Globalization, The Eclectic Paradigm and WTO Governance Likelihood - Research Paper Example

Globalisation, the eclectic paradigm and WTO governance likelihood BY YOU YOUR SCHOOL INFO HERE HERE Question Globalisation is a system of world-wide integration that stems from trade and exchanges of ideas, products, culture and worldviews (Albrow and King 1990). Globalisation is the underpinning rationale by which social relationships begin to witness borderless characteristics so that regional and international cultures experience lifestyle as a single, distanceless space. Through new developments in technology, transportation, and economic infrastructure, the world becomes more inter-dependent. According to Robertson (1992) globalisation represents a compression of the entire globe and an escalation of a consciousness that sees the world as a holistic unit rather than divided by geographical boundaries. One of the primary aspects of how globalisation impacts international business is the inter-dependency of international trade. Whereby historically economies were limited to geographical boundaries, having economic systems wholly contained within a national infrastructure, today with the presence of global product trade, it is altering the global economy. For instance, this can be witnessed in China, a country that maintained a very immature capital market until the 1990s as a result of the historical command economy that was centrally controlled by Chinese government. As China’s economy began to expand as a result of government deregulation, GDP and exportation became a favourable activity to ensure rapid economic growth. As a result, in order to become competitive with the rest of the developed world, it was necessary for businesses (once dominated by government) to adopt capitalistic and neoliberal ideologies which allows for capital assets and production systems to be wholly owned and managed by private business leaders (Degen 2008). As a result of this change toward capitalism in a previously Communist nation, it became more inviting for foreign businesses to establish joint ventures and strategic alliances with growing Chinese companies to gain a foothold for market entry. Government in China no longer owned majority equity stakes in businesses which ultimately led to opening new competitive opportunities for smaller firms that could not previously compete with government-controlled business group conglomerates. As a result, Western management philosophy (as one relevant example) became entrenched in Chinese businesses with an emphasis on human capital development and organisational culture development rather than operating under tightly-controlled and centralised hierarchies of authority. Adopting a more HR-focused management ideology and other Western values radically changed the competitive advantages of Chinese businesses and changed the attitudes and beliefs of Chinese employees. Hence, a cultural transformation in a business context occurred that would not have existed without global trade and foreign business partnerships that serviced to remove barriers to export and import activities. Furthermore, the Chinese securities market was significantly under-developed in 1990. As a result of growing joint ventures and alliances with foreign partners, it was advantageous to begin selling common stock shares to bring these businesses more capital and make them viable to domestic and international investors. By 2008, there were over 540 companies listed on the Shenzhen Stock Exchange and maintained a market value of one trillion RMB (Liang and Useem 2009). The neoliberal perspective that demands less government regulation and control over businesses, as well as supporting capitalistic securities systems, created a new foundation for economic strength in China which would have been stifled without the economic, cultural and managerial influence that is provided by globalisation. From a specifically economic perspective, globalisation has also changed monetary policy in many nations that now have trade relationships with international partners. The country, once isolated to production of coffee and rail transport systems, now sustains growing international influence as a producer of industrial goods, consumer products and commodities. As Brazil’s economy improved and the infrastructure began to change distribution capacity, foreign businesses found this to be an ideal market for MNEs to expand their international presence and improve revenues. Today, as a result of market entry by foreign businesses, 67 percent of the nation’s total GDP is attributed to the service sector, inclusive of restaurants, hospitality and health care in order to sustain a new economy that adopted ideologies related to consumerism and neoliberalism. The influence of foreign businesses in Brazil and a new enhancement of social welfare as a result of expanding distribution capacity and foreign product introduction radically changed the market viability of Brazil and enhanced economic growth. Additionally, using Brazil as the relevant example, the country experienced substantial hyperinflation as a result of poor government-imposed economic policy and lack of government foresight to improve international trade in the 1960s and 70s. From 1990 to 1997, before becoming highly influential as a global trade opportunity, the country’s inflation levels were consuming GDP by a margin of nearly 40 percent (Selva 2010). As a result, credit card companies started charging consumers 25 percent interest, tariff increases in electricity and telephone rose by a staggering 17 percent and water prices rose 19 percent in 2003 (Business News Americas 2004). The government, unable to control this hyperinflation, began to focus on building a stable securities market modelled against North American neoliberalism. Based on regression analyses, having a healthy and well-structured stock market is highly beneficial for a country’s economic power (Budden, Cope, Hsing and Zee 2010). Additionally, the country’s president now works with the nation’s Central Bank to establish a monetary policy that is aligned with Western models. The Central Bank changed the crawling peg strategy which was influential in enticing hyperinflation and now has established fixed rate policies as a means of stimulating healthier trade and inviting foreign direct investment. The United States, a substantially influential trade partner with Brazil, maintained strong contentions related to tariffs on agricultural trade and differences in currency exchange rates stemming from poor fiscal policy (Klom 2003). Therefore, socio-political and business relationships with foreign trade partners influenced sweeping reforms to fiscal policy and emphasis on establishing a more stable and expansive securities market in Brazil. Without the influence of North American (and other) trade partners, the country would likely still be utilising the crawling peg strategy which aligns a nation’s currency to a basket of different foreign currencies (Startz 2005). Hence, the entire economic system in Brazil was transformed as a result of globalisation and exposure to more viable and efficient economic systems utilised in dominant developed nations. International businesses are also influenced by globalisation in terms of culture. As an outcome of significant foreign investment, many MNEs maintain ethnically diverse labour forces that consist of ethnic and cultural backgrounds with very disparate values, attitudes and beliefs. For instance, many East Asian cultures are collectivist, in which there are substantially-strong loyalties to in-group members and where reputation (loss of face) is a very distasteful situation (Cheung, et al. 2008). In many Western nations, employees and managers of businesses are individualistic and more concerned about gaining recognition for their individual accomplishments with much less group loyalty and consideration. As a result of globalisation, MNEs with diverse employee populations had to radically alter human resources policies and change leadership philosophies to accommodate the needs of heterogeneous group members. For instance, Pelled (1997) found that conflict occurred regularly in work teams that consisted of ethnically diverse populations. Zerbinos and Clanton (1993) discovered that ethnic minorities often believed that their career advancement opportunities were hampered as a product of discriminatory behaviours in the workplace. Hence, business leaders in MNEs began to address these conflicts in order to build a cohesive and dedicated organisational culture that could work collaboratively together in order to bring the business competitive advantages. Today, companies have substantial diversity policies and provide training to ensure that cultural differences are negated from team-working models and establish a non-discriminatory and favourable social environment within an organisational context. Without the presence and influence of globalisation, many organisational stereotypes and prejudices about members of different ethnic groups would still exist in the conglomerate. As a result of globalisation’s influence, companies with diverse workforces now find substantial competitive advantage through development of a singular internal culture that works collaboratively without considerable culture-related conflicts. Finally, the international business environment is impacted at the social level. Large multi-national companies, such as Coca-Cola, have become icons in not only the country of origin, but in China, the United Kingdom and many other nations. Even though the intention of the company, when entering a new market, is to boost revenues and build demand by consumers, the ultimate outcome is a convergence of cultures that would not have occurred without globalisation. Chinese consumers now have Coca-Cola engrained in their culture, which can be witnessed on transport vehicles, advertising in multiple retail locations, and in popular culture through the efforts of product placement in marketing by the company. Globalisation has made Coca-Cola part of the lifestyle and cultural values of many markets where the company has now expanded. The market opportunities available for Coca-Cola (and other companies as well) provided an opportunity to improve sales of the product, but have provided social consequences as a result of this activity that has unified consumer cultures that were once very disparate. Question 2 Tesco, the second largest retailer behind Wal-Mart, was expected to pose a significant competitive challenge to existing supermarket retailers in the United States. There were substantial motivating factors for foreign direct investment in the country as opposed to licensing under the OLI Framework (the eclectic paradigm). Primarily, Tesco maintained significant ownership advantages. The company maintained a global reputation and brand identity that is recognised and respected by many different foreign nations. Tesco maintained substantial buying power in many foreign markets and a well-developed supply chain that provided cost leadership advantages for the firm. Furthermore, the company had built a cohesive and well-trained leadership structure that promoted entrepreneurial skills and sustained substantial knowledge of marketing, distribution, procurement and cost controls. Hence, ownership advantages were substantial and the firm’s competitive advantages could have been eroded through licensing agreements by minimising managerial competency, reducing marketing effectiveness, and causing challenges to maintaining its buyer power in the market. Tesco also recognised a location advantage which should have generated substantially larger profits in the U.S. market. Firstly, the United States is the second largest economy in the world with a GDP of $16.8 trillion dollars as of 2013 (BEA 2014). As a result of a booming economy, 154 million American citizens were actively employed and the country maintained a median household income of $52,029 (Semega 2009). This represented an ideal market to move production to the United States through foreign direct investment. Labour inputs were advantageous for FDI as well in the United States due to the extensive training and education of employed professionals which would lower the unit costs of producing products and distributing these goods in the foreign market. Secondly, it would have been more advantageous for Tesco to utilise the vast natural resources in the United States through FDI than a licensing agreement or other market entry modes. The costs and labour involved with extracting natural resources in the United States maintained a cost advantage for Tesco. The United States has a well-developed infrastructure for distribution, a vast agricultural network, and many well-respected, branded products that have considerable consumer loyalty and preference in the United States over that of other nations. Consumerism and branding in marketing have given many products that are sold on Tesco’s shelves a positive identity which allows for premium pricing structures on the goods and enhanced word-of-mouth. Since Tesco maintained the ownership advantage of a well-trained and competent management team in areas of sales and marketing, it was far more motivating to engage in FDI rather than a licensing agreement to ensure that organisational management was capable of taking advantage of these marketing related opportunities. By allowing a licensed agent to handle establishing buyer power in the supply chain or engaging top quality product brands would likely not have been as effective in sustaining Tesco’s competitive advantages. Dunning and Narula (1995) and Almeida (1996) have found that motivations for FDI under the eclectic paradigm include knowledge assets, something sustained by Tesco’s proficient management teams and not necessarily shared by a licensed agent or other potential partners (e.g. joint venture) with market entry into this country. Yet another factor which motivated FDI rather than other market entry strategies was that government favours companies that seek local production. Even though Tesco maintained a strong supply chain in Europe and Asia, it would not have been cost effective to utilise an import strategy due to the added tariff levels imposed by the U.S. to drive out foreign market flooding that would erode the competitiveness and economic security of local agricultural and other foods producers. By entering the U.S. market and establishing its wholly-owned warehousing facilities and other assets, the country could take advantage of local production opportunities, thus avoiding tariff charges and further enhancing the company’s global supply chain. Tesco also maintained internalisation advantages which would not have been supported efficiently through joint venture or licensing agreements. Tesco is able to organise creation of all of its core competencies, especially related to management and service production capabilities, which gives the firm a further competitive advantage over other firms that could have theoretically been market entry partners for the firm. This is considered a transaction attribute. If Tesco were to allow its ownership advantages to extend outside of the confines of the company, these advantages become private goods. Tesco believed it could sustain its internalisation advantages through the exploitation of its ownership advantages (i.e. management competency and brand identity) rather than allowing joint venture or licensing partners to gain advantages by utilising these attributes already a part of Tesco. Tesco considered that its ownership advantages could minimise many different transaction costs by seeking FDI, allowing the company to retain its potent proprietary knowledge and inter-firm capabilities and talents. The entrepreneurial know-how that existed at the cultural and managerial level at Tesco had established a model whereby collective contributions to sustaining profit, controlling costs, and enhancing marketing efficiency created rewards and motivation for employees and managers which built more organisational commitment. As a result, joint ventures or licensing would substantially raise the transaction costs of human resources, marketing, training and many other dimensions of business operations that were already efficient and capable of being benchmarked by competitors. Proprietary advantages at the internal level could have been jeopardised by seeking an alternative market entry strategy. The challenges of allowing a secondary agent to control some of Tesco’s advantages are substantial. This can be illustrated by Tesco’s mounting losses in the United States which emerged as a product of merging two different vendors to supply the consumer market (Geoghegan 2011). Tesco already maintained internalised experience and knowledge as it pertains to building an efficient supply network and alliances with vendors that contribute substantially to Tesco’s revenues. In the United States, when the company attempted to rely on the competency and cost controls of suppliers, rather than producing using internalised talent and experience, it resulted in financial losses for the firm. Hence, internalised advantages are substantially important for a firm which makes it more motivational to seek FDI rather than joint ventures or other market entry strategies. Furthermore, upon entering the US market, the company determined that the Fresh & Easy concept would be advantageous to busy and high resource consumers. Fresh & Easy carried a plethora of ready-to-eat meals. Initially, upon market entry, the company experienced a loss of $1.8 billion as consumers were not interested in the concept despite its convenience focus (Kirka 2013). However, as a result of internalisation advantages and ownership advantages, Tesco was able to respond to these problems and radically adjust market focus and reposition the business in order to make the brand appear more relevant to US consumers. However, Tesco has determined that it should sell Fresh & Easy to another buyer and recreate a new strategy for sustaining profitability in what turned out to be a very challenging foreign market for the firm. This is just an example of the internalised talents, executive-level experience and knowledge, and the marketing competencies that were pre-existing within Tesco that served as the motivation for FDI as market entry strategy. The company knew that its knowledge assets would equip the firm to be responsive in the face of challenges which could not be as effectively dealt with by joint venture or licensed partners. Tesco has had difficult experiences in new foreign markets and been able to adapt or reposition the company to be more competitive and relevant in the minds of its important target consumers. This experience serves as proprietary knowledge that gives the firm more rapid responses to challenging market conditions. In a joint venture strategy, Tesco would have had to not only share profits, but share knowledge and decision-making, which might have made the Fresh & Easy concept even more financially destructive and limit the capability of the business to create new and innovative strategies to regain its market share. Tesco knew of these attributes prior to entering the US market, thus motivating FDI as the most viable strategy. Overall, the capability of the firm to engage in foreign production, rather than granting licenses to do so, was better supported by Tesco’s organisational structure and culture than would have been achievable by any foreign partner. Clearly, producing in the United States was far less laborious and costly due to the existing resources available in the country which are not as beneficial in other countries where procurement often involves import tariffs and other tax burdens. The government was supportive of production from the foreign business within the boundaries of the United States and the level of executive competency of Tesco could simply not be matched with a joint venture partner. In nearly every degree, the eclectic paradigm explains the motivations for why Tesco determined that foreign direct investment would be most viable for the firm and why the company decided to reject any other entry mode that shares authority or decision-making processes. Question 3 Though there might be desirability by some entities for the World Trade Organization to become a more influential force in governing competition regulation, there is little likelihood that this will occur in the near future. In the 1990s, the European Commission determined that all global trade partners would benefit from a compromised and established competition agreement. The World Trade Organization looked to be the best mechanism for controlling this due to the existing framework for dispute resolution and its expansive trade-oriented commitments (Sweeney 2009). There was considerable support for this development by the European Union, Canada and Japan. However, the United States was staunchly opposed to a multilateral solution that would establish an international law on competition. The U.S., a strongly individualist nation, believed that WTO regulation in this capacity would be interventionist and that such a law would reduce the authority of current anti-dumping laws established already by the World Trade Organization (Sweeney). The U.S. is one of the most influential and potent free trade participants in the world, with many domestic products produced in this U.S. distributed across the world. This has enhanced consumer lifestyles in developed and developing nations and provided nations with considerable financial advantages. Hence, when the United States illustrates an opposition stance for multilateral agreements being outlined and enforced by the WTO, countries would be limiting their advantages through trade partnerships by defying U.S. influence in this capacity. The United States wanted to have solutions for competition regulation that were non-binding and existing directly between joint trade partners (a bilateral solution for regulation). Every attempt, therefore, to come up with an appropriate global competition regulation agreement was impossible and met with failure. The problem is that the neoliberalist ideology suggests that businesses should have increased autonomy and be free of governmentally-imposed regulations. This ideology is spreading across much of the developed world in an effort to produce greater economic efficiency and enhance competitiveness within a geographical region. Hence, there are many nations, not just the United States, which believe a multilateral hard law for regulating global competition is subversive for the neoliberalist agenda. It imposes a new regulatory force into business activities and national trade agreements which is in defiance of the capitalistic model and neoliberal values and attitudes. Furthermore, in order to effectively regulate global competition, the World Trade Organization would have to consider a plethora of issues, which would conflict the process of being able to tangibly control competitive activities. Some of these include export cartels, international firm conduct, global mergers, and import conduct. The World Trade Organization is a highly centralised organisation which does not have the capacity to be a regulating force in multiple sectors and industries. Hence, enforcement of an established competition law ratified by member nations would be quite difficult. One of the main problems with establishing this type of agreement is the existence of cartels. Under current legislation developed by agreeing member nations at the WTO, there is a significant lack of enforcement capability as it pertains to controlling cartels that serve to fix prices or conduct other questionable non-competitive activities. Most member nations believe that cartels should be absolutely prohibited in the global trade process, but developing nations do not have the capacity in all situations to prosecute anti-competitive cartel activities or discourage the formation of them. Therefore, again, ensuring that the WTO is able to enforce the established law which regulates competitive activity is thorny at best. Furthermore, not all nations maintain the same anti-competition regulations which outline what is acceptable and unacceptable in a competitive context. For instance, the United States’ antitrust laws prevent companies from entering into collusive agreements where price gouging occurs as a means of driving out competition. In one particular lawsuit, the U.S. filed a suit against Apple, Harper Collins and many other businesses in the book industry, alleging that they entered such an agreement to price many different e-books much lower than their main competition, Amazon.com, in order to raise profitability opportunities for those who entered the agreement. Amazon, as a first-to-market pioneer in e-books, had built a solid brand reputation and was able to therefore charge prices of $9.99. Those competitors recognised as defendants in the suit learned they could control sales of e-books by offering products at substantially lower prices. In other nations, however, collusion occurs, especially prevalent in Chinese or Japanese business groups, where pricing is considered to be a relevant and accepted competitive practice. As a result, it is unlikely that the World Trade Organization would be able to achieve consensus about what regulations would satisfy the individual values and legalities of disparate nations. Yet another problem that would likely conflict development of such a regulation is the basis of international mergers. In some situations, local authorities approve a merger on the condition that the newly-formed business entity sells a variety of its important assets that could pose a challenge to competition growth (Sweeney). For some merged companies, such a demand would be impossible and seriously jeopardise its liquidity or other economic circumstances. An established WTO-enforced competition regulation could not provide local solutions, thus making it nearly impossible to enforce just a single remedy when there are multiple alternatives other then divestiture of assets that could be viable for sustaining local or international competition laws. Creating a singular competition regulation that would be enforced by the WTO could restrict the ability of companies to gain advantages through an important merger as there is a plethora of alternative solutions that could also ensure that mergers do not impose anti-competitive consequences. Japan, a country that was non-victorious in World War II, had competition laws imposed on it in the 1940s by the United States. Prior to this imposition, Japan maintained a regulatory environment that was substantially contrary to that of the Western world. Japan, in an effort to rebuild its economic capacity and strength after WWII was more liberal in competitive activity and it was advantageous to be non-interventionist in certain questionable competitive scenarios. Japan, in an effort to maintain this laissez-faire style of regulation, was consistently coerced to develop more industry-oriented policies that were aligned with antitrust laws in the United States. As a result, animosities were developed and Japanese business leaders believed that this new restrictive philosophy of regulation served as a hindrance to economic and industrial development during this period. The relevancy of the Japanese example is that many nations do not favour the interventionist power of other entities in an effort to regulate competitive behaviours since it has historical implications on economic growth and industrial development. Many nations want to have autonomy when it comes to regulating competition, especially in non-democratic nations where authority in such regulation is not shared with citizens or business management. Having a singular code of regulation established by the WTO would not be congruent with the self-governing and sovereign ideologies of certain nations which would likely lead to considerable challenge of such laws and direct opposition. Having established that the U.S. was opposed to the construction of such an agreement, it is likely that this oppositional ideology would spread to other nations that want sovereignty in regulatory decision-making, hence creating even more failures in the future when attempting to draw up a unified agreement for competition regulation law establishment. Conclusion As illustrated, globalisation maintains a plethora of different influences on international business that are inclusive of socio-cultural impacts, economic reforms, and general business management philosophies and policies. The influence of foreign business activities, along with joint ventures and strategic alliances, serve to change the internal organisational design of foreign businesses in an effort to adopt similar models which are known to bring foreign businesses substantial competitive advantages. Society and culture are changed through exposure to foreign socio-cultural characteristics and ideologies, often aligning international values to maintain a singular worldview. Furthermore, the eclectic paradigm described the motivations for choosing foreign direct investment as a market entry strategy which include ownership advantages, internalisation advantages, and location advantages. The case study of Tesco illustrates how a multi-national organisation rejects alternative market entry strategies which share control and decision-making as it could erode the existing competitive advantages currently sustained by the company seeking new market opportunities. Tesco would have been severely jeopardising the many attributes that would have made direct foreign production efficient and profitable by externalising its internal talents, knowledge and experiences through joint ventures or licensing agreements. Finally, there seems to be a mixed set of international beliefs regarding whether it would be viable or appropriate to have the World Trade Organization attempt to regulate competition. Clearly, the influential and beneficial United States was the main opponent of the construction of such a law and wanted more bilateral autonomy in determining competitive regulation without the interventionist influence of the WTO. This could likely be a product of the experience of the U.S. that multilateral agreements are fixed and rigid and do not have the capability to adjust to changing market conditions. In any event, it is highly unlikely that the WTO will ever be an enforcer for competition regulation in a global environment where local solutions and laws have serviced the needs and market-related ideologies of many different foreign nations. References Albrow, M. and King, E. (1990). Globalisation, knowledge and society. London: Sage. Almeida, P. (1996). Knowledge sourcing by foreign multinationals: patent citation analysis in the US semiconductor industry, Strategic Management Journal, 17(Winter), pp.155-165. BEA. (2014). Gross domestic product: fourth quarter and annual 2013, Bureau of Economic Analysis – US Department of Commerce. [online] Available at: http://bea.gov/newsreleases/national/gdp/2014/pdf/gdp4q13_adv.pdf (accessed 1 April 2014). Budden, M.C.,Cope, R.F., Hsing, Y. and Zee, S.M.L. (2010). 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