What is globalisation?
GLOBALISATION is the term used to describe the growing integration of the world’s economy. It is suggested that as globalisation takes place, national economies are becoming integrated into a single ‘global economy’ with similar characteristics. There are interrelationships throughout the world between related businesses, between competitors and between businesses and consumers. Decisions taken in one part of the world affect other parts. Businesses base decisions on what is happening in the ‘world market’ rather than national markets.
Evidence of the integration of the world’s economy can perhaps be seen in businesses that design and market their products to a world market, such as Coca-Cola. This product is sold in many countries throughout the world. Consumers in different countries recognise the product easily and have similar tastes for the product. Coca-Cola is able to market its products worldwide. It has close relationships with businesses in other countries, some of which manufacture Coca-Cola products.
Three important aspects of globalisation might be identified:
- The growing importance of international trade: Between 1980 and 1990 the volume of international trade almost doubled. In part, this can be accounted for by increases in production during the same period. However, since 1945, increases in production have been far outstripped by increases in the volume of international trade.
- The rise of the multinational business: The operation of multinational companies can be seen in many countries around the world. Familiar products and brand names appear worldwide. This is a trend which accelerated in the latter part of the twentieth century. For example, by 1995 the production of foreign branches of multinational companies generated $7,000 billion. This exceeded global exports of goods and services by 20 per cent. The operation and effects of multinationals are discussed later in this unit.
- The emergence of businesses which think globally about their strategy: Such businesses base their strategic decisions on the global market rather than national markets. For example, a business may make parts for a product in several different countries and assemble them in another because this is the most cost effective and efficient method to get the product to its consumers. They will tend to make use of their business’s competitive advantage by locating production wherever it is most efficient. This means businesses with widely spread networks of research, component production, assembly and distribution.
Factors affecting globalisation
It could be argued that certain factors have contributed to the growth of globalisation.
- Technological change has played an important role in globalising the world’s economy. More powerful computers and communications technology have allowed the easy transfer of data. The internet is beginning to revolutionise the way in which consumers purchase products.
- The cost of transportation has fallen.
- The deregulation of business: Throughout the 1980s and 1990s many businesses were privatised in countries throughout the world. The removal of restrictions on foreign businesses operating in former communist countries also increased the ability of businesses to operate globally. New markets such as power generation were opened up to foreign competition.
- The liberalisation of trade: Trade protection has been reduced due to the operation of organisations such as the WTO.
- Consumer tastes and their responses have changed: Consumers in many countries are more willing to buy foreign products.
- The growth of emerging markets and competition: New markets have opened up in countries that have seen a growth in their national income. Examples might include countries in South East Asia and the more successful former communist countries in Eastern Europe. As businesses in these countries have become more successful, they have been able to compete in Western economies.
The effects of globalisation on business
Globalisation has had many effects upon businesses throughout the world. The impact of globalisation has not been evenly spread. Some business, for example those in telecommunications, have witnessed dramatic changes. Others, such as small businesses serving niche markets in localised areas, may have been little affected by globalisation.
There is a number of effects of globalisation upon businesses. Some provide opportunities whilst others present threats:
Competition: The impact of globalisation on many larger businesses has been to dramatically increase the level of competition which they face. There is a number of reasons for
- Foreign competition has increasingly entered markets previously served mainly or exclusively by domestic businesses.
- Deregulation has meant that many businesses which previously had little or no competition are now opened up to the forces of global competition
- Globalisation has provided opportunities for new, innovative businesses to enter markets and compete with all comers including well established industry leaders. For example, Microsoft, Intel, Compaq and Dell, all relative newcomers to the computer industry, were able to compete effectively against the market leader IBM. HYPERCOMPETITION has been used to describe competition in the new global economy. This term refers to the disruption of existing markets by flexible, fast moving businesses.
Meeting consumer expectations and tastes: Competition by businesses seeking to meet customer needs in increasingly effective ways has raised customer expectations in many markets. Businesses must now meet ever greater consumer demands about quality, service and price. They must also provide the greater choice of products expected by purchasers. The global market has made predicting consumer preferences more difficult. For example, few businesses predicted the huge rise in the popularity of mobile phones or the speed with which consumers would accept the internet.
Economies of scale: Businesses able to build a global presence are likely to enjoy a larger scale of operations. This will enable them to spread their fixed costs over a larger volume of output and reduce unit output costs. A larger scale of operations also allows businesses to exercise power over suppliers and benefit from reduced costs. For example, global hotel chains such as Holiday Inn and Marriott are in a position to benefit from volume discounts from catering supply companies.
Choice of location: Businesses with a global presence can choose the most advantageous location for each of its operations. When locating its operations, a business may consider:
- Reduction of costs. For example, Nike’s decision to locate its shoe manufacturing operations in countries such as China and Vietnam was perhaps based on cost reduction factors;
- Enhancement of the business’s performance. Production and service facilities are located in parts of the world which are likely to improve factors such as product or service quality. For example, Microsoft may have taken this into account when deciding to locate its research laboratories in Cambridge.
Mergers and joint ventures: Businesses are increasingly merging or joining with others often in other countries, in order to better provide its goods or services to a global market. Both manufactures and retailers are operating on a global basis. A manufacturer, for example, may merge with another in order to make products in the country in which they will be sold.
A MULTINATIONAL company is an organisation which owns or controls production or service facilities outside the country in which it is based. This means that they do not just export their products abroad, but actually own production facilities in other countries.
These companies usually have interests in at least four countries, but there are many which operate in a huge range of countries throughout the world.
There is a number of reasons why firms become multinationals:
- To avoid protectionist policies. By actually producing within a particular country, a firm can usually avoid any tariffs or quotas which that country may impose. This is why Japanese car firms, such as Nissan, Toyota and Honda, have established themselves within EU countries in recent years.
- The globalisation of markets. National boundaries, many believe, are becoming irrelevant for firms as instant communications and high speed travel make the world seem smaller. This is sometimes referred to as the ‘global village’. Multinationals, which are global or international in outlook, are the ideal type of business organisation to take advantage of this situation.
The influence of multinationals
There is great debate as to the actual effects of multinationals. Whilst there are clear benefits of multinationals operating in a particular country, there are also a number of problems associated with them.
The balance of payments and employment: One benefit of multinationals is their ability to create jobs. This, along with the manufacturing capacity which they create, can increase the GNP of countries and add to the standard of living. As well as this, multinationals benefit the balance of payments of a country if their products are sold abroad. The setting-up of a car manufacturing plant by Toyota in Derby helps to illustrate this. Not only has this plant created jobs, but it has raised the GNP of the UK. The balance of payments has also been helped as a large proportion of the Derby plant’s cars are shipped out to other EU nations.
However, whilst multinationals can create jobs, they are also capable of causing unemployment for two reasons. First, they create competition for domestic firms. This may be beneficial, causing local firms to improve their efficiency, but it can also be a problem if it results in these firms cutting their labour force or closing down plants. Second, multinationals often shift production facilities from one country to another in order to further their own ends. The effect of this is that jobs are lost and production is either reduced or completely stopped.
In addition, multinationals can have a negative impact upon the balance of payments. This is because many of them receive huge amounts of components from their branches abroad, thus adding to the total quantity of imports.
Technology and expertise: Multinationals may introduce new technology, production processes and management styles and techniques. This has been one of the benefits to Western countries of Japanese multinationals. Techniques such as in-time stock control and management methods such as quality control circles have been successfully used by Japanese firms in foreign countries. Such techniques have also been adopted by home based firms. These raise the standards of local firms who become aware of these new developments. The process by which multinationals benefit countries in this respect is known as technology transfer. Technology transfer can be especially important to developing countries, which may lack technical expertise and know-how. However, this is not always the case. Managers and supervisors are often brought in from the multinationals’ home country, with little training being given to locally recruited staff. As a consequence locals may be employed in low skilled jobs.
Government control: Because of the size and financial power of many multinationals, there are concerns about the ability of governments to control them. For example, they may be able to avoid paying corporation tax in particular countries.
Taxation can be avoided by the use of TRANSFER PRICING. This involves declaring higher profits in those countries with lower taxation levels, thus reducing the overall tax bill. A company may charge subsidiary branches in low taxation countries low prices for components bought from overseas branches of the same firm. This means that costs in the low tax country are kept low and high profits can be declared. Similarly, subsidiary branches in high tax countries are charged high prices for components bought in from overseas branches. This means little or no profit is recorded.