Globalization

Trimester I 2009

Wednesday, 30 April 2014

Globalization can be described as a process by which the people of the world are unified into a single society and function together. This process is a combination of economic, technological, socio-cultural and political forces. Globalization is very often used to refer to economic globalization, that is integration of national economies into the international economy through trade, foreign direct investment, capital flows, migration, and the spread of technology. Thomas L. Friedman "examines the impact of the 'flattening' of the globe", and argues that globalized trade, outsourcing, and political forces have changed the world permanently, for both better and worse. He also argues that the pace of globalization is quickening and will continue to have a growing impact on business organization and practice.

Peter Drucker cautions; All institutions have to make global competitiveness a strategic goal. Globalize or perish is the slogan nowadays. Globalization is to be considered at two levels: World economy and at the micro level i.e. globalization of the business and the firm.
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Globalization of World Economy: The World Economy has changed from being international to transnational. Drivers of globalization are: International trade (lower trade barriers) Financial flows Allowing of FDI, technology transfer etc. Communication Technological advances in transportation, electronics etc. Population mobility Transnational Economy is characterized by: Money Flows rather than by trade in goods and services. Management is the decisive factor of production while the traditional factor of production, land and labor have become secondary. Goal is market maximization and not profit maximization. Trade is a function of investment Growing pervasiveness of the transnational corporations which see the world as a single market.

Wednesday, 30 April 2014

Globalization of Business
Globalization of business encompasses the following: Doing or planning to expand business globally. World class companies have located their manufacturing units in low labor cost countries. Companies offer products in several diversified industries. Doing away with the distinction between the domestic and foreign market and having a global outlook of the business. Ability of the company to compete in domestic markets with foreign competitors. No nation can any longer hope to lead an existence of solitude and isolation. Locating the production and other facilities on a consideration of the global business dynamics, irrespective of national consideration. Basing product development and production planning on the global market consideration. Global sourcing of factors of production. Global orientation of organizational structure and management culture. A global company has three characteristics: It is a conglomerate of multiple units (located in different parts of the globe) all linked by common ownership The multiple units draw on a common pool of resources such as money, information, patents control systems, etc. The multiple units correspond to a common strategy.
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Companies go Global to:

Make profits in overseas markets. With rapid technological changes and faster communication methods there is viability in having foreign affiliates and subsidiaries. Domestic markets are no longer adequate. Raymond Vernon propounded the Product Cycle theory: Companies that develop attractive new products sell them in their home markets. As soon as there is awareness of this new product in the foreign market, producers begin to export the product. As demand increases in the foreign market, it might be more viable for the producer to establish a unit in the foreign market for the production of the same commodity. Raw materials, labor etc. could be cheaper and more reliable in other markets. Prefer to operate business in countries which have a stable political environment. To reduce high transportation costs. The company could produce high value added components in a few centralised facilities and produce the less critical components and assemble the final product in it major markets. Be closer to the market or alternatively to their location of raw material.
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Features of Globalization
Globalisation became even more pronounced in the late 1980s due to the political and economic changes in the communist countries. Economic reforms in other countries, mulitlateral trade agreements which liberalised international trade and investment and the technological and communications revolution. New markets: Growing global markets ie banking, insurance etc; new deregulated and globally linked financial markets, increase of mergers and acquisitions globally eg Corus steel etc.

New actors: MNCs integrating their production and marketing; WTO (World Trade Organisation) authority to enforce that Government are being compliant to the rules; a booming international network of NGOs; regional blocs and more policy coordination groups
New Rules: Market policies of privatization and liberalisation spreading around the world; widespread adoption of democracy in majority of countries; conventions and agreements on the global environment, multilateral agreements in trade; intellectual property, communication etc. Tools of Communication: Linking people through internet and electronic communication; cellular phones; video conferencing, computer aided design Wednesday, 6 etc. 30 April 2014

Essential Conditions for Globalization: These conditions are to be satisfied by both the domestic economy and the firm for successful globalization: Business Freedom: Should not be any unnecessary government restrictions like import restriction, restriction on flow of finances etc. Facilities: Depends on facilities available to the organization globally. Government Support Resources Competitiveness Strategies and orientation. Advantages of Globalization: Productivity grows more rapidly Global competition and imports can curb increase in prices Open economy encourages innovation Unfettered capital flows give access to foreign investment and keep interest rates low. Capital mobility enables the total savings of the world to be distributed among countries which have the highest investment potential Rapid development of capital market through huge capital inflow by way of FIIs. However, the ease with which funds can be withdrawn from countries have created panic situations. Disadvantage of Globalization: Millions have lost or are fearing loss of jobs Replacement of traditional products by modern products Technology that the MNC brings into the country might not be best suited to the host country. Increases income inequality between countries and within countries Leads to loss of national sovereignty and countries find it difficult to follow independent Wednesday, 30 April 2014 7 domestic policies

Strategies in Globalisation
Globalisation involves decision making on the following lines: Deciding whether to go global Deciding which markets to enter Deciding how to enter the market Learning how to handle differences. Adjusting the management process Selecting a managerial approach Deciding organisation structure.
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Strategies in Globalisation
Deciding whether to go global: Globalisation is here to stay. Considering the vastness of the domestic market firms need to take a decision on whether or not to go global. Technological innovations, crumbling trade barriers, global flow of capital, revolution in information technology, intensity of market competition, changing lifestyles and demand for new products are making internationalisation inevitable. However, not all businesses need to go global. Local businesses do well to concentrate on local markets. Before going international, the Company must weigh several risks and decide about its ability to operate globally. Deciding which markets to enter: This involves deciding on: Volume of foreign sales Number of countries to market in Type of countries to enter.

Wednesday, 30 April 2014

Strategies in Globalisation
Deciding how to enter the market Entry Strategies: The Company must decide on the best mode of entry. The usual entry strategies are: Exporting: It is the simplest and the traditional mode of entering foreign markets. Exporting is the appropriate strategy when one or more conditions prevail. Volume of foreign business is not large enough to justify production in the foreign market. Cost of production in the foreign market is high. Foreign market is characterized by production bottlenecks like infrastructural problems. There are political or other risks in the foreign country. Company has no permanent interest in the foreign market. Foreign investment is not favored by the foreign country concerned. Licensing or contract manufacturing is not a better alternative. Exporting is more attractive than other modes particularly when underutilized capacity exists and where expansion of the existing facility might be easier and less costly.
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Strategies in Globalisation
Licensing: Licensing occurs when one company (the licensor) grants a license to a company in another country (the licensee). The license agreement might provide for the flow of unpatented technical information to the licensee, it may authorise him to use the licensors trade name, it may also specify that the licensor will provide technical assistance and product upgrades and improvements. In return the licensee will be required to pay an upfront payment and royalty to the licensor.
Licensing is most common in technology intensive and R & D intensive sectors such as pharmaceuticals, chemicals and industrial sectors. It enables the licensor to exploit their R & D acheivements through the generation of royalty income. The licensor benefits from the lcensees local knowledge. However, it does not provide a basis for further expansion into the market. Rather, it could give rise to potential competitors. Franchising is a form of licensing in which the franchiser provides the franchisee with a standard package of products as well as marketing and management systems that have proved successful in the home country. Franchising allows the franchisor (parent company) more control over how you operate your business and there is usually a franchise fee (monthly percentage of your gross sales). In exchange most franchisors provide training and support to make sure that your business succeeds. Franchising is a great opportunity for those without business experience as they will hold your hand and train you. Franchising is Wednesday, 30 April 2014 11 common in service industries like hotel and fast food etc.

Strategies in Globalisation
Contract manufacturing: It is an alternative to licensing. A company doing international marketing, contracts with a foreign producer to manufacture products for sale in the foreign market. The company however, retains responsibility for promoting and distributing its products. Advantages:

The Company does not have to commit resource for setting up production facilities. It frees the company from the risks of investing in foreign countries. In case there is idle production capacity readily available, it enables the marketer to get started immediately. In many cases the cost of the product obtained by contract manufacturing is lower than if it were manufactured by the international firm. It is a less risky way to start with. If the business is not successful, it is easier to wind up. Less control over the manufacturing process Has the risk of developing potential competitors It is not suitable in case of high tech products and cases which involve trade secrets etc.
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Disadvantages:

Wednesday, 30 April 2014

Strategies in Globalisation
Management Contracting: In a management contract, the supplier brings together a package of skills that will provide an integrated service to the client without incurring the risk and benefit of ownership; i.e. the firm providing the management know-how may not have any equity stake in the enterprise being managed. It could entail supply of expertise in functions such as finance, personnel, production and general management. It is a low risk method of getting into a foreign market and it starts yielding income from the very beginning. Benefits: They can provide organizational skills not available locally. Expertise is immediately available rather than built up. Management assistance in the form of support services that would be difficult and costly to duplicate. Disadvantages: Arrangement is not sensible if the company can put its scarce management talent to better use or if there are greater profits to be made by undertaking the whole venture. Management contract might prevent a company from setting up its own operations Eg: Tata Tea has contracts to manage plantations in Sri Lanka
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Strategies in Globalisation
Turnkey Contracts: A turnkey operation is an agreement by the seller to supply a buyer with a facility fully equipped and ready to be operated by the buyers personnel, who would be trained by the seller. It is similar to the management contract wherein the company contracts with a foreign entity to design and build an entire operation. The term is common in the construction industry, for instance, in which it refers to the bundling of materials and labor by sub-contractors.

Turnkey contracts are used in the construction of large infrastructure projects such as power plants, dams, airports, road, railways etc. BOT is an example of a turnkey project.
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Strategies in Globalisation
Joint Ventures mean joining up with foreign companies to produce or market the products or services. There are different types of joint ventures such as: Licensing / franchising arrangements Contract manufacturing Management contracts Sharing of ownership and management in an enterprise. Joint venture generally means Joint Ownership venture. A joint ownership venture may be brought about by: A foreign investor buying an interest in a local company A local firm acquiring an interest in an existing foreign firm By both foreign and local entrepreneurs jointly forming a new enterprise. In addition to the foreign and local partner, ownership could also be invited from the public. Benefit of the same is that it permits a firm with limited resources to enter more foreign markets than might be possible under a policy of forming wholly owned subsidiaries. Local partner would be in a better position to deal with the Government and the public. Presence of a local partner would lower the hostility in the minds of the locals
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Strategies in Globalisation
Mergers and Acquisitions: Merger : A merger is a result of two firms, often of similar size, agreeing to move ahead and exist as a single new company. Mergers are mostly financed by a stock swap. In a stock swap, owners of stock in both companies receive an equivalent measure of stock in the newly formed association Acquisition : A corporate action in which a company buys most, if not all, of the target company's ownership stakes in order to assume control of the target firm. Acquisitions are often made as part of a company's growth strategy whereby it is more beneficial to take over an existing firm's operations and niche compared to expanding on its own. Advantages : Provides instant access to markets and distribution network. It helps in reducing competition.

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Strategies in Globalisation
Strategic Alliance:
A Strategic Alliance is a formal relationship formed between two or more parties to pursue a set of agreed upon goals or to meet a critical business need while remaining independent organizations. It seeks to enhance the long term competitive advantage of the firm by forming alliance with its competitors, existing or potential in critical areas. Partners may provide the strategic alliance with resources such as products, distribution channels, manufacturing capability, project funding, capital equipment, knowledge, expertise, or intellectual property. The alliance is a cooperation or collaboration which aims for a synergy where each partner hopes that the benefits from the alliance will be greater than those from individual efforts. The alliance often involves technology transfer (access to knowledge and expertise), economic specialization , shared expenses and shared risk
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Strategies in Globalisation
Countertrade: Countertrade is a form of international trade in which certain import and export transactions are directly linked with each other and in which import of goods and services are paid for by export of goods, instead of money payments. Main variants of countertrade are: Barter: Exchange of goods or services directly for other goods or services without the use of money as means of purchase or payment. Switch trading: Practice in which one company sells to another its obligation to make a purchase in a given country. Counter purchase : Sale of goods and services to a country by a company that promises to make a future purchase of a specific product from the country. Buyback occurs when a firm builds a plant in a country - or supplies technology, equipment, training, or other services to the country and agrees to take a certain percentage of the plant's output as partial payment for the contract
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Strategies in Globalisation
Learning how to handle differences: Another stage in evolving a global strategy is learning to handle differences that exist across countries. Few differences of utmost importance is awareness of political risk, cultural differences etc. Use of local nationals in key management positions can ease the political, social and cultural friction. Adjusting the management process: Management process involves planning, organising, staffing and controlling. Managerial process at the macro and micro level need to be oriented in different countries. The thrust in adjusting the management process is to motivate people to think and act globally. Selecting a managerial approach: What must be the appropriate managerial practice suitable for an MNC? An amalgamation of the Japanese and American approaches is needed wherein Japanese approach was of long term employment, collective responsibility and collective decision making while the American approach is of short term employment, individual responsibility and individual decision making and rapid career paths. Deciding of an Organisation Structure: Efficient operation of an MNC requires an effective organisational structure. A successful organisation should maintain smooth operating internal communication and control, as well as sensitive and flexible interaction with the dynamics of the Wednesday, 30 April 2014 19 international business environment.

Governments measures towards Globalisation

Removing constraints and obstacles to the entry of MNCs into India. The Foreign Exchange Management Act has been passed by deleting the clauses which restricted the entry of MNCs. Permitting Indian companies to collaborate with foreign companies in the form of joint ventures both in India and abroad. Replacing licenses of imports with tariffs. Eliminating various import duties and drastic reduction of other import duties. World Bank advocated import liberalization. Consequently, GOI reduced import tariffs to 15% Lifting the quantitative restrictions on 715 goods in April 2001, to enhance efficiency, quantity, product design, prices etc. Removing of export subsidies. Replacing licensing of exports with duties. Liberalising the inflow of FDI Offering incentives to MNCs and NRIs to invest in India Allowing Indian companies to procure capital from GDR/ADR Full convertibility of rupee on capital account. Seeking membership in trade blocs Acting cautiously of convertibility of rupee on capital account.
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Globalisation of Indian Business

Indias economic integration was very limited due to the restrictive policies till 1991. With the new economic policy in 1991, there has been a change. Factors favoring Globalisation: 1. Human resources: Alongwith low cost of labor, India has been one of the largest pool of scientific, managerial and technical manpower. 2. Wide base: India has been a broad resource and industrial base which can support a variety of businesses. 3. Growing entrepreneurship: While many of the existing industries are planning to go international, there is also considerable growth of new and dynamic entrepreneurs. 4. Growing domestic market: 5. Transnationalisation of World Economy: World is a single market. 6. NRIs: There are a large number of NRIs who are resourceful in terms of capital, skill, experience, exposure, ideas etc. 7. Economic liberalisation: Delicensing of industries, removal of restrictions on growth, opening up of industries has encouraged globalisation of the Indian economy.
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Globalisation of Indian Business

Obstacles to Globalisation: 1. Government Policy and Procedures: Indian government policies and procedures are still most complex, confusing and cumbersome. Government policy and the bureaucratic culture in India are not that encouraging. 2. High cost: High cost of many vital inputs and other factors like raw materials, power, finance infrastructural facilities tend to reduce the growth as well as competitiveness. 3. Obsolescence: Technology employed, mode and style of operations are in general obsolete. 4. Resistance to change: Several socio political factors resist change and this comes in the path of modernisation. 5. Poor Quality image: Quality of many Indian products is poor which has become a handicap for items of good quality. 6. Supply Problems: Low production capacity, shortages of raw materials and infrastructures like power and port facilities, Indian companies are not able to accept orders or to keep up delivery schedules. 7. Small size and lack of experience: Due to small size and lack of experience in managing international business, Indian entrepreneurs face challenges. 8. Limited R & D: Expenditure on R&D in India is less than 1% of GNP while it is 2-3% in most of the developed countries. 9. Trade barriers: Although tariff barriers to trade have been reduced, the Wednesday, 30 April 2014 22 non tariff barriers are increasing particularly in the developed countries.