MNG 00723 Global Business

Globalization

Globalization means the free movement of the goods, services, people, information, etc. it is the process of interaction between people, governments, organizations. The seamless movement of the good and services around the world is globalization.  It is the practice of combining the countries arising from the convergence of products, ideas etc. the main driver of globalization is technology. The economic life have transformed due to the advances made in information technology. It has its own effects on the environment, on culture, on economic development around the globe. It is the result of the opening of the global economy and the increment in trade between nations.

How it affect the domestic business

There is no industry which is not affected by the introduction of globalization. It has several effects and has impacted each and every industry whether small or big. Some of them have hit hardly, like, automobile, food sector, electronics, textiles, etc. the economic transactions, institutions, practices all have been impacted. The already existed norms and behavior have been challenged and it requires a change in the mindsets of people. Companies have left with the options of downsizing; consolidation etc (Time, 2016). continuous improvement in the productivity is the vital solution left in front of the managers at firm level, and it will help them to remain viable economically. The effects of globalization have changed the way we used to carry our business practices.  It has resulting in inviting competition from all over the world. Earlier it was competition between the domestic companies for market share, and now they have to compete globally. As an outcome of globalization there is a continuous reestablishment. However, it created opportunities and different options for the people who are taking it proactively and are prepared for it (Cavusgil et al., 2014).

Impacts of globalization

Globalization has resulted in the access of global markets for the other companies. The companies now attempts to expand their operations from national to international level which have resulted in increased customer demand. People now have an access to different variety of products which was just limited to few ones. It promoted the cross- cultural management. The most visible effect in India was the flow of foreign capital (Cavusgil, 2014). New production units have been set up in India. Due to the competition which has resulted from globalization the quality of products has also enhanced. Because of the rise in competition, the companies are compelled to raise their standards and put all effective measures to provide satisfaction to their customers in order to make a visible place in the market. But at the same time, globalization has some negative effects as well (Lundvall et al., 2011). It became hard for regulators to predict the effect of their actions worldwide. It results in transfer of jobs from developed countries to the less developed countries. Any Country is now able to out-compete a typical OCED country. Globalization is able to switch taxation away from corporations on the individual citizens. The major drawback is that it led to fluctuation in price. Because of the increased competition, the developed countries are compelled to lower down their prices because the other countries like china are delivering a cheaper product (Hay, & Marsh, 2016).

Comparison between Absolute and Comparative Advantage

Absolute advantage is one in which a country is able to produce a particular product or good more efficiently than the other country. Comparative advantage on the other hand is one in which a country is able to produce a certain product with a lower opportunity cost than the other country. Comparative advantage is one in which the trade is mutually favorable, while absolute advantage is one in which trade is not mutually beneficial (Yang, & Ng, 2015). Comparative advantage normally differentiates the output of production of the same product among two countries. It is the ability of a certain country to create a particular product more superior than the other country. When a country produces the more number of products even after having the same resources supplied to both, then the country will have an absolute advantage. The products are produced in better way in absolute advantage. Unlike absolute advantage, comparative advantage checks the overall production of the good within the time frame. Absolute advantage deals in multiple products when compared to comparative advantage (CNBC, 2016). Cost is the factor which is involved in absolute advantage, whereas opportunity cost is involved in the case of comparative advantage.  While a country is able to have an absolute advantage in providing every product, it’s not possible to produce every product in comparative advantage for a country. The absolute advantage only takes productivity into account and doesn’t consider any measure of cost. Comparative advantage is always complementary, unlike absolute advantage (Moak, 2017).

For example,

China has lower opportunity costs in producing automobile vehicle (1 < 2) and Japan has lower opportunity costs in producing mobile (0.5 < 1). Without trade, in China the price of 1 pair of mobile would be 1 pair of automobile vehicle, whereas in Japan 1 pair of mobile would be exchanged for 0.5 pair of automobile vehicle.

Comparative advantage

China has a comparative advantage in the production of automobile vehicle (lower opportunity costs than Japan, because 1 < 2), whereas Japan has a comparative advantage in the production of mobile (because 0.5 < 1). Thus, China should specialize in producing automobile vehicle and exporting them to Japan and Japan should specialize in producing mobile and exporting them to China.

Reasons for Imposing Tariffs

Donald Trump, American president have recently decided to impose 45 % tariff on Chinese imports. He will impose tariffs not only on china, but on any other trade partner who can cheat its trade deals by doing currency manipulations or exporting subsidies illegally. Such tariffs are defensive not protectionist (CNBC, 2016). Putting tariffs are a strategic strategy to prevent china from cheating on any trade deals internationally. His major objective was to create new jobs and to reduce huge trade deficit. This will lead to boost up the income levels and create tax revenues. The another reason was that the intellectual property behind the US technology was been plagiarized by china, which helped china to get its stuff more cheaper and at the same time it helped china to gain big advantage in many leading industries like, automobiles, biotechnology, etc. He put 45% tariff on Chinese imports to protect jobs of employees in America from the unfair competition (Boundless, 2017).

More than 50,000 American factories were shut down and there was zero gain in real household income, the annual GDP growth rate went almost half when china declared war on the US since 2001 when it joined the World Trade Organization. the another reason was that china’s basic VAT is 175, but there were items like, agricultural products, are not taxed, while some faced a lower rate around 13% (CNBC, 2017).

Impact of Imposing Tariffs

Putting tariffs can be a part of the negotiation and hence it is risky. It will welcome a situation of war. It will give rise in customer costs and it will be ultimately borne by the consumers at a large degree. There will be a rise in the retail price of the imported goods and also the domestic goods that are the alternatives of the imported goods (Bookboon, 2011). There will be an increase in the production costs, which will have an effect on majority of materials that are used in making a particular product. This will lead to a mess in the entire production process. There will be price spikes across the economy, since economy is linked into difficult supply chains. Similarly, slowdown in the supply chains will lead to layoffs for the producers. The interest rates and stock market will show a rise, the credit risk will also shoot up, which will create a negative impact on the economy. American with lower income will be impacted the most by these higher tariffs. Making the workforce adaptable to these new changes is crucial and difficult. There are some parts for consumer’s items which are made in abroad. Increasing tariffs will make it difficult and expensive to import these parts (Study, 2017). At the end, it is concluded that putting high tariffs on Chinese imports will have a crucial impact on the jobs as well as domestic markets.

Referencing

Time.(2016) [Online] available at: http://time.com/money/4282166/donald-trump-tariff-plan-cost/  (Accessed: 3 August 2017).

CNBC.(2016) [Online] available at: https://www.cnbc.com/2016/12/07/trump-and-china-tariff-on-imports-would-hurt-many-us-companies.html (Accessed; 3 August 2017).

Boundless.(2016) [Online] available at: https://www.boundless.com/users/235420/textbooks/business-fundamentals/international-business-for-the-entrepreneur-14/globalization-opportunities-and-threats-to-developing-country-business-55/negative-and-positive-effects-of-globalization-for-developing-country-business-253-15556/ (Accessed: 3 August 2017).

Bookboon.(2011) [Online] available at: http://bookboon.com/blog/2011/10/how-globalization-affects-business/ (Accessed: 3 August 2017).

Study.(2017) [Online] available at: http://study.com/academy/lesson/what-is-globalization-definition-effects-examples.html (Accessed: 3 August 2017).

Cavusgil, S. T., Knight, G., Riesenberger, J. R., Rammal, H. G., & Rose, E. L. (2014) International business. USA: Pearson Australia.

Dunning, J. H. (2014) The Globalization of Business (Routledge Revivals): The Challenge of the 1990s.UK: Routledge.

Lundvall, B. Å., Joseph, K. J., Chaminade, C., & Vang, J. (2011) Handbook of innovation systems and developing countries: building domestic capabilities in a global setting. UK: Edward Elgar Publishing.

Hay, C., & Marsh, D. (2016) Demystifying globalization. USA: Springer.

Yang, X., & Ng, Y. K. (2015) Specialization and economic organization: A new classical microeconomic framework (Vol. 215). USA: Elsevier.

Moak, K. (2017) Developed Nations and the Economic Impact of Globalization. Germany:  Springer.

CNBC.(2017) [Online] available at: https://www.cnbc.com/2017/01/15/just-how-badly-could-trumps-threatened-45-tariff-hurt-china.html (Accessed: 3 August 2017).