GLOBALIZATION - THE WHY AND HOW
The Times of India, April 20, 1992

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
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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