Business Environment - Globalization and Its Impacts on the World Economic Development - Essay Example

Business environment Table of Contents Introduction 3 Discussion 3 Conclusion 6 Reference List 7 “National boundaries have been surmounted by the phenomenon of ‘globalization’ and therefore, national governments are no longer able to promote independent economic policies.” Introduction The advent of globalization has been regarded by many as the most significant revelations in the new millennium and an unavoidable reality in the contemporary society (Buruma, 2013). Globalization established robust interconnections between countries all over the world thereby allowing them to conduct trade governed by certain rules and regulations (Butler and Lees, 2006). This diminishing boundary has led to internationalization of bilateral trade and business thereby allowing companies all over the world to expand their reach in regions other than its home country (Dreher, 2006). Such has been the effect of globalization that each and every products and services in the modern business environment are being designed keeping in mind the preferences and tastes of the global customers (Ekholm, Forslid and Markusen, 2007). The extent of globalization has surmounted to a degree where economic policies of each and every country are interdependent. This is precisely because of the fact that economic policies in one country have a corresponding impact on the country with which it shares significant trade relationships (Haskel, Pereira and Slaughter, 2007). It is with regards to the facts that have been mentioned above, the researcher believes the statement, “National boundaries have been surmounted by the phenomenon of ‘globalization’ and therefore, national governments are no longer able to promote independent economic policies” to be absolutely justified. In this study, the researcher will conduct an extensive qualitative research on literatures that have been published surrounding the topic. By doing so, the researcher will be endeavouring to collect conclusive evidences justifying the credibility of the proposition stated above. Discussion Financial integration is considered to be a by-product of globalization by several researchers. The business activities that are conducted in the financial service sector have become heavily globalized. A noteworthy relevance can be found in the banking and insurance industries where each and every business activities have transcend every international boundary. For instance banks all over the world are heavily engaged in transactions which increase their exposure to various foreign exchanges (Naor, Linderman and Schroeder, 2010). Therefore, any unanticipated fluctuations in the foreign exchange rate could have adverse impact on a particular bank due to its exposure to that currency (Hopkins, 2011). That is why national governments have to be very careful while drafting monetary policies as fluctuation of foreign exchange depend a lot on the monetary policies made by the government (Saggi, 2002). Such fluctuations may not only impact the financial performance of the local firm but may also hamper the business relations between domestic and foreign owned companies. In addition, economic policies framed by national governments also has considerable influence on various country wide economic factors such as interest rates, inflation rate and so on and so forth (Wrigley, Coe and Currah, 2005). Therefore, abnormal variance in any of the aforementioned economic factors can trigger a worldwide crisis. For instance a rise in interest rate would lead to a situation where foreign companies will refrain from availing loan from domestic banks which in turn would hamper the business of domestic banks (Kose, 2013). Moreover, companies may also choose not to expand their business in those countries that have higher rate of interest. Consequently any bilateral trade between the countries may get restricted. This is precisely the reason why national governments cannot form economic policies independently. The policies will always have some form of relevance with foreign countries. Moreover, tax rate is another economic policy that has a significant influence on a company’s decision to expand its operations overseas or to conduct business with a company that is based overseas. Corporate tax is one such economic policy that is one of the key determinants of a company’s decision to conduct business overseas. It is quite obvious for a company to not invest in a country that has a high corporate tax rate. Given the fact that companies have to pay taxes on their capital gains, a high corporate tax rate would decrease their profit margin significantly (Hamilton and Webster, 2009). This factor will definitely discourage companies from setting up their business in countries that have a high tax rate. This will have a significant impact on the FDI inflows in a country that has a higher corporate tax rate which in turn will restrict its economic growth. This justifies the reason behind the fact that economic policies can no more be independently formed. Policies have to be framed after considering a number of global factors as well as the long terms objectives that are yet to be achieved by the government (Goldberg and Pavcnik, 2007). Tax rate imposed on bank transactions is another major economic factor that plays a major role in policy making process conducted by national governments. In this progressively globalised world, people are money throughout the world for business as well as personal purposes. Such payments are initially made in home country currency to the bank and thereafter the bank converts the home country currency to the recipient country’s currency on the basis of a transaction day’s exchange rate (Cummings and Worley, 2014). For the purpose of this service, banks are supposed to levy a certain percent of transaction tax which has to be paid by the entity or person sending the money. Therefore, in reality a person is paying less money than the amount desired by the recipient. When remitting huge sum of money people have to pay substantial amount of taxes time and again. The same happens in case of people who conduct business with companies headquartered in a different country. In such cases they have to pay a large sum of money as tax to the banks, for being able to transfer money in foreign currency. An increase in this transaction tax will discourage managers from making such transfers which in turn may deteriorate the financial performance of banks thereby proving to be detrimental to the economic health of the country (Crane and Matten, 2010). This is another reason why national governments are no longer in a position to promote independent economic policies. Export and import policies are amongst the most significant economic factors that have reduced the independence of economic policies framed by governments in this increasingly globalised world. Export and import form a significant part of bilateral trade conducted between two countries. Export and import relationships between countries have intensified greatly over the past two decades owing to globalization (Chiu, et al., 2011). These business activities have proved to be largely profitable for businesses over the past few years. Companies have found a new line of business in the form of export and import as a result of a robustly interconnected world. This is precisely the reason why any change in import and export regulations (such as import and export taxes) will have a momentous impact on the financial performance of a company (Akram, et al., 2011). If a government choose to increase its import tax then companies in domestic country may choose to refrain from importing products from another country which in turn will not only deteriorate the financial performance of the home country company but will also hamper the business generated by the foreign company. Such rise in import taxes may discourage foreign companies from conducting any trade in the future which in turn will reduce the flow of foreign currency in domestic soil thereby deteriorating economic health of the home country. Any unanticipated rise in the export tax will always discourage exporters from exporting products to foreign countries (Ekholm, Forslid and Markusen, 2007). This may also result in trade deficits if a particular country starts importing more products when compared to the amount of goods that is being exported out of the country. These facts suggested the reason behind the interdependence that is observed in the economic policies framed by national governments in two countries. Inflation rate is another crucial economic factor that is widely considered by national governments while framing economic policies. This is precisely because any rise in the inflation rate will have several negative impacts. For example, an increase in inflation rate will increase the cost of goods sold by a company which in turn will deplete the margin of profit realized by the company. If the company is based in a foreign country then the management may be compelled to shift their operations out of the country if the rate of inflation goes beyond control (Haskel, Pereira and Slaughter, 2007). This in turn will have a significant negative impact on the economic health of the domestic country as the government’s tax revenue will decrease significantly. Moreover a rise in the rate of inflation may decrease the purchasing power of domestic people which in turn will lead them to buy global products which are offered at a comparatively cheaper price. As a consequence, the demand for global products may rise to an unexpected level when compared to the local products. Therefore, importers would be compelled to import more foreign products when compared to the products that are exported, which in turn will also result in current account deficit (Buruma, 2013). This is the reason behind the reduced independence of economic policies framed national governments all over the world. The rapid globalization of countries all over the world has completely altered the thought process of governments when it comes to forming macroeconomic policies. Policies associated with the stabilization of the macro economy have always been the focus of national governments throughout the world (Ekholm, Forslid and Markusen, 2007). As such governments emphasize a lot on regulating the flow of money in order to maintain the stability of the economy. This is precisely because of the fact that regulating the flow of money in a particular company allows the government to keep a control over the rate of inflation. It also enables the government to keep a check over the rate of interest within the country. Governments have been seen allowing heavy flow of money within the economy in order to encourage local as well as foreign companies to establish their businesses in the country. Credit flow within the economy is heavily facilitated with the help of a decreasing interest rate thereby allowing companies (both domestic and foreign) to avail loans conveniently (Saggi, 2002). This fact justifies that national governments are bound to frame macroeconomic stabilization policies keeping in mind the needs and requirements of the globalised world. When the flow of money eases up considerably, it creates a huge demand for goods in the market thereby driving the prices of products and services up. This is the time when an economy is hit with higher inflation rates. In such situations national governments have to constrict the flow of money within the economy thereby raising the interest rates. This makes it difficult for companies to borrow loans from banks which in turn dry up the flow of credit. Such situations are extremely discouraging for both local as well as foreign companies based in a particular country. In such cases national governments have to be extremely cautious while constricting the flow of money (Kose, 2013). This is precisely because if credit flow is squeezed beyond an unanticipated level it might compel foreign companies to pull out of the country which in turn may hinder the growth of the country’s economy. It may also lead to an even higher rate of inflation. Therefore, monetary policies have to be formulated in accordance with the circumstances that are created due to a highly interconnected and internationalized world. Conclusion The swift tempo of globalization has made it enormously difficult for national governments to make economic policies independently. They have to be extremely careful while formulating such policies as any unanticipated variations in their policies may lead to severe repercussions not only in the home country but also overseas countries. This may compel the foreign country governments to dismiss their trade relationships with the home country which in turn may prove to be detrimental to the economic health of both the countries. The degree of interdependence in economic policies between countries have risen to such an extent due to globalization that an imbalance in any particular country’s economy will have a significant impact on other countries associated with the former in any way. This is precisely the reason why economic policies of two trade partner countries have to be in complete alignment with each other. The facts that have been mentioned in this study provide a detailed justification as to why national governments are no longer in any position to promote independent economic policies. 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