Globalization and its Impact on Today's International Business - Coursework Example

? xxxxx No. 12345 (BUSINESS) GLOBALIZATION AND ITS IMPACT ON TODAY’S INTERNATIONAL BUSINESS ABC Xxxxx xxxx College Department of XXXX XXXX 10 May, 2011 (Total words: 3054) Introduction In modern era, there is no such field of life which has not been affected by the positive or negative influence of globalization. Both hypothetically and virtually, the worldwide impacts of globalization can be pragmatic in different social, cultural, political, technological, and economic fields. This paper takes a close look at the issues regarding the international business. A well researched attempt has been made to evaluate the term ‘globalization,’ its correlation with international trades and investments, domestic environments, latest technologies, and the impact on the current international business environment. It describes that world economy is taking a more global shape and discusses the main drivers of globalization by arguing that the drivers are playing a key role to set up a more firmly integrated global financial system. A substantial preference is given to two factors to underlie the implications of globalization i.e. declining barriers to the international businesses and the continuous changes in communication, information processing, and transportation modes. It also analyzes that how the international businesses are reacting to the changing environment of global economy. The paper puts some light on the concerns highlighted by rapid globalization along with its implications to particular countries as well as a short history of globalization and the growth of international marketing by multinational companies. The roles of these companies and government policies have been critically analyzed to figure out the benefits and gray areas of globalization. Further through the critical analysis, an endeavor has been made to discuss the famous questions like what the benefits of globalization are, and what are its threats, both real and perceived? What do the terms international business, international transaction, and international trade mean? What are the differences between international business and domestic business? At the end, the paper gives a brief overview about the future scenario of world business environment. Globalization Over the past thirty years or so, a universal shift has been occurring in the world economy. There was a time when national economies were isolated from one another and relatively self contained. The rationale of isolation included barriers to cross-border trade and investment, i.e. due to distance, time zone, environment and cultures, natural differences in languages and political regulations, and the business systems. Today, the world has been observing a totally different scenario because geographical distances are reducing due to tremendous development in telecommunications and transportation technologies. Beside this, the global environment and culture have turned into almost same fashion while national economies are merging into an integrated as well as independent global economic system. All these changes and developments have decreased the barriers to cross-border trade and investments. The process of these changes in global economy is generally known as globalization (Panic, 2003). Impact on International Business: A General Overview Impact of globalization can be observed at a global scale in numbers of different fields including economic, social, political, cultural, and technological aspects of life. It has affected the human life in different angles of their individual and collective norms. In the cultural context, globalization has impacts on thoughts, theories, idealism, consumer behavior, and practices of human race (Grossman & Krueger, 1995). In the perspective of international business, its impacts range from manufacturing, production, promotion, consumption, commercial exchange, and distribution. One of the major impacts of globalization on international business is that it forced the world to establish certain institutions which have global level influence on the world economy. Over the past 50 years, several important global institutions have been established, such as the General Agreement on Tariffs and Trade (GATT), the World Trade Organization (WTO); the International Monetary Fund (IMF), the World Bank; and the United Nations (UN). The major roles of these institutions are to manage, regulate, and police the global marketplace, and to promote the establishment of multinational treaties to govern the global business systems. Today volumes of merchandise, services, and investments have been crossing the borders across the world and almost more than $4 trillion foreign exchange transactions are made on a daily basis. In 2009, almost $12 trillion of goods and $3.3 trillion of services were vended at a cross-border level (Colvin, 2004, and Pollock, 2003). The World Trade Organization and leading economic powers of the world are continuously inclining towards the international trade and investment. Many organizations and companies have made their materials as symbols and popular in a variety of cultures, e.g. Coca Cola, Sony Play-Stations, Starbucks, Nokia cell phones, Disney films, Apple iPods and iPhones, and IKEA stores. The world economic system has become integrated. Any financial crisis in United States can affect a large number of countries at the global scale, e.g. the global recession in 2008 and 2009. In 2009, the United States had the highest level of outputs with a GDP of $14.4 trillion while its per capita GDP was $46,900. United States produces about 25 percent of the global GDP (U.S. Central Intelligence Agency, World Factbook). However, beside these, it is also a fact that there are vigorous and vocal groups who protest against globalization and sometimes their protests turn violent. In terms of effectiveness, globalization has produced lot of prospects. The organizations have enhanced their earnings either by promoting and selling their goods and services across the globe. Companies are also reducing the input costs by working in those countries where manufacturing equipment and labor are inexpensive. The political and economic situations of 1980s also favored the businesses to cross the cultural and geographic borders. After the fall of communalism in late 80s, the nations started to formulate their economic policies with respect to international trade and free markets. Legal, administrative, and regulatory problems in the foreign investments decreased. There were lots of nations which transformed their economies, privatized their projects, deregulated the markets, and welcomed the foreign businesses investments. This really helped the businesses to grow internationally in both advanced and developing nations. Along with effectiveness, globalization has also created lots of threats to the domestic businesses and markets. Though international business is generally considered as an expansion of the domestic business, however, it is extensively dissimilar from the latter with respect to its operational nature and environmental dynamics. There are drivers which create environmental diversity and thus make the international business more complex than domestic business. It includes social customs, cultures, government regulations, legal framework, business practices and political stability. Actually, the strong strategic position facilitates the international companies to dominate the share from local markets. For example, US automobile industry has been persistently struggling since a long time ago against the Japanese, European, and now the Korean companies as these countries have taken the markets from them. Once General Motors had more than 50% share of the market, but globalization provided space for international markets to venture and today Japanese Toyota surpassed Ford and GM and has become the largest automobile company in the world. According to Thomas Friedman, the world is getting flat now and thus the old concepts are in transition phase (Friedman, 2005). When globalization was in its initial phase, employees of manufacturing companies and service industries had different opinions toward it. Workers of manufacturing companies had reservations regarding their job security while employees of service industries felt themselves more secure. Today the concept has been changed. Advanced technologies, lower transportation costs, and tendency of recruiting the skilled human resource has reduced the application of many services which the companies were earlier used to offer (World Trade Organization, 2009). Impact on Global Markets Globalization has several facets but mainly it deals with globalization of markets and products. As far as globalization with respect to markets is considered, it is basically referred to as the merging and integration of distinct markets into one huge marketplace at the world level. It is widely considered that the preferences, trends, tastes, and behavior of consumers in different nations provide an initial base to converge the market on some sort of a single norm and thus assist in developing the global market. Coca Cola soft drinks, burgers of McDonalds, coffee of Starbucks, credit cards of Citigroup, furniture of IKEA, and video games of Sony PlayStations are some leading examples of this trend. By offering a universal product, the companies actually form a global market. In order to gain the benefits of international investments, it is not necessary for a company to be of the same strength as the multinational companies, e.g. in the USA, almost 90% of the firms, which make foreign investment at a global scale, don’t have more than 100 employees while their market share has been rising for last ten years and now has crossed 20% of the overall market share (World Trade Organization, 2009). Similarly, 97% of US exports are associated with firms having strength less than 500 workers (U.S. Department of Commerce, 2000), e.g. B&S Aircraft Alloys, a New York based company has almost 40% exports from its $8 million annual revenue while Hytech, another company of New York, also has 40% exports from its $3 million annual earnings by investing into five countries. In Germany, almost 98% of companies, both small and large ones, are dealing with international trade either through production or exports (Draffin, 2001). Although Coca Cola, McDonalds, Pizza Hut, Starbucks, IKEA, and some other companies have dominating influence on international markets, even then there are certain differences which still persist with respect to various dimensions. It includes consumer behavior like preferences and taste, cultural values, distribution channels, business systems, and legal regulations. These differences are actually the drivers for international investors to customize their marketing strategies, production techniques, and operational criteria which correspond well to some specific culture or society of a foreign country. Presently, most global markets are not markets for consumer products; rather, they are marketplaces for industrial commodities and materials that serve a universal need at a global level, e.g. commodities such as wheat, oil, and aluminum, commercial products such as jet aircraft or ships, industrial products such as microprocessors, and computer software etc. in many such global markets, the companies face a strong competition from its competitors or rivalries such as rivalry between Coca Cola and Pepsi in terms of soft drinks, Boeing and Airbus in civil aircraft, Ford and Toyota in automobiles, Rolls-Royce and General Electric in aero engines, Nokia and Samsung in mobile phones, while Microsoft, Sony, and Nintendo in video games. Whenever a company ventures into a new market, either in some developed or developing countries, its competitors also venture into that market to prevent their competitor from attaining a competitive edge (Benoit & Milne, 2006). Since by following one another, the companies bring their assets as well, therefore, this homogeneity replaces diversity. Thus, instead of using words such as German market, or US market, or UK market, or Chinese market, etc, generally it is used as global market for the purpose of uniformity. Impact on Production As far as globalization of production is concerned, it deals with the sourcing of services and goods from locations across the globe. There are generally two main objectives behind this. First is to take the advantage of national differences in terms of cost and quality of production which include land, labor, energy, and capital. Secondly, companies expect to reduce their overall cost and enhance the functionality and quality of their products and thus enable them to compete with their rivals more effectively. The Boeing 777 is one of the leading and a profitable jet airliner of the world. There are 8 Japanese suppliers which manufacture its different parts such as wings, doors, and fuselage. Similarly, the doors for the nose landing gear are made up by a supplier of Singapore. Moreover three Italian suppliers manufacture wing flaps for it (Caves, 1993). Almost 30% of the Boeing 777 is built by foreign companies. The Boeing 787, one of the latest models of Boeing has further enhanced this trend, i.e. almost 65% of the cost of aircraft manufacturing is outsourced to international companies while 35% of it is associated with three Japanese companies (Metthee, 1994). A worldwide network of manufacturing companies supplies a better product in the end and thus improves the dominance of Boeing to win the market share of jet airline industry against its greatest rival Airbus. Vizio is another example of large-scale network activities. Drivers of Globalization There are basically two main drivers that have really affected the international business (Frankel, 2000). The first one is the minimization of barriers towards the international trade and investment while the other driver is the technological affects particularly the substantial advancements in the fields of communication and transportation. International business is generally referred to such business activities which deal with the transferring of assets, services, goods, skills, knowledge, or information across the borders. Foreign direct investment (FDI) comes when an organization invests its resources abroad in some business activities. A lot of barriers with respect to international trade arise in the form of high tariffs on imports of manufactured goods. The main aim of imposing such high tariff is to protect the local industries from the dominant affects of foreign companies. After the World War–II, advanced western nations realized the scope of international business at global scale and therefore committed themselves to reduce the barriers against the free flow of goods and services (http://www.un.org/Overview/brief.html). The commitment provided a base for the establishment of General Agreement on Tariffs and Trade (GATT) which had the major goal to minimize the barriers against cross-border trades. The concept of globalization impacted and today more than 150 countries are members of GATT. The flowing table summarizes the impact of GATT on international business and shows a substantial fall in tariff rates during last 60 years. Countries 1950 1990 2006 France 18% 5.9% 3.9% Germany 26% 5.9% 3.9% Italy 25% 5.9% 3.9% Japan - 5.3% 2.3% Sweden 9% 4.4% 3.9% UK 23% 5.9% 3.9% USA 14% 4.8% 3.2% (Source: World Trade Report, Geneva: WTO, 2007) The statistics reveal that multinational companies are investing heavily in foreign markets and thus foreign direct investment is playing a crucial role in the continuous growth of world economy. In 1975, the annual flow of FDI was $25 billion. In the next 25 years, it reached a record $1.2 trillion in 2000. In 2007, it further flourished and ended up with $1.5 trillion (World Trade Organization, 2007). During last two decades, the rate of FDI surpassed the world’s total trade e.g. the world’s total FDI flow increased eight times more than the world trade (United Nations, World Investment Report, 2008 and UN Conference on Trade and Development, January, 2009). By 2006, almost 78,000 companies had 780,000 affiliates in global markets with more than 70 million workers employed with them. In 2007, the foreign affiliates of multinational organization had a total turnover of about $25 trillions, greater than world’s total exports i.e. almost $14.1 trillion. Presently they account one-tenth of global GDP as well (World Trade Report, Geneva: WTO, 2007). The world’ business activities have also been greatly influenced by the advancements in scientific technologies particularly in the fields of transportation, communications, and information processing. The explosive emergence of the World Wide Web and online media (internet) has given a further push to it. The world has become a global village because of transportations. It has also become a global audience because of telecommunications. Probably, the most crucial invention is the continuous development in microprocessor which enhanced the performance of several management areas in globalization. It includes low cost computing, volatile development of high-powers, and the smooth execution of information system that can be done by companies and individuals as well. The applications of satellites, wireless technologies, optical fiber, and the recent World Wide Web have brought a revolution in the global communication systems. The use of internet has made communication cheaper. From 1930 to 1990, the rate of a three minutes telephone call between New York and London dropped to $3.32 from $244.65 (Frankel, 2007) and by the use of internet; the foreign phone calls are getting more and more inexpensive. Special packages and discount rates are available now for business calls. The trend of using internet has been increased during 20 years. There were only 1 million internet users till 1990, which reached 1.3 billion by December, 2007 (Fernald and Greenfield, 2001). According to statistics, almost $250 billion of goods were sold online to the international markets (http://www.internetworldstats.com/stats.htm). Globalization changed the outsourcing environment as companies are taking full benefits by applying the latest communication tools, especially the Internet. The online medium is one of the best tools to utilize for outsource service by inexpensive producers in foreign markets. The use of online sources has enabled the American hospitals to outsource their radiology work to India where images from MRI are read at night while at that time, American doctors sleep and they receive the ready and verified results next morning. Similarly, lots of software companies, e.g. IBM, are taking the services of Indian engineers to carry out maintenance functions on the software designed by the U.S engineers. The time difference between India and United States facilitates the Indian engineers to carry out particular tests and then disseminate the results back to the United States through secure channels. Thus, the U.S engineers receive the ready results the next morning for further work. In this way, the product is prepared by utilizing less time and lower costs. Some other companies outsource service functions such as customer call centers in developing countries where the labor is inexpensive. In the United States, some estimates highlight that in 2008 almost $70 billion were saved in the field of health, e.g. in customer care and claims processing (Pritchard, 2004). Conclusion The globalization of products, markets, increasing trends of foreign direct investment, international trade, and imports all entail that world economy is progressing with a great pace, the world hasn’t seen ever. Globalization has brought the whole world in some sort of the same direction. Irrespective of its strengths or weaknesses, it has changed the global economic environment. The global multinational companies not only benefited the society but also created several threats to the unskilled employees. The global international markets are continuously changing. Although forecasts are not always correct, economists suggest that Asian markets, developing countries, and third world countries will turn out to be the most competitive markets in a decade or so. Bibliography Benoit, B. & Milne, R. (2006). Germany’s best kept secret, how its exporters are betting the world? Financial Times. 19th March, 2006. P. 11. Caves, R. E. (1993). Japanese investments in U.S: lessons for the economic analysis of foreign investment. The World Economy 16. P. 279-300. Colvin, G. (2004). Think you job can’t be spent to India. Fortune. P. 80. Draffin, C. M. (2001). Going global: export market proves profitable for region’s small businesses. Newsday. March 19, 2001. P. C18. Fernald, J. 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