Globalisation As A Contemporary Phenomenon In Developing Countries - Essay Example

CATCH UP 0 INTRODUCTION Globalisation is a contemporary phenomenon (Soros, 2002) that has changed and continues to effect changes in almost all facets of contemporary society (Suarez-Orozco & Qin-Hilliard, 2004). In this regard, globalisation has been defined in several ways; however, the most common understanding toward this phenomenon is that it refers to the removal of economic and trade barriers existing among and between nations. As such, under this framework, the world has experienced the inception of transnational corporations, multinational corporations, rapid rise of urban centres and freer movements of goods, and services as well as people, capital, culture and even identity (Soros, 2002; Balakrishnan, 2003; Fischer, 2003; Molina & Molina, 2009; Small- Medium Enterprises, 2007). Moreover, as globalisation becomes one of the defining characteristics of the contemporary period, it becomes one of the fundamental elements in understanding global market economy. Since, it sheds light to the contemporary condition that firms and organisations are dealing with regardless of the place or country where the firms are situated. However, as globalisation has created a smaller and more connected world (SME, 2007), it has also widened the gap between developed countries and developing countries (Nolan, 2005; Nolan & Yeung, 2001a, 2001b). In fact, Nolan (2005) states The high income economies contain just 16 percent of the world’s total population. They account for 91 percent of the world’s total stock market capitalization, 95 percent of Fortune 500 companies, 97 percent of the FT 500 companies, 99 percent of the world’s top brands and 100 percent of the world’s top 300 companies by value of R&D spending… While, The whole of the developing world, containing 84 percent of the world’s population, contains just 26 Fortune 500 companies, sixteen FT 500 companies, fifteen of Morgan Stanley’s list of the 250 leading ‘competitive edge’ companies, one of the world’s top 100 brands and none of the world’s top 300 companies by R&D expenditure. (p. 11) In light of this situation, a firm in developing country has a lot of catching up to do with companies in the developed world if it intends to create a niche in the global market. As such, the problems of catch up posit a humongous challenge to large firms in developing countries. Recognising the existence of the problems of catch up, the paper will try to examine the problems of catch up within the context of a large firm in a developing country. Considering the wide scope of the subject matter that the paper intends to examine, the research will be limiting its study into one developing country only – China. Likewise, it will only tackle one large domestic firm in China. Furthermore, in tackling this query, a library research had been conducted. The following electronic databases Academic Source Complete, Business Source Complete, Jstor, and EConlit were searched using the following key terms: catch up, economic trade, China, China’s economic growth, international trade, globalisation, firms, and economic theories. Moreover, books dealing with the subject matter of the research were also included in the search. Excluded in the research are position papers, monographs, editorials and opinions. The paper will be having the following structure. The first part is the introduction where the topic of the research is presented, the method used in tackling the concern of the study is given and the structure of the paper is provided. The second part will be dealing with globalisation. The third part will be discussion pertaining to the nature of firms. The fourth will be the part the presentation of the scenario and the situations which show the gap between developed and developing country in terms of the global. While, the fifth part will be the presentation of one of China’s large firm and on how it deals with the problem of catch up. Finally, the sixth part of the paper is the conclusion. In the end, the researcher hopes that the conceptual clarification and articulation that is undertaken in this study may help in the further understanding of the problems of catch up as experience by large firms in developing countries. 2.0. GLOBALISATION, ITS UNDERLYING PRINCIPLES AND OTHER IMPETUS OF CHANGE As mentioned earlier, globalisation is considered as a contemporary phenomenon (Soros, 2002). However, it does not imply that the underlying principles supporting globalisation is also new. Instead it is assumed that the fundamentals necessary for its inception has been laid down in the course of history. The three fundamental principles supporting contemporary globalisation are economic liberalism; decentralisation and minimal governmental control in the market and privatisation. These are keys in understanding global market economy. The concept of division of labour has long been part of the history of human thought. Plato in The Republic has used the idea to raise the point that since man by himself is insufficient, in lieu of the fact that he cannot do everything by himself; man has to learn to share with other human beings teh craft of his hands. However, Plato has also noted that for the sharing to be more efficient for everybody, the person must perform the task that he is naturally suited to do. Thus, he maintains that the farmer should keep and do his best in farming, the shoemaker in making shoes, the carpenter in making houses and so on. Plato stipulates this position since it is in this way that work becomes more productive and more output is attained. In the modern period, Adam Smith in Wealth of Nations, using the metaphor of invisible hand, described the rationality behind market competitiveness. In this characterisation, actions undertaken by players in the market not only benefit themselves, but that their actions also benefit the society as a whole. This is achieved in view of the fact that firms gain efficiency through specialisation via implementation of the division of labour in the firm and the exchange that transpires in the market. These activities, guided by invisible hand, stimulate not only efficiency in the production level but it also stimulates “technical progress” (Nolan, 2005, p. 64). However, the context of globalisation has created a different scenario which necessitates a different approach. By 1970s the world had witnessed the rise of transnational corporations and multinational corporations. These corporations operate globally with their mother company (normally) stationed in one of the developed countries. This has become feasible because of economic liberalisation. What is economic liberalisation? Economic liberalism is basically derived from the classical view of liberalism which gives primordial importance to the notions of individual liberty, limited governmental power or rule and the rule of law. These concepts, in turn, embody the basic principles of free market, profit, private property and economic initiative (Malanczuk 1997). Thus, economic liberalisation can be generally understood as referring to lesser or decreasing governmental control and regulations of the market which in turn paves for the increasing participation of private enterprises (Malanczuk 1997). In this regard, the influence of classical liberalism is still perceptible in the contemporary understanding of the concept. However, what is notable is the transformation of economic liberalism into pragmatic neo-liberalism which is much influenced by “treaties of friendship, liberal national legislation, bilateral trade /commerce and less and less government intervention in the market.” (Killion 2003 p5). In other words, economic liberalisation is the recognition of the existing interdependence of countries across the globe. As such, countries have opened their doors for economic trade with other countries. This opening of doors entails removal of barriers to trade like tariffs (World Bank, 1993; 1997). In this regard, it can be maintained that the moment the country accepts economic liberalisation, it is assumed that the government will establish policies that will open the market and encourage and stimulate the local market and encourage foreign direct investments (World Bank, 1993, 1997). As such, transnational corporations and multinational corporations become the concrete instance of economic liberalisation. It has opened the global market in such a way that economic boundaries have become blurred, physical boundaries are no longer limitations and adaptation and assimilation of overseas companies while maintaining the mission, vision, goal and technology of the mother company have become the norm and challenge for TNCs and MNCs (Nolan, 2005). However, it is not just liberalisation that serves as the principle that propels globalisation. Together with liberalisation is the supposition that there will be less and less or minimal governmental intervention in the market economy (Killion, 2003; Helleiner, 2004; Nolan & Yeung, 2001a; 2001b). This change is significant as many developing countries have governments who are deeply involved in the market economy. For example, China prior to its joining of WTO, the government is the leading investor. In fact, their biggest enterprises are State owned enterprises (SOE) (Nolan & Yeung, 2001a; Nolan, 2010). The State is the centre of power in the market economy. However, since their joining, China has slowly adapted economic policies which lessen governmental control in the market and the encouragement of foreign direct investors which is attested to by the continued increases of FDIs in China (Liu et al, 2006, Nolan, 2010; World Bank, 1993). This reality which is known as decentralisation. The government through proper planning and policies slowly slackens its hold on the market and starts to shift the power from the state to corporations, managers, producers and consumers – non-state actors. Decentralisation is essential for globalisation since decentralisation makes room for flexibility, innovativeness, lesser bureaucratic intervention, spurs economic growth via encouraging development of new strategies that better suits the firm and best responds to the needs and demands of the market rather than the what the bureaucracy wants (Breslin, 2000). Finally, privatisation is the programme that governments adapt as they fully integrate in the global market. Privatisation is generally understood as the transfer governmental functions, governmental ownership to the private sector. This agenda is undertaken because it reduces government expenses, increases efficiency, encourages foreign investors, and reduces political intervention, increases innovation, competition, and responsibility. Finally, it is in line with international demands and trends (World Bank, 1995). Economic liberalisation, decentralisation and privatisation are the principles and schemes supporting globalisation. however, it should be noted that together with globalisation there are other changes happening. These include rapid developments in the field of computer and information technology (Purser, 2004; Calder & Watkins, 2008) the transformation of the value of knowledge and information as an important primary asset of firms and corporations if firms intend to survive the highly competitive global market (Purser, 2004), and rapid urbanisation of some cities (Nolan, 2005; Molina & Molina, 2004; Musterd, 2006). These factors together with globalisation are the elements of the contemporary scenario that firms encounter. These elements, at the same time, challenge firms to continually find means with which they can be abreast with developments in computer and information technology, how firms can turn information and knowledge into assets and how to acquire, maintain, sustain, share and interpret these knowledge and information and finally how firms handle issues that arise out from ensuing material developments that pushes people to flock urban centres? These concerns are experienced more in developing countries rather than in developed countries. Moreover, it presents the truism that as countries and domestic firms respond to the challenges pose by globalisation and other factors acting as drivers for change, transformation in the nature firms of firms and organisations happens for it properly respond to the demands of the global economic market. 3.0 A LOOK ON FIRMS Milton Friedman (1970) has claimed that the business of business is no other than to gain profit. The moment firms veer away from this purpose, which is the sole reason for a business’ inception, it commits a grave error in business judgement. However, to presuppose that understanding the firm via the manner with which it gains profit defeats the inherent relations that drive the creation of firms in a specialised economy (Coase, 1937). Firm is “consists of the system of relationships which comes into existence when the direction of resources is dependent on an entrepreneur” (Coase, 1937, p. 394). This definition of a firm highlights one important point that acts as the conduit of the system of relationships of which it is consisted – an entrepreneur. This point becomes significant if firm is understood in the light of the notion that firms exists not because of some altruistic reasons but it comes into being because of the direction that is provided by the entrepreneur. Furthermore, it recognises, that its inception is affected not just by a single relation but, that it is made up of several relations which, in turn, create a system of relations with which the firm defines its existence. What does this imply? Firms, have both an internal system that is adopted as it optimises the resources of production (Penrose, 1959) and an external system that continuous to drive the competition with which the firm thrives. In the internal system of the firm, aside from the known importance of the material resources that is used for the production of the end product coupled with the issues of waste, costs, quality and just- in-time delivery of the resources and the products pertinent to it, the most important resource of the firm are its people. These are workers, non-managerial staffs and the management. The dynamic relation of the management with the resources of the firm is such that “There is a close relation between the various kinds of resources with which a firm works and the development of ideas, experience, and knowledge of its managers and entrepreneurs”(Penrose, 1959, p. 85). This view presents the supposition that at the management level, understanding the intricacies of the firm- its culture, nature, organization, history, vision and goals- and coupling it with the knowledge of its resources, transforms the firm’s capacitates into a subjective productive opportunity (Penrose, 1959). This is, of course, not discounting the important role of R & D. Acknowledging the integral role of the management in setting the direction for the firm, it reaffirms the notion that “All directives are from bottom up and all decisions are from top to bottom” (Williamson, 1996, p 148). This context puts into question the role of the workers and non-managerial staffs in the development of ideas, experience and knowledge. It brings to the fore the question of the condition wherein the workers are perceived as mere passive receivers of information and directives and given minimal chance to become involved in the development of ideas and knowledge for the firm. In fact, it has been observed that there is minimal scholarly literature discussing the role of workers and non-managerial staffs in idea formation (Li et al, 2008). This situation is currently being questioned, since it is now recognised that workers and non-managerial staffs are the ones who are directly working and carrying out the decisions made by the management (Li et al, 2008). In this regard, from this perspective, firms is perceived as directed by the entrepreneur, its systems of relations is tied up in the understanding of teh close relation between the resources of the firm and development of ideas, experiences and knowledge by the management and the recognition of the external factors that continue to affect the direction taken by the firm (Penrose, 1959; Coase, 1939; Williamson, 1996; Schumpeter, 1962). However, the contemporary nature of the firm has changed in response to the demands of the contemporary global market. Firms no longer just respond to the shareholders’ demand for increased profit, but firms have recognised the importance of responding to the demands made by the stakeholders of the organisation (Hemingway, 2002; Zolsnai, 2006). Moreover, firms started to recognise that they respond not only to the economic stimulations and transactions that are happening, but that they are integral members of the society where they are situated. Thus, redefining firms’ not just as economic actors but that they are also social actors that are capable of transforming society and becoming agents of change (Hemingway, 2002; Tencati & Zolsnai, 2009). As such, there are discussions asking firms to go over the tenets of the law as they perform their corporate social responsibilities, “a commitment to go over and above explicit legal requirements to respect the implicit social contract between business and society so that the firm’s “license to operate” goes with social responsibility to create sustainable value for all its stakeholders” (Zolsnia, 2006;3). In addition, contemporary firms now recognise the central role of human resource in attaining the goals and visions of the firms. It is not just the management, but it is recognising the fact that workers and all members of the organisation contributes to the success of the firm (Li et al, 2008) The mobilisation of all the members of the organisation toward attaining the goals of the firm is necessary if success is to be achieved (Li et al, 2008). This new appreciation of the new nature of firms, coincide with the change in the attitude of the market toward consumers – consumers are no longer treated as mere receivers of information and products but, they are deemed as central in the implementation of the marketing strategy (Mehta, 1994; 2000). The recognition that the satisfaction of consumer preferences is at the heart of all marketing and production endeavours (Hastings & McDermott, 2006) has become the ethos of contemporary market. The change in the nature of the firm, the shift in the attitude of the market, the acknowledgement of the central role human resource in achieving firm’s success, and the satisfaction of consumer preferences have become significant part in the understanding the contemporary condition of the global economic market. 4.0. THE SCENARIO Table 1. The Scenario Source: Created by the researcher Firms in contemporary period have to contend with the numerous factors that are acting together in the market. If they intend to survive in the highly competitive global market, they cannot relegate in these factors in the periphery. However, there is an imbalance (Nolan, 2005; Nolan & Yeung, 2001a; Porter 1990a; Subramanian & Wei, 2006). By 1990, there has been an explosive movement in the global market – mergers and acquisitions (Nolan, 2005). This movement has resulted in the concentration of large conglomerates in the hands of the few so much so that Just two firms make large (over 100 seats) commercial aircraft. In pharmaceuticals, the top ten firms account for 46 percent of world sales. In oil and petrochemicals, a group of just three ‘super majors’ has emerged, occupying three of the top seven slots in the Fortune 500 list of the world’s largest companies ranked by sales revenue. In power equipment, the top three firms account for almost nine-tenths of the world total of gas turbines installed in the 1990s. In the auto sector, the top six auto firms account for over 75 percent of the global market. In IT hardware, the top three firms account for 71percent of the global supply of servers, for two-fifths of the global sales of PCs and three-fifths of global sales of mobile phones. In FMCGs, just two firms account for over 80 percent of global sales of carbonated soft drinks; two firms account for around 70 percent of global sales of camera film; three firms account for almost one half of global sales of spirits; and four firms account for 60 percent of global tobacco sales. SOURCE: Nolan, 2005, p. 10 In the face reality, coupled with the conditions set by globalisation and other factors of change, how can large firms of developing countries catch up with the transnational corporations and multinational corporations in terms of technology, research and development, market share, organisational behaviour, institutional support, and political and social conditions. 5.0. CHINA AND SANJOU: THE PATH OF REFORM In the past three decades since China has opened her doors to international trade, her economic growth is considered as ‘miraculous’(Sachs & Woo, 1993). It has astounded the world and its resilience has been manifested during the global recession, China’s economy continues to experience growth. it is important to note that it is deemed as astounding and miraculous since China since opening her door to international trade has remarkably increase the number of middle class and has consistently reduced the number of her people who are living under the poverty line (Soong & Cui, 2006; Nolan, 2005). Although, it’s undeniable that is marked number of her people who are suffering from poverty but, the government is addressing the issue. Since, it is primarily the reason why China has opened her door to international trade – to free her people from the slavery of poverty. Prior to China’s entrance into the world trade, China practised the policy of self-reliance and self-sufficiency in all facets of China’s economic life (Fan, 1995). However, recognising the failure of this policy as it reduced a large number of Chinese in abject poverty and starvation, the government slowly China’s isolationist policy and started implementing the open door policy which marked China’s entrance into international trade (Fan, 1995). China’s move was considered as crucial not only for the world but for China herself since abandoning the isolationist policy and accepting the open door policy entails concurrence with liberalism and its market economy. As such, China’s open door policy entails three shifts. First, in the open door policy, China has accepted free market – free trade. This means that China is now willing to enter in bi/multilateral trade agreements with other countries which, means that China will be adopting economic policies that will reduced or even totally removed tariffs (Burbridge, 1978). The second shift entails the gradual removal or relaxing of governmental control in the market economy (Killion, 2003; World Bank, 1997;1995;1993). Finally, the third shift is the combination of decentralisation and privatisation (World Bank, 1997;1995;1993). These shifts in China’s trading policy has revolutionised China and the world. It has only paved economic growth for China but, it has also opened the world to influx of products made in China (Friedman, 2005). Furthermore, China has become one of the favourite destinations of foreign investors. Table 2. China’s FDI from 1984 -2007 SOURCE: Lau & Bruton, 2008 From the table, it is clearly shown that foreign investors have consistently preferred investing in China which is a direct result of China’s open door policy. The continued increase in foreign direct investments is considered as one of the major economic drivers of China (Nolan, 2005; 2010; World Bank, 1993; Fukasaku & Lecomte, 1996; Gilbert & Wahl, ). Yao (2006) claims “The empirical results show that both exports and FDI have made a positive and significant contribution to economic growth in the Chinese regions… They suggest that economic development, exports and FDI appear to be mutually reinforcing under the open-door policy” (p. 339,340). In the midst of this fast phase growth, how is Sanjiu, one of China’s largest pharmaceutical companies faring? 5.1. SANJIU: IN FOCUS It is China’s goal to be one of the world’s pharmaceutical giants by the middle of next century (Nolan & Yeung, 2001a; 2001b). In response to the goal, China has supported R & D in pharmaceutics and has relaxed governmental control in pharmaceutical industry. Unfortunately, by 1998, no one Chinese medicine has achieved international patent (Nolan & Yeung, 2001a). What happened? Just like any other State Owned Enterprise (SOE), Sanjiu is headed by military men who are not familiar with the rudiments of the industry. However, despite this initial limitation, they are set in creating a niche in the global market. Sanjiu has been given by the government complete autonomy in the course and conduct of its business (Nolan & Yeung 2001a). They are investing heavily on R&D spending millions of ruan. Likewise, they made purchased modern of machineries and equipments that are necessary to be competitive. Moreover, they are seriously undertaking the training of their personnel so that they can meet the ‘Good Manufacturing Standards’ set by the U.S. Food and Drug Administration (FDA). In fact, the personnel are encouraged to take MBA. As such, all cadres that are involved in Sanjiu educated. In addition, they have increased the number of medical representatives working for the company. In fact, most of their representatives are doctors (Nolan & Yeung, 2001a). Furthermore, the company provides good incentives to its people (Nolan & Yeung, 2001a). However, despite these radical steps taken to turn Sanjiu into being globally competitive, its best product – Sanjiu Weitai- which is a cure for stomach ailment is considered even by its top management just an ordinary medicine (Nolan & Yeung, 2001a). Another, observable development with the company is that during the period of mergers and acquisition, it has diversified. This means that the company is no longer just involved in the pharmaceutical industry but, it has invested also in food and beverage, wine manufacturing, agriculture, tourism and hotel, real estate and construction, trading and retailing and automobiles (Nolan & Yeung 2001a). However, there are already criticisms regarding the diversification strategy that the company has undertaken, especially, that its automobile investments did not perform well. While, on the other hand, there has been little movement in addressing and further improving its core product – pharmaceutical and healthcare. 5.2. PROBLEMS OF CATCH UP IN SANJIU AND SOME POSSIBLE SOLUTIONS The following are some observations regarding Sanjiu’s problem of catch up. 1. Being in the pharmaceutical and health industry, it is essential that R&D be given sufficient funding to pursue experimentation and studies. Indeed, Sanjiu has allotted millions ruans which is equivalent to several million dollars. While, multinational companies of high-income countries are spending hundreds of millions in R&D or even billions. For, instance Pfizer had spent $1 billion in R&D. If Sanjiu intends to compete globally then they have to match up or even surpass the budget allotted by pharmaceutical companies of high- income countries. 2. Another problem with catching up is the organisational structure. TNCs and MNCs are lead by people who are trained for the position. While, on the other hand, Sanjiu is led by military men who are unfamiliar with the rudiments of the business structures of the industry. Given that they motivate people to action and encourage everybody to continue studying and acquire the necessary knowledge but still the expertise acquired through experience of years of work within the same field. This scenario creates advantage over managers who are newcomers to the field, the industry and the company. This concern is tied up with the third observation. 3. Concern pertaining political and social changes. Although China has already opened her doors to free trade, the role of the government is still very much perceptible. Nolan & Yeung (2001a) has noted that what happened with Sanjiu is that it has tried to address questions of expansion and retention at the same time. This is because the business life of the firm is still very much tied up with the political and social conditions of the society. Since in the end, it is really the government who is taking the reign, although it is masked by the rhetoric of liberalism. This claim is maintained base on the supposition that the top management is made up of military men whose skills no longer much their current position. This kind of move is seldom observed in TNCs and MNCs. In other words, it highlights the reality of bureaucrats in business. 4. It misplaces the firm. The firm is supposed to be directed by the visions of the entrepreneur. In this regard, Sanjiu though given autonomy in the conduct of its business, it is still controlled by the national team. Again, this is manifested by the hierarchy of the organisation. The researcher is not discounting the fact that the firm is peopled by experts in the field. However, what is being questioned is the fact that at the centre of the organisation is people that are appointed by the government. Thus, the national government is implicitly in control in such an important enterprise (Nolan, 2005). This kind of situation is not something that can be observed in the top 20 pharmaceutical firms in the world. 5. A more intensive technology is necessary for Sanjiu to be one of the biggest pharmaceutical companies in the world. This is the way to go in the industry. Heavy investments should be made in medical technology, and computer and information technology. Investments in this aspect of the industry are already being made and are sustained by firms in high-income countries. Thus, to catch up, Sanjiu should also invest on technology. 6. Continuous training and education of all personnel should be encouraged and supported. Experts are already working in the firm. However, it is necessary that the members of the firm be abreast with the current trends and developments in the field. This is valuable in face of the truism that knowledge and information in contemporary firms are essential and considered as primary assets. As such, continuous education and training of the personnel should be given priority. 7. Another concern that Sanjiu has to deal with is the problem of corruption. Although the government is doing much to curve and eradicate corruption, the government has not yet won the battle. In effect, concern with graft and corruption is a common observable concern among developing countries. This situation not only undermines investors trust but it also dissuades the local investors and the people from fully trusting the government. 8. Company diversification is common in the global revolution. However, if Sanjiu is dead set in fulfilling its goals in becoming one of the leading pharmaceutical companies in the world, management should provide it continued and sustained support even if it is diversifying. Globalisation and other factors for change creates the backdrop with which the scenario of large firms from developing countries are dealing with the problem of catching up with the companies in developed countries. In case of Sanjiu, it is not only the case of adjusting to the demands of liberalisation, decentralisation and privatisation but it is also adjusting on the entire chain of changes in China’s society as it opens its doors to free trade. As such, Sanjiu is facing the tension globalisation while at the same time trying to break free from long entrench institutional structures that hampers growth. 6.0. CONCLUSION Large firms from developing countries confronted with the problem of catching up with firms coming from developed countries are facing a humongous challenge but a surmountable one. It requires the coordination of all interested parties – the Sanjiu, cadres in Sanjiu, the government, the stakeholders, consumers and the shareholders. It is no easy task as the firm finds itself in a transition period. However, it does not mean that it is something that cannot be addressed. Sanjiu has undertaken the first necessary steps – investing in R&D, investing medical, computer and information technology, education and training for all personnel, incentives and redefinition of the organisational behaviour and culture. However, more is to be done for Sanjiu and other large firms in bridging the gap. REFERENCES: Balakrishnan,P. 2003. “Globalisation, power and justice”, Economic and Political Weekly, 3166 – 3170. 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