GLOBALIZATION

Broadly speaking, the term ‘globalization’ means integration of economies and societies
through cross country flows of information, ideas, technologies, goods, services, capital,
finance and people. Cross border integration can have several dimensions – cultural, social,
political and economic. In fact, some people fear cultural and social integration even more
than economic integration. The fear of “cultural hegemony” haunts many. Limiting
ourselves to economic integration, one can see this happen through the three channels of (a)
trade in goods and services, (b) movement of capital and (c) flow of finance. Besides, there
is also the channel through movement of people.

Historical Development

Globalization has been a historical process with ebbs and flows. During the Pre-
World War I period of 1870 to 1914, there was rapid integration of the economies in terms of
trade flows, movement of capital and migration of people. The growth of globalization was
mainly led by the technological forces in the fields of transport and communication. There
were less barriers to flow of trade and people across the geographical boundaries. Indeed
there were no passports and visa requirements and very few non-tariff barriers and
restrictions on fund flows. The pace of globalization, however, decelerated between the First
and the Second World War. The inter-war period witnessed the erection of various barriers
to restrict free movement of goods and services. Most economies thought that they could
thrive better under high protective walls. After World War II, all the leading countries
resolved not to repeat the mistakes they had committed previously by opting for isolation.
Although after 1945, there was a drive to increased integration, it took a long time to reach
the Pre-World War I level. In terms of percentage of exports and imports to total output, the
US could reach the pre-World War level of 11 per cent only around 1970. Most of the
developing countries which gained Independence from the colonial rule in the immediate
Post-World War II period followed an import substitution industrialization regime. The
Soviet bloc countries were also shielded from the process of global economic integration.
However, times have changed. In the last two decades, the process of globalization has
proceeded with greater vigour. The former Soviet bloc countries are getting integrated with
the global economy. More and more developing countries are turning towards outward
oriented policy of growth. Yet, studies point out that trade and capital markets are no more
globalized today than they were at the end of the 19th century. Nevertheless, there are more
concerns about globalization now than before because of the nature and speed of
transformation. What is striking in the current episode is not only the rapid pace but also the
enormous impact of new information technologies on market integration, efficiency and
industrial organization. Globalization of financial markets has far outpaced the integration of
product markets.

GAINS FROM GLOBALISATION

The gains from globalization can be analyzed in the context of the three types of
channels of economic globalization identified earlier.

Trade in Goods and Services

 According to the standard theory, international trade leads to allocation of resources
that is consistent with comparative advantage. This results in specialization which enhances
productivity. It is accepted that international trade, in general, is beneficial and that restrictive
trade practices impede growth. That is the reason why many of the emerging economies,
which originally depended on a growth model of import substitution, have moved over to a
policy of outward orientation. However, in relation to trade in goods and services, there is
one major concern. Emerging economies will reap the benefits of international trade only if
they reach the full potential of their resource availability. This will probably require time.
That is why international trade agreements make exceptions by allowing longer time to
developing economies in terms of reduction in tariff and non-tariff barriers. “Special and
differentiated treatment”, as it is very often called has become an accepted principle.

Movement of Capital

Capital flows across countries have played an important role in enhancing the
production base. This was very much true in 19 th and 20th centuries. Capital mobility enables
the total savings of the world to be distributed among countries which have the highest
investment potential. Under these circumstances, one country’s growth is not constrained by
its own domestic savings. The inflow of foreign capital has played a significant role in the
development in the recent period of the East Asian countries. The current account deficit of
some of these countries had exceeded 5 per cent of the GDP in most of the period when
growth was rapid. Capital flows can take either the form of foreign direct investment or
portfolio investment. For developing countries the preferred alternative is foreign direct
investment. Portfolio investment does not directly lead to expansion of productive capacity.
It may do so, however, at one step removed. Portfolio investment can be volatile particularly
in times of loss of confidence. That is why countries want to put restrictions on portfolio
investment. However, in an open system such restrictions cannot work easily.

Financial Flows

The rapid development of the capital market has been one of the important features of
the current process of globalization. While the growth in capital and foreign exchange
markets have facilitated the transfer of resources across borders, the gross turnover in foreign
exchange markets has been extremely large. It is estimated that the gross turnover is around
$ 1.5 trillion per day worldwide (Frankel, 2000). This is of the order of hundred times greater
than the volume of trade in goods and services. Currency trade has become an end in itself.
The expansion in foreign exchange markets and capital markets is a necessary pre-requisite
for international transfer of capital. However, the volatility in the foreign exchange market
and the ease with which funds can be withdrawn from countries have created often times
panic situations. The most recent example of this was the East Asian crisis. Contagion of
financial crises is a worrying phenomenon. When one country faces a crisis, it affects others.
It is not as if financial crises are solely caused by foreign exchange traders. What the
financial markets tend to do is to exaggerate weaknesses. Herd instinct is not uncommon in
financial markets. When an economy becomes more open to capital and financial flows,
there is even greater compulsion to ensure that factors relating to macro-economic stability
are not ignored. This is a lesson all developing countries have to learn from East Asian crisis.
As one commentator aptly said “The trigger was sentiment, but vulnerability was due to
fundamentals”.
CONCERNS AND FEARS

On the impact of globalization, there are two major concerns. These may be
described as even fears. Under each major concern there are many related anxieties. The
first major concern is that globalization leads to a more iniquitous distribution of income
among countries and within countries. The second fear is that globalization leads to loss of
national sovereignty and that countries are finding it increasingly difficult to follow
independent domestic policies. These two issues have to be addressed both theoretically and
empirically.

The argument that globalization leads to inequality is based on the premise that since
globalization emphasizes efficiency, gains will accrue to countries which are favourably
endowed with natural and human resources. Advanced countries have had a head start over
the other countries by at least three centuries. The technological base of these countries is not
only wide but highly sophisticated. While trade benefits all countries, greater gains accrue to
the industrially advanced countries. This is the reason why even in the present trade
agreements, a case has been built up for special and differential treatment in relation to
developing countries. By and large, this treatment provides for longer transition periods in
relation to adjustment. However, there are two changes with respect to international trade
which may work to the advantage of the developing countries. First, for a variety of reasons,
the industrially advanced countries are vacating certain areas of production. These can be
filled in by developing countries. A good example of this is what the East Asian countries
did in the 1970s and 1980s. Second, international trade is no longer determined by the
distribution of natural resources. With the advent of information technology, the role of
human resources has emerged as more important. Specialized human skills will become the
determining factor in the coming decades. Productive activities are becoming “knowledge
intensive” rather than “resource intensive”. While there is a divide between developing and
the advanced countries even in this area – some people call it the digital divide - it is a gap
which can be bridged. A globalized economy with increased specialization can lead to
improved productivity and faster growth. What will be required is a balancing mechanism to
ensure that the handicaps of the developing countries are overcome.

Apart from the possible iniquitous distribution of income among countries, it has also
been argued that globalization leads to widening income gaps within the countries as well.
This can happen both in the developed and developing economies. The argument is the same
as was advanced in relation to iniquitous distribution among countries. Globalization may
benefit even within a country those who have the skills and the technology. The higher
growth rate achieved by an economy can be at the expense of declining incomes of people
who may be rendered redundant. In this context, it has to be noted that while globalization
may accelerate the process of technology substitution in developing economies, these
countries even without globalization will face the problem associated with moving from
lower to higher technology. If the growth rate of the economy accelerates sufficiently, then
part of the resources can be diverted by the state to modernize and re-equip people who may
be affected by the process of technology up gradation.

The second concern relates to the loss of autonomy in the pursuit of economic
policies. In a highly integrated world economy, it is true that one country cannot pursue
policies which are not in consonance with the worldwide trends. Capital and technology are
fluid and they will move where the benefits are greater. As the nations come together whether
it be in the political, social or economic arena, some sacrifice of sovereignty is inevitable.
The constraints of a globalised economic system on the pursuit of domestic policies have to
be recognised. However, it need not result in the abdication of domestic objectives.

Another fear associated with globalization is insecurity and volatility. When

countries are inter-related strongly, a small spark can start a large conflagration. Panic and
fear spread fast. The downside to globalization essentially emphasizes the need to create
countervailing forces in the form of institutions and policies at the international level. Global
governance cannot be pushed to the periphery, as integration gathers speed.

Empirical evidence on the impact of globalization on inequality is not very clear. The
share in aggregate world exports and in world output of the developing countries has been
increasing. In aggregate world exports, the share of developing countries increased from 20.6
per cent in 1988-90 to 29.9 per cent in 2000. Similarly the share in aggregate world output of
developing countries has increased from 17.9 per cent in 1988-90 to 40.4 per cent in 2000.
The growth rate of the developing countries both in terms of GDP and per capita GDP has
been higher than those of the industrial countries. These growth rates have been in fact
higher in the 1990s than in the 1980s. All these data do not indicate that the developing
countries as a group have suffered in the process of globalization. In fact, there have been
substantial gains. But within developing countries, Africa has not done well and some of the
South Asian countries have done better only in the 1990s. While the growth rate in per capita
income of the developing countries in the 1990s is nearly two times higher than that of
industrialized countries, in absolute terms the gap in per capita income has widened. As for
income distribution within the countries, it is difficult to judge whether globalization is the
primary factor responsible for any deterioration in the distribution of income. We have had
considerable controversies in our country on what happened to the poverty ratio in the second
half of 1990s. Most analysts even for India would agree that the poverty ratio has declined in
the 1990s. Differences may exist as to what rate at which this has fallen. Nevertheless,
whether it is in India or any other country, it is very difficult to trace the changes in the
distribution of income within the countries directly to globalization.

IMPACT OF GLOBALISATION ON BUSINESS ENVIRONMENT

The shift from a manufacturing economy to a services economy from production of goods to
production of ideas, and from the machine age to the information age has been accompanied
by many transformations. Rather than producing goods, the service firms produce 'ideas'.
Organizations in the 'services era', such as software, financial services, and biotechnology
firms, depend on 'intellectual capital'. People create 'intellectual capital' and are therefore, the
most valuable asset of a firm. Even the environment within which firms conduct business
today is very different and much more complex and dynamic when compared to the
environment fifteen years ago. Firms no longer compete or operate nationally only.
Organizations are no longer governed by the business, legal and political environment of their
own nations only. As the world becomes one global playing field, the environmental changes
in countries other than the home country of a firm affect business decision and the
performance of firms. Several societal and global phenomena have challenged the
management of human resources. Thus, changes in the economic, business, social and
cultural environments have brought about a transformation in the HR function and the roles
and responsibilities of HR professionals.
Some of the significant environmental trends and changes faced by HR managers that pose
major challenges are as follows:

 Trends in the business environment

 The changing nature of work
 Demographic, societal and work-force trends
 The changing nature of the employment relationship.

Organizations are venturing beyond national boundaries in the pursuit of business

opportunities. Toyota Motor Corporation makes cars in USA and India, Mc Donald's sells
burgers in India and hamburgers in China, and Marks and Spencer's sells products in India.
Every other product sold by Wal-Mart stores Inc. is made in India. This is the time when
buildings are conceptualized in the US designed in India and built in China. Very recently,
Ford Motor Co. (Ford) announced its plans to invest $ 1 billion in products and plants in the
Asia-Pacific region in the next few years to maintain its presence in the fast-growing markets.

Outsourcing has made India a Manufacturing hub, especially for the automobile sector; with
cheap labour providing one of the competitive advantages. Government policy reforms and
growth against an appreciating rupee have also facilitated this trend. Large numbers of
manufacturing assembly jobs that require low skills have moved from the US and Western
Europe to developing countries like China, Thailand, Malaysia, and India. India's
manufacturing and services companies invested $10 billion overseas in 2004. The top 15
Indian IT, software and related companies have invested mostly in developed countries. Like
the IT and automobile industries, domestic hospital chains from India, such as Apollo
Hospitals Group, Fortis Healthcare and Max Healthcare Institute Private Limited, also have
ambitious expansion plans in markets as far away as the US, UK, Mauritius, and South-East
Asia.

Multinational corporations require employees who can adapt to different cultures, customs,
social practices, values, economic and political systems and management approaches, who
can work with other employees from differing backgrounds. This has caused new challenges
for HR managers. The HRM function of a company must develop systems that will help
individuals from different cultural backgrounds to work together. Human resource managers
must ensure that employees with the requisite knowledge, skills, abilities, and cultural
adaptability are available so that they may be successful in global assignments.

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.
 Table 1 Environmental Trends and Human Resource Challenges

Sr.
Environmental Trends Human Resource Challenges
No.
1. Business Environment
Managing a global workforce.
Ensuring availability of employees who have the skills for global
Globalization and increased assignments.
 
competition Focusing increasingly on employee productivity to ensure
competitiveness.
Ensuring legal compliance when conducting business abroad. 
Managing employee insecurity.
  Mergers and Acquisitions Ensuring continued employee productivity.
Developing HR initiatives to manage employee morale.
Managing organizational relationship with survivors 
Managing morale and commitment of survivors
Providing outplacement services or relocation for employees who lose
  Downsizing
jobs.
Providing personal and family counseling to employees who lose their
jobs.
2. Changing Nature of Work
Managing workforce with flexible working patterns.
Industry and Occupational Focusing on competencies during hiring process.
 
shifts Designing incentive based compensation.
Developing proactive employee development programmes.
Managing a virtual workforce.
Managing employee alienation.
Technological Developing training modules and conducting programmes to provide
 
Advancements employees with required skills.
Retraining current employees to mange obsolescence.
Providing work-life balance initiatives.
Manage employee concerns about losing jobs due to outsourcing.
  Outsourcing
Managing employee morale and productivity.
Managing the loss of organizational control over work.
Flexible Work Developing programmes for motivating the flexible workforce.
 
Arrangements Developing ways of ensuring commitment of the flexible workforce to
the firm.
3. Demographic, Societal, and Workforce Trends
  Workforce Diversity
Devising customized HR strategies for hiring, retaining, and motivating
employees belonging to different generations. 
  Workforce Composition
Developing life-style driven perks for the new generation employees.
Developing work-life balance programmes.
  Workforce Availability Ensuring the availability of skilled talent to fulfill organizational needs.
 Finding replacement for retirees.
Managing the demand-supply gap for qualified managerial talent due to
a large retiring workforce.
Ageing population and Developing mentoring programmes to ensure the skills of experienced
 
workforce mangers are passed on to new managers.
Obsolescence training and retaining of older employees. 
Managing retirement policies.
Conducting programmes to retain experienced employees.
Ensuring the continued supply of trained manpower.
Training new hires.
Partnering with universities and developing academic initiatives to
Educated and knowledge
  meet projected shortage of skilled manpower.
workforce
Training employees in computer skills, communication skills, and
customer handling skills.
Emphasizing re-training and development activities.
Strategizing to attract and retain educated and skilled women workers.
  Women in workforce Conducting programmes for women who opt for career breaks.
Providing facilities such as crèches, flexible working hours, etc.
  Changing family structures Developing work-life balance programmes.
Developing diversity training programmes.
Developing HR initiatives directed to workforce diversity.
  Global Workforce Identifying and training expatriate managers for overseas assignments.
Developing equitable pay plans for individuals working in different
countries.
Developing systems to motivate the temporary workforce and elicit
Contingent
commitment from them
  Workforce/workforce
Helping the temporary employees to quickly adapt to the organization
flexibility
to reach their full potential
4. Changing Nature of Employment Relationship
Offering challenging jobs to employees.
Managing rewards for enhancing employee performance.
Providing opportunities for enhancing skills through training,
    development, and educational programmes.
Developing programmes for employee commitment.
Understanding value differences across different employee groups and
customizing HR programmes.

Source: Agarwala, Tanuja, "Strategic Human Resource Management", Oxford Publication,

2007.

Another recent change faced by HRM in the present business scenario is that of Mergers and
Acquisitions. Companies today need to be fast growing, efficient, profitable, flexible,
adaptable, and future-ready and have a dominant market position. Without these qualities,
firms believe that it is virtually impossible to be competitive in today's global economy. In
order to gain access to new markets and fresh ideas, companies often choose to grow via
Mergers & Acquisitions (M&A) rather than concentrating their efforts on their own business
activities. Such inorganic growth is often viewed as a faster way to achieve growth for the
company. Especially in technology driven industries, where growth is often accelerated
through increased innovations, and one way for the firms to compete is to align themselves
 with those companies that are developing the innovative technology. Such alignment is
achieved through M&A activities. Successful manifestation of such activities involves
complex procedures and processes in order to integrate both organizations and align them as
per a common unified objective.

It has created certain problems for an organization. One of the problems associated with
M&A's is the retrenchment of staff that becomes surplus due to rationalization of operations.
For example, in the financial services sector, M&A activity between 1996 and 2006 caused
an aggregate employment decline. Due to M&A, sector experts predicted a loss of more than
300,000jobs in the banking sector between 1999 and 2002. When negotiations for M&A are
on, employees of the concerned firms are subject to several rumours that cause insecurity
about the future. Thus, HRM is faced with several challenges before, during, and after the
M&A decision.

In the present era, the competitive advantage of organizations is linked to 'knowledge'. There
is a lot of emphasis placed upon dissemination of knowledge, and knowledge workers within
organizations. Therefore, there is an increased focus on management of the knowledge
resource in organization. Thus, in the 21stcentury, the HRM function has a key role to play in
shaping the competitive position of the organization. To compete effectively in the
knowledge economy, a firm must have what Ulrich calls 'organizational capabilities'.HRM
plays an important role in creating, developing, and managing the organizational capabilities
that are necessary for competing in the knowledge economy. Human resource mangers have
to create effective teams within a diverse workforce; tap talent throughout the organization by
recruiting, retaining, and developing people at all levels; build and integrate cultures as
mergers and acquisitions become common; and develop employee commitment toward
organizational vision. Human resource management is confronted with major challenges in
the present knowledge economy. Thus, HRM is no longer simply focused on 'managing
people' or confined to traditional HR functions rather; it is now responsible for managing the
capabilities within the organization. The Table 1.2 given below elaborates upon the
challenges facing HRM in the knowledge economy.

The four major HRM roles in the Knowledge economy are as:-

 Human Capital Steward

 Knowledge Facilitator
 Relationship Builder
 Rapid Deployment Specialist

Table 2 Challenges facing HRM in the Knowledge Economy

* Attracting and retaining knowledge workers, who are intellectual capital of the firm
* Obtaining commitment from workers in the context of a changed employer-employee contract
* Ensuring the availability, development, and utilization of human capital to enhance its value
* Motivating Knowledge workers
* Ensuring maximum utilization of temporary and contingent employees
* Encouraging employees to commit to continuous learning
* Facilitating sharing of knowledge within organizations
* Facilitating work-life balance
* Rewarding Knowledge acquisition and  knowledge sharing
* Enhancing cross-functional team work and team identification
* Creating a flexible human resource management team that sets and supports the agenda for change
* Coordinating between organizational functions.

To sum up, the business environment affects the HRM. External business environment
includes the political, economical, socio-technological aspects. The impact of external
environment affects the internal environment of an organization which in turn, affects the
decision-making of the organization. Traditionally, the main aim of organizations was to earn
profits. But now modern day organizations have to consider about 'Corporate Social
Responsibility' though not at the cost of earnings because earnings are the main source of
survival in the competitive market. A smooth and congenial external environment will ensure
the smooth functioning of an organization. There is a lot of interdependence between the two.
Since the world is now considered as a global village, the integration of global and business
environment is very important.