Globalization

What is Globalisation?

‘Globalisation’ means ‘the reduction of the difference between one economy and another’ so that trade within and between different countries is increasingly similar all over the world. Globalisation has become a big buzz word in the last 10/15 years, but it has been going on for centuries, and especially since 1945. What has changed is the pace of this trend; it used to be quite a slow process and in recent years it has become much faster.

Background

In the 17th Century new ship design allowed Europeans to start trading with the rest of the world in a much bigger way, although trade was still a tiny part of the economy compared to agriculture.

Later developments in transport, steam ships, the railways and now aircraft, have all contributed to the development of trade. Aircraft also move people around quickly, so the sense of the size and distances of the world ‘shrinks’ making us feel that far-away places are no longer so strange. The internet now allows international communication in a way that was not possible before; your favourite site could just as easily be in New Zealand as in London.

The WTO has, since 1945, made major reductions to the barriers to trade, and this has led to an enormous increase in international trade compared with domestic trade. Because world trade has consistently grown much faster than world GDP, the proportions of domestic versus international business have changed; much more of all countries’ business is now done overseas than used to be the case.

Increasing Economic Integration

A second important idea is that of ‘integration’. In the past, an economy was largely self-contained, and imports and exports were something that happened almost co-incidentally. Now, economies depend closely on each other for inputs eg raw material and for markets for outputs.

A recession in one economy (especially a large economy like Japan or the US) affects many other economies. Consumer markets are the most important in any economy. There has been a rapid convergence of consumer tastes and buying habits, so the purchases of consumers all over the world have an increasing amount in common (although there are still many important differences); a business can sell much the same product in many different markets. A global brand like ‘Coca-Cola is very good examples of this.

Multinational companies ("MNCs") have existed for many years, but today there are many more of them and their importance to all economies has become much greater. Their example, and their success, has led many businesses to change their strategic objectives and their management thinking so ‘thinking globally but acting locally’ is now much more common; many businesses used to almost ignore what went on elsewhere.

Factors Affecting Globalisation

The following main factors have fuelled the pace of globalisation:

1. Technological change, especially in communications technology. For example, UK businesses and data by satellite to India (taking advantage of the difference in time zones) where skilled but cheaper data handlers input the data and return it by satellite for the start of the UK working day.

2. Transport is much cheaper and faster. This is not just aircraft, but also ships. The development of containerisation in the 1950s was a major breakthrough in goods handling, and there have been continuing improvements to shipping technology since then.

3. Deregulation. From the 1980s onwards (starting in the UK) many rules and regulations in business were removed, especially rules regarding foreign ownership. Privatisation also took place, and large areas of business were now open to purchase and/or take-over. This allowed businesses in one country to buy those in another. For example, many UK utilities, once government businesses, are owned by French and US businesses.

4. Removal of capital exchange controls. The movement of money from one country to another was also controlled, and these controls were lifted over the same period. This allowed businesses to move money from one country to another in a search for better business returns; if investment in one’s own country looked unattractive, a business could buy businesses in another country. During the 1990s huge sums of money, mainly from the US, have come into the UK economy. See,

5. Free Trade. Many barriers to trade have been removed. Some of this has been done by regional groupings of countries such as the EU. Most of it has been done by the WTO. This makes trade cheaper and therefore more attractive to business.

6. Consumer tastes have changed, and consumers are more willing to try foreign products. The arrival of global satellite television, for example, has exposed consumers to global advertising. Consumers are more aware of what is available in other countries, and are keen to give it a try.

7. Emerging markets in developing countries, especially the ‘Tigers’ of SE Asia eg Thailand. There has been high growth of incomes in these countries, which makes large consumer markets with money to spend. Indonesia, for example, whilst still not particularly rich, has some 350 myn consumers. Both India and China are very poor countries, but there are small middle classes who are doing very well and have money to spend. Although these groups are small in the context of the country, the overall populations are so huge (over 1 byn) that a small middle class adds up to many millions of consumers.

The Effects of Globalisation on Business

The effects vary a lot from one part of the world to another, and from one area of business to another. Communications infrastructure is important to modern businesses, but not all countries have got one. There is also the ‘non-traded’ sector ie goods and services which are not traded internationally. Domestic services, for example, have to be provided where the house is; you can’t export a clean house.

Competition

- Foreign businesses buy into domestic markets.
- Deregulation opens up markets to competition.
- Deregulation encourages innovation in new products and markets which challenges traditional market leaders

Meeting consumer expectations and tastes

- Generally, consumers all over the world are better informed, have higher incomes and therefore higher and more exacting expectations. This forces businesses to meet higher standards.

Economies of scale

Selling into a global market allows for enormous economies of scale, although not all industries benefit from these.

Choice of location

Businesses are now much freer to choose where they operate from, and can move to a cheaper and more efficient location. In the last decade the UK has been seen by many businesses as an attractive business location, especially in financial services, and many businesses have located in the UK which has boosted the UK economy but also provided increased competition for UK businesses. This increased movement of businesses and jobs has, to some extent, forced governments to compete with each other in providing an attractive and low-cost location. Ireland, for example, offers ‘tax holidays ’ to businesses relocating there. Manufacturing businesses are increasingly relocating to low-wage countries such as Indonesia. Inputs vary in price across the world, and businesses now have more freedom of movement in moving to get hold of those cheaper inputs eg labour in developing countries, or financial advice in the City of London. One limitation on this is that managers won’t always move to some countries if living conditions are unpleasant or even dangerous.

Multi-national and multi-cultural management

This is a major challenge to businesses and their managers. A multi-national business environment is more complex with more variables, and so is more difficult to manage. A multi-cultural employment policy leads to employees of many different nationalities, languages, religions and cultures in different offices across the globe. These employees react in quite different ways to incentives, to motivation and it is very difficult to find managers who are sensitive to all these different factors. It is very easy to inadvertently give offence and demotivate workers. For example, the Japanese were initially very disappointed with their Thai employees who didn’t respond well to Japanese methods of building up corporate loyalty and motivation. Once they turned production targets into a game, the Thais worked extremely well.

Globalisation of markets

National borders are becoming less and less important. Markets stretch across borders and MNCs are well-placed to take advantage of this. The same issues of language and culture and so on arise. Consumers are more alike, but by no means the same. Many businesses have made expensive mistakes by not taking local variation sufficiently into account. Marketing, in particular, is a minefield because of its dependence on language. The marketing books are full of stories, often very amusing, of how businesses got it wrong

Foreign investment is no longer something that flows only from a developed country to a developing one. Indian companies are on an expansion drive. Indian business houses, like the Tata Group and firms like Ranbaxy Laboratories Limited (Ranbaxy), Wipro Limited (Wipro), Sun pharmaceutical Industries Limited, Crompton Greaves Limited, Asian Paints, and Cognizant Technology Solutions, have struck merger and acquisition deals world wide to become global players. Acquisitions by Indian companies have now become strategic in nature, by which they have been able to take leadership positions in Asia. The table 1.1 depicts major Human Resource Challenges faced by modern businesses in the present scenario.