02 Impact of Globalization Assignment Sample
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Introduction
The study relates to the understanding of globalization and its impacts on the business environment. The specific analysis is conducted on the risks and opportunities of globalization on firms and their performance. Globalization have varied impacts on the business processes and their overall performance. The international expansion is also explained as a solution to manage the globalization impacts.
Globalization
Globalization is free movement of goods, services and people seamlessly and in an integrated manner across the world. It is the result of the open global economy and increased trade between different nations. When the countries are close to open trade and foreign investment, the result is enhanced integration, interconnectedness of economies across the world.
Further, globalization can also mean that the countries liberalize their procedures of import and open to foreign investments in the major sectors of economy (Calvo, 2006). The countries attract the global capital by opening up their economies to various international companies.
The rules and procedures of countries permit the flow of people and investment in different countries and results in freeing up many sectors into productive fields. It creates a win-win situation for maximum economies of the world.
Globalization is based on the concept of comparative advantage and states that if one country is good at producing particular good can export it to other countries that are not efficient at product goods. The country can export the goods produced in an efficient manner to another country to achieve win-win situation (Kaminsky, 2009).
It is an underlying assumption that all countries are not good at all efficiencies. And the countries also have different resources and wage differentials that results in cross trading with each other.
Development of globalization
Globalization has taken place from many years, and used the road infrastructure, monetary systems and system of rules to maintain control over the empires. The globalization extent has increased in significant manner from last 15 years after some major developments that includes:
- India, China, Eastern European States ae part of global economy.
- Major technological developments in the sectors of transportation that has led to the importance of distance while trading in business.
- Relocation of production processes globally through outsourcing and off shoring practices (Levine, 2001).
- Acceleration of trade and capital market integration.
- Converged technology and income, especially India and China have experienced major growth resulting in reduction of poverty and increased income level.
Future for globalization
It is indicated that the growth of globalization is witnessed in last 15 years and continue growing in considerable manner. However, there are many risks of global integration and economy from factors such as climate change, opposed economic integration by different interest groups (Baldwin, 2009).
Despite of such risks, the overall future of globalization and economic integration is quite positive. The analysis of likely economic events are as follows:
- Better prospects for economic growth and continuation of positive growth globally.
- Strongest growth will be seen in Asian market.
- Intensification of global economic integration and continued investments for expansion and international trade.
- More dispersion in the processes of global production and increased specialization.
- Better growth rate in the exporting of manufacturing processes with advanced technologies.
- Adoption rate will be higher with new technologies and innovation. And it will lead to more incentives for research and development areas (Stiglitz, 2010).
- Advanced skills in the workforce with the adoption of new technologies.
- High economic growth rate and better response of government for economic development.
Overall, the prospects of globalization are optimistic and major comparative advantage areas are agricultural products, high technology manufacturing products, incentives for research and development.
These trends are likely to have positive implications not only for individuals and firms but for governments and countries (Forbes, 2010). However, there are specific risks to the global growth but many risks can be managed by the countries.
Risks and opportunities for firms
The isolation of economies is no longer a good strategy for businesses and most of the countries are moving to globalization and opening their opportunities to transact with businesses across the world. Conducting the global business is beneficial as it leads to better financial rewards. However, it is not always positive and the firms need to conduct the international business in a very strategic manner (Mundell, 2008).
The globalization of business is an absolute necessity to remain in the competition within the marketplace. The impact of globalization is positive as well as negative for firms. This section provides detail about the risks and opportunities for firms after globalization.
Expanding the business in business is mostly risky and expensive for firms but the globalization shift has changed the situation in significant manner. Currently, globalization is a developing force but at the same time, it leads to many interdependencies and leads to increased risks. There are many opportunities in the international market but with that, the opportunity comes with various unforeseen risks (Stulz, 2009).
It is very important for firms to take aggressive and proactive steps to manage the globalized business in appropriate manner. In present times, the conduct of business in international market is more like an offensive situation rather than defensive. Considering the opportunities of globalization for firms, the large size of international market as compared to the domestic market can be considered.
The businesses can increase their revenues by accessing the maximum number of markets and cater to the potential customers in new market (Calvo, 2006). Considering the downside of globalization, the companies will be taking advantage of securing brand recognition and loyalty in the international market.
The risks are related to the increasing demands of consumers and the economy of whole world will flatten soon. The slow adoption of globalized processes can also lead to losses but at the same time, the negative impacts are also present for firms.
The globalization phenomenon is not new as it exists since the dawn of time but it is visible and impactful in recent years. There are many macro-economic effects of globalization and continued the rapid advancement with the establishment of free trade agreement, increased usage of internet, development of countries, improvements in information and communication technology, multi-national business performance, stabilized impact of Euro currency on global market, increased liquidity of efficient capital markets.
The globalization has served to stabilize the business and financial markets in a dramatic manner and impacted the political, economic, and financial volatility (Bordo, 2001). The market is also shifting in drastic manner and impact the market and firm stability for the business expansion and capital markets
The negative factor impact on the world economy after globalization includes down equity, trade deficit, petroleum prices, constricted fund flow, housing crisis, increased cost of living. The conventional theory of economy suggests that there are many negative metrics in the economy and it has led to great depression in the economy (Leiderman, 2006). In the cases of severe risks, the financial turmoil takes place but at the same time, the foreign investments from G7 countries like Dubai, China, Japan and shows the opportunity to acquire interests.
The interdependency in the global business environment is a major risk for the countries that come along with the enhanced business opportunities. The emerging market present opportunities for higher growth and the risks can be adjusted on the same basis. For example, 80% of the population of the world accounts for 20% of the GDP of the world and 50% of the GDP of the world accounts for the emerging market. Considering the opportunities in global world, below mentioned factors are primary business opportunities.
- Rising Economies:In the recent years, developing countries like China and India has experienced major growth percentage and annualized growth.
- Demographics:Many markets have maximum younger populations and educated professionals, expanding middle class, urbanization, rising income levels and other related factors. These factors boost the economic growth along with globalization (Mundell, 2008).
- Increased consumer demand:The expansion of economies and presence of global companies bring the employment orientation across the intellectual capital. It is also creating major demand for western and modern style real estate infrastructure. There is a rising demand for hospitality, retail, industrial, office and related infrastructure.
- Infrastructure development:The utilities, communication and transportation are improved for better performance of firms in different countries. In most of the urban areas, it is a positive factor and lead to many opportunities.
- Opening of closed market systems: Most of the emerging markets have been engaged in systematic reform of societal values in the world (Stiglitz, 2010). It includes legal process, property rights, and published statues and regulations. Moreover, the privatization of industries, liberalization of rules, relaxation of capital controls regarding foreign direct investment encourages investment and growth.
To meet the increased demand of consumers, many businesses attempt to expand their geographical areas and extend their value chain at an international level. The globalization has major impact on the business due to cross-border transactions and huge proliferation. The businesses are expanding in international areas to maintain competitiveness and diversifying their footprints (Forbes, 2010).
The investments are high due to risks in the broader market. The bottom line of globalization is that it creates many business opportunities, diversify the risk, increase brand equity and expand the sources of revenue for the firms. But the risks of globalization need to be managed by the businesses to maintain the landscape.
Minimization of Risks through international business engagement
The international expansion is one of the good moves for seeking business opportunities in international business environment. But it is very important to develop proper understanding of the globalized opportunities before building the international market strategy.
The entrance in foreign market without the basic understanding and appropriate strategy. The international expansion can be a very good action for achieving success in global strategy. Some of the major considerations while expanding overseas are mentioned below to avoid unplanned costs, unanticipated liabilities, unforeseen regulation issues.
- Need of consumers – The consumer need is the base for initiating the strategy as it details about the need of local consumers in the target market. The affordability, preferences and choices of consumers need to be decided before entering the international market. It is not relevant to sell the high quality products and services at low prices in case, the consumers do not have sufficient purchasing power to buy them (Baldwin, 2009).
For example, Africa is home for six different growing economies in the world but it does not mean that it offers positive business opportunities for the luxury goods. The average income in Africa is very low as compared to other developed markets. Therefore, it is necessary to analyze the consumers, demographics, and competitive landscape within the market. The cost structure of company need to be analyzed in the multinational market.
- Customization or localization – The localization of product or services means the suitability of current offerings in relevance to the local market needs and demands. For example, McDonald’s has experienced great success in many countries because they have customized their menus according to local demands (Tornell, 2003).
In Hong Kong, McDonald’s offers shrimp burger according to the need of local consumers. The company is highly innovative in marketing their localized products in the market and make them suitable for the needs of customers. So, it is important to adopt and be flexible for seizing the business opportunities in the target market.
- Mode of entry – The entry mode is very important aspect for the business and it decides the success or failure of organization. There are various modes of entry like joint venture, partnership, franchise and many more. But it is important to decide the entry mode according to the specific business portfolio or offering within the market.
The company can initiate joint venture in case of good amount of familiarity in the target market. The selection of partner in case of joint venture is also an important consideration for businesses (Kaminsky, 2009). The business need to think carefully before initiating the presence in different country. The companies have low bargaining power as compared to large companies and they find them at high risk while dealing with unethical partners.
- Entry barriers – There are many barriers of entry in the target market and it can be soft or hard barriers. The soft entry barriers include culture, language, infrastructure issues, logistics cost, expensive transportation etc. For example, the infrastructure and transportation costs in Brazil are very high, especially in North Brazil.
The infrastructure of Brazil is decrepit. In this case, the company need to be very selective about the countries and research about the possibilities of partnering with local partners and suppliers so that the major challenges can be resolved. It will also pave the way for maximizing the business opportunities.
- Legal and regulatory issues – The businesses planning to expand internationally need to understand the target market and its legal and regulatory structure. The company needs to understand the relevant legal and regulatory structure that relates to the products or services of the company (Baldwin, 2009). There are taxes on exports and costs on moving the goods from various countries.
In addition, the labour and employee consideration need to be clarified to the businesses. For example, it is very expensive to hire new workers in Europe due to extensive labour laws and it is also very difficult to fire the employees. The business need to plan proactively about the employees and other costs before deciding to expand in new market.
- Exchange rate risks – The fluctuations of exchange rate add a layer to the complexity of entering in new market. There are frequent changes in the local currency of the countries imposed by the foreign governments. For example, China imposes limits on the capital that flows out of the country and ultimately, complicates the financial benefits within the business (Mundell, 2008).
In addition, the intellectual property protection is also a major concern as it varies according to the target market and poses challenges in many developing countries. And there are many risks related to political situations, corruption and security, especially in case of unstable regions like Middle East. So, it is important to consider this factor before expanding in global market.
There are various companies that have expanded to Middle East and failed due to economic instability. The best way is to develop a careful strategy and find the appropriate balance between the risk mitigation and market opportunities for the overseas expansion of business.
Conclusion
In conclusion, it can be considered that the globalization has progressed in recent years and poses various risks and opportunities for businesses. However, the developed countries have major gains from globalization and developing countries face difficulties in gaining success through globalization. The risks can be managed proactively to reap maximum business opportunities by the firms expanding in different countries.
The international expansion is one of the most lucrative ways to minimize the risks of globalization and gain maximum benefits and it is important to minimize the risks because the countries cannot be isolated in long term and need to expand business and gain benefits of globalization.
References
Baldwin, R. E., and Martin, P., (2009), “Two Waves of Globalization: Superficial Similarities, Fundamental Differences,” in Horst Siebert (ed.), Globalization and Labor, Tübingen: Mohr Siebeck.
Calvo, S., Leiderman, L., and Reinhart, C., (2006), “Inflows of Capital to Developing Countries in the 1990s,” Journal of Economic Perspectives, 10:2, pp 123-139.
Forbes, K., (2010), “The Asian Flu and Russian Virus: Firm-Level Evidence On How Crises Are Transmitted Internationally,” International Monetary Fund Seminar Series 2000-49, pp. 1-57, October.
Kaminsky, G., and Schmukler, S., (2009), “What Triggers Market Jitters? A Chronicle of the East Asian Crisis,” Journal of International Money and Finance, 18, pp. 537-560.
Levine, R., (2001), “International Financial Liberalization and Economic Growth,” Review of International Economics, 9:4, pp. 688-702.
Mundell, R., (2008), “A Reconsideration of the 20th Century,” American Economic Review, 90:3, pp. 327-340.
Stiglitz, J., (2010), “Capital Market Liberalization, Economic Growth, and Instability,” World Development, 28:6, pp. 1075-1086.
Stulz, R., (2009), “Globalization, Corporate Finance and the Cost of Capital,” Journal of Applied Corporate Finance, 12:3, pp. 8-25.
Tornell, A., Westermann, F., and Martínez, L., (2003), “Liberalization, Growth, and Financial Crises: Lessons from Mexico and the Developing World,” in progress
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