Protecting Local Firms by Their Governments - Coursework Example

Running Head: INTERNATIONAL BUSINESS Student Name Course Code Name of Institution Date of Submission Introduction Most local firms do engage their governments in lobbying for their rights and place in international trade. Governments also protect their local firms when it is believed that such firms are facing stiff competition or are being damaged through unfair competition from other foreign firms. The idea of protecting local firms by their governments is usually political and economic motivation. Local government’s participation in international business can only work for short term periods but bring some negative impacts in the end (Wild, 2008). Among the disadvantages of government participation in global business, include the idea of making local firms less competitive in the global business among other drawbacks. However, it also comes with various opportunities for the same protected firms. Most governments develop policies to protect their local firms through such methods as adopting trade policies that include tariffs, import quotas, subsidies, and other handicaps used to regulate importation of goods. Governments also may decide to raise the prices of imported products to make them less attractive to local consumers and make local products cheaper to attract and encourage local consumers. Another important protectionism device is the use of import quotas that aims at limiting the number of imported products (Ball et al, 2012). Opportunities for national firms The arguments that favor government participation in global business on behalf of local firms could be the prevention of dumping. Dumping can occur when foreign firms export their products at a cheaper price in order to make local companies less viable and thus driven out of business. In this regard, foreign companies can easily enjoy monopoly and profitability. Although this argument has some degree of credibility, it is also difficult to establish the exact costs of a specific firm. It is also possible that foreign firms can find an effective way to produce more products that can call for national governments to regulate monopoly other than applying protectionism policies (Wild, 2008). Another argument that encourages government participation in global business is that of employment opportunities. This improves rates of employment since imports have the possibility of taking away domestic jobs. A good example of this argument can be related to the UK car markets back in the 1970s where foreign car manufacturers took the market away. Therefore, government action in protecting local firms against foreign competition can help improve employment and thus increase per capita income hence improving the living standards of the citizens. This also offers a great opportunity for local firms to grow and seize more opportunities to make them highly competitive (Hill, 2012). Government participation in international business on behalf of its local firms is very much important in protecting local infant industries. This protection of local companies against foreign unfair competition helps the local infant firms to grow and have a competitive advantage against international industries. This will put foreign firms that are starting up at a very difficult situation in competing on prices of already established and stable local firms. It is also important for local firms since foreign companies would produce large volumes of products and thus have an added advantage of controlling local economies of scale than the local firms (Ball, et al, 2012). This will put local firms at a glance in the global business and participate in international business in a more competitive stage. Government protection of local firms also takes care of strategically important industries such as firearms and petroleum industries. For instance, in the United Kingdom, UK firms and government respectively do firearm production and management of sale and regulation. This idea aims at maintaining government regulation and compliance of laws taking care of various important industries. Finally, government protectionism is helpful in avoidance over market specialization. This is very much evident with the protection of economy from being flexible through excessive specialization that brings about less vulnerable access to stock shocks and imbalance. For example, a nation that puts much emphasis and production of certain goods such as tea and cocoa may face fluctuations in international markets. In extreme ends, when prices of such goods fall in the international market, living standards in the specific country may fall drastically. Government protection of these businesses is much welcome to protect such industries and foster economic growth. Such firms would have been protected from the risks of specialization and hence realization of growth and productivity. Pitfalls for national firms in engaging their governments on their behalf Government protection of local firms has several disadvantages to the economy and progress of local firms. The most significant disadvantage is that of which are the strains that impact on the crucial principles of free trade placed by World Trade Organization. This puts local firms at a point of competition based on prices as opposed to quality of products sold in the market. This brings in the question of false security offered to local firms and the deception of consumers on the quality of products and denial of easy access to a range of products. At the heart of government protection of local firms against pressures of international business are tariffs, duties, inventory quotas and any other government measures that are designed to regulate importation of foreign goods to protect local firms from takeovers resulting from associations with foreign companies (Ball et al, 2012). Additionally, most governments provide support in terms of subsidies and loans to local firms that fail to compete at international levels. These government action results in a great shackle in the free market fostered by WTO through support of domestic companies and imposition of sanction and trade barriers on foreign companies. For this very reason, most analysts believe that government protectionism is a major step against globalization. Government protectionism also results in consumers paying heavily. This is because the lack of a system of competitive pricing, local companies are at ease to raise prices of their products without considering an improvement of their quality. Put more simply, in the event where companies do not face competition, consumers are left with very limited options to choose from (Harrison, 2010). Furthermore, government protectionism has negative impacts on business as well, though their impact and influence is more of a head-in-the-clouds brand of suffering. Government protectionism usually creates an unprecedented corporate complacency, which in turn takes business in a direction likely to believe that it has a nice safety net that the government has set up behind it (Hill, 2012). In the event where foreign and international competition becomes so stiff and unbearable, such businesses are unlikely to have the resources and the ability to stand the competition and hence their failure to survive. Finally, government protectionism restraints consumers from access to foreign goods and non-domestic companies that are believed to provide unique products. This limits the choice of taste and preference by government subjecting foreign companies to trade barriers. Ways in which firms get their governments to advance their interests in the World Trade Organization (WTO) Governments adopt various measures used to impose barriers of free trade to foreign companies in their aim of protecting the interests of their domestic companies. Such measures are usually economically and politically motivated. Among the commonly used measures are tariffs, import quotas, administrative barriers, embargo, subsidies, and anti-dumping legislations (Hill, 2012). However, these measures vary from one country to another and may at times be a noncompliance with WTO rules of free trade. 1. Tariffs Tariffs implies to taxes imposed on foreign goods upon importation. Most governments have measures that ensure variation of rates and taxes of imports depending on the type of goods imported. Imposing taxes on imported goods makes such products expensive since it increases costs on importers (Wild et al, 2008). This makes imported products a bit expensive and therefore influencing consumers to purchase locally manufactured products. 2. Quotas Governments put a certain physical limit on the quantity of goods and products that should be imported at a particular period of time. Since the use of quotas will reduce the quantity of goods imported, it is much likely to increase their market prices. Consequently, high prices of imported products will lure consumers to purchase domestic products and hence growth of local firms. Just like any other government protectionist measure, quotasare aimed at benefiting the producers of local products and goods on the expense of consumers within the economy (Ball et al, 2012). 3. Administrative Barriers Most countries use their domestic legislations that touch on vulnerable industries such as food safety,firearms control acts, environmental standards, electrical safety among others as a way to introduce barriers to imports. These administrative barriers are usually aimed at protecting local firms from unfair competition from foreign firms (Wild et al, 2008). However, the WTO usually accuses countries that engage in such activities as bridging laws of free trade. 4. Embargo An embargo is a protectionism measure adopted by countries to ensure trade and commerce prohibition with a specific country. This will put the prohibited country and its government at difficult internal situation and prevents its firms from investing or conducting business within the prohibiting country. This is effective in protecting domestic firms since embargo has the ability of making economy suffer from its initiative. 5. Subsidies The government offers government subsidies that come in the form of lump sum cash or soft loans to domestic firms that may not be having the necessary resources for sufficient competition with foreign firms. The main intention of government subsidies is to help protect jobs in the local firms and put such firms at a better position to compete with foreign firms (Harrison, 2010). 6. Anti-dumping legislation Governments, in their bid to protect local firms, develop anti-dumping legislations to prevent dumping of local products because of unique products produced by foreign firms. In practice however, anti-dumping laws aims at imposing trade tariffs to imported products, thus making them expensive in the market (Harrison, 2010). Conclusion Government protectionism is only good in fewer cases. WTO argues and condemns against government protectionism because it affects the economy of a given country and the global economy as well. This campaign against protectionism has seen many countries entering into trade agreements amongst themselves.Foreign firms and consumers suffer the most from the negative impacts of government participation in business. This is because foreign firms are restricted through the aforementioned measures and domestic firms offered incentives. Consequently, imported products become expensive and thus companies find themselves in a constant competition for prices in the expense of product quality. Reference List Ball, et al. (2012). International business: The Challenge of Global Competition (13th ed.). McGraw-Hill: Irwin Harrison, A. (2010). Business Environment in a global context. Oxford University Press, Great Clarendon Street, Oxford Harrison, A. (2010). Business Environment in a global context. Oxford University Press, Great Clarendon Street, Oxford Hill, Charles W. (2012). International Business: competing in the global marketplace (9th ed.). Sydney: McGraw-Hill Wild, John J., Wild, Kenneth L. & Han, Jerry C.Y. (2008). International business: The challenges of globalization (4th ed.). Pearson Education, Inc., Upper Saddle River, New Jersey. Read More