What Globalisation Means - Essay Example

I. Defining Globalisation Globalisation is a that has encouraged widespread discussion. Affecting all nations in the 21st century, it has an overwhelming impact on the economies, social life, culture, traditions, and technological components of every country. It also permeates the way of life of every citizen in the world today, greatly influencing the quality of life, the directions they would take, and their future. The word “globalisation” was coined by Levitt (1983) where he describes it as the shrinking of the world as brought about by the expansion of the reach of global media and the reduced cost of communication, resulting in the convergence in the tastes of consumers worldwide and the large-scale creation of global markets for standardised products. One definition is “the growing interdependence between different people, regions and countries in the world as social and economic relationships come to stretch worldwide” (Giddens 2001). Another definition is that it is “the present worldwide drive toward a globalised economic system dominated by supranational corporate trade and banking institutions that are not accountable to democratic processes or national governments” (The International Forum on Globalization). According to Rosenberg (2000), “The term ‘globalisation’ after all, is at first sight merely a descriptive category, denoting either the geographical extension of social processes or possibly, as in Giddens’ definition, ‘the intensification of worldwide social relations’.” Globalisation has seen the growing role and importance of transnational corporations. Business is the order of the day, and these firms which is primarily characterised by their cross-border markets and production systems serve as the epitome of the globalised economy. In the spheres of business and industry, Bartlett and Ghoshal (1989), Hout et all.(1982), Campbell (1993), Keegan (1995), Bertrand (1994), Parker (1998), among others, the following definition emerges: “Globalization [to business administration] is the set of transformations faced by companies as a consequence of the contemporary phenomenon typical of the post cold war which is constituted by: (1) the empowerment of transnational organizations; (2) the mass information technology evolution; (3) the increasing flows of capital, merchandise, people and data across national borders; and (4) the tendency of world market homogenisation.” (Azevedo and Bertrand, 2000). I am defining globalisation as “the increasing interdependence in economic, political and social relationships of nations brought about by the creation of global markets and the influence of global media resulting in homogenisation of consumers worldwide.” II. A New Business Model Globalisation and the initiation of new technologies have significantly changed the way business, government and society are organized. One of the key driving forces behind these changes is a new business model. Manufacturing technology, which began during the industrial revolution, making mass production possible; Transportation technology, like railways, motor transport, steam shipping and aeroplanes, allowing the movement of people, materials and finished products from country to country and continent to continent more quickly and cheaply; Information and communications technology, like the telephone, computers, the internet, satellite television, which have together contributed to both the globalisation of markets and the global co-ordination of worldwide business activities; all these contribute to the rapid pace of globalisation. Globalisation and the initiation of new technologies have significantly changed the way businesses, governments and societies are organized. One of the key driving forces behind these changes is a new business model. According to Stonehouse (2002) From the perspective of business, interest in globalisation centres on two major facets: the globalisation of markets and the globalisation of production and the supply chain. Levitt (1983) ‘The globalisation of markets’ suggested that technological change, social, political and economic developments have, in recent decades, driven the world toward a ‘global village’ or ‘converging commonality’ – homogenized, unified global market in terms of consumer tastes and product preferences. Levitt (1983) considers that the main beneficiaries of this convergence would be global organisations producing globally standardised products in order to achieve world economies of scale. Such global business are (because of scale of economies) to undercut the prices of more nationally based on standardisation of product, branding and advertising. According to Stonehouse et al. (2002) Globalisation of strategy is the extent to which an international business configures and co-ordinates its strategy globally. A global strategy will normally include a global brand name and products, presence in major markets throughout the world, productive activities located so as to gain maximum advantage, and co-ordination of strategy and activities throughout the world. III. Forces promoting globalisation Globalisation increased in pace in the last two decades as a result of developments in information technology, global communications and transportation which enable people to communicate, transport goods and services, and interact faster (World Bank Brief 2000). In order to compete within the global market, more open policies encouraging close international economic cooperation are being adopted by many governments. This contradicts David Ricardo’s theory of comparative advantage wherein it would be more beneficial for nations to specialise their production and trade with each other. The theory of comparative advantage is gradually being reduced to irrelevance as the power of the nation state is diminished and production and market directions are increasingly wielded by transnational forms. The end of nation states and the rise of transnational corporations is explained by Kenichi Ohmae in In The Borderless World (1990): “The global economy is becoming so powerful that it has swallowed most consumers and corporations, made traditional national borders almost disappear, and pushed bureaucrats, politicians, and the military toward the status of declining industries.” Ohmaes (1990) work represents what may be called the business-utopian model of globalisation, but the idea that national systems of government are becoming marginal is shared by theorists of cosmopolitan governance who believe that powerful new supranational institutions are emerging—a view that is no less unreal. Advancements in communications and information technology have increased the pace of globalisation in the past decade and is associated by some to post-modernity and Americanisation. Gibbins and Reimer (1999) describes it as an “image industry, in which desires are created over needs”. They identify media as the one responsible for creating the images with which traditional societies are continuously exposed. This constant media exposure creates a homogenising effect on the aspirations of the global consumer. Among the major contributors to this homogenising effect of media are the Internet and television. Rostow (1990) showed society’s linear development in five stages. Stage 1 is characterised by subsistence economic activities. The products are consumed by the society that produces it or are bartered for other products from other societies. Production is agricultural and labour intensive, requiring minimal capital. Stage 2 societies are considered begin trading surplus goods. Transportation becomes important and savings, investments and entrepreneurial activities are practiced. Industrial activities increase in Stage 3. Land-based economy is replaced by manufacturing. Societies focus on one or two industries and growth is limited to a few regions. Political and social institutions are established to support industrialisation. Stage 4 sees technology promoting diversity in economic growth. The fifth stage is characterized by high mass consumption. The accumulation of investments, labour and advances in technology is imperative to improve the living standards in poor countries (IMF Brief 2000). Poor countries must acquire these collaterals to be able to survive in the globalised world. To acquire investments and new technology, poor countries must attract foreign capital and enter into closer cooperation with transnational firms that will allow technology and information transfer. The conditions of Stages 4 and 5 are precisely the conditions characterising globalisation, and if theory were to be applied, the accumulation of these factors would result in the development and improvement in the quality of life in underdeveloped and developing nations. Market Forces Development. Kenichi Ohmae (1996) predicted in his book The decline of the nation state, that countries will rely less on national power and more on international partnerships in trade and economic zones. A good example of this tendency towards increased international partnerships is China, which transformed its economy to a centrally-planned system to a more market-oriented one. Its rapidly growing private sector is increasingly becoming a major player in the global stage. Collectivised agriculture was phased out in the 1970s. Other economic reforms such as price liberalization, fiscal decentralisation, autonomy for state enterprises, development of stock markets, diversification in banking, and the opening to foreign trade and investment, brought China into the global economic arena. Most recent among these economic developments is the sale of equity in China’s largest state bank to foreign investors. There have also been recent refinements in foreign exchange and the bond market. China’s economy is presently only second to the U.S. It also has from 100 to 150 million surplus workers drifting from village to village seeking low-paying jobs. With the potential cross-border movement of workers and the preference of companies for high-skilled yet low-wage workers, China is most likely to penetrate and impact the global labour market. International organisations also become increasingly powerful as a result of globalisation. The General Agreement on Tariffs and Trade (GATT) and the World Trade Organisation (WTO) promotes the lowering of tariffs and removal of trade barriers, these being requisites in the global economy allowing the manufacture of products from any location on the globe. Work, services and knowledge become virtualised and can be offered anywhere while countries compete to attract investments in the establishment of production facilities, and high-skilled and knowledge-based workers. This competition standardises labour, tax and trade policies among nations. Nations must meet standards of conformity to remain competitive and attractive to investors. Globalisation is larger than any national leader or politician and the role of international organizations like the World Bank, International Monetary Fund, Asian Development Bank and Association of Southeast Asian Nations, to name a few, are becoming larger and increasingly influential. Theoretical Approach As efficiency barriers of time and space break down and international markets become increasingly integrated, corporations must adopt a global dimension if their operations are to remain competitive. They must develop strategies to design products for a global market, and to produce and deliver them using a supply chain that rationalises the firm’s resources to the maximum extent. Market Forces There is probably one significant respect in which business rise and that is what company produces and how it sells. All these derive from the market forces such as global consumer needs , wants and desires ; their spending power; increasing income levels; conversation needs and related international segmentation. According to Levitt (1983) the successful global firm should not differentiate in response to the requirements of markets that differ in product preferences, spending patterns, shopping preferences and institutional or legal arrangements. But the global firm should accept and adjust to these differences only reluctantly, after relentlessly testing their immutability, after trying in various ways to circumvent and reshape them. It is a view that successful global corporations should investigate into individual aspects of their policy, culture and tastes; and adapt these differences in order to pursue correct global strategy. Persistent differences in the world are consistent with fundamental underlying commonalities, which often complement each other. External industry globalisation drivers External industry globalisation drivers are grouped into five major categories: market factors; cost factors; competitive factors; technology factors; and environmental factors. Among market factors which can drive globalisation are: emergence of global customers, homogenisation of consumer needs and wants, existence of global marketing channels, and transferability of marketing practices (Levitt, 1983; Yip, 1989). Cost benefits are argued to be a key benefit of globalisation (Levitt, 1983; Yip, 1989). Key benefits include economies of scale in marketing and production, economies of scope, efficiencies in sourcing and transportation, and synergies in other value-adding activities. Similarly, the need to respond to competitive challenge is another major driver of globalisation (Hamel and Prahalad, 1985; Yip, 1989). With competition becoming globalised in many industries, business units have to respond to the competitive pressure by leveraging their competitive position across markets, and by seeking integrated operations (Hout et al., 1982). Technological advances are also considered major drivers of globalisation (Levitt, 1983). Communication and transportation technology makes integrated global operations feasible and desirable. Industries with high technology intensity are particularly conducive to standardized marketing approaches. Host government regulations/incentives, as well as other environmental forces, can drive globalisation (Yip, 1989). Similarity of tariff barriers, product standards, marketing regulations, and incentives for foreign direct investment can serve as stimuli for globalisation. In an influential article, Levitt (1983) argues forcefully that advances in communication and transportation technologies and increased worldwide travel have homogenised world markets. Increasingly, consumers in different parts of the world tend to demand the same products and have the same preferences. In this new era, the strategic imperative for businesses competing globally is to achieve the economies of scale which the global market affords. Thus, multinational corporations which treat individual country markets separately are likely to disappear and be replaced by global corporations which sell standardized products the same way everywhere in the world. A major source of competitive advantage has become the ability to produce high-quality products at lowest cost, since global consumers will sacrifice their idiosyncratic preferences for the high-quality but low-priced products. According to Levitt (1983), the optimum global strategy is to produce a single standardized product and sell it through a standardized marketing programme. According to Stonehouse (2002) from an international business and management perspective, the central debate in globalisation focuses on Levitt’s (1983) and Ohmae’s (1989) thesis that international firm can only survive by developing global strategies. Central to Levitts’s argument is the view that intensified competition and technology developments will drive companies to operate globally ignoring national boundaries. Thus, firms who seek to get closer to their customers or seek cost/differentiation advantages through economies of scale, labour specialisation or greater market share through penetration/concentration in international markets and are encouraged by globalisation forces. In contrast to Levitt’s single standardized product, a broad product portfolio is recommended by Hamel and Prahalad (1985). They believe a global strategy requires several product varieties, so that investments in technologies, brand names and distribution channels can be shared. The global strategic imperative is to seek cross-subsidization across product lines and markets, world brand domination, and strong worldwide distribution systems. The strategic logic behind Hamel and Prahalad’s (1983; 1985) prescription is that firms can attack rivals and defend their market shares by leveraging proprietary technology through proprietary distribution channels. Porter (1986) recognizes the interdependency among various country markets and contends that a global strategy has two basic dimensions: configuration of value-adding activities and co-ordination of the activities across markets. He maintains that the strategic imperative in global markets is to concentrate value-added activities to exploit factor cost differentials and extend competitive advantages by co-ordinating interdependencies among markets. Hence, success demands achieving integration of the firm’s competitive position across markets. In contrast, Quelch and Hoff (1986) emphasize the importance of being responsive to local market conditions. They view the strategic imperative as the efficient global use of good marketing ideas rather than standardization, and an organization structure which encourages transfer of information. They believe global operations should be tailored to maximize efficiency in concept development and effectiveness in local market delivery. That is, a business must “think global” but “act local”. Ohmae (1996) views the world market as being composed of three major parts: the USA, Japan, and Europe. To be successful in global competition, firms must become a triad power, establishing strong competitive position in all three parts. Ohmae (1996) also argues that the key to global success is the deliberate “insideration” of functional strengths. He considers “equidistance” the critical requirement of a global strategy: seeing globally, thinking globally, and acting globally. He suggests that the proper structure for a multinational corporation is one in which different country subsidiaries participate equally in global strategic decisions. However, this triad of global economic power may soon be rendered passé with China’s entry as a major player. Yip’s (1995) contribution to this stream of writings is to develop a normative contingency framework of global strategy, arguing that external industry/market forces drive globalisation. To survive and prosper in the global marketplace, businesses must respond to the industry imperatives. Yip (1995) defines a global strategy as having five dimensions: global market participation; product standardization; concentration of value-adding activities; uniform marketing; and integrative competitive moves. He contends that a global strategy must match the globalisation potential of the industry as defined by the cost, market, government, and competitive environments. IV. Conclusion Modernisation has taken a significant turn in the past three decades as the world economy increasingly became globalised. Based on the definitions of experts and organisations, I developed my own definition of globalisation, “the increasing interdependence in economic, political and social relationships of nations brought about by the creation of global markets and the influence of global media resulting in the homogenisation of consumers worldwide.” MacLuhan’s ‘global village’ has become a reality with developments in communication, transportation and information technology responsible for breaking down barriers and bringing about transformations in the economic, political, social, and cultural aspects of every nation. Experts contend that globalisation is an extension of modernisation, considered as the post-modern manifestation of a dynamic world economy which brings about the convergence in the economies of individual nations. Characteristic of globalisation is the rise and empowerment of transnational corporations and the decline of the power of nation-states. This is especially true in Asia which has adopted more liberal policies fostering closer economic and political cooperation in the region. Thus, Asian countries have created their respective economic niches which complement each other in the global economy. For example, the manufacture of electronics and IT components is the specialisation of Singapore while Malaysia focuses on the assembly and repair of equipment. The Philippines utilises its vast base of knowledge-based workers to compete in the IT field. All these individual national activities in information technology are based on each country’s comparative advantage in relation to foreign investments and businesses. Each country offers cheaper and more efficient systems in the delivery of goods and services required by one or several businesses engaged in IT. In most cases, specialisation in production and comparative advantage are replaced by global production systems responding to the needs of consumers for standardised products. Consumer preferences are increasingly homogenised through constant exposure to global media, thus creating the standardised need of consumers on a worldwide scale. Business savvy is manifested by the ability of firms to produce goods and services with less cost, high quality at the least possible time. A nation’s economic survival greatly rests upon its ability to compete globally. This has spurred formerly protective economies to liberalise their policies and encourage close partnerships with other countries. It has opened new opportunities to many nations especially in Asia, while it also raised fears on the ability of old economic powers to maintain their competitive edge over new players. A good example is China, which has grown out of its isolation and is increasingly active in its role as a major player in the global economy. It has established new relations with the United States and Europe, improving its international image for the purpose of attracting foreign investments. China has indeed caught the attention of foreign businesses because of its huge population and the vast potential of its surplus work force which can supply the demand for high-skilled and low-wage workers. Major investments are being made by U.S. and European businesses, recognising the advantages of establishing offshore facilities that would complement their operations and production. Many businesses have resorted to interfirm cooperation to streamline and increase the efficiency in their respective operations. Interfirm cooperation is evident in research and development which allows firms to benefit from lower costs and high quality knowledge-based workers while the host country gains from technology transfer, acquiring new technologies and information from research and development efforts. Globalisation is not new. It had been around for the past 5,000 years although its presence became highly evident and its growth gained rapid pace only in the past two decades. It is among the major forces shaping the world today, and the future of nations and humanity will be greatly influenced by their interactions and roles in the global economic stage. It has transformed nations and people. It has permeated every fibre of contemporary human existence. It will continue to exert its influence for a very long time. Bibliography Bartlett, Christopher A., Ghoshal, Sumantra. Managing Across Borders: The Transnational Solution. Boston: Harvard Business School Press, 1989. Bertrand, Hélène. 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