Globalisation - Business Environment

Although there is not a single accepted definition of globalization, it is a term used to describe the process of integration on a worldwide scale of markets and production.The world is moving away from a system of national markets that are isolated from one another by trade barriers, distance or culture. Advances in technology and mass communications have made it possible for people in one part of the world to watch happenings in far off places on television or via the Internet.Increases in labour mobility have meant that it is possible to buy Chinese food anywhere in the world. An extreme view of this process is called ‘hyper globalization’, where the world market is seen as a borderless global marketplace consisting of powerless nation states and powerful multinational corporations. The more generally accepted view is called ‘transformationalism’ which sees the process of globalization as bringing about changes in both the power of countries and companies and in national characteristics and culture. Any differences do not disappear but are maintained, albeit in changed forms. The population in India might drinkCoca-Cola and listen to western music but this does not mean that they hold the same views and values as the west.Globalization has taken place because of closer economic ties between countries, because of developments in mass communications, transportation and electronics and because of greater labour mobility. In such a world other forces come into play regionalism, for example where countries that have geographical or cultural ties group together. This concept is covered later in this chapter. A heated debate has taken place over the past decade between the pro-globalization and the anti-globalization lobbies.
The arguments put forward by the proponents of globalization stem from the benefits brought about by increased international trade and specialization as outlined at the beginning of this chapter. They argue that all countries open to international trade have benefited only those that are closed to international trade (some African countries, for example) have become poorer. In the case of China, the opening up to world trade in 1978 has led to increases in GDP percapita, up from $1460 per head in 1980 to $4091 per head in 2004. The pro-globalization arguments can be summarized thus: increased globalization leads to greater specialization so that all countries involved benefit from the increased international trade; countries that are open to international trade have experienced much faster growth than countries that are not;barriers to trade encourage industries to be inefficient and uncompetitive; it is not just the large multinationals that benefit from globalization small and medium-sized companies are also engaged in global production and marketing.
The arguments against globalization are just as strong. It is argued that the benefits of higher world output and growth brought about through globalization have not been shared equally by all countries. The main beneficiaries have been the large multinationals rather than individual countries or people. It is argued that the international organisations which promote free trade should pay more attention to the issues of equity, human rights and the environment rather than focusing simply on trade. It is also argued that increased globalization leads to economic instability. The anti-globalization arguments can be summarized thus: the benefits of globalization have not been shared equitably throughout the world; globalization undermines the power of nation states it empowers the large multinationals at the expense of governments many multinationals are financially bigger than nation states; the large organisations that promote free trade (like the WTO and the IMF) are not democratically elected and their decisions are not made in the public eye; the policies of these organisations are only aimed at trade human rights and environmental concerns are ignored.The late 1990s and early 2000s have seen fierce, large-scale anti-globalization demonstrations at meetings of the G8 ministers all over the world. The main international organisations concerned with globalisation have already been discussed in Chapter. They are the World Trade Organisation (WTO), the International Monetary Fund (IMF), the World Bank and the OECD. In addition to these there is the United Nations Conference on Trade and Development (UNCTAD), which is a permanent intergovernmental body of the United Nations which aims to maximize investment to the developing nations and to help them in their integration into the world economy.

There are several elements of economic globalization: international trade; foreign direct investment; and capital market flows. Each of these will be discussed in turn, and comparative figures are given in Table for 1990 and 2003. The table uses the OECD categorization of members into three bands high income countries, which includes the EU, North America and Australasia, middle income countries which includes East Asia and the Pacific Rim, and low income countries, which includes South Asia and Africa.

International trade

Table provides evidence of increased globalization the share of international trade in goods as a percentage of GDP has increased between 1990 and 2003 for all income groups and particularly for the middle income group. The same is true for services, although the data is not shown. This table does, however, hide differences within each group in the low income group, for example, although the share has increased overall, there are countries that have experienced negative growth (Botswana and Namibia, for example both of which are open to international trade). Although the share of developing countries has increased over time, world markets are still dominated by the developed world, especially in high-value, high-tech products. It is also true that increased trade does not automatically lead to increased development as in parts of sub-Saharan Africa where the products sold are basic primary products.
Capital market flows
This refers to the flows of money from private savers wishing to include foreign assets in their portfolios. Again, Table shows that this has increased in all income bands during the time period. The overall figures hide a greater volatility than in international trade or foreign direct investment and the fact that the flows have been largely restricted to emerging economies in East Asia. Capital market flows occur because investors want to diversify their portfolios to include foreign assets; it is therefore aimed at bringing about short-term capital gains. Unlike foreign direct investment, there is no long-term involvement on the part of the investor.
Foreign Direct Investment (FDI)
This refers to the establishment of production facilities in overseas countries and therefore represents a more direct involvement in the local economy (than capital market flows) and a longer-term relationship. Between 1990 and 2000, the value of FDI worldwide more than doubled the two biggest recipients and donors were the UK and the USA. Since 2000 FDI has fallen in line with world economic recession but it recovered slightly in 2004. FDI represents the largest form of private capital inflow into the developing countries. The importance of FDI is considered in the case study at the end of the chapter.
Each of the three elements of economic globalization has a different effect and carries different consequences for countries. Capital market flows are much more volatile and therefore carry higher risk these flows introduce the possibility of ‘boom and bust’ for countries where capital market flows are important. The financial crises in the emerging
Asian countries in the late 1990s had a lot to do with these capital flows. Openness to trade and FDI are less volatile and it is these that are favoured by the international organisations like the World Bank and the WTO. It is also true that the benefits of globalization have not been shared equally between those taking part the developed nations have reaped more benefit than the poorer nations.
The role of multinational enterprises
Substantial amounts of foreign trade and hence movements of currency result from the activities of very large multinational companies or enterprises. Multinational enterprises (MNEs) strictly defined are enterprises operating in a number of countries and having production or service facilities outside the country of their origin.
These multinationals usually have their headquarters in a developed country with two exceptions (Daewoo and Petróleos de Venezuela), the largest 100 MNEs are based in the developed world. Typically, MNEs still employ two-thirds of their workforce and produce two-thirds of their output in their home country. A relatively new concept is the transnational enterprise (often used interchangeably with multinational enterprise); it refers to enterprises which do not have a national base they are truly international companies. More will be said about this concept later, but as they are still relatively rare this section will concentrate on MNEs.Multinationals are often well-known household names, as Table shows.
Multinationals can diversify operations across different countries. This brings them great benefits:

  1. MNEs can locate their activities in the countries which are best suited for them. For example, production planning can be carried out in the parent country, the pro-duction itself can be carried out in one of the newly industrialised countries where labour is relatively cheap and marketing can be done in the parent country where such activities are well developed. The relocation of production may go some way to explaining the decline in the manufacturing sector in the developed nations.
  2. An MNE can cross-subsidise its operations. Profits from one market can be used to support operations in another one. The cross-subsidisation could take the form of price cutting, increasing productive capacity or heavy advertising.
  3. The risk involved in production is spread, not just over different markets but also over different countries.
  4. MNEs can avoid tax by negotiating special tax arrangements in one of their host countries (tax holidays) or through careful use of transfer pricing. Transfer prices are the prices at which internal transactions take place. These can be altered so that high profits can be shown in countries where the tax rate is lower. For example, in the USA in 1999 two-thirds of foreign-based multinationals paid no federal income tax. The loss to US taxpayers from this has been estimated as in excess of $40 billion per year in unpaid taxes.
  5. MNEs can take advantage of subsidies and tax exemptions offered by governments to encourage start-ups in their country.

The very size of MNEs gives rise to concern as their operations can have a substantial impact upon the economy. For example, the activities of MNEs will affect the labour market of host countries and the balance of payments. If a subsidiary is started in one country there will be an inflow of capital to that country. Once it is up and running, however, there will be outflows of dividends and profits which will affect the invisible balance. Also, there will be flows of goods within the company, and therefore between countries, in the form of semi-finished goods and raw materials. These movements will affect the exchange rate as well as the balance of payments and it is likely that the effects will be greater for developing countries that for developed countries.
There is also the possibility of exploitation of less developed countries, and it is debatable whether such footloose industries form a viable basis for economic development.
Added to this, MNEs take their decisions in terms of their overall operations rather than with any consideration of their effects on the host economy.
There is therefore a loss of economic sovereignty for national governments.
The main problem with multinationals is the lack of control that can be exerted by national governments. In June 2005 the OECD updated its Guidelines for

Multinational Enterprises, which are not legally binding but are promoted by OECD member governments. These seek to provide a balanced framework for international investment that clarifies both the rights and responsibilities of the business community. It contains guidelines on business ethics, employment relations, information disclosure and taxation, among other things. Against all this is the fact that without the presence of MNEs, output in host countries would be lower, and there is evidence that on labour market issues the multinationals do not perform badly.

The transnationality index gives a measure of an MNE’s involvement abroad by looking at three ratios foreign asset/total asset, foreign sales/total sales and foreign employment/total employment. As such it captures the importance of foreign activities in its overall activities. In Table Vodafone Group plc has the highest index this is because in all three ratios it has a high proportion of foreign involvement. Since 1990 the average index of transnationality for the top 100 MNEs has increased4 from 51 per cent to 55 per cent.These multinationals are huge organizations and their market values often exceed the GNP of many of the countries in which they operate. There are over 60 000 MNEs around the world and they are estimated to account for a quarter of the world’s output. The growth in MNEs is due to relaxation of exchange controls, making it easier to move money between countries, and the improvements in communication, which makes it possible to run a worldwide business from one country. The importance of multinationals varies from country to country, as Table shows. As can be seen, foreign affiliates are very important for some countries and not so important for others; in the case of Japan there is hardly any foreign presence at all. For all of the countries, except Finland, Germany and Japan, foreign affiliates have a bigger impact on production than employment.

Share-of-foreign-affiliates in manufacturing production and employment
It has already been noted that one response to globalization has been the increased importance of regionalism. Regional trade agreements (RTAs) are groupings of countries set up to help trade in the world. They are often based on geographical proximity (the EU, for example) but not necessarily the Protocol relating to Trade Negotiations among Developing Countries (PTN), for example, which has members from all over the world, is based on economic status rather than geographical location.All such agreements have to be notified to the World Trade Organization. In July 2005, the only member of the WTO not part of a trade agreement was Mongolia; over 300 such agreements had been notified to the WTO and there were 180 in operation. At first glance it may seem that the existence of regional trade agreements might go against the remit of the WTO to promote free trade, but it accepts that some arrangements can bring economic benefits. The agreements theWTO is most interested in are the ones which abolish barriers between members provided they do not do this to the detriment of other members. The WTO has a committee which considers each RTA and assesses whether the rules contravene the rules of the WTO.These agreements can take a variety of forms. The most basic relationship and the most common is a free trade area where trade barriers between members are abolished but where each member maintains its own national barriers with non-members. Examples of this include the North American Free Trade Agreement (NAFTA) and the Association of South East Asian Nations (ASEAN) Free Trade Area.The arrangement could take the form of a customs union or common market, where members abolish trade barriers with members and adopt a common external tariff with non-members. Examples of this include the EU and the Southern Common Market (MERCOSUR) in South America. More involved relationships include economic union where members unify their economic policies through to political union the creation of a new ‘state’. Again the EU is an example of a regional group that made great progress towards economic union and has made some movement towards political union. As the section on the EU has shown, these regional groups have not super ceded national governments and are unlikely to.

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