International Business Strategy - Protectionism - Essay Example

International Business Strategy - Protectionism The multinational enterprises (MNEs) need to identify, manage and measure the political risks before venturing into an overseas country. These risks can be firm-specific, country-specific or global-specific. When investing in some of the emerging markets, the MNEs, especially those from highly industrialized nations, face serious risks because of cultural and institutional differences. Protectionism is a country specific risk and is a form of cultural and institutional risk. Protectionism is defined as the attempt by a national government to protect certain of its designated industries from foreign competition (Eiteman, Stonehill & Moffett, 2007). Economic integration leads to openness and openness triggers volatility leading to insecurity. To alleviate the fears, to provide security to the local firms, the governments need to have a protectionist attitude (Fitoussi, 2007). Protectionism interferes in the process of globalization as it puts strict limits on the interplay of free markets. In fact the rise of protectionism led to the end of the first phase of globalization. The MNEs however attempt to overcome the host country protectionism through different ways. Protectionism implies that the government in the emerging economies will not let growth slow down. It will use the instruments of economic policy which assures to reduce the uncertainty linked with investment (Fitoussi, 2007). It also helps to increase the dynamism in the labor market. Protectionism definitely helps the “infant” industries in emerging markets. It fosters the long term rate of growth of developing countries. Nevertheless, if these economies have to be integrated into the world economy, it requires a richer industrial structure. The fiscal and social receipts are too low and the welfare state is embryonic. Protectionism would allow it to develop a richer industrial structure and to provide through tariffs the necessary public funds to build a social system. Trade protection has to be there for the developing nations to eventually integrate into the world economy. Shiva (2005) is of the firm conviction that trade liberalization does not lead to development. “Aid for Trade” is merely a coercive imposition of trade liberalization by WTO, the World Bank, and IMF. These tactics enable the MNC’s to expand and enlarge in every sector - agriculture, services, manufacturing. Protectionism is justified because development should be endogenous and not imposed with conditions. Every nation should be assisted to evolve its economy from within, which alone can give it sustenance. Economies that develop due to external factors are highly sensitive to world markets. In Turkey, however, the SMEs objected to the protectionist attitude of the local government because they perceived that it was designed in the interest of a few privileged firms (Coskun & Altunisk, 2002). The structure of business in Turkey was predominantly family owned and closely controlled. Turkey also maintained high tariffs on many food and agricultural products to protect its domestic producers (FTB, 2001). They did not think protectionism was a threat to them because it would benefit some others with vested interests. While the SME managers were in favour of free market in Turkey, the international firms felt that protectionism was necessary without which there would be inequalities in competing with foreign firms. After gaining political stability, the new policy granted foreign investors full convertibility in their transfers of capital and earnings (Erkilek, 2003). While Turkey enjoys the 11th place in the banking sector among the telecom and utilities investors it ranks twelfth (Kearney, 2006). It is also considered a viable platform for the automobile sector in Europe. General Motors (USA) plans to restart its productions facilities in Turkey while Hyundai is expanding its base in Turkey to meet the growing demand in Europe. In Ireland high tariff barriers and the intention to promote indigenous manufacturing prohibited foreign ownership of firms from the early 1930s to the late 1950s (Barry & Bradley, n.d.). India’s trade policy too was restrictive and protected. Macroeconomic imbalances, like the fiscal and balance of payments deficits rose. When India received financial assistance from IMF in 1991 to meet external payments, it was based on the condition that India would undergo structural reforms and trade liberalization. Radical changes took place in government policies. Import-export restrictions were eased, tariffs reduced and consequently there was increase in firm-level productivity. Average tariffs fell from more than 80 percent in 1990 to 37 percent in 1996. The economy reacted positively and the ratio of total trade to GDP rose from an average of 13 percent in the 1980s to nearly 19 percent of GDP in 1999/00 (Topalova, 2004). Another outcome of protectionism by the host country is that while multinationals bring with them cutting-edge technology and huge amount of funds, there is stiff resistance from domestic competitors (Savitsky & Burky, 2004). Global competition has important implications for economic policy. Due to their scope and size, MNEs can stifle competition. It can also lead the economy towards oligopoly or monopoly. Concentration of market share in one hand distorts the allocation of resources, raises prices, and decreases output. The government policy of the host country at times allows monopoly to prevail. Multinationals have to face anti-corporate and anti-establishment sentiments triggered by the civil societies in the host country. There is a general assumption that liberalization trade benefits big business houses at the cost of the consumers. They do not take into consideration the boost that it gives to the development of the local economy. The power of MNEs is kept in check by the national governments. MNEs can overcome host country protectionism in several ways. First is the market entry strategy. Each strategy has its own risks, advantages and disadvantages. While exports is the simplest form of entering an international market, other strategies that companies can consider are licensing, joint ventures and off-shore operations. Joint ventures have to be applied in countries where foreign ownership is restricted. In the service sector brand extension strategy is frequently followed by companies (Aaker & Keller, 1990 cited by Pina et al., 2006). This helps to keep the marketing costs low while the chances of success are high. The frequent use of a monolithic branding strategy helps build goodwill behind the widely employed corporate brand (Free, 1996 cited by Pina et al.,). DHL, the global market leader of the international express and logistics industry, had long-term commitment in China. DHL recognized the boom in China's express and logistics market. DHL had a made a strategic move to penetrate the market at the right time. As per Gao et al., (2006), brands that enter the market earlier have larger market shares, which is the competitive edge that DHL gained by early entry. It entered into joint venture with Sinotrans had unrivalled local knowledge in the China foreign trade transport market. Joint ventures may perhaps be time-consuming and initially difficult, but yields optimum results both for the MNE and the local company offering partnership (Gross, 1995). Joint ventures help the MNE gain access to the domestic market while still maintaining control over its activities. Under joint ventures, foreign investors gain from the reasonably well educated low cost labor available in emerging economies. The host country government extends support in all matters like foreign exchange and tax exemption. General Motors (GM) too wanted to act aggressively and start a joint venture in Japan, but they did not succeed. Hence, they changed their strategy and brought R&D functions into China at the request of the government. When other automobile companies were reluctant to drain technology and quality control, and confined themselves to assembly of finished cars, GM took the bold initiative to tie up with the government for R&D functions. GM’s PATAC, a joint venture R&D centre is an independent automotive research development company (Hara & Nakanishi, 2004). Today GM has local production, has established an R&D function, as well as developed its own sales channels to create a local sales function. Motorola of US had clearly defined investment and insiderization policies (Hara & Nakanishi). It established joint committee with the government Electronics Department. It set targets for local content, carried out philanthropic activities including construction of elementary schools. It concentrated on high-end users in mobile phones sector to handle local competition. It could capture the sophisticated, wealthy, and young users due to its innovative design. Thus it is seen that nations that followed protectionism remained underdeveloped until they liberalized the trade policies although economists like Shiva tend to disagree. Industries that are usually protected are defense, agriculture and infant (emerging) industries. Services industry and the automobile industry spread their processes spanning several nations. Protectionism occurs through tariff and non-tariff barriers. Protectionism is meant to help the local firms survive in the face of competition but it has been seen that competition can make the local firms more alert and bring down the costs for the end consumers. MNEs however find ways to enter the emerging economies and get established. They select the right mode of entry depending upon the country and the industry for instance GM entered China through R&D while DHL entered into a joint venture with a local firm. Through these strategies the MNEs have been able to overcome the host country protectionism. References: Barry, F., & Bradley, J., (n.d.), FDI and Trade: the Irish host-country experience, Royal Economics Society Annual Conference, University of Staffordshire, March 24-26, Coskun, R., & Altunisk, R., (2002), Management's concern about the isseus faced by Turkish SMEs, International Journal of Entrepreneurial Behaviour and Research, Vol. 8 No. 6, pp. 272-291 Eiteman, D., Stonehill, A. I., & Moffett, M. H., (2007), Political Risk Asessment and Management, Chapter 17, Multinational Business Finance, Pearson Addison-Wesley, 08 March 2008 Pina et al., (2006), The effect of service brand extensions on corporate image, European Journal of Marketing, Volume 40 Number 1/2 2006 pp. 174-197 Savitsky J J & Burki S J (2004), Globalization and the Multinational Corporation, 08 March 2008 Shiva V (2005), Trade Liberalisation Is Not Development, ZNet, 08 March 2008 Topalova P (2004), Trade Liberalization and Firm Productivity: The Case of India, IMF Working Paper, 08 March 2008 Read More