What is Globalisation? Significance, Stages, Drivers,

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.

Growing Significance of Globalisation

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.

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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.

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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.