in China reveals that privatization of small portion of shares increases performance, while selling of increased shares lead to decline in performance (Sun and Tong, 2002). All these arguments suggest that ownership does matter. Since the end of cold war, technological advancement and productivity expansion have triggered the rapid pace of globalization. New economic developments internationally have played an important role in fading the spatial barriers between nations. The formation of an international industrial and financial system is contributing towards a free flow of information, products, people and investments across the globe. Along with global integration of markets, remarkable macroeconomic performance is strongly pressurizing system convergence (Scott, 1997). With global slowdown in growth, economic and financial turbulence is increasing, and the competition between varieties of capitalism in different regions such as Anglo-Saxon capitalism like in United States, the social-market capitalism like in Germany, and mercantilist capitalism like in Japan is on a continuous rise making it harder for various capitalists to maintain their separate identities (Howell, 2003). Trade liberalization through multilateral cooperation such as World Trade Organization, International Monetary Fund, Organization for Economic Cooperation and Development and General Agreement on Tariffs and Trade also led to further expansion of private sector opening new opportunities of market competition. The gradually converging trend of other capitalist varieties towards United States model has also stimulated large firms to become multinational in scope. Along with these factors, increased competition in domestic markets due to Foreign Direct investment from industrialized nations is intensifying pressures for financial assets and corporate control in markets (Sachs and Warner, 1995). The entry of china in product markets has even elevated the global competition. According to Ostry (2000), a “confluence of unrelated events ... are accelerating the global reach of investor capitalism and deepening the push for convergence to an ‘Anglo Saxon’ corporate governance model in which the stockholder is king”. Despite the formation of economic blocs by different nations to resist change, recession and weakening corporate governance has forced nations such as Germany and Japan, who are resisting with social and political push backs, to accept foreign ownership of domestic firms. The key challenges faced by capitalist nations due to global integration of markets include restoration of public trust in economic virtues shaken due to corporate scandals, competitive advantage among shareholders, corporate social responsibility, and job and income inequalities (Whitman, 2003). The formation of an unrestricted international free market has benefited multinational companies and corporations in influencing the political decisions. The rules set by states for such firms are not followed; instead markets are determining economic and political policies of individual states. Apart from promoting the hegemony of corporations, risking jobs and communities, exploiting cheap labor, raising environmental concerns and undermining social stability, convergence is also likely to diminish the value of citizenship (Gilpin, 2001). References Anderson, E., and Gatignon, H., 2005. Firms and the creation of new markets. In: C. Menard and M. Shirley, eds. 2005. Handbook for New Institutional Economics, Norwell MA: Springer, pp.401–431 Arrow, K. J., 1974. Limited knowledge and economic analysis. American Economic Review, 64(1), pp. 1–10. Fleming, D. and Goetz, S. J., 2011. Does local firm ownership matter? Economic Development Quarterly, XX(X), pp. 1 –5. Frick B., 2004., Does ownership matter? Empirical evidence from the German wine industry. KYKLOS, 57(3), pp. 357-386 Gilpin, R., 2001. Global political economy. Princeton, NJ: Princeton University Press. Howell, C., 2003. Varieties of capitalism: And then there was one?. Comparative Politics, pp. 102-124. Grossman, S. J. and Hart, O. D., 1986. The costs and benefits of ownership: A theory of vertical and lateral integration. Journal of Political Economy, 94, pp. 691-719. Jacobides, M. G., 2003. How do markets emerge? Organizational unbundling and vertical disintegration in mortgage banking. Acad. Management J, 48(3), pp. 465–498. Karpaty, P. and Lundberg, L., 2004. Foreign direct investment and productivity spillovers in Swedish manufacturing. FIEF Working Paper Series, No. 194. Madhok, A., 2006. How much does ownership really matter? Equity and trust relations in joint venture relationships. Journal of International Business Studies, 37, pp. 4–11. Neumann, R. and Voetmann, T., 2003. Does ownership matter in the presence of strict ant activism legislation? Evidence form equity transaction in Denmark. International Review of Financial Analysis, 157-171. Pawakapan, N., 2000. Trade and Traders: Local becomes national. Journal of Southeast Asian Studies, 31 (2), pp. 374-89. Ros, A. J., 1999. Does ownership or competition matter? The effects of telecommunications reform on network expansion and efficiency. J.Reg.Econ, 15, pp. 65-92. Sachs, J. D. and Warner, A., 1995. Economic reform and the process of global Integration. Brookings Papers on Economic Activity, 1-95. Sarasvathy, S. D. and Dew, N., 2005. New market creation through transformation. 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