Concept of Globalization Globalization means different things to different people. The three important perspectives of globalization are as follows: • To a business executive, globalization refers to a strategy of crossing national boundaries through globalized production and marketing networks. • To an economist, globalization refers to an economic interdependence between countries covering increased trade, technology, labor, and capital flows. • To a political scientist, globalization refers to an integration of a global community in terms of ideas, norms, and values.
Because of these differences in perspectives, globalization has been defined in many different ways. The following are the widely used definitions of globalization: • “Globalization is a free movement of goods, services, people, capital, and information across national boundaries. ” • “Globalization is a process by which an activity or undertaking becomes worldwide in scope. ” • “Globalization is a process of integration of the world as one market. ” Form these definitions; it is clear that globalization leads to an integrated global economy.
The process of globalization ultimately converts the huge globe into a small global village. Forms of Globalization Globalization is a multi-dimensional process. It has four important dimensions: economic, cultural, political, and environmental. The process of globalization is now influencing these aspects of an economy. A brief description of these forms of globalization is as follows: ECONOMIC GLOBALIZATION: Economic influence is the most obvious part of globalization. Economic globalization is contributed by liberalization, deregulation, privatization, and declining costs of the markets in goods, services, capital, trade, and finance.
Economic globalization has speeded up in the recent past. A free-trade doctrine removes the barriers to the flow of goods between countries. The formation of the World Trade Organization (WTO) has given impetus to this process. Multinational companies are another force to boost up economic globalization. CULTURAL GLOBALIZATION: Different countries have different sets of national beliefs, values and norms. The expanding process of globalization has brought these cultural diversities together to form a global culture.
Advances in communications, television networks, transportation technology have been reducing the barriers of distance and culture. Over the last several years, global communications have been revolutionized by developments in satellites, digital switching, and optical fiber telephone lines. As a result of such developments, reliable system of commercial jet travel has reduced the time it takes to get from one location to another. This has tremendous impact on the flow of tourists across the globe. Television programmers have made people aware of other cultures and languages.
These have reduced the cultural distance between countries. The process of globalization has increased mutual understanding, peaceful coexistence, and learning from each other’s experiences. POLITICAL GLOBALIZATION: Nations today are more inter-dependent. They are joining hands to participate in creating macro-political framework for development. There are exchanges of views and experiences between nations regarding the establishment of good governance system, legal system, human rights, free media, property rights, decentralized pattern of governance, relatively free access to state information, and so on.
The regional grouping of nations has promoted the integration further and created pressure for democracy and human rights. Because of these global influences, the political system worldwide made a shift away from command and mixed economies to the free-market model. ENVIRONMETAL GLOBALIZATION: The globe today is facing unprecedented problems of global warming, depletion of the ozone layer, acute loss of bio-diversity, and trans-border pollution. In fact, ecological problems like floods, soil erosion, water pollution, air pollution, acid rain, and global warming cross national borders without hindrance.
To prevent any further degradation of global ecology, the world community is actively engaged in preventing the growing problem of environment. Today, world attention has been drawn toward conservation of environment, harnessing water resources, and judicious use of non-renewable resource. The world community is, therefore, trying to encourage countries to understand these global environment issues and adopt legal and other measures to protect the environment. Nature of Globalization Globalization promotes international business.
The international business is composed of four main categories: (i) world trade, (ii) portfolio investment (iii) direct investment, and (iv) multinational enterprises. A brief description of international business is given below: WORLD TRADE: The oldest form of international business is trading of merchandise. Consumers in one country buy goods, which are produced in another country. This is a common phenomenon. Most of the world trade today is among the industrialized countries. World trade is mostly made up of manufactured goods.
The service trade has also been rapidly increasing during recent years. Export business is beneficial for a country not only in terms of trade, but also because it creates export-related jobs. With the growing integration of the world economy, world trade would also increase. In fact, expansion of world trade itself has been made easier by two things. Firstly, technological changes in transport, global network of banking and insurance, and information flows have made it possible to undertake world trade more quickly.
Secondly, a number of international and regional agreements or arrangements have been established to promote and coordinate world trade. PORTFOLIO INVESTMENT: International portfolio investment is also known as indirect foreign investment. Portfolio investment is the second main type of globalization. It is the purchase of foreign securities in the form of stocks, bonds, or commercial papers to obtain a return on that investment in the form of dividends, interests, or capital gains. Acquiring foreign stocks and bonds does not confer managerial control of a foreign enterprise on the buyer.
Rather, the international portfolio investor is a creditor whose main concern is a decent return on his or her investment. Therefore, the capital flow is greatly affected by relative interest rates and strong currency values, which result in high return for the investors. FOREIGN DERECT INVESTMENT: Foreign direct investment (FDI) is the long-term capital investment. It involves acquisitions by domestic firms of foreign-based factories or any other types of business firms. The investor, thus, enjoys managerial control over the assets of the acquired firm.
Direct investment may be financed in a number of ways other than through capital movements. Foreign investments may be financed by borrowing locally, by reinvesting foreign earnings, by the sale to foreign affiliate of non-financial assets such as technology, or through funds generated by licensing fees and payments for management services to the parent company. MULTINATIONAL COMPANIES: FDI is an important vehicle for the birth and growth of multinational companies. A multinational company encompasses both domestic and overseas operations.
It is called multinational because it operates across national boundaries. However, its focus is on foreign markets. A multinational company, thus, has all the components of the definition of globalization and international business discussed above. Being multinational in scope and activity, such firms also encounter wide-ranging socio-cultural, political, and legal problems while operating in many different countries. Methods of Globalization There are a number of methods for globalization of business. In each method, there is a choice of strategies to follow.
These strategies are sometimes referred to as “foreign market entry strategies”. If the international business strategy is to be successful, a business firm must carefully analyze the advantages and disadvantages of different entry methods before deciding on its approaches. A brief account of some of the methods of globalization is as follows: EXPORTING: The most widely used and common method of doing business internationally is exporting. A direct export operation is a direct sale by a manufacturer to an overseas customer. Indirect exporting involves selling through an intermediary.
Exporting is preferable when the cost of production in the home country is substantially lower than producing goods in foreign markets. Therefore, business firms having cost advantage would like to export their products to foreign markets instead of investing in production facilities there. Exporting is, thus, the first stage in the evolution of international business. Exporting is the best alternative under a given set of conditions. It is the least complex global operations. However, there are some factors, which make exporting less attractive than other alternatives.
For example, policies of some governments discriminate against import. In some cases, imports are even banned. There may also be hostility against imports. In these situations, exporting strategy may not be effective. LICENSIG AND FRANCHINSG: Licensing and franchising are important entry and expansion methods. Through these methods, the companies can expand their business. Earnings come to the company through fees and royalties. Today, many western companies have been extensively using licensing and franchising practices.
One of the growing trends in international business today has been trademark licensing. This has become a substantial source of worldwide revenue. Licensing offers rapid entry into a foreign market. Under international licensing, a business firm can contractually assign the rights to certain technical know-how, design, intellectual property to a foreign company in return for royalty. In many countries, law regulates such fees or royalties. At times, a licensing agreement may be of cross-licensing type wherein there is mutual exchange of knowledge and patents.
In a cross-licensing arrangement, a cash payment may or may not be involved. The advantage of licensing is that the licenser does not have to bear the development costs associated with opening up in a foreign country. The licensee bears the costs. Franchising is a form of licensing in which a parent company (the franchiser) grants another independent entity (the franchise) the right to do business in a prescribed manner. The franchisee buys an established marketing package without the risks of product acceptance, market testing, etc. The franchiser gets foreign market entry at minimum cost, plus a local ntrepreneur. The privilege may be the right to sell the parent company’s product, to use its name, to adopt its methods, or to copy its symbols, trademarks and architecture. One of the common forms of franchising involves the franchiser supplying some ingredients for finished products, like coca-cola supplying the syrup to the bottlers. Hilton Hotels might sell a franchise to a local company in Nepal to operate hotels under the Hilton name. FULLY OWNED MANUFACTURING FACILITIES: Bigger corporations establish their own factories abroad.
This strategy has some advantages. The corporation owning the factory has full control over production and quality. There is also no risk of developing potential competitors as in the case of licensing and contract manufacturing. However, there may be some problems while operating in a foreign country. The government may impose restrictions on the use of desired technology. Similarly, constraints such as lack of skilled manpower, infrastructural facilities, production bottlenecks, raw material supply etc. may also be encountered.
Above all, the corporation may have to invest a lot in terms of financial and managerial resources to operate the plant in its fullest capacity. JOINT VENTURES A joint venture is a partnership in which the domestic firm and the foreign firm negotiates tie up involving one or more of the the following:equity,transfer of technology,investment,production and marketing. The arrangement defines responsibility for performance,accountability and powersharing. MERGER AND ACQUISITION The most extensive form of participation in global market is 100% ownership,which may be achieved by start up,merger or acquisition
STRATEGIC ALLIANCE Various terms are used to describe the linkage between firms to jointly pursue a common goal,such as collaborative agreements,strategic alliance and global strategic partnership. EFFECT OF GLOBALISATION Increasing globalization has many effect and consequences on an indivisual business firm as well as the national economy. These effect are both positive as well as negative. We can identity some 5 major effects of Globalisation Liberalized International Trade Import Penetration Foreign Direct Investment Multinational Companies Competitive Environment
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