Globalization
of business existed as far back as 3000 B.C.
as trade between the ancient civilizations of
Egypt, Messopotamia, Indus Valley and Phoenecia,
with gold jewellery, spices and silk being the
earliest commodities traded. The explorations
and conquests of Asia by European Explorers
and by Generals like Alexander the Great, provided
the acceleration to trade between Asia and Europe
with Constantinople, now Istanbul, being the
focal point of trade between the East and West.
There
was a decline in trade in the early stages of
the advent of the church, which did not encourage
mercantilism. However, the formation of national
states, the rapid socio-economic cultural changes
in Western Europe, the Protestant Reformation
and the colonization by Spain, Portugal, England
and France, accelerated trade between the Colonies
and the Conquerors.
The
industrial revolution in the 18th and 19th centuries
gave a further impetus to the marketing of international
products. The 20th Century has seen a rapid
development in international business, both
trade and industry oriented as a result of advancements
in communications technology, the polarization
of the world into groups during the two world
wards, and an increased quest to higher standards
of living among the liberated colonies. This
has resulted in the formation of various international
agencies and treaties for regulation and control
of international trade.
The
classical theories of comparative cost
advantage on the basis of factor endowment
are not adequate to explain the reasons for
trade as these are qualified by factors such
as exchange rates, transportation costs, proximity
amongst nations, product life cycle and most
importantly, development in technology.
Basis
of Globalization
The
basic objectives of national governments
are :
-
Economic
growth : Reasonably full employment for the
population
-
Price stability : Balance of payments equilibrium
-
Reasonably equitable distribution of income.
-
Control over the pattern of economic development.
-
Maintenance of ecological balance; Ensuring
nations sovereignty.
At
some point in time both from the macro (or national)
point of view, and from the micro (or the firm's)
point of view it makes economic sense to make
direct foreign investments and set up global
ventures.
Why
should nations globalise ?
Developing
nations have poor levels of technology, limited
access to markets and no optimization of resources
and this hampers potential human enterprise
that may exist.
The
benefits of a nation's globalization are :
-
Access
to Capital resources; Transfer of technology
-
Imports substitution; Export earnings
-
Employment generation; Transfer of skills
-
Utilization of local resources; Access to
Global markets
Thus
by globalizing their economies, nations take
advantage of already existing factor endowments
and raise the levels of their economies to a
higher level of development, growth and per
capital income generation.
Governments
often perceive unfair practices by global
ventures, some of these are :
-
Restriction
/ allocation of markets; Extraction of excessive
profits;
-
Entering a market by 'taking over'
-
Diverting local savings from productive investment
-
Restricting access to modern technology
-
Staffing key technical and managerial positions
with expatriates
-
Failing in the way of training and developing
local personnel
-
Showing scant respect for social customs;
Contributing to price inflation
-
Dominating key industrial sector; Manipulating
local laws
-
Dumping unwanted technology; Over-invoicing
equipment
-
Spare parts; Manipulating foreign policy
In
order to overcome some of these perceived unfair
practices, nations might resort to regulations
to control global ventures, for instance :
-
Foreign forms share ownership with nation's
-
Specify that proportions of key positions
to be manned by nationals
-
Encourage global ventures in export oriented
industries
-
Place ceilings on royalties and fees
-
Renegotiate concessions contracts
-
Increase local content requirements
-
Place ceilings on repatriation of profits
Governments
Role in Enhancing Effectiveness of Economic
Development
Recent
trends around the world have shown that the
Government's role of protector and regulator
must give way to that of a catalyst in the process
of economic development of a nation. A role
that contributes to creating the right environment
for the economic development largely created
by the efforts of people themselves. Thus, many
governments have embarked upon this role with
a view to accelerating the economic development
of their nations. The role governments should
play and the environment they should create
may be enumerated as follows :
-
Countries
to be competitive should have good infrastructure
-
Should have no/low bureaucratic impediments
-
Should have free Foreign Exchange Flows
-
Should have low levels of taxation
-
Should have a democratic system with political
stability and no violet strife
-
Should have a speedy, honest and efficient
judicial system.
-
Should have a high level of literacy an good
level of management and technical education.
-
Should have low wage rates
-
Should invest in R & D and encourage firms
to do likewise, preferably participating in
Joint R & D investment with firms.
-
Should encourage savings to minimize government
deficits.
-
Should encourage competitiveness as protectionism
helps only in short term but competitiveness
in the long term
-
Should provide a strong information base to
be used by business
-
Should make global standards of quality and
competitiveness as the basis of comparison
-
Should capitalize and build up on basic factor
endowments to get globally competitive
-
Should not overplay its role
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The
Firm's Objective
International
firms are motivated to globalize business
in order to fulfill the following objectives
:
-
To
obtain a satisfactory return on invested
capital
-
To rationalize production, marketing, financing
research
-
To maintain technological and other proprietary
advantages
-
To keep financial risks at tolerable limits
and spread risks
-
To earn foreign exchange;
-
To keep ahead of their competitors
In
order to achieve these objectives, international
firms constantly seek new sources of raw materials
and new markets to spread their manufacturing
activities - Global Ventures help them to
locate their plans nearer to their markets,
or sources of raw materials, or both.
Stages
of Globalization
Globalization
of business receives impetus when:
-
Exchange
rate fluctuations impinge upon companies'
ability to control costs and these can be
offset by global locations with multiple
currency activities
-
With improved communications and travel
facilities, firms can operate effectively
- globally
-
Firms can take advantage of sourcing raw
materials and components worldwide to their
advantage
-
Depending on factor costs, firms can take
advantage of locating where the input factor
costs are lowest and similarly be located
in markets that are closer to places of
manufacture to save on transportation costs.
Firms
begin globalising by exporting from home countries,
followed by worldwide marketing networks.
This leads to starting up whole marketing
and manufacturing facilities in other countries
and eventually developing complete business
systems including R & D in different locations
around the world, taking advantage of local
factor endowments and finally creating a system
of uniform values for the whole company globally
while maintaining specific characteristics
and local values, i.e. being both global and
local at the same time.
The
first step in this would be to identify
global regions or groups of countries
that are target prospects for Globalization
opportunities, for instance EEC, East Block,
South East Asia, West Africa, Africa, Latin
America, North America, Middle East, etc.
Within
these regions, specific countries or smaller
country groups are identified, such as in
South East Asia - Indonesia, Malaysia, Thailand;
in the Middle East - countries of the Gulf;
in Africa - Countries of East or West Africa,
etc.
The
next step would be to carry out industrial
risk analysis of various countries using a
broad range of macro indicators, such as the
following :
-
Literacy level / trade manpower; Political
stability
-
Threat of aggression - Internal and External
-
Industrial policies of the government
-
Government intervention in business
-
Bureaucratic impediments; Geography
-
Domestic economy, its strengths and weaknesses
-
Internationalisation of economy, GDP Growth
- per capita income
-
Inflation rate, Interest rates
-
Currency
and exchange regulations; Taxation policy
-
Intellectual property protection; Legal
system
-
Science and technology; Sophistication of
market size
-
Infrastructural facilities; Business confidence
level
There
could be various methods of carrying out risk
assessment for each country.
A
good method is the Asian Business investment
risk indicator using a broad range of political
and economic factors to give an assessment
of risk potential. Scores out of 10 are allotted
to each criterion and then totaled. The higher
the score the lower the risk.
Three
of the categories are derived from simple
calculations based on hard economic data.
The first is inflation. Upto 1.99 percent,
the score remains at 10 but thereafter one
point is deducted for each band of 2 per cent.
The interest rate score is calculated in the
same way.
The
third calculated score, the economic growth
category, is worked out by starting at 0 and
adding a point for every 1 per cent of estimated
GDP growth, up to 10.
Scores
for political volatility, threat of armed
aggression, government intervention business,
bureaucratic impediments, labour strife, is
shortages and infrastructure are decided by
the panel of editors according to their assessment
of past and future trends.
Finally
there is a business confidence score based
on a survey, the index of which is divided
by 10 and rounded up to the nearest whole
number, based on a survey of various individuals
and scored for the same.
It
is important to note that statistical numbers
sometimes do not speak the whole truth. Hence
it is necessary that professionals / entrepreneurs
should make personal visits and have interactions
with the local population, the business community,
the government and diplomatic circles. This
would give a first hand authentic feel of
the business and political climate. Thus entrepreneurial
judgement in the final analysis is of utmost
importance.
Industry
Surveys to evaluate the potential
for business opportunities can be carried
out by reviewing the following areas :
A
study could be carried out of the global backdrop
of the industry on a global basis and thereafter
review the overall state of the industry of
the concerned country.
A
review of the level of technology employed,
vis-à-vis the state-of-the-art technology
globally available and the extent of local
R & D carried out and level of investment
in R & D within the country.
A
review should be carried out of the major
players in the industry and their respective
market shares to understand whether there
are monopolistic or oligopolistic situations.
This would have to be supported with a detailed
demand analysis, after taking into account
the existing capacity and the new projects
on the anvil. The rivalry of the existing
competitors and the sharpness of competitiveness
and marketing efforts would give an indication
of the nature of competitors and the demand
supply situation.
A
review would have to be carried out of the
availability of related and supporting industries
and ancillaries, their levels of sophistication
besides the geographic analysis of the industry
dispersal.
The
level of sophistication of buyers would need
to be understood based on the trends of the
consuming sector and its trends, in order
to plan for the appropriate levels of the
product in terms of sophistication without
being rendered obsolete in a short while.
Finally,
one would have to consider the threats from
substitute products or services that could
be an alternative to those being contemplated.
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