GLOBALIZATION
Globalization refers to the process of integration of world economies into a single market.
It involves transformation of many economies into transnational economies. It is a borderless economy characterized by the free flow of trade and factors of production across national borders.
The IMF defines Globalization as “ the growing economic interdependence of countries worldwide through increasing volume and variety of cross border transactions in goods and services and of international capital flows, and also through the more rapid and widespread diffusion of technology”.
Globalization may be considered at two levels viz., at the macro level (i.e., globalization of the world economy) and at the micro level (i.e., globalization of the business and the firm). Globalization of the world economy is achieved, quite obviously, by globalising the national economies. Globalization of the economies and globalization of business are very much interdependent.
Reasons for Globalization/ Drivers of globalization
• The rapid shrinking of time and distance across the globe thanks to faster transportation and communication.
· Growing international trade due to lower trade barriers
· growing financial flows (FDI, Portfolio Investment, Debt)
· Rapid technological changes.
• Saturation of domestic markets.
• Companies often set up overseas plants to reduce high transportation costs.
• Companies set up overseas production facilities to be close to their raw materials supply and to the markets for their finished products.
• The creation of the World Trade Organization (WTO) is stimulating increased cross-border trade.
Nature of Globalization
Globalization is characterized by the following features:
- Removal of trade barriers and controls between countries
- Free flow of goods and services and factors of production among countries
- Free flow of capital and investment and mobility of population
- Emergence of management as a decisive factor of production, other factors like land, labour and capital remaining secondary.
- Emergence of transnational corporations through mergers and acquisitions
- The goals of transnational economy is market maximization and not profit maximization
- Technological advances in transportation, electronics and communication.
- Emergence of regional blocs and cooperative treaties.
Features of Globalization
The following are the features of the current phase of globalization:
New markets
• Growing global markets in services – banking, insurance, and transport.
• New financial markets - deregulated, globally linked, working around the clock, with action at a distance in real time, with new instruments such as derivatives.
• Deregulation of anti - trust laws and proliferation of mergers and acquisitions.
• Global consumer markets with global brands.
New actors
• Multinational corporations integrating their production and marketing, dominating food production
• The World Trade Organization - the first multilateral organization with authority to enforce national governments compliance with rule
• An international criminal court system in the making
• A booming international network of NGOs
• Regional blocs proliferating and gaining importance – European Union, Association of South- East Asian Nations, Mercosur, North American Free Trade Association, Southern African Development Community, among many others
• More policy coordination groups – G-7, G40, G22, G77, OECD
New rules and Norms
• Market economic policies spreading around the world, with greater privatization and liberalization than in earlier decades
• Widespread adoption of democracy as the choice of political regime
• Human rights conventions and instruments building up in both coverage and number of signatories – and growing awareness among people around the world
• Consensus goals and action agenda for development
• Conventions and agreements on the global environment – biodiversity, ozone layer, disposal of hazardous wastes, desertification, and climate change
• Multilateral agreements in trade, taking on such new agendas as environmental and social conditions
• New multilateral agreements- for services, intellectual property, communications – more binding on national governments than any previous agreements
• The multilateral agreements on investment under debate
New Tools of communication
• Internet and electronic communications linking many people simultaneously
• Cellular phones
• Fax machines
• Faster and cheaper transport by air, rail and road
• Computer-aided design
Stages of Globalization
There are five different stages in the development of a firm into global corporations.
First stage
The first stage is the arm’s length service activity of essentially domestic company, which moves into new markets overseas by linking up with local dealers and distributors.
Second stage
In the stage two, the company takes over these activities on its own.
Third stage
In the next stage, the domestic based company begins to carry out its own manufacturing, marketing and sales in the key foreign markets.
Fourth stage
In the stage four, the company moves to a full insider position in these markets, supported by a complete business system including R & D and engineering. This stage calls on the managers to replicate in a new environment the hardware, systems and operational approaches that have worked so well at home.
Fifth stage
In the fifth stage, the company moves toward a genuinely global mode of operation.
GLOBALIZATION STRATEGIES
The various strategies of transiting a firm into global corporation are as follows:
- Exporting
Exporting, the most traditional mode of entering the foreign market is quite a common one even now.
- Licensing and Franchising
Under international licensing, a firm in one country (the licensor) permits a firm in another country (the licensee) to use its intellectual property (such as patents, trademarks, copyrights, technology, technical know-how, marketing skill or some other specific skill).
Franchising is “a form of licensing in which a parent company (the franchiser) grants another independent entity (the franchisee) the right to do business in a prescribed manner.
- Contract manufacturing
A company doing international marketing, contracts with firms in foreign countries to manufacture or assemble the products while retaining the responsibilities of marketing the product.
- 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. The arrangement is especially attractive if the contracting firm is given an option to purchase some shares in the managed company within a stated period.
- 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 buyer’s personnel, who will be trained by the seller. Turnkey contracts are common in international business in the supply, erection and commissioning of plants, as in the case of oil refineries, steel mills, cement and fertilizer plants etc.
- Wholly Owned Manufacturing Facilities
Companies with long term and substantial interest in the foreign market normally establish fully owned manufacturing facilities there. This method demands sufficient financial and managerial resources on the part of the company.
- Assembly operations
A manufacturer who wants many of the advantages that are associated with overseas manufacturing facilities and yet does not want to go that far may find it desirable to establish overseas assembly facilities in selected markets. The establishment of an assembly operation represents a cross between exporting and overseas manufacturing.
- Joint Ventures
Any form of association, which implies collaboration for more than a transitory period is a joint venture. Types of joint overseas operations are:
· Sharing of ownership and management in an enterprise
· Licensing / franchising agreements
· Contract manufacturing
· Management contracts
- Third country location
When there are no commercial transactions between two nations because of political reasons or when direct transactions between two nations are difficult due to political reasons or the like, a firm in one of these nations which wants to enter the other market will have to operate from a third country base. For example, Taiwanese entrepreneurs found it easy to enter People’s Republic of china through bases in Hong Kong.
- Mergers and acquisitions
Mergers and acquisitions (M & A) have been a very important market entry strategy as well as expansion strategy. A number of Indian companies have also used this entry strategy.
- Strategic alliance
This strategy seeks to enhance the long-term competitive advantage of the firm by forming alliance with its competitors, existing or potential in critical areas, instead of competing with each other. Strategic alliance is also sometimes used as a market entry strategy. For example, a firm may enter a foreign market by forming an alliance with a firm in the foreign market.
- Counter trade
Counter trade refers to a variety of unconventional international trade practices which link exchange of goods- directly or indirectly – in an attempt to dispense with currency transactions. Counter trade is a form of international trade in which certain export and import transactions are directly linked with each other and in which import of goods are paid for by export of goods, instead of money payments.
Benefits
The important arguments in favor of globalization are:
• Productivity grows more quickly when countries produce goods and services in which they have comparative advantage.
• Living standards can go up faster.
• Global competition and imports keep a lid on prices, so inflation is less likely to derail economic growth.
• An open economy spurs innovation with fresh ideas from abroad.
• Export jobs often pay more than other jobs.
• Unfettered capital flows give access to foreign investment and keep interest rates low.
Disadvantages
Following are the cases against globalization:
• Millions have lost jobs due to imports or production shifts abroad. Most find new jobs that pay less.
• Millions of others fear losing their jobs, especially at those companies operating under competitive pressure.
• Workers face pay cut demands from employers, which often threaten to export jobs.
• Services and white-collar jobs are increasingly vulnerable to operations moving offshore.
• Employees can lose their comparative advantage when companies build advanced factories in low-wage countries, making them as productive as those at home.
ESSENTIALS FOR GLOBALISATION
They are some essential conditions to be satisfied on the part of the domestic economy as well as the firm for successful globalization of the business.
• Business freedom
There should not be unnecessary government restrictions like import restriction, restrictions on sourcing finance or other factors from abroad, foreign investments etc. the economic liberalization is regarded as a first step towards facilitating globalization.
• Facilities
The extent to which an enterprise can develop globally from home country base depends on the facilities available like the infrastructural facilities.
• Government support
Government support may take the form of policy and procedural reforms, development of common facilities like infrastructural facilities, R & D support, and financial market reforms and so on.
• Resources
Resourceful companies may find it easier to thrust ahead in the global market. Resources include finance, technology, R & D capabilities, managerial expertise, company and brand image, human resource etc.
• Competitiveness
A firm derives competitive advantage from any one or more of the factors such as low costs and price, product quality, product differentiation, technological superiority, after sales services, marketing strength etc.
• Orientation
A global orientation on the part of the business firms and suitable globalization strategies are essential for globalization.
GLOBALISATION IMPACT ON INDIAN ECONOMY
In India, the process of dismantling trade barriers was started in 1991 and subsequently, every year the Government has been announcing reduction in custom duties and removing quantitative restrictions. It is argued that this shall enable free flow of goods, capital and technology and thus globalization becomes a motivating force for nations to develop themselves at a faster rate. For a developing country like India, it opens access to new markets and new technology. Thus, the import-substitution strategy has been replaced by exported growth during the last decade in India. The recent developments in
information and communications technology have further facilitated and accelerated the pace of globalization. International financial markets, transborder production networks and acceleration in capital flows across national frontiers have been the driving forces leading to greater global integration of the economies.
MULTINATIONAL CORPORATIONS
The dynamics of the business environment fostered by the drastic political changes in the erstwhile communist and socialist countries and the economic liberalization across the world has enormously expanded the opportunities for the multinational corporations, also known by such names as international corporation, transnational corporation, global corporation (or firm, company or enterprise) etc.
The rapidity with which the MNC’s are growing is indicated by the fact that while according to the World Investment Report 1997 there were about 45000 MNC’s with some 280000 affiliates. According to the World Investment Report 2001 there were over 63,000 of them with about 822,000 affiliates. Only less than 12 % of these affiliates were in the developed countries. China was host to about 3.64 lakh of the affiliates (i.e., more than 44% of the total) compared to more than 1400 in India. The MNC’s account for a significant share of the world’s industrial investment, production, employment and trade.
Definition and Meaning
A multinational corporation is defined as “a corporation that controls production facilities in more than one country, such facilities having been acquired through the process of foreign direct investment. Firms that participate in international business, however large they may be, solely by exporting or by licensing technology are not multinational enterprises.” - Leonard Gomes.
The various benchmarks sometimes used to define “multi nationality” are that the company must:
• Produce (rather than just distribute) in the domestic country and abroad
• Operate in a certain minimum number of nations (six for example)
• Derive some minimum percentage of its income from foreign operations (e.g., 25%)
• Have a certain minimum ratio of foreign to total number of employees, or of foreign total value of assets
• Possess a management team with geocentric orientations.
• Directly control foreign investments (as opposed simply to holding shares in foreign companies).
Merits of MNCs
The important arguments in favor of the MNCs are mentioned below:
• MNCs help increase the investment level and thereby the income and employment in host country.
• The transnational corporation has become vehicles for the transfer technology, especially to the developing countries.
• They also kindle a managerial revolution in the host countries through professional management and the employment of highly sophisticated management techniques.
• The MNCs enable the host countries to increase their exports and decrease their import requirements.
• They work to equalize the cost of factors of production around the world.
• MNCs provide an efficient means of integrating national economies.
• The enormous resources of the multinational enterprises enable them to have very efficient research and development systems. Thus, they make a commendable contribution to inventions and innovations.
• MNCs also encourage domestic enterprises and suppliers to support their own operations.
• MNCs help to increase competition and break monopolies.
Demerits of MNCs
The various cases against MNCs are:
• The MNCs technology is designed for worldwide profit maximization, not the development needs of poor countries.
• Through their power and flexibility, MNCs can evade or undermine national economic autonomy and control, and their activities may be inimical to the national interests
• MNCs may destroy competition and acquire monopoly powers.
• The tremendous power of the global corporations poses the risk that they may threaten the sovereignty of the nations in which they do business.
• MNCs retard growth of employment in the home country.
• The transnational corporations cause fast depletion of some of the nonrenewable natural resources in the host country. They have also been accused of the environmental problems.
• The transfer pricing enables MNCs to avoid taxes by manipulating prices on intra company transactions
• The MNCs undermine local culture and traditions; change the consumption habits for their benefits against the long-term interests of the local community.
PRESPECTIVE
Future holds out an enormous scope for the growth of MNCs. The changes in the economic environment in a large number of countries indicate this. A united Nation’s report described several developments that points to a rapidly changing context for economic growth, along with a growing role transnational corporations in that process. These include:
• Increasing emphasis on the market forces and a growing role for the private sector in nearly all developing countries.
• Rapidly changing technologies that are transforming the nature of organization and location of international production.
• The globalization of firms and industries.
• The rise of services to constitute the largest single sector in the world economy and
• Regional economic integration, which involve both the world’ largest economies as well as selected developing countries.
MULTINATIONALS IN INDIA
The inflow of foreign funds through MNCs in India is showing an upward trend in recent years. 1991 onwards, the Government of India has taken several steps to attract foreign investments and entry of the MNCs, such as:
• Abolition of industrial licensing
• Removal of restriction on investment under the MRTP Act
• Liberalization of policy and procedure for transfer of technology, import of capital goods etc
• Existing companies are allowed to raise foreign equity up to 51%
• Provisions of the FERA have been relaxed. As a result, companies with more than 40% foreign equity can operate like any other Indian company.
• Foreign companies are permitted to use their trade in domestic markets. During the nineties, there has been an increasing trend of foreign investments in India. The government approved 666 foreign collaborations in 1990. This number has become more than double to 1520 by 1992. At present, the USA is the largest investor in India, followed by Switzerland, Japan and UK. Foreign investment has largely been concentrated in sector such as fuel and oil refineries, power chemicals and electrical equipments and electronics.
THE RISE OF INDIAN MULTINATIONALS
After liberalization of Indian market in 1991 and in its due course, India INC. is flying high not only over the Indian sky but globally. Though it took almost a decade when many Indian forms have slowly and surly embarked on the global path and lead to the emergence of the Indian Multinational Companies. With each passing day, Indian businesses are acquiring companies abroad, be coming worldwide popular suppliers and are recruiting staff across national boundaries. While an Asian Paints is painting the world red, Tata is rolling out indicas from Birmingham and Sundaram Fasteners nails home the fat that the Indian company is an entity to be reckoned with.
GATT AND WTO
GATT was established in 1948 on the lines of the recommendations of the Bretton Woods conference (1944) for the establishment of an International Trade Organization. It was an agreement between the contracting countries for liberating trade and commerce between countries.
Objectives of GATT
The primary objective of GATT was to expand international trade so as to bring about all-round economic prosperity. The preamble to the GATT mentioned the following as its important objectives:
- raising the standard of living
- ensuring full employment and a large and steadily growing volume of real income and effective demand.
- developing full use of the resources of the world
- expansion of production and international trade.
GATT embodied certain conventions and general principles governing international trade among member countries. The rules or conventions of GATT were:
- any proposed change in the tariff or other type of commercial policy of member country should not be undertaken without consultation of other parties to the agreement.
- the countries that adhere to the agreement should work towards the reduction of tariffs and other barriers to international trade, which should be discussed within the framework of GATT.
For the realization of its objectives, GATT adopted the following principles:
1. non discrimination between member countries in the conduct of international trade.
2. prohibition of quantitative restrictions on trade.
3. consultation between countries for solving disagreements and issues involved in the trade negotiations.
So far eight rounds of Multinational Trade Negotiations (MTNs) were held under the auspices of GATT. The Uruguay Round (UR) was the eighth and the latest round held in Punta del Este in Uruguay in September 1986.
The UR round took up three basic subjects for discussion:
1. reducing trade barriers and improving market access.
2. strengthening GATT disciplines
3. problems of liberalization of trade in services (GATS), Trade Related aspects of Intellectual Property Rights (TRIPs), and Trade Related Investment Measures.
WTO
The GATT was transformed into WTO with effect from 1st Jan 1995 following the UR round. It is a powerful body than GATT and has an enlarged role than the GATT in international trade.
WTO is based in Geneva Switzerland. India is one of the founder members of GATT and WTO (also founder member of IMF and World Bank). When GATT was signed in 1947, 23 countries participated. The number increased to 117 in the UR round (1986), 128 on 1st July 1995, 142 in Nov 2001(Doha Summit 4th) and 149 in Dec 2005 (Hong Kong Summit –6th ).
Functions
The WTO has the following functions:
- Administering and implementing the multilateral and plurilateral trade agreements which together make up the WTO.
- Acting as a forum for multilateral trade negotiations.
- Seeking to resolve trade disputes
- Overseeing national trade policies, and
- Cooperating with other international institutions like IMF and IBRD in global economic policy making.
GATT vs. WTO
GATT
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WTO
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The WTO Structure
Ministerial Conference
The Ministerial Conference is the highest authority in the structure of WTO. It is composed of representatives of all WTO members. It meets at least every two years and is empowered to make decisions on all matters under any of the multilateral trade agreements.
General Council
It is a subsidiary body of Ministerial Conference which also composed of all the WTO members. The General Council convenes in two particular forms- as the Dispute Settlement Body and the Trade Policy Review Body. The former oversees the dispute settlement procedures and the latter conducts regular reviews of trade policies of individual WTO members.
The General Council delegates responsibility to three other bodies viz. the Council for Trade in Services and Council for TRIPS.
The three other bodies established by the Ministerial Conference and reporting to the General Council, are:
a) The Committee on Trade and Development – which is concerned with issues relating to the developing countries and especially to the least developed among them.
b) Committee on Balance of Payments - which is responsible for consultations among WTO members and countries which resort to trade restrictive measures in order to cope with their balance of payment difficulties.
c) Committee on Budget, Finance and Administration – which is concerned with issues relating to WTO’s financing and budget.
Implications for India
8 Arguments for WTO
- the system helps promote peace.
- disputes are handled constructively
- rules make life easier for all
- freer trade cuts the cost of living
- it provides more choice and quality of products
- trade raises incomes
- trade stimulates economic growth
- the basic principles make life more efficient
8 Criticisms of WTO
- WTO dictates policy
- the WTO is for free trade at any cost
- common interest takes priority over development
- common interest takes priority over environment
- common interest takes priority over health and safety
- worsens poverty and destroys jobs
- small countries are powerless in the WTO
- the WTO is a tool of powerful lobbies.
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