Ways to Increases Productivity: Internationalization and Globalization - Essay Example

Introduction Internationalization and globalization have forced the companies and the government to find new ways to increases productivity. This has given rise to the need to innovate. It has also been found the technological innovations play a significant role in economic growth. Although technological advancements take place in many countries, innovative activity takes place in a small but growing number of countries. The intensity of innovation varies across countries and depends upon several factors. According to Porter and Stern (2001)1, innovation intensity depends on an interaction between private sector strategies and public sector policies and institutions. It is not just the emerging economies that need to be innovative; the developed countries have to step-up the rate of innovation to drive faster productivity growth that will help sustain healthy economic growth rates. Innovation leads to increased productivity and prosperity of a nation which in turn means world economic growth. Innovation addresses the most pressing social and human challenges. The social and human challenges can be met through education which brings about lifestyle changes in the people. Overall, the national environment matters to attain success in innovative activity. According to a recent survey conducted by the research firm the Economic Intelligence Unit Japan has been declared as the most innovative country, ahead of the US, Switzerland and Sweden. Innovation according to this study is “the application of knowledge in a novel way, primarily for economic benefit” (Blackcoat, 2007)2. The study has also indicated that China will see great progress for innovation while the US will remain the most “suitable place for innovation”. The study further suggests that there is no substitute for good education or for policies that encourage investment in IT communication infrastructure (Finfacts, 2007)3. Businesses consider innovation as a way to beat their competitors. For the economy to prosper the governments see the need for an innovative environment. Hence, innovation, government and businesses are linked together (Valery & Kekic, 2007)4. Firms collaborate with customers to product innovative products and personalize it; process innovation becomes important to design and improvise on the existing product and enhance productivity. Talents from different economies interact with each other to strengthen the links among personalization, collaboration and innovation. This has far-reaching implications for global business and for the nation that takes such initiatives. Japan has witnessed an unparallel rise in competitiveness. Reforms in government policies and a set of common corporate management techniques have been identified as the reasons for Japan’s meteoric rise. Japan’s ability to create innovative products and services and make it commercially viable has caught the attention of economists round the world. Their quality lies in the ability to unite and work together in groups. They have been able to achieve the phenomenal growth despite the social and cultural barriers that continue to exist. “Wah” (harmony) has been the root of innovation and people in Japan give up personal interests for the group (Blackcoat, 2007). They value the group over individuals which is the principal reason of their rise. Japan as a resource-poor economy was under pressure to innovate. The economy has a large proportion of high technology activities that are innovation intensive. Their investments in R&D are the highest. Japan has more scientific researchers per million population than the United States (Valery & Kekic, 2007). The top determinants that make a country innovative include technical skills of the workforce and the quality of the IT/ telecommunications infrastructure. China has been found to have more favorable conditions for innovation. China outspends Jana in R&D but in the sphere of innovation, Japan has the “small country advantage”. Most of the countries in the top 25 ranking in innovation have a population of less than 10 million. The return on innovation is higher in middle income countries like Mexico and China. This implies that even though they need to import technology, the rate at which they are able to absorb it, depends on their local innovation performance. This is further confirmed because the economies of the top two innovative nations – Japan and Switzerland have not grown in the past decade (Valery & Kekic, 2007). The low and middle income countries benefit from their own innovative technologies as well as the spillover effect from foreign innovations. Thus, it is highly likely that China would push its position up in the ranking in the next decade. Patent has been used as a chief measure of innovation. A country is deemed to be high in innovation ranking depending upon the number of patents it generates per million population (Valery & Kekic, 2007). The number of patents denotes the inventions that have taken place in the country. The direct drivers of innovation apart from patent are R&D as a percentage of the GDP, the quality of local research infrastructure, education level of the workforce, technical skills of the workforce, quality of IT can communications infrastructure, and broadband penetration. Apart from these, the government reform measures, the political stability, flexibility of the labor market, ease of access to finance, also influence innovation in a country. A good innovative environment can help translate the direct drivers into innovative performance and China has ranked 42nd as an efficient innovator. While India is considered the second best place to innovate, next only to the US, in the next five years China is expected to break its position and move up five places. It would overtake India in innovation in view of the amount of expenditure they are pouring in R&D and education. It is already spending more than Japan in R&D. Growth of China History The rising commercial, financial and political profile of the People’s Republic of China in Africa has been of great interest to economist and observers (Chen, Chiu, Orr & Goldstein, 2007)5. With the rapid economic growth that China has experienced in the last decade, and with its accession to WTO, China now desires to become the global economic powerhouse and it is estimated that by 2015 the Chinese economy will be as big as the US. Concern for third world countries After the People’s Republic of China was established in 1949, it used its own legacy of colonial aggression and experience of liberation to establish links with the African-nation states emerging from colonial rule (Melville & Owen, 2005)6. Throughout the 1990s the Chinese increased their aid to the African governments and worked with mutual respect with a concern for diversity. When the western aid was drastically cut back to Africa, China stepped in for diplomatic reasons. China wanted to become the leader in guiding the third world countries. China in any case enjoyed goodwill of Africa following the anti-apartheid struggle. Invest climate Investment climate improve substantially in India, China and Uganda (IFSL, 2005)7 which resulted in reduced poverty. FDI in China averaged over $40 billion a year and was the major driver of growth and they embraced a broad program of improvements. The role of multinationals is enhanced because they provide the funds, jobs and the technical expertise to the host country. Setting up joint ventures has several advantages in China as seen by Gross (1995)8. Under joint ventures, foreign investors gain from the reasonably well educated low cost labor available in emerging economies. China extended all support in matter of foreign exchange and tax. R&D China has always been keen to innovate and as such instead of allowing automobile companies to merely assemble cars, they prevailed upon General Motors to start research and development centre in China. GM’s PATAC, a joint venture R&D centre is an independent automotive research development company (Hara & Nakanishi, 2004)9. Today GM has local production, has established an R&D function, as well as developed its own sales channels to create a local sales function. Motorola too took advantage of the response to liberalization and reforms in the emerging economy in China. It established joint committee with the government Electronics Department. While the government allowed Motorola to carry out philanthropic activities including construction of elementary schools, the country benefited as local talent was employed and given a platform to develop innovative designs. FDI The sudden emergence of China as the FDI recipient has gained importance. From an isolated economy in 1979, China has become the largest recipient of FDI in the developing world and globally the second, only next to the United States because of its proactive policies towards FDI (Fung, Iizaka & Tong, 2002)10. China’s distinction is its enormous population and its huge size. China experienced an FDI boom for seven years from 1992-1998 and the factors that contributed to it included further liberalization of FDI regime in China coupled with the explosive growth of the domestic economy. According to Shiva (2005)11, the economy should evolve from within but to get into the stream, to emerge and compete in the world market, financial and technological aid is essential for the poor countries. This is precisely where China benefited. Gradual reforms took place over two decades and FDI came into China in five different forms: equity joint ventures (EJVs), cooperative operation enterprises or contractual joint ventures (CJVs), wholly foreign-owned enterprises (WFOs), foreign sharing-holding enterprises (SH) and joint exploration (JE). Initially FDI was in the form of contractual joint ventures where the risk of foreign participants is lower. As further reforms measures were adopted and the business environment improved, and the government concentrated on promoting high-tech capital intensive projects, WFOs increased (Fung, Iizaka & Tong, 2002). China FDI consisted mainly of Greenfield investments (Graham & Wada, 2001)12. FDI poured in from countries all over the world and the annual rate of increase in FDI averaged more than 40% over the early 1990s which peaked to 175% in 1993 (Berkun, 2001)13. The industries that the foreign firms concentrated upon were garments, textiles, fur, leather and machinery. Chain’s economy was transformed from a Soviet style planning system and international isolation system to a market-oriented economy with increasing interdependence with the world economy. Chinas total trade increased from US$ 38 billion in 1980 to more than US$ 474 billion in 2000 (Fung, Iizaka & Tong, 2002). China featured 26th in the list of exports from any nation but it came up to the 7th position in 2000. The growth of China’s trade since 1978 was phenomenal. Its share of world trade quadrupled from 0.9 percent in 1978 to 3.7 percent in 2000. Again the FFEs had a major role to play. The share of exports grew by 45% between 1985 and 1999 (Tseng & Zebregs, 2004)14. Education There are 16 million students in China at present and China produces 352,000 engineers a year against the US which produces 137,000 (Valery & Kekic, 2007). This itself boosts China’s ability to innovate. Technology FDI leads to indirect productivity gains for host country firms as they also provide training in labor and management. China allowed several benefits to the foreign firms as an incentive to attract technology and expertise in management (Fung, Iizaka & Tong, 2002). With increased FDI came technology transfer and technology transfer accelerated the growth of the Total Factor Productivity. Unemployment With the growth of foreign funded enterprises (FFEs) in China, employment in the urban areas quadrupled between 1991 and 1999 to a total of 6 million accounting for 3 percent of China’s urban employment. The state-owned enterprises were undergoing reform and this led to unemployment but the presence of FFEs helped to ameliorate this unemployment to a large extent. In the coastal provinces the FFEs accounted for ten percent of the urban employment (Tseng & Zebregs, 2004). Culture infiltration Nestle of Switzerland wanted to use its brand name to infiltrate into China but they were unable to introduce coffee culture in China, so they adopted a diversification strategy (Hara & Nakanishi). They bought Chinese brands offering products like water, seasonings, and milk. China maintains its local culture and do not permit infiltration, which demonstrates its cohesive culture. Even Coca-cola had to adapt to the local culture in order to succeed. While the can is still red, the famous Coke logo had to be replaced with Chinese characters (Hollis, 2006)15. Commercial infra-structure Multinational companies are opening research and development centers in China as costs are much lower. The local scientists are paid only 20% of the amount that western scientists require (Valery & Kekic, 2007). Even though this may be termed exploitation, it makes the country generate ideas and become creative. Current situation Government reforms China’s ongoing reforms have opened the economy to international trade and investment. The rapid growth has been fuelled by the growth of fixed assets investment, high savings rate, FDI inflow and major infrastructure development. China is now the fourth largest economy in GDP terms and the world’s third largest trader. It has been able to sustain the growth due to political and social stability and improvements in labour productivity. Direct selling had been banned in China since 1998 but in 2005 China issued new regulations where direct selling has become permissible with certain conditions and bonds to be executed (China, 2007)16. Restrictions on franchising has also been removed which gives greater market access to all enterprises engaged in franchising. China has also formulated an action plan on Intellectual Property Rights Protection which covers trade marks, patents and export-import. This law encompasses nine areas of protection in which are included education, publicity, international exchange and co-operation. The influx of foreign investors in real estate had grown disproportionately that the government had to impose restrictions. Foreigners now need to be residents in China for a year and the foreign enterprises must have branches or representative offices in China. The relaxation of the government policy in China has fostered the growth of the private sector which has boomed due to change in the consumption patterns since reform (Chow & Tsang, 1994)17. The China’s central government decided to open its retail market to foreign investors in 1992 to accelerate the country’s tertiary industry growth and to create more job opportunities (Wong & Yu, 2002)18. This broadened the channels for foreign retail investors to tap into China’s 1.236 billion population. After China’s entering WTO structure, there was no boundary in retailing industry from 2004. Consumerism and Retail sector The middle class residents are avid consumers of electrical and electronic goods, up market fashion and upgraded home products. They spend more on entertainment and recreation, healthcare, fitness, insurance and finances (China, 2007). These changes have brought about a shift in how multinational retailers function in China. The young generation between 13 and 24 is the first generation that follows the one-child policy. They draw from the advertisements in magazines, televisions and internet about new trends and styles that influence them. For luxury goods they have become brand conscious and as they can afford them it is regarded as status symbol. As far as daily use products are concerned, they do not look for brand but concentrate on price and quality. Though foreign brands are still preferred, some domestic companies have come out with equally good products. Although foreign direct investment (FDI) had opened up in manufacturing and financial sectors in China soon after the reforms, in the retail sector it started only in 1992 (Saimee, Yip & Luk, 2004)19. Today China is set to become the industrial giant of the 21st century with FDI reaching 912 billion in 2004 (SD, 2007)20. The standard of living has greatly improved in China and the economic and social inequality has become evident (Wong & Yu, 2002). Social and economic reforms have led to rapid increase in consumer incomes and demand for products and services (Chan, 2005)21. In the first six months of 2004, the consumer retail sales of the nations were 2.5 trillion yaun. Retailers from various nations already have presence in China. The major retailers include Carrefour (France), Wal-Mart (USA), Tesco (UK) and Metro AG (Germany) among many others. Carrefour has seventy-three hyper markets across twenty nice cities across China and Wal-Mart operates sixty-six (SD, 2007). Demographics and consumer behavior China’s population in 2005 was estimated to be over 1.3 billion. The population growth has reduced slightly and it is expected that by 2015 the economically active population in China will stand at 1005 million against 934 million in 2005 (China, 2007). There have been changes in the society and lifestyle resulting in late marriages and decreased child birth. This will directly impact the consumer market in China. This means there will be less spending on child related goods like toys and clothes but at the same time the purchasing power in the hands with families with no children will increase as far as household improvement goods are concerned. Higher aging population increases the demand in services like healthcare and insurance. The average per capita disposable income in the country has gone up. There is an unequal regional distribution of prosperity. Coastal cities like Shanghai, Beijing, Guangzhou and Shenzhen are more affluent than other cities as they were the first to open up their economy two decades ago (China, 2007). The per capita disposable household income in these cities is higher than the national average. The rapid expansion of retail format in these cities has positively impact other areas like the Pearl River Delta and the Yangtze River Delta. Even the rural dwellers have benefited from the change in the economy. Their concept of consumption has changed. China is a vast country and consumers in different regions and income brackets are at different stages in their brand relationships (Hollis, 2006). The MNCs have not been able to meet with great success in China as they find it challenging to compete in the Chinese market. The domestic products are innovative and match the quality of the foreign goods. Besides, the imported good are very highly priced for the rural consumers where the domestic producers have been able to make inroads. Surprisingly, Coca-cola was able to compete with a local drink manufacturer as they could reduce prices due to sheer volume of sales. As local brands have evolved, the Chinese consumer evaluates them as they do with the foreign brand. This again shows the taste of the local consumer. There is also increasing acceptance of Chinese products abroad. Ecological imbalance Rapid economic growth in China has led to an ecological imbalance in China as its essential resources are getting depleted and pollution reaching alarming proportions. China has spent less than one percent of its GDP on environmental protection. People are content with the material benefits and the economic development. They have not yet realized the serious threat that the ecological deterioration poses to the nation. Thirty to forty percent of environmental degradation has been brought about by the consumption activities of private households (Cha & Lau, 2000)22. If the consumers channel their purchasing acts into ecological concerns, the enterprises will be forced to adopt the concept of green marketing in their operations. While in the year 2000 their consciousness about ecology preservation was low, by 2005 the Chinese people did start taking measures to cope with the problem of rapid industrialization (Li et al., 2005)23. Lifestyle changes and improvement in the standards of living has increased the amount of e-waste (electrical and electronic waste) generated in households. Only 4% of the world’s forests are located in China as a result they country relies on import of fibre from USA. Until the year 2000, the Chinese paper mills relied on North America for 80% of its recovered fibre imports (Recycling International, 2006)24. If the recycling industry could be developed in China it could greatly relieve the country of the resource scarcity. If the 14 million tonnes of waste paper could be recycled in China for utilization, 11.2 million tonnes of fresh paper could be produced, 240 million trees could continue to grow, and a half of the paper making energy sources could be saved (China Economic Net, 2006)25. Olympics and World Expo While Beijing won the bid for the 2008 Olympics, Shanghai was awarded the 2010 World Expo. Both these events have given a boost to the already expanding tourism industry in China. This will focus the world’s attention on Beijing and the country is gearing itself for it (Ruggia, 2005)26. This has already created a market for travel to China from the US. In response to the arrangements, the airlines have also added capacity. Travel agents are setting up packages to sell to the tourists arriving to witness the Games. The Games have also added infrastructure in the city and has increased employment. China is expected to be the top tourist attraction in the world by 2020. Business travel, international conventions and exhibitions, competitive packages priced for leisure tourists and increase in flight sectors have boosted the in-bound tourism as well as domestic tourism (Yu & Smith, 2007)27. Travel and hospitality sector The tourism in China has grown phenomenally and many reputed hotels in China are managed by international brands. The hotels owned by domestic brands performed better than private hotels, which demonstrate the desire for aesthetic and design by the customers. There is intense competition but after the Games in 2008, it is expected that a saturation point would have reached when the demand reduces (Yu & Smith, 2007). Arts & Design China has been innovative even in the field of furniture, arts and design. An exhibition Inspired by China was held at Massachusetts recently where the rich heritage and tradition of China was used for contemporary furniture designs (MAD, 2007)28. As China emerges into the global art community, this exhibition reflects the increasing opportunities for cross-cultural exchange among artists. While China has been a source of inspiration, the reopening of China to the West in early 1970s spurred a growing interest in historic Chinese furniture. The Chinese artists trained in sculptor, design and traditional furniture making are creating unique pieces of contemporary furniture. The Chinese designs, art and furniture-making has traveled half way round the globe and are becoming increasingly popular. The incense stand and the drum stool give an indication of how the Chinese fuse the tradition with contemporary art. Source: MAD (2007). Rockets in the sky China has the largest artificial weather program in the world in terms of equipment, size and budget. It is no coincidence that the world’s largest such project is in China and this being such a big country, they felt they could not rely on the whims of the nature. They can ease drought and improve harvest and now they can even do firefighting, prevention of hailstorms, and replenishment of river heads and reservoirs (Aiyar, 2007)29. They can even induce rain to lower the temperature during a prolonged heat wave. It is going to exhibit this and it will fire rockets into the sky to ensure perfect weather during the Beijing Olympics (Deadspin, 2007)30. This would scatter any rain clouds that may form. The Chinese government is really going to try and control the weather during the Olympics using rockets. The peasant gunner would work with meteorologists watching radar in the sky. They will hunt pregnant clouds and pound them with rockets containing silver iodide (MacLeod, 2006)31. The country wants to use the Games to showcase for the countrys astonishing economic development. At every stage the Chinese government has taken up nature’s challenge. It recently completed the $25 billion Three Gorges Dam against the objections of environmentalists. Broadband China has more than 119 million internet users and by 2007 this was expected to increase to 178 million (China, 2007). There are more than 20 million online shoppers in the country and online shopping has increased by 35% between 2004 and 2005. Conclusion China has all the ingredients that go to make a country innovative. The economic reforms combined with political stability game them the impetus to surge ahead in every direction. China has been bale to attract the highest FDI, only second to India. Their expenditure on R&D is more than Japan, which is one of the main determinants for being innovative. Massive transformation has taken place in the lifestyle of the residents, specially the urban population. Due to market saturation in the urban areas, the retailers – both domestic and the multinationals are now directing their attention to the rural areas. This has given rise to the consumerism culture even in the rural areas like the Pearl River Delta. Education wide the level has gone up and it produces double the number of engineers than does the US. They are creative and innovative in preserving the tradition and fusing it for new creation. They have used this in the furniture creation. China does not lag behind in hosting conventions and events for which it is very well equipped with hotels and convention centers. Hosting of the 2008 Games has given it a platform to showcase the country’s innovation and development. The most interesting area is firing of rockets to control, weather – be it to prevent rain or to induce rain. Even to make up for scares resources, it imports fibre from the US and recycles it. The disposable income in the hands of the people has increased which has brought about lifestyle changes and popularity of luxury brands. For luxury goods the people are brand conscious while for daily necessities they are price conscious. The Chinese products have also found a favorable market in the west but the image of China has changed from being the world’s factory to being one of the greatest innovators. Despite this they have not allowed culture infiltration and this has been possible because of the cohesion and unity in all they do. China fits the parameters in the definition of innovation, which says that the knowledge must be applied primarily for economic benefits. They have to be conscious of the environment degradation but this in inevitable in the face of economic development. This apart, China can be said to be leaders in the field of innovation. 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