The Impact of Economic Growth on Internationalization of a Company - Literature review Example

The impact of economic growth, political and economic systems on the internationalisation of an organisation Student’s Name: Grade Course: Tutor’s Name: Date: As globalisation takes centre stage in the business sector, firms are increasingly seeking appropriate locations to set up business in the international arena. To take full advantage potential markets afforded by globalisation, firms are finding it necessary to internationalise their operations. Like everything else that involves cross-border activities, the internalisation process for organisations is not always straightforward; indeed, there are considerations to be made before an organisation can decide whether an overseas location provides a viable market for its goods or services. Scholars and international commentators developed the internationalisation theory for purposes of addressing the underlying considerations that an organisation makes before entering specific markets. On one end of the spectrum, the theorists argue that international organisations have specific advantages, which they seek to exploit in the international arena; on the other end however, the theorists argue that firms internationalise if they are convinced that their comparative advantages can outweigh the relative costs of doing business in the international market (Denisia, 2010). While this essay does not dwell on the internationalisation theory, it pays specific attention to the economic and political factors that affect an organisation’s willingness or lack thereof to enter into a specific international market. The essay is divided into four parts with the sections hereunder discussing the impact of political and economic systems on a country’s development; reasons why organisations consider the economic development of a country before setting operations therein; and whether there are specific political and economic systems that are attractive to organisations that intend to internationalise. In the concluding part, the essay states that the political and economic systems in specific international locations often need to be considered on a case-to-case basis depending on the type of business that the organisation seeks to pursue. This is because as will be shown in this essay, both democratic and autocratic systems have their different ways of fostering economic development in their respective jurisdictions, just as market economies and mixed-economies have been seen to provide room for business growth with no specific system being better than the other (at least theoretically). In contemporary thought, a country is perceived as being as good as its political systems. In other words, it is expected that poor political systems lead to poor economic and social outcomes for the people residing in a specific country, while the reverse would also be true (Arsenault, 2008). The term political system has been defined as “the system of government in any nation” (Hill, 2011, p. 43). Some of the considerations used in determining the status of the political systems in a given country include: the political institutions; whether or not the country has a functional democracy; the relationships that exist between different functions of the government; and the country’s entire political architecture (Davis, 2011). Hill (2011) on the other hand has narrowed down the political systems of a country as being constituted by two dimensions: “the degree to which they emphasise collectivism as opposed to individualism” and “the degree to which they are democratic or totalitarian” (p. 43). Hill (2011) notes that political systems that uphold collectivism most likely practice totalitarian governance, while those that uphold individualism most likely practice democracy. It is often believed that democracy and individualism are the best political systems to foster economic growth (Arsenault, 2008). The reasoning behind such beliefs is that democracy and individualism secure people’s rights, grow economies, protect individual livelihoods, and represent and advance common interests in a specific society (Arsenault, 2008). The assumption that democracy fosters economic growth has however been contested by several authors. Schlesinger (2004) for example argues that authoritarian regimes that foster collectivism have been seen to produce better economic results than democracies. Schlesinger (2004) argues that much as democracy requires private ownership in order to prosper, capitalism does not necessarily need democracy in order to prosper. Considering the above arguments, one can therefore argue that there are no right or wrong political systems that can be said to lead to a country’s development. As evident in the Chinese example provided by Arsenault (2008), even countries that do not have democratic political systems too can develop economically. Kurlantzick (2008) states that the type of development observed in countries that have autocratic regimes owes its success to autocratic capitalism, which is a variant of capitalism as witnessed in the democratic societies. In the autocratic capitalism, governments allow some level of economic openness through which their economies obtain investments and foreign technologies. However, the State retains control over sectors considered as critical to its rules. Such include the gas and oil sector among others (Kurlantzick, 2008). The business dictionary defines economic systems as “an organised way in which a State or a nation allocates its resources and apportions goods and services in the national community” (Business Dictionary, 2012, n.pag). Hill (2011) categorises the economic systems into market economies, controlled economies, and mixed economies. In market economies, the demand and supply of goods and services determines the production of the same. Controlled economies on the other hand depend on governments to plan resource allocations and determine the production quantities needed to serve the society. In mixed economies, both market economies and controlled economies co-exist as governments have some stake in business ownership while leaving a percentage of the same to the private sector (Hill, 2011). Notably, economic systems are closely related to the political systems discussed above, and as Hassett (2007) aptly notes, the role of governments in both the political and economic systems is to aggregate preferences. In other words, government makes decisions for the people under its leadership (i.e. the citizens of a country), and by so doing, charts the political and economic systems that are well suited for development. As Hassett (2007) further notes, there is no conclusive evidence that a specific type of political system or an economic system leads to more development or economic prosperity compared to others. As such, organisations seeking to internationalise their businesses have to pay specific attention to the prevailing political and economic practices in each country in order to determine whether or not a destination will be a viable internalisation location for them. Some of the negative indicators to look out for include inequality, corruption, un-sustainability, dependency, and poor quality of life among others. To answer the question about why a country’s level of economic development is a vital consideration for organisations seeking to internationalise, this essay recognises that it serves as an indicator of the policies and efforts put in place by governments to not only encourage economic prosperity among the people, but the social support systems needed to prop up such development. According to Hill (2011), the economic development of a country is mainly measured through the Gross National Income (GNI). Notably, GNI “measures the total annual income received by residents of a nation” (Hill, 2011, p. 58), and is hence a reflection of their economic prosperity. Although GNI does not account for the differentials in the cost of living between countries, this shortcoming is often overcome by adjusting GNI per capital by the purchasing power in each country. Based on such metrics, organisations would be able to determine if a specific country has a large enough potential market that would justify the setting of operations therein. Apart from the size of the potential market, Teerayut (2002) observes that the economic development in a country also determines whether the internationalising organisation will be able to access the right skills, resources, the right costs, the right infrastructure and the appropriate communication systems needed to make the business a success. Even where the right skills may not be available, Teerayut (2002) argues that organisations need to be certain that trainable local labour is available. Notably, the level of economic development in a country also offers some indicators of the situation of the workforce such as literacy rates (and hence their potential to be trained), and the wage levels (hence their levels of disposal income, and to some extent the availability of cheap labour) as measured through the Human Development Index (HDI). HDI has been defined by Hill (2011) as an attempt by the United Nations (UN) “to assess the impact of a number of factors on the quality of human life in a country” (p. 62). Overall, economic development is a vital consideration for organisations that intend to internationalise because, as is evident above, it offers insights into the potential market and potential resources (both human and material), and also offers some indications into the disposable incomes that people in a country have. Just because people in a specific country may not have the disposable incomes needed to make profits does not however rule out the possibility of internationalising to such a country. For example, most MNCs operating in China do not sell their products in the country; rather, they see China as an ideal operating overseas location due to the cheap available labour and low operating costs. However, their markets for the products made in China are elsewhere. In other words, while the level of economic development in developed countries makes them good markets for finished goods, their relative wage expectations compared to a country like China makes them unattractive to manufacturers. To answer the above question on whether there is any one political and economic system that is more attractive to organisations seeking to internationalise, this paper recognises the arguments advanced by Hill (2011) as valid. Specifically, Hill (2011) argues that countries that uphold a market economy provide organisations “greater incentives for innovation and entrepreneurship than either a planned or a mixed economy” (p. 65). By inference, one can argue that since market economies are prevalent in democratic political systems, then Hill (2011) is indirectly suggesting that democratic capitalistic societies contain the attractions that organisations need as incentives to internationalise. Hill further supports his argument by underscoring the need for strong property rights, which is evidently still underdeveloped in autocratic political systems. Later in his writings however, Hill (2011) categorically states that market-based systems are evident even in the autocratic states. In other words, while free market economic systems ideally provide incentives for organisations seeking to internationalise, the political systems they operate in do not seem to be a major concern for the same organisations. To make the right internationalising decision however, Zekiri and Angelova (2011) suggests that organisations need to know that each political and economic system has its strengths and weaknesses. Before making the decision therefore, each firm needs to consider its background, its nature, its strategic objectives, and the resources it needs. Additionally, organisations need to consider other issues such as safety, packaging, patents, copyrights, trademarks, labelling and environmental laws among other factors (Zekiri & Angelova, 2011). Whatever the political system that an organisation is attracted to, Zekiri and Angelova (2011) recommend that the firm must be sure that its activities will be acceptable in the same. For example, an organisation that seeks to internationalise in an autocratic society must be willing to abide by government regulations and even less lenient property ownership laws. Again, and as argued by Zekiri and Angelova (2011), the autocratic political systems are only attractive if the organisation is totally convinced that the benefits of operating in such an environment outweigh the costs and associated risks. The above statement notwithstanding, other aspects such as the “invisible-hand view”, “helping-hand view”, or “grabbing-hand view” as identified by Andolfatto (2004) should be considered by organisations seeking to internationalise. Although there are economic concepts which seek to determine who benefits from the economic rents obtained from regulating access to a market, the “views” as identified above could provide some insights into what economic systems prevail in a target international location. For example, in democratic systems that foster market economies, and which uphold individualism, the “invisible hand” view is likely to be applicable. According to Andolfatto (2004), the invisible hand is used in reference to government regulations that are literally rarely obvious to business organisations or entities. In such regulatory environments, individuals pursue their own interests, but by so doing, manage to either knowingly or unknowingly, contribute to the overall economic (and social) development of the society (Andolfatto, 2004). The helping-hand view is on the other hand used in reference to governments’ interference in the markets (albeit for corrective purposes). According to Andolfatto (2004), the helping hand does not advocate for total control by the governments; however, it argues that massive intervention by the State is necessary for purposes of helping markets “work better in achieving the social good” (Andolfatto, 2004, p. 3). Any organisation seeking to internationalise to countries that adopt the helping-hand view should be aware of the probability of ‘knee-jerk’ government intervention whenever the market is perceived to being oversupplied, or undersupplied. The weakness of this view mainly stems from its assumptions that governments always know what is good for the markets and the society. As Andolfatto (2004) however notes, even if governments knew what was good for the markets and the society, the danger that people working for the government might disguise the ‘helping hand’ and make market interventions meant to benefit them rather than foster the social good cannot be ignored. Using Hill (2011) as a point of reference, one can argue that the helping hand fits into the autocratic systems, where collectivism is upheld, and where market economies rarely exist. In regard to the grabbing-hand view, it is hypothesised that industries operating in a specific sector in a specific country are able to use regulations therein for their benefit (Andolfatto, 2004). This view is founded on a political model where both democratic and despotic governments are portrayed as pursuing goals that do not fit within the social welfare framework in whichever way it is defined (Andolfatto, 2004). In other words, it is argued that governments, regardless of whether they are democratic or undemocratic, pursue selfish ends (either for the political class or for their supporters), and hence do not act for the overall benefit for the entire society. The major problem with countries whose systems fit into the grabbing hand view is that industry incumbents can create rents through low organisation and information costs, hence locking out the possibility of new entrants. If this view were to be considered, organisations seeking to internationalise would then have to be politically well positioned in order to enter and succeed in a specific market, or withstand the high barriers of entry into a specific international market. According to Scleifer and Vishny (1993, cited by Djankov et al., 2000), an important reason why countries still use regulations and permits in their respective markets is because they offer officials in the government chances to collect bribes. In other words, if an international organisation cannot bribe the official, then the permit or operating license is denied. While the objectivity in Scleifer and Vishny (1993 cited by Djankov et al., 2000) is debatable, it raises vital considerations for organisations seeking to internationalise. For example, a 1999 report by the World Bank stated that once international organisations make the decision to invest in Africa, they are subjected to processes which include extortion, delays, and repeated obstacles – which are only overcome if the organisation makes large payoffs to the regulators or interested individuals. In conclusion, it is worth reiterating that much as the political and economic systems are seen to have an impact on countries’ economic development, there is no one political or economic system that has been seen to lead to economic development more than the other. Just as democratic societies that thrive on individualism and market economies as a way of realising capitalism, their counterparts in the autocratic regimes are also seen to be doing comparatively well even amidst the mixed-market systems that are free in some sectors, while others are still regulated by the respective governments. As has been argued above, the economic development of a country is a good indicator of the people’s earning therein, but also serves as an indicator of the resourcefulness of the country both in terms of materials and human capital. In the end therefore, the organisation seeking to internationalise needs to consider each international location on a case-to-case basis. If the merits and opportunities in a location outweigh the demerits and the risks, the wise thing would be to internationalise to the identified location. This means that the economic and political systems notwithstanding, the decision to internationalise to a specific location should be based on the comparative advantages that the organisation seeks to gain when compared to the costs, difficulties and risks that it will undertake. References Andolfatto, D. (2004). Notes on the grabbing hand by Shleifer and Vishny. 1-11. Retrieved August 24, 2012, from http://www.sfu.ca/~dandolfa/sv.pdf Arsenault, P. (2008). China and the Authoritarian model: the relationship between economic growth and economic freedom. Rutgers University. Retrieved August 23, 2012, from: http://rutgers.academia.edu/PhilipArsenault/Papers/177580/China_and_the_Authoritarian_Model_The_Relationship_Between_Economic_Growth_and_Economic_Freedom Business Dictionary (2012). Economic system. WebFinance Inc. Retrieved August 23, 2012, from http://www.businessdictionary.com/definition/economic-system.html Davis, P. (2011). The political economy of business environment reform: An introduction for practitioners. The Donor Community for Enterprise Development. 1-32. Denisia, V. (2010). Foreign direct investment theories: an overview of the main FDI theories. European Journal of Interdisciplinary Studies, 3: 53-59. Djankov, S., La Porta,R., Lopez de Silanes, F., & Shleifer A. (2000). Regulation of entry. Second draft, 1-51. Retrieved August 24, 2012, from http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.23.9290&rep=rep1&type=pdf Hassett, K. (2007). Does economic success require democracy? The American. Retrieved August 23, 2012, from http://www.american.com/archive/2007/may-june-magazine-contents/does-economic-success-require-democracy Hill, C.WW.L. (2011). International business: Competing in the global market place, 8/e. Burr Ridge: McGraw-Hill Higher Education. Kurlantzick, J. (2008). Monster’s ball- global authoritarianism on the march. New republic, October 8: 1-7. Retrieved August 23, 2012, from http://www.tnr.com/article/monsters-ball?page=0,0 Schlesinger, A.M. (2004). War and the American presidency. New York: Norton. Teerayut, W. (2002). Internationalisation: motives and consequences. ABAC Journal, 22(3): 16-30. Zekiri, J., & Angelova, B. (2011). Factors that influence entry mode choice in foreign markets. European Journal of Social Sciences, 22(4): 572-584. Read More