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Globalisation
What is globalisation?

GLOBALISATION is the term used to describe the growing integration of the world's
economy. It is suggested that as globalisation takes place, national economies are becoming
integrated into a single 'global economy' with similar characteristics. There are
interrelationships throughout the world between related businesses, between competitors and
between businesses and consumers. Decisions taken in one part of the world affect other
parts. Businesses base decisions on what is happening in the 'world market' rather than
national markets.
Evidence of the integration of the world's economy can perhaps be seen in businesses that
design and market their products to a world market, such as Coca-Cola. This product is sold
in many countries throughout the world. Consumers in different countries recognise the
product easily and have similar tastes for the product. Coca-Cola is able to market its products
worldwide. It has close relationships with businesses in other countries, some of which
manufacture Coca-Cola products.

Three important aspects of globalisation might be identified:

 The growing importance of international trade: Between 1980 and 1990 the
volume of international trade almost doubled. In part, this can be accounted for by
increases in production during the same period. However, since 1945, increases in
production have been far outstripped by increases in the volume of international trade.
 The rise of the multinational business: The operation of multinational companies
can be seen in many countries around the world. Familiar products and brand names
appear worldwide. This is a trend which accelerated in the latter part of the twentieth
century. For example, by 1995 the production of foreign branches of multinational
companies generated $7,000 billion. This exceeded global exports of goods and
services by 20 per cent. The operation and effects of multinationals are discussed later
in this unit.
 The emergence of businesses which think globally about their strategy: Such
businesses base their strategic decisions on the global market rather than national
markets. For example, a business may make parts for a product in several different
countries and assemble them in another because this is the most cost effective and
efficient method to get the product to its consumers. They will tend to make use of
their business's competitive advantage by locating production wherever it is most
efficient. This means businesses with widely spread networks of research, component
production, assembly and distribution.

Factors affecting globalisation

It could be argued that certain factors have contributed to the growth of globalisation.
 Technological change has played an important role in globalising the world's
economy. More powerful computers and communications technology have allowed
the easy transfer of data. The internet is beginning to revolutionise the way in which
consumers purchase products.
 The cost of transportation has fallen.
 The deregulation of business: Throughout the 1980s and 1990s many businesses
were privatised in countries throughout the world. The removal of restrictions on
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foreign businesses operating in former communist countries also increased the ability
of businesses to operate globally. New markets such as power generation were opened
up to foreign competition.
 The liberalisation of trade: Trade protection has been reduced due to the operation of
organisations such as the WTO.
 Consumer tastes and their responses have changed: Consumers in many countries
are more willing to buy foreign products.
 The growth of emerging markets and competition: New markets have opened up in
countries that have seen a growth in their national income. Examples might include
countries in South East Asia and the more successful former communist countries in
Eastern Europe. As businesses in these countries have become more successful, they
have been able to compete in Western economies.

The effects of globalisation on business

Globalisation has had many effects upon businesses throughout the world. The impact of
globalisation has not been evenly spread. Some business, for example those in
telecommunications, have witnessed dramatic changes. Others, such as small businesses
serving niche markets in localised areas, may have been little affected by globalisation.

There is a number of effects of globalisation upon businesses. Some provide opportunities

whilst others present threats:

Competition: The impact of globalisation on many larger businesses has been to dramatically
increase the level of competition which they face. There is a number of reasons for
this:
 Foreign competition has increasingly entered markets previously served mainly or
exclusively by domestic businesses.
 Deregulation has meant that many businesses which previously had little or no
competition are now opened up to the forces of global competition
 Globalisation has provided opportunities for new, innovative businesses to enter
markets and compete with all comers including well established industry leaders. For
example, Microsoft, Intel, Compaq and Dell, all relative newcomers to the computer
industry, were able to compete effectively against the market leader IBM.
HYPERCOMPETITION has been used to describe competition in the new global
economy. This term refers to the disruption of existing markets by flexible, fast
moving businesses.

Meeting consumer expectations and tastes: Competition by businesses seeking to meet

customer needs in increasingly effective ways has raised customer expectations in many
markets. Businesses must now meet ever greater consumer demands about quality, service
and price. They must also provide the greater choice of products expected by purchasers. The
global market has made predicting consumer preferences more difficult. For example, few
businesses predicted the huge rise in the popularity of mobile phones or the speed with which
consumers would accept the internet.

Economies of scale: Businesses able to build a global presence are likely to enjoy a larger
scale of operations. This will enable them to spread their fixed costs over a larger volume of
output and reduce unit output costs. A larger scale of operations also allows businesses to
exercise power over suppliers and benefit from reduced costs. For example, global hotel
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chains such as Holiday Inn and Marriott are in a position to benefit from volume discounts
from catering supply companies.

Choice of location: Businesses with a global presence can choose the most advantageous
location for each of its operations. When locating its operations, a business may consider:
 Reduction of costs. For example, Nike's decision to locate its shoe manufacturing
operations in countries such as China and Vietnam was perhaps based on cost
reduction factors;
 Enhancement of the business's performance. Production and service facilities are
located in parts of the world which are likely to improve factors such as product or
service quality. For example, Microsoft may have taken this into account when
deciding to locate its research laboratories in Cambridge.

Mergers and joint ventures: Businesses are increasingly merging or joining with others
often in other countries, in order to better provide its goods or services to a global market.
Both manufactures and retailers are operating on a global basis. A manufacturer, for example,
may merge with another in order to make products in the country in which they will be sold.

Multinationals

A MULTINATIONAL company is an organisation which owns or controls production or

service facilities outside the country in which it is based. This means that they do not just
export their products abroad, but actually own production facilities in other countries.
These companies usually have interests in at least four countries, but there are many which
operate in a huge range of countries throughout the world.

There is a number of reasons why firms become multinationals:

 To avoid protectionist policies. By actually producing within a particular country, a
firm can usually avoid any tariffs or quotas which that country may impose. This is
why Japanese car firms, such as Nissan, Toyota and Honda, have established
themselves within EU countries in recent years.
 The globalisation of markets. National boundaries, many believe, are becoming
irrelevant for firms as instant communications and high speed travel make the world
seem smaller. This is sometimes referred to as the 'global village'. Multinationals,
which are global or international in outlook, are the ideal type of business organisation
to take advantage of this situation.

The influence of multinationals

There is great debate as to the actual effects of multinationals. Whilst there are clear benefits
of multinationals operating in a particular country, there are also a number of problems
associated with them.

The balance of payments and employment: One benefit of multinationals is their ability to
create jobs. This, along with the manufacturing capacity which they create, can increase the
GNP of countries and add to the standard of living. As well as this, multinationals benefit the
balance of payments of a country if their products are sold abroad. The setting-up of a car
manufacturing plant by Toyota in Derby helps to illustrate this. Not only has this plant created
jobs, but it has raised the GNP of the UK. The balance of payments has also been helped as a
large proportion of the Derby plant's cars are shipped out to other EU nations.
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However, whilst multinationals can create jobs, they are also capable of causing
unemployment for two reasons. First, they create competition for domestic firms. This may be
beneficial, causing local firms to improve their efficiency, but it can also be a problem if it
results in these firms cutting their labour force or closing down plants. Second, multinationals
often shift production facilities from one country to another in order to further their own ends.
The effect of this is that jobs are lost and production is either reduced or completely stopped.
In addition, multinationals can have a negative impact upon the balance of payments. This is
because many of them receive huge amounts of components from their branches abroad, thus
adding to the total quantity of imports.

Technology and expertise: Multinationals may introduce new technology, production

processes and management styles and techniques. This has been one of the benefits to
Western countries of Japanese multinationals. Techniques such as in-time stock control and
management methods such as quality control circles have been successfully used by Japanese
firms in foreign countries. Such techniques have also been adopted by home based firms.
These raise the standards of local firms who become aware of these new developments. The
process by which multinationals benefit countries in this respect is known as technology
transfer. Technology transfer can be especially important to developing countries, which may
lack technical expertise and know-how. However, this is not always the case. Managers and
supervisors are often brought in from the multinationals' home country, with little training
being given to locally recruited staff. As a consequence locals may be employed in low
skilled jobs.

Government control: Because of the size and financial power of many multinationals, there
are concerns about the ability of governments to control them. For example, they may be able
to avoid paying corporation tax in particular countries.
Taxation can be avoided by the use of TRANSFER PRICING. This involves declaring higher
profits in those countries with lower taxation levels, thus reducing the overall tax bill. A
company may charge subsidiary branches in low taxation countries low prices for components
bought from overseas branches of the same firm. This means that costs in the low tax country
are kept low and high profits can be declared. Similarly, subsidiary branches in high tax
countries are charged high prices for components bought in from overseas branches. This
means little or no profit is recorded.