What is Globalisation?
Today, the term globalisation has become extremely common. Globalisation has been derived from the word ‘global’, which refers to the issues and concerns related to the whole world. It is often said that our world economy has become quite globalised. It means that the whole world is increasingly behaving as a single large market having interdependent production where people consume similar goods. Also, this single large market responds to the same impulses.
The increase in the world trade is a direct manifestation of globalisation. This can be verified by checking the statistics related to the world trade such as Gross World Product or GWP.
Another very visible phenomenon that shows the increasing impact of globalisation is the increasing levels of Foreign Direct Investment (FDI) in developing countries. As a result of globalisation, all the capital markets of different countries have also become integrated.
Reasons for Globalization
Businesses all over the world now recognise that globalisation affects them irrespective of whether they are small scale domestic organisations or are Multinational Corporations (MNCs). The scale of impact of globalisation may vary. The importance of globalisation has increased immensely in the last few decades due to the following reasons:
Gains access to international markets
Globalisation, improved communication and technology helps organisations in gaining access to international markets. It means that Indian pharma companies can source raw materials from foreign countries and sell the finished goods in the international markets.
Similarly, various US-based MNCs have outsourced the majority of their business processes to India. There are various technology companies that enter and set-up units in other foreign countries where they produce goods using domestic resources and sell products in that market and in other markets also. The primary reason for accessing international market is to utilise the resources and labour that is available at lower costs than in home country.
Lower the cost of customer service
There are various organisations that need to provide customer service round the clock. For instance, banks need to provide customer service 24×7 to their account holders for availing services such as blocking credit or debit cards. Various technology companies set up Business Process Out- sourcing (BPO) companies and Knowledge Process Outsourcing (KPO) companies in developing countries such as India to take advantage of lower cost of human resources.
Also, many small scale foreign companies also outsource their non-critical work processes to remote staff which can be located anywhere in the world. It means that if a customer in Australia is facing some issue with his software, he/she may call up customer service number which is directed to a technical help executive who may be located in China or in India or anywhere in world.
Provide a level playing field
International markets are open and fairly competitive. This ensures that all companies irrespective of their size and might can enter the international market and offer its products or services. It is possible that a small or miniscule organisation achieves a greater success in foreign countries as compared to home countries or vice versa.
Encourage healthy competition
Domestic and international organisations, whether large or small-scale, have equal access to in- ternational markets. The markets provide a level playing field to all competitors. The most innovative and efficient organisations are able to perform better.
Expand customer base
When a company is limited to domestic market, it is able to offer its products and services only to domestic consumers. However, when companies are allowed to enter and access international markets, they can offer their products and services to foreign customers. For instance, basmati rice of India is very popular in foreign countries where it is exported from India. India imports electrical machinery and parts from various countries such as Germany and USA.
Protects against economic uncertainties
When companies operate domestically, they are majorly exposed to risks of domestic market. A huge downturn or upward change in the domestic market exposes companies to large downward or upward changes. However, when companies operate in international market, they are exposed to domestic as well as international risks. The domestic and international conditions may vary. For instance, when domestic markets are facing challenges, the international markets might be stable or booming. Although, a completely negative situation with challenging domestic and international markets is also possible; the overall risk is reduced.
Increase global output
Companies can take comparative advantage due to the several resources available in abundance in different countries and increase their overall output levels using the given resources as compared to the output they can produce using only the domestic resources.
Increase inflow of technologies and intellectual capital
Different countries have different kind of capabilities. Most developed countries have access to advanced technologies. Globalisation and international business help countries in gaining access to technologies or in technology transfer and transfer of intellectual capital. In the absence of international markets, developing countries would not be able to access such technologies or would have to make huge investments in research and development of alternative technologies domestically, which is quite expensive.
Increase the inflow of FDI
Organisations from developed countries make investments in developing countries, which paves the way for FDI. When FDI is initiated, it also brings products that would not be available otherwise along with increased levels of quality. It must be noted that FDI or international capital flow is beneficial for the investing countries because it mobilises the savings from these countries to developing countries having a high marginal product of capital.
Changes in political scenario
Globalisation has also led to widespread and rapid political changes in various countries. For instance, China opened up its economy in 1978, whereas India opened up its markets in 1991. In addition, the rise of globalisation has increased the importance of supranational institutions such as WTO, World Bank and IMF.
Change in trade barriers of cross border trade
Gradual decrease in the cross border trade barriers increases the pace of globalisation.
Stages of Globalisation
In order to become a truly globalised organisation, an organisation has to undergo certain stages of development. The easiest and most frequently used method to go global is to start exporting. Thereafter, an organisation may try to enter foreign markets by forming joint ventures or by setting-up some subsidiaries. In 1990, Kenichi Ohmae, a Japanese organisational theorist working for McKinsey, Japan identified five stages of globalisation.
Let us now discuss the various stages of globalisation as follows:
Stage 1 – Exporting
Under the exporting stage of globalisation, a domestic organisation establishes relationships with local dealers and distributors of foreign countries and starts exporting their products in the foreign markets. Organisations using international or global strategy and having low local responsiveness use this mode of globalisation.
Stage 2 – Marketing abroad
If an organisation is successful and gains profits by exporting, then it usually introduces some marketing functions into the foreign market. However, an organisation may directly start with this mode of globalisation. Organisations moving from an international strategy towards a multi-domestic strategy use this mode of globalisation.
Stage 3 – Manufacturing abroad
Under this stage, a domestic company sets up manufacturing units in certain key foreign markets and starts manufacturing abroad. This becomes possible by using modes of entry such as licensing, joint venture or subsidiaries. Organisations moving from international strategy towards a global or multi-domestic strategy use this mode of globalisation.
Stage 4 – Transfer of other head office functions abroad
Under this stage, the organisations transfer some or all of their head office functions to their subsidiaries abroad. It means that the organisation achieves a full insider position in foreign markets. All business processes and systems R&D and engineering are also transferred. In this stage, the organisation needs to replicate hardware, systems and operational approaches used domestically in a new environment.
As a result, the organisation needs to extend headquarter support functions such as personnel and finance to their office abroad. This practice usually leads to transfer of major functions such as R&D, engineering, finance, etc., to foreign office which becomes a small replica of the domestic head office.
Stage 5 – Recentralise functions
Under this stage, the organisation transfers its functions back to the centre. This centre is usually an office which has proved its excellence and zeal to grow operations. This centre may or may not be the head office, it may also be the subsidiary of the organisation. Organisations moving from global strategy towards a transnational strategy use this mode of globalisation.
Drivers of Globalisation
There are five different types of drivers of globalisation are:
Technological drivers
Technology has proved to be a true enabler and has paved the way for globalisation. There have been technological innovations in almost every field such as trans- portation, communication, telecommunication, and computing.
There have been upgradations in microprocessor speed and telecommunication has ensured low-cost effective and fast computing. Most importantly, there has been rapid growth in Internet speed and resources, which has given a boom to e-commerce and other Internet-based business transactions.
Political drivers
When countries allow their domestic companies to go global or allow foreign organisations to do business in domestic markets, they usually need to liberalise the trading rules and deregulate their markets. The impact of liberalisation and deregulating (or decreasing the regulation) is that it leads to decreasing the tariff rates and increasing FDI inflows.
Market drivers
When domestic markets become saturated or nearly saturated, the opportunities for growth become extremely limited. Under such circumstances, many organisations choose to go global to exploit the opportunities available therein. Organisations can also make use of global marketing channels.
Cost drivers
Organisations can now source from anywhere in the world from where they get the best quality materials at best prices. It is because cost of similar products varies in different countries. Also, product development costs vary in different countries. Therefore, global firms can use global cost drivers to create new products involving low development costs.
Competitive drivers
In globalised markets, inter-firm competition is present and there is a lot of interdependence among countries. Competition promotes innovation, trade and FDI.
Modes of Globalization
The following measures have been followed for globalization of Indian economy:
Increased Foreign Investments
Under the new economic reforms limits of foreign capital investment has been increased. In many cases 100% direct investment has been allowed without any restrictions. Expert trading houses have been allowed capital investment upto 100%. Foreign Exchange Management Act (FEMA) is enforced in this regard.
Lesser Tariffs and Duties
For getting international benefits, custom duties and tariffs on importds and exports are gradually decreasing.
Increase in Exports
Globalization shall help in the promotion of exports. Exporters have been provided special facilities and concessions for increasing the exports.
Freedom to Repatriate
Before the new economic policy, foreign investment in India was allowed on non-repatriation bases i.e. foreign investors were not allowed to take their income on foreign investment back to their country without the prior permission of Reserve Bank of India. Now this rule has been relaxed and foreign investors are free to repatriate their investment as well as income on investment, thereby attracting more investors to India.
Strategies for Globalization
The next important question is how do the companies go global? Globalization does not take place overnight .It proceeds through several stages. There are several strategies of globalization. Different strategies can be adopted by the companies for different markets. Some of these strategies are discussed in brief as under:
Exporting
Exporting is the most traditional way of entering into foreign market. Initially, a domestic business unit starts its international business by exporting to one nation. Gradually, it expands its exports to various nations. Exporting is very useful when a country has surplus production capacity i.e., its domestic consumption is less than its production capacity.
Licensing and Franchising
In licensing business unit of one country (Licensor) allows the business unit of other country (Licensee) to use its technical know-how (patents, trademarks, copyrights, etc.). For this, licensor charges royalty from license for a stipulated period of time. In most of the nations, the rate of royalty ranges from 5 per cent to 8 per cent of sales. Licensing agreements enable the licensor to make maximum utilization of its intellectual property. Licensee, too, can avail the benefits of modern technology by entering into licensing agreement.
Under franchising, business unit of one nation (Franchiser) grants right to do business in a particular manner to the business unit of other nation (Franchisee). This right can be with regard to selling the goods under the brand name of franchiser. In some cases, the key components are provided by franchiser to franchisee. In another form of franchising, the manufacturer may appoint dealers in other nations.
For example, soft drink manufacturers like Pepsi and Coca-Cola provide the key part of their product, Le. syrup to their franchisee in other nations. The franchisees have their own bottling plants where they make soft drinks but they sell the same under the brand name of franchiser.
Contract Manufacturing
In this agreement, business unit of one nation enters into agreement with manufacturers of other nations to allow them to manufacture the goods at their own, but right to market these goods is retained by the parent foreign enterprise. Under such agreement, the parent foreign enterprise Foreign Market Entry Strategies Exporting (from home country/third country) can expand its business to other nations without setting up its own manufacturing plant in other nations. If the parent enterprise feels that marketing in a particular nation is not much profitable, it can have easy exit from that nation as it has not set up its own production plant in other nation.
Joint Ventures
It is a common strategy for getting an entry into foreign market. In joint venture, foreign partner makes an arrangement with local unit of other country in which ownership and management are shared by local unit and foreign partner. Local unit has thorough knowledge of domestic conditions and it has its local set-up and infrastructure like manufacturing unit, distribution network, service centers, etc.
Management Contracting
In this arrangement, parent enterprise of one nation sets up management agencies. Through these management agencies, business units of other nations are managed without any stake in ownership/capital. It means the parent enterprise simply provides its managerial expertise to business units of other nations. For this, some fees in the form of percentage of profit or lump sum fee is charged by parent enterprise.
Wholly Owned Subsidiaries
Some companies open wholly owned manufacturing units in other nations. These subsidiary companies are wholly owned by their parent company. MNCs prefer this route for globalization when they want to have complete control over manufacturing activities in other nations. Instead of entering into joint ventures, licensing, franchising, exporting, etc., they set up their own subsidiary units in different nations. MNCs have full ownership and control over these subsidiary units. For example, LG Electronics has set up LG India as its wholly owned manufacturing subsidiary unit.
Assembly Contracts
In this strategy of entering into foreign markets, foreign partner provides key components and parts which are assembled in another nation. Usually business unit of developed nation provides key components, while these are assembled in developing nation. These contracts are entered into so as to avail the benefit of cheap labour available in developing nations. The products so assembled are marketed under the brand name of foreign parent company.
Cross-border Mergers and Acquisitions
Such mergers and acquisitions take place between business units of different nations. In merger, business units usually operating at same level, having same type of business join hands to avoid competition and to enhance their long-term competitive strength.
Third Country Route Location
This strategy of taking entry into foreign markets is used to take advantage of friendly relations between two nations. In this case, one country does not make direct investment in other nation; rather investment is made in third nation. Through this third nation, the investment is routed to destination country.
Strategic Alliance
Strategic alliance is entered between two business units for achieving a specific goal e.g., setting up common research and development unit for developing new technology, providing training to employees of both units.
Turnkey Projects
In turnkey project agreements, business unit of one nation agrees to construct entire plant for the business unit of other country. The business unit which agrees to construct a plant is known as licensor and the business unit to whom the completed project is handed over after completion is known as licensee. When initial construction phase of the project is more complex than the routine operational part, then turnkey projects are common.
There are a number of foreign market entry strategies for going global. The choice of the most suitable alternative is based on the relevant factors related to the company and the environments of the domestic and foreign markets. Global marketers have to make a multitude of decisions regarding the entry mode which may include the target product/ market, the goals of the target markets the mode of entry, the time of entry , a marketing-mix plan , a control system to check the performance in the entered markets.
Advantages of Globalization
- Encourages producers and consumers to benefit from deeper division of labour and economies of scale.
- Competitive markets reduce monopoly profits and incentivize businesses to seek cost-reducing innovations.
- Enhanced growth has led to higher per capita incomes – and helped many of poorest countries to achieve faster economic growth and reduce extreme poverty measured as incomes < $1.90 per day (PPP adjusted).
- Advantages from the freer movement of labour between countries.
- Gains from the sharing of ideas / skills / technologies across national borders.
- Opening up of capital markets allows developing countries to borrow money to over a domestic savings gap.
- Increased awareness among consumers of challenges from climate change and wealth/income inequality.
- Competitive pressures of globalization may prompt improved governance and better labour protection.
Disadvantages of Globalization
- Inequality: Globalizations has been linked to rising inequalities in income and wealth. Evidence for this is the growing rural–urban divide in countries such as China, India and Brazil. This leads to political and social tensions and financial instability that will constrain growth. Many of the world’s poorest people do not have access to basic technologies and public goods. They are excluded from the benefits.
- Inflation: Strong demand for food and energy has caused a steep rise in commodity prices. Food price inflation (known as agflation) has placed millions of the world’s poorest people at great risk.
- Vulnerability to external economic shocks: National economies are more connected and interdependent; this increases the risk of contagion i.e. an external event somewhere else in the world coming back to affect you has risen / making a country more vulnerable to macro-economic problems elsewhere.
- Threats to the Global Commons: Irreversible damage to ecosystems, land degradation, deforestation, loss of bio-diversity and the fears of a permanent shortage of water afflict millions of the worlds most vulnerable.
- Race to the bottom: Nations desperate to attract inward investment may be tempted to lower corporate taxes, allow lax health and safety laws and limit basic welfare safety nets with damaging social consequences.
- Trade Imbalances: Global trade has grown but so too have trade imbalances. Some countries are running big trade surpluses and these imbalances are creating tensions and pressures to introduce protectionist policies such as new forms of import control. Many developing countries fall victim to export dumping by producers in advanced nations (dumping is selling excess output at a price below the unit cost of supply.)
- Unemployment: Concern has been expressed by some that capital investment and jobs in advanced economies will drain away to developing countries as firms switch their production to countries with lower unit labour costs. This can lead to higher levels of structural unemployment.
- Standardization: Some critics of globalization point to a loss of economic and cultural diversity as giant firms and global multinational brands dominate domestic markets in many countries. Dominant global brands: Globalization might stifle competition if global businesses with dominant brands and superior technologies take charge of key markets be it telecommunications, motor vehicles and so on.
