Impact of Globalization on National Economies - Case Study Example

 «Impact of Globalization on National Economies» Globalisation is a distinctive feature of today’s world economy. Globalisation facilitates worldwide economic integration of separate national economies into one global economy by allowing free trade and free movement of capital between cross borders. It interconnects the national economies of different countries through foreign trade, foreign investment, and transfers of financial and other resources. Since 1950 trans-national trade has increased rapidly with a yearly percentage of + 6.5. Within the period of 1985 to1997, the foreign investments of OECD countries have increased sevenfold, from the rate of $ 47 billion to almost $ 360 billion. Today, $ 1.2 billion in mixed currencies is meandering around the world as a result of international trade. (Zwass 2002, p.139). Multinational firms and the age of Globalisation: In the context of globalisation, firms have to manage their business on a global environment basis. The main advantage of globalisation is that even small firms have option for acquiring financial and material resources from overseas. The chief players in globalisation are multinational firms. Most of the MNCs have wide global market operations. It is estimated that two hundred and fifty thousand branches of 40000 trans-national concerns are operating on global basis. “One hundred largest multinational firms account for more than 30 % of all world trade. The ten mega multis play a growing role in the production and sales, as well as in the worldwide labour market.” (Zwass 2002, p.139). Competitive advantages of MNCs on global economy: Globalisation leads to expansion of trade across countries, and thus the market opportunity for product also expanded. As a part of globalisation FDI and financial flows have increased and firms have options for accepting foreign fund for their operations. Cross-border transaction between countries has increased with increasing international trade. “Growing interdependence and interdependence of national economies that facilitates increase volume of cross-border transactions in goods, services, finance, investment, technology and to a lesser extent labour.” (Globalization: Will Now Consider Economic Globalization. p.3). Impact of globalization on National economies: Through the transferring of advanced technology and telecommunications techniques every country integrated into the world economy is affected by the global forces. Due to the backward societal and technical infrastructure along with political inefficiency reduce the potential positive outcomes of the globalisation to the undeveloped countries. Globalisation is a type of increased international business developed through free trade and migration. In globalisation strategy, planning and technology for production is centred in developed countries and the operations have performed in developing countries. Thus the developing countries are highly benefited from globalisation as they have more opportunity for economic growth through additional resources from foreign investors. As a result of globalisation, the demand for primary products is reduced and it causes unstable economic development. (Management of Multinational Corporations. 2007). It can be seen that globalisation increases ‘refugeeism’ in countries. Due to the centralization of wealth and opportunities in developed countries, the rate of expatriation to such countries is well increased. It creates problems of overpopulation and human right issues in those countries. They also suffer social security problems. (A Report on Globalization for the Affairs Committee on Parliament. 2001). Globalisation theory: Old concept of globalisation involves the movement of trade or manpower across borders. But in modern concept, globalisation involves expansion of trade and movement of capital across borders. The real step behind the globalisation is beginning from the removal of trade and import restrictions between countries and opened up its markets to international investors. According to the theory of Mr. Roland Robertson, globalisation is both a process and a theory. In his views, globalisation is “an accelerated compression of the contemporary world and the intensification of consciousness of the world as a singular entity.” (Globalization of Education Globalization Theory The Role of Education. 2008). This concept was initially developed by Marshall McLuhan in the 1960s through his idea of global village. But his concept was related to the western concept of modernisation of societies. With the sharing of technology and modernisation between countries the globalisation has developed highly. The present concept of globalisation had begun during the early 1980s. Effects of globalization on the operations of MNCs: Customers always prefer to get maximum benefits at minimum cost. With the development in communication technology, consumers become the controller of the market. The entire decision making in the business is subjected to the needs and interests of consumers. Together with increasing trans-national trade the cost of supply chain management has increased to a great extent. Multinational firms required to manage their supply chain in a cost effective manner in order to render the products and services at reduced cost to global customers. The competition between well established business firms on a global basis necessitates higher efficiency of production process and management of business. (Management of Multinational Corporations. 2007). In economic globalisation, foreign direct investment of Multinational Corporation is done through setting up of production facilities in the host countries. MNCs are controlling and directing the major part of the world trade flow. “Bernard, Jensen, and Schott find that 90 percent of U.S. exports and imports flow through a U.S. MNC, with roughly 50 percent of U.S. trade flows occurring between affiliates of the same MNC, or what is termed “intra-firm trade”. (Blonigen, p.1). The importance of MNCs and FDI is increasing the world economy. The impact of this in the countries economy is in the introduction stage. MNCs are required to overcome the trade protection in host countries. Government restriction in terms of tariff and other trade barriers forced MNCs to adopt adequate strategies to overcome these barriers. Information about host countries and the cost advantages should be necessary for MNCs to enter in the market profitably. The local regulatory environment is a major factor that determines the possibility of business in that environment. (Blonigen). The changing geography of world economy as a result of globalisation provides opportunity for MNCs to expand and diversify their business operations in multi-directions. Conflicting government policies is a major threat for MNCs in their global operations. The localisation strategy of MNCs makes the local market more competitive for the native firms. The development of communication technology in cheap and efficient way and better transportation system makes the globalisation process more easy and fast developing nature. Intensified global competition necessitates reducing the cost of operations by firms. Localisation is an essential strategy for MNCs. The major challenge for MNCs in the global environment is to serve individual customers and at the same time expand their operation on different community basis. It can be summarised as “the cost advantages of standardisation versus the revenue advantages of adaptation.” (Buckley and Pervez). Case Study: Effects of Globalisation on Tesco Tesco is a well established retailer group in UK. The international expansion strategy of Tesco is a part of its globalisation strategy. The globalisation strategy of Tesco was started in 1995. The company expanded rapidly in the country. Tesco and other giant retailers had enough scope to expand within the country itself. When domestic growth opportunity is limited, it turned to globalization process. (Griffith 2008). The new forms of market experience provided through super markets and hyper markets are attractive and capable of meeting all needs of customers at a single place. Thus the existing retail market leaders required to find out new ways and place for marketing. In such a situation Tesco had decided to expand their business on a trans-national basis. The globalization trend in the retail industry is summarized in the following chart. (Griffith 2008). Globalisation of Tesco: The first step towards globalisation of the company began in 1995 with the setting up of business unit in Hungary. The international expansion strategy of Tesco was not effective in some markets. Their initial expansion strategy to Thailand and France failed due to the strong competitive force in the market. With a keen business strategy Tesco attained successful business launching in Hungary. In Hungary, the support of Local Government for acquiring the sinking local supermarket chain called Global was a stepping stone for Tesco for its globalisation. With the localisation strategy in the working of supermarkets, Tesco attained customer acceptance and market share in the global garment industry. The following table illustrates the business units of Tesco in various countries: Country Number of Stores Thailand 370 Poland 280 Japan 109 Hungary 101 Republic of Ireland 95 South Korea 91 Czech Republic 84 Slovakia 48 China 47 Turkey 30 Malaysia 19 (Shaffer et al 2007). The basic concept adopted and implemented by Tesco for the business is localisation strategy. In the retail stores, supermarkets and hypermarkets, the local needs of customers are considered as the basis of marketing strategy. This helps them to attain market acceptance with growth potential in foreign markets. High levels of standardization are employed in the business units and it provides massive economies of scale for the organization. Local conditions, food habits and tastes have to be taken into consideration while formulating marketing strategy. The success of Tesco in food retailing business is mainly related to their localization strategy. For example, in the beginning of summer season in Eastern Europe, Tesco has introduced swimsuits with the aim of supplying it to the tourists of summer vacation. For the promotion of products according to the local holidays and celebrations, all Tesco store managers in international markets were provided with instructions. This helps the firm to introduce products according the changing needs of consumers with the different celebrations. (Griffith 2008). The sharing of resources becomes easier through operate in geographically closed international markets. Tesco uses local products on their supply menu with regard to the attitude of the local community and their food habits. For example in Slovakia, the local products among total supply are of 60% and it is nearly 90% in Poland. Tesco usually enter into business combination with reputed local producers and manufacturers for this purpose. The entry and expansion strategy of Tesco in Japan is evidence of their accurate market approach. Before entering into the Japanese market, Tesco conducted two years of research relating to the features of Japan retail market and consumers’ purchase behaviour in the country. After identifying the potential opportunities in the market it entered in the Japanese market in 2003. By acquiring the local discount supermarket chain, C Two Network having 78 branches, it got powerful starting in the market. In addition to this, some more acquisitions of local firms were carried out by Tesco in Japan. (Entry and Expansion Strategy: Tesco in Japan). In South Korea, instead of starting independent business units, Tesco followed business combination with the local retailer called Samsung. This tie up enabled the company to have strong understanding of the Korean market and in turn localise its products to suit the tastes of the Korean market. “The joint venture helped Tesco acquire in-depth knowledge of the market and also helped it acquire the best store locations. Tesco began operating in the country under the well established 'Home Plus' banner.” (Entry and Expansion Strategy: Tesco in Japan). In case of global expansion of business, foreign firms have to face strong competition from local firms. The local small enterprises may be incapable to succeed in the strong competition created from giant foreign investors. Analysis of Management strategy of Tesco in Global environment: Extensive research on local market opportunity helps Tesco to formulate appropriate strategies. For achieving profitability in foreign retail markets, it will take a number of years. Challenge relating to the cultural and social diversity that exists in a global environment also affects profitability in globalbusiness strategy. The success of globalisation strategy of Tesco is mainly attributed to its efficient managers who are capable of identifying the opportunities in market and creating good customer relationship with local customers. The number of managers from UK is only limited and the store managers in foreign retail units are selected locally. This helps them to reduce costs and also help to create better relation with the local customers. Business combination with efficient local partners in the market also helps Tesco to procure knowledge about local tastes and customs. By making existing operations more effective and selecting suitable product mix, Tesco has achieved market acceptance and growth in foreign markets. (Child 2002). Conclusion to case study: Tesco had to face challenges and failures during its global expansion process. But with the most successful strategy of localisation it attained success on its global business. Along with product localisation, lower level managers are also selected from the local areas and this helps to identify the local cultural back ground of consumers. The company also takes into account local habits, festivals, and beliefs and incorporates them into their business. Along with this, the overall management of Tesco is handled by efficient management teams who have experience and efficiency in adopting adequate business practices. Through this Tesco ensured its international growth on the right path. Advantages of Globalisation on Multinational firms’ operations: Foreign investors have the opportunity to expand their business by acquiring local firms in foreign countries. Due to the small population size in many countries, domestic firms have only limited opportunity for their domestic expansion. Trans-national business expansion overcomes the limitation of population and demographic factors. Firms may transplant their production operation in the most suitable location which ensures maximum cost effectiveness in production process. Through large scale production, economies of scale are achieved in operations. Efficient and highly skilled labour resource can be ensured by business firms locally for their operations. A crucial aspect of globalisation is the power of multinational corporations to control the entire global economy for their benefits. It is reported that over 33 per cent of world output and 66 per cent of world trade is controlled by a few giant MNCs. Economic and cultural power of MNCs is not favourable for the communities in various countries. They can impact upon communities for achieving their business goals. Exploitation of cheaper labour and resources in developing and undeveloped countries is a best example of social interference of MNCs. It creates significant inequalities in income distribution among communities. By exploiting unemployment in undeveloped countries, MNCs paid only low wages to workers in such countries. The “1998 survey of special economic zones in China showed that manufacturers for companies like Ralph Lauren, Adidas and Nike were paying as little as 13 cents per hour (a 'living wage' in that area is around 87 cents per hour). In the United States workers doing similar jobs might expect US$10 per hour.” (Smith and Doyle 2002).  MNCs impose significant influence on modification of rules and regulations of government agencies in countries. In case of policy formation of national governments and international bodies such as the EU and the World Bank MNCs have higher influential power. “As George Monbiot has argued with respect to Britain, for example: the provision of hospitals, roads and prisons... has been deliberately tailored to meet corporate demands rather than public need.” (Smith and Doyle 2002).  Conclusion: Globalisation increases the interdependence between economies of different countries. The interconnectedness between firms through business combinations facilitates transfer of technology and resources between countries. Thus the developing and undeveloped counties are benefited from the advanced technology developed by industrial countries. Together with advantages globalisation imposes risks relating to communal agitations. A wise management of globalisation will help to control the poverty of nations. Globalisation provides transfer of advanced technology to undeveloped countries for exploiting their unused natural resources. Internationalisation is a part of globalisation in which firms have different choices for market locations, production location and the technology. International political and economic opportunities can be effectively exploited by multinational firms. Through globalisation, the control of the world market is handled by the multinational firms. Through globalisation, the mobility of labour and resources world wide becomes free of restrictions. This provides new opportunities for firms with significant positive influences. MNCs have to consider their corporate responsibility and human rights in their business locations. 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Last accessed 23 December 2008 at: http://books.google.co.in/books?id=cUR7ULcpkJgC&pg=PA139&lpg=PA139&dq=Globilization:+forces,+players&source=web&ots=DwOAJS485v&sig=ojQ4AiDdp-RQVXVwZpJZdG1mIMc&hl=en&sa=X&oi=book_result&resnum=4&ct=result Read More