Changing Trends of International Business - Essay Example

International Business The world is on the brink of economic recession as it faces one of the worst financial crises of recent years. The credit crisis that sprang up in the United States quickly engulfed large parts of the world leading to a downturn in investor confidence and bad times for companies, some of whom are having to close down (Elliot 2008). This has had further adverse effects on the people of various countries, many of whom are being laid off from their jobs or are facing pay cuts as international and local businesses try to cope with the downturn in the global economy. It is this same story that is dominating the headlines all over the world from both a global and local perspective as mechanisms change and new measures are brought into place to buck the trend. Australian newspapers have similarly been blazing on about the changes in the economic policy and big business. 1st Article The Age reported on February 25th about the Australian clothing company Pacific Brands moving its manufacturing facilities to China (Draper 2009). This has been in line with moves by a range of such businesses in the country deciding to place their facilities in Asia. Brands espoused by the company have been seen to be quintessentially Australian with a large following. This decision has been seen with a reflection of how many other local manufacturers in the food industry and others have slowly been taken over by foreign based companies. However, The Age reports that Pacific Brands, which retains Australian ownership, stresses that it remains very much Australian. Despite its manufacturing facilities now located in Asia and the subsequent layoff of workers in the country, the company's top management is quick to point out that the idea generation and organization will always remain Australian and thus it will not lose its focus towards the country (Draper 2009). 2nd Article In another article, The Canberra Times comments on the possible measures being contemplated by the Government to limit free trade by ranking up tariffs and subsidies (Barnett 2009). This is seen as a possible deterrent to the adverse effects of the international financial crisis and that it would help local businesses to stand up. Globalization is seen by some circles to be blamed for the recession that is leading to layoffs and a drop in production. It is believed that such restrictive measures can be used, despite remaining WTO legal to help the Australian economy. However it is argued that it could potentially be devastating since the country now has a big population and in recent years has been witnessing floods in rural areas and bush fires along with other troubles. It requires the elements of free trade to be present so that cheap imports can be brought in to meet local needs as the local economy may not be as self sufficient as is predicted (Barnett 2009). Question 1 Both these articles can be said to fall into the study of international business. The article by The Age speaks of the move by one Australian company that is typical of the trend being adopted by companies worldwide to find cheaper labor costs and costs of manufacturing to get higher profit margins. This shows the emergence of the global economy that we are witnessing today and the worldwide marketplace such that it is viable for businesses to shift their facilities to different parts of the world as comparative advantage shifts (Hirst 2002). It further has implications for local employment and that in the area to which the company shifts where the company will have to adapt to the local culture and practices in the case of its workforce there. It may further have to deal with exchange rate changes, a possible reliance on hedging techniques and be involved in the foreign exchange market which further links the company with others around the world. The other one by The Canberra Times talks about the Australian government's response to a global financial crisis and the ensuing recession. This is relevant to international business as it has implications for multinational companies with interests in Australia and those companies that rely on exports to the Australian market. Furthermore, the ensuing effects on international trade could result in a revamping of policies by local companies and rethinking of strategies being employed after a shift in policy regarding international trade. This however is not without changes in the pattern of exports and imports of the country which further brings about changes in the balance of payments. Given that Australia has a floating exchange rate system; it has broader implications for the products being imported into the country and those being exported overseas in terms of pricing. Therefore, such policy making is definitely a crucial part in the consideration of international business. Question 2: a When one analyses these two articles, it gives a lot of information about the business environment globally and implications for various stakeholders as every action carries consequences with it. The Australian government may be the most active of the stakeholders and every event will affect the way it sees things and needs to respond. The article about Pacific Brands presents the government with a problem. Since the clothing giant is moving its manufacturing facilities outside the country, it will result in a loss of jobs and a rise in unemployment (McMahon 1986). This too is coming at a time when the world economy is facing recession and pressure on employment is high. Since other businesses may be closing too with the change in conditions, the government will have to face the task of somehow employing these workers that are laid off. It may further lead to a rise in welfare costs as more and more people may come to depend on it, stretching the government's budget. Apart from seeing it from a current perspective, the move by Pacific Brands reflects a more general move for manufacturing sector towards the Asian countries with cheap labor (Alon 2008). This may require the government to support the services sector more as a way to make up for this loss in manufacturing as Australia, like most developed countries, may enjoy a comparative advantage in that sector. This could be done via tax benefits etc so as to export these services to the Asian countries in return for the manufacturing goods which will now have to be imported into the country. Reliance can also be increased on primary sector where Australia has been faring well due to its geographical advantage (Edey 2007). This could be done through concession on land and the formation of advisory boards to help the beef, sheep and dairy products sector capture a greater part of the export market. There are however advantages of moves such as that by Pacific Brands. Since the company will now see it's per unit costs dropping, it may be able to enjoy higher profit margins, becoming more profitable and perhaps more competitive in the international market. Since Australia remains the base country, the capital will eventually flow there. Since the company has pointed out that organization and idea generation will be Australian, such growth of the company may create higher level jobs for Australians (Draper 2009). The article from The Canberra Times speaks of a more general trend of the Australian economy. Since the global financial crisis is encompassing the Australian economy as well, it presents challenges for the Australian government. Already they are considering jacking up tariffs to subdue import level and try to become self sufficient. This is a move away from the free trade under neo-liberalism that was being espoused earlier (Cohen 2007). The choice by the government is reminiscent of the action taken by countries following the Great Depression in the 1930s. It could potentially lead to other government opting for trade barriers as well leading to trade wars between countries, if the government chooses to go through with the plan. This would adversely affect many businesses. It could further lead to problems in the economy as is mentioned in the article as Australia may not be as self sufficient as it is thought to be with other problems such as floods and bush fires on the agenda as well (Barnett 2009). If imports drop, it may promote new business inside the country but may lead to a rise in prices as demand outstretches supply for local goods. Inflation will thus become a problem for the government. However, with increased reliance on local businesses, it may create additional jobs in the country leading to a slowdown in the unemployment rate which would be one less thing to worry about for the government. Furthermore, multinational businesses may choose to establish facilities in Australia to avoid the trade barriers and access the market directly which will further bring increased investment into the country. Question 2: b Australian businesses will be looking at the move employed by Pacific Brands and considering the advantage and feasibility of moving manufacturing facilities overseas. As the world globalizes and becomes more interdependent and multi national corporations establish roots all over the world, including in Australia, the businesses have to respond to keep their costs lower so as to compete effectively in the global marketplace (Bhagwati 2004). Thus the merits and demerits of a move similar to Pacific Brands will be considered. This will be particularly relevant of Australian clothing manufacturers who may now face tougher competition in terms of cost from the company. There is however another side they may be considering. Since the same clothes will now have to be imported to the country, the businesses may also look at the stability of the Australian dollar in relation to other currencies and also whether the government will keep to its mantra of free trade under the WTO. If the changing times results in the Australian dollar fluctuating a lot and perhaps tariffs being imposed, as was being considered in The Canberra Times' article, the rising costs of hedging and import duties may not be worth the cost saving in manufacturing by moving to Asia. Australian businesses may have mixed opinions about the possibility of restricting free trade. Those based in the country may be very happy about the measures as it would make their goods more competitive in the market, leading to potentially higher profits. With cheap imports from China and India out of the way, local businesses could expand and grow considerably. However for businesses such as Pacific Brands that are moving overseas, it may present significant problems. Their goods exported to the Australian market may now become relatively expensive which may be disadvantageous to them (Krugman 1987). They could then explore further avenues in other markets around the world. However, if the move by Australia leads to other countries putting up trade barriers as well, it may lead to big trouble for the company which may have to consider moving its facilities back into Australia. Question 2: c Other multinational corporations may also have some concern over the move by Pacific Brands. Those in the clothing sector may now see more competitive pricing from this Australian manufacturer leading to lower margins in the Australian market. This could lead to a shift in their focus towards cutting costs as well to stay competitive in the market. Due to other Australian manufacturers following similar trends, it could lead to a diminishing of the margins available in the market in Australia and possibly dissuade more multinational manufacturers from opting to establish facilities in Australia and possible targeting exports there (Faulkner 2002). Multinationals may also have mixed reactions to a change in policy by the Australian government. Trade barriers will have good effects for those already established in the country. They may now see less competition from cheap Chinese imports and can utilize their economies of scale to get a better grip in the market. Those outside Australia that used to access the market by exporting goods may now have to consider a new investment into the country. They may consider setting up their manufacturing facilities in the country to bypass the tariffs and be more competitive in the Australian market. Question 3 The Heckscher-Ohlin theorem could be crucial to analyzing both the articles (Blaug 1992). As the trend taken by Pacific Brands shows, companies such as those in the clothing sector that are more labor intensive are choosing to move their facilities to more labor intensive areas with cheap labor such as China. This is in line with a general move of labor intensive manufacturing towards Asia (Atkinson 1969). To prevent unemployment as a problem and develop Australian industry, the government could choose to benefit the capital intensive businesses in the country to replace the deficiency created by the labor intensive ones moving overseas. A greater effort may be required in the case of Australia's private sector but once it is made capital intensive with the extensive use of machinery over labor, it could make the country's products more competitive in foreign markets and thus lead to development of business. The theories of international trade and investment with regards to the balance of payments of the country may also be important (Stein 1997). With the manufacturing sector mostly moving overseas, Australia will see a steady rise in imports of manufactured goods leading to possible an adverse balance of trade. However, if the government measures with regards to tariffs are imposed, it may lead to a bucking of this trend and increased reliance on home produced goods and thus a decline in imports. However this is a two way game as other countries may respond with similar measures leading to an equivalent decline in exports, thus not improving the balance of trade any further. Apart from seeing it from a current perspective, the move by Pacific Brands reflects a more general and widespread move by the manufacturing sector in developed countries towards the Asian ones which carry the advantage of cheap labor (Alon 2008). This will prompt the government, as seen by the model above, to support the services sector more as a way to make up for this loss in manufacturing as Australia, like most developed countries, may enjoy a comparative advantage in that sector. This could be done via tax benefits etc so as to export these services to the Asian countries in return for the manufacturing goods which will now have to be imported into the country. Reliance can also be increased on primary sector where Australia has been faring well due to its geographical advantage (Edey 2007). This could be done through concession on land and the formation of advisory boards to help the beef, sheep and dairy products sector capture a greater part of the export market (Polonsky 2007). Theories with regards to the global money system also assume greater importance as businesses become more international. Australia's floating exchange rate presents companies with some thought with regards to expansion overseas and the trade carried out by the company (Levi 2004). Since the floating exchange rate reflects the credits and debits in the balance of payments, it will be subject to perpetual change. This creates a degree of uncertainty for businesses with global operations as they may see the value of their holdings appreciate or depreciate with regards to the exchange rate. Australian businesses going overseas like Pacific Brands may thus have to make use of external and internal hedging techniques to even out their projected cash flows to judge viability of different projects. Businesses in Australia that import materials may experience fluctuating costs as the Australian dollar rises and falls (Levi 2004). Furthermore, multinationals in the country may incur problems in terms of the profits they are able to transfer overseas which may be subject to the change in currency value. Judging by the government's proposed move mentioned in The Canberra Times, this may be particularly relevant as restricting imports via trade barriers will diminish the supply of the Australian dollar and may lead to appreciation in the currency, making exports by local businesses more expensive overseas and thus prove disadvantageous to many. Thus we see in these two articles the changing trends international business is taking. A lot of it is dependent on the individual strategic steps taken by the increasingly globalizing corporations as well as small businesses that are making it to the international market. A lot however is also dependent on the policies and patterns regarding international trade as determined by country policies. As we see the world in the midst of a global financial crisis, it may bring about many more changes at the micro and macro level, especially in the case of Australia which is witnessing a change in its industries. Bibliography Alon, I. (2008). 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