Global Business Environment - Free Essay Example

Unit 1 Global Business Environment Structure 1. Introduction 2. Meaning of Globalisation 1. 3Driving Forces of Globalisation 1. 4Dimensions of Globalisation 1. 5Stages of Globalisation 1. 6Introduction to Theories of International Trade 1. 6. 1 Absolute Advantage Theory 1. 6. 2 Comparative Cost Advantage Theory by David Ricardo 1. 6. 3 Factor Endowment Theory (Heckscher-Ohlin Thesis) 1. 7 Trading Environment of International Trade 1. 7. 1 Tariff and Non-tariff Barriers 1. 7. 2 Trade Blocs – Regional Economic Integration 1. 7. 3 Raising of New Economies 1. 8Self Assessment Questions 1. 9Answers . 10Case Studies 1. 1 Introduction Globalization describes an ongoing process by which regional economies, societies, and cultures have become integrated through a globe-spanning network of exchange. The term is sometimes used to refer specifically to economic globalization: the integration of national economies into the international economy through trade, foreign direct investment, cap ital flows, migration, and the spread of technology. However, globalization is usually recognized as being driven by a combination of economic, technological, socio-cultural, political, and biological factors. The term can also refer to the transnational dissemination of ideas, languages, or popular culture. Looking specifically at economic globalization, demonstrates that it can be measured in different ways. This center around the four main economic flows that characterize globalization: †¢ Goods and services, e. g. , exports plus imports as a proportion of national income or per capita of population †¢ Labor/people, e. g. , net migration rates; inward or outward migration flows, weighted by population †¢ Capital, e. g. , inward or outward direct investment as a proportion of national income or per head of population Technology, e. g. , international research development flows; proportion of populations (and rates of change thereof) using particular invention s (especially factor-neutral technological advances such as the telephone, motorcar, broadband). 1. 2 Meaning of Globalisation Globalization refers to shift towards a more integrated and interdependent world economy. Globalization has two main components: 1. Globalization of Markets: It refers to the process of integrating and merging of the distinct and separate national markets in to one global market place. E. g. Global acceptance of consumer products such as Coca-Cola, Levi’s jeans, McDonalds, etc 1. Globalization of Production: It refers to the tendency among many firms to source goods and services from different locations around the globe in order to take advantage of national differences in the cost and quality of factors of production (labor, energy, land and capital). E. g. The Boeing Company’s airliners source various components from various parts of globe. 1. 3 Driving Forces of Globalisation 1. Declining trade and investment barriers After the World W ar II the lowering of trade barriers led to the free flow of goods, services, and capital between nations. In additions to lowering of trade barriers, many countries have also removed restrictions on barriers to FDI. These two changes made the laws less restrictive there by encouraging both inward and outward investment by foreign firms. 2. The role of technological change Advances in microprocessors and telecommunication Emergence of the internet and World Wide Web Innovations and development in the transportation technology 3. Other Environment specific drivers Competition Regional, economic and political integration Economic growth Converging consumer needs Cost reduction Increase sales and profits Features of Globalisation †¢ Buying and selling goods and services from o any country in the world. Due to globalization, entire world is treated as a single market. Thus product can be purchased and sell at any place of the world †¢ Operating and planning to expand busin ess throughout the world. Because of globalization firm can operate its function at anywhere of the world †¢ Erasing the difference between domestic market and foreign market. Globalization helps to think entire world as single market. †¢ Establishing manufacturing and distribution facilities in any part of the world based on the feasibility and viability rather than national consideration. †¢ Globalization makes product planning and development based on market consideration of the entire world. Sourcing of factors of production and inputs like raw materials, machinery, finance, technology, human resources, managerial skills from the entire globe. Advantages of Globalisation: 1. Free Flow of Capital Globalization helps free flow of capital from one country to another country. Globalization increases capital flow from surplus countries to the needy countries, which in turn increase the global investment. 2. Free Flow of Technology Globalization helps in the flow of technology from advanced countries to the developing countries. This helps the developing countries to implement new technology. 3. Increase in Industrialization Free flow of capital along with the technology enables the developing countries to boost industrialization in their countries. This ultimately increases global industrialization. 4. Spread up of Production Facilities Throughout the Globe Globalization of production, leads to spread up of manufacturing facilities in all the global countries depending upon the locational and various favourable production factors. 5. Balanced Development of World Economies With the flow of capital, technology, and locating the manufacturing facilities in developing countries, the developing countries industrialise their economies. This in turn leads to balanced development of other countries. . Increase in Production and Consumption Increased in industrialization in the globe leads to increase in production and thus results in balanced industrial development along with increase in income enhances the levels of consumption. 7. Lower Price with High Quality Increased industrialization, spread up of technology, increased production and consumption level enable the companies to produce and sell the products of high quality at low prices. 8. Cultural Exchange and Demand for a Variety of Products Globalization reduces the physical distances among the countries and enables people of different countries to acquire the culture of other countries. The cultural exchange, in turn, makes the people demand a variety of products which are being consumed in other countries. Ex: ‘American pizza’ in India, ‘Hyderabadi biryani’ and ‘Masala dosa’ on abroad. 9. Increase in Employment and Income Globalization results in shifts of manufacturing facilities to the low wages developing countries. As such, it reduces job opportunities in advanced countries and alternatively creates job opportuniti es in developing countries. 0. Higher Standard of Living Globalization reduces prices and thereby enhances consumption and living standards of people in all countries of the world. 11. Balanced Human Development Increased industrialization on balanced lines in the globe, improves the skills of the people of developing countries. Increased economic development of the country enables the government to provide welfare facilities like hospitals; education institutions etc, which in turn contribute towards the balanced human development across the globe. 12. Increase in Welfare and Prosperity The balanced industrial, social and economic development of the world nations consequent upon the globalization along with the welfare measures provided by government lead to increase in the welfare of the people and prosperity of the world countries. Disadvantages of Globalisation 1. Globalisation Kills Domestic Business MNCs from advanced countries utilize the opportunities created by globaliz ation, establish manufacturing and marketing facilities in developing countries. The developing countries fail to compete with MNCs on the technology and quality front. This leads to closing down of the domestic companies. 2. Exploits Human Resources The process of globalization helps MNCs to move to the developing countries which lack adequate laws and regulations to protect human resources and the environment. 3. Violation of Labour and Environment The foreign companies which are located in developing countries invariably violate the labour and environmental laws in order to have cost advantage. These companies employ child labour, pollute environment, ignore workplace safety etc. 4. Leads to Unemployment and Underemployment MNCs produce the products in their home countries or in some other foreign countries and market them in developing countries. Therefore, the domestic industry’s operation is too reduced. This in turn leads to reduction in employment opportunities particularly in less developed countries. 5. Decline in Demand for Domestic Products Selling of high quality foreign products at low prices by MNCs reduces the demand for the domestic products. 6. Decline in Income Unemployment and decline in demand for domestic products of both industrial and agricultural goods (including service) leads to reduction in income of the people. . Widening Gap between the Rich and the Poor Competent people, people with innovative skills, efficiency etc. , get abnormal income while other average people have to strive for even minimum wage. This results in widening the gap between haves and the have-nots. 8. Transfer of Natural Resources MNCs establish their manufacturing facilities in developing countries exploit their natural resources and sell products to other countries. 9. Leads to Commercial and Political Colonialism The critics of globalization fear that the globalization ultimately results in commercial by colonialism by the super powers like USA and EU. 10. National Sovereignty at Stake The critics of globalization view that globalization results in shift of economic power from the independent countries to the supranational organizations like WTO, EU etc 1. 4 Dimensions of Globalisation There are four dimension of Globalization 1. Building the global economy 2. Formation of world opinion 3. Democratization, or the creation of a global community 4. The emergence of global political institutions. 1. Building the global economy †¢ In the longer run, the evolution of the global economy of international and interregional trade is primarily a function not of actual or growing GNP, but of potential for structural change. 2. Formation of world opinion †¢ World opinion aids in the construction   of social reality in that it helps us to make sense of the world; †¢ It also aids in the clarification of values by assigning priorities to social  demand, and legitimizing some demands and rejecting others. †¢ The rise of world opinion is the process that defines the global problems around which major issues i. e. f global politics; revolve over the long term of a century or so. 3. Democratization, or the creation of a global community †¢ Democratization is the third dimension of globalization. †¢ In   the   broadest   terms, we might see it, too,   as   a   learning process,   that of the human species learning to live with   itself in conditions of equality under law, to use the earliest   Greek definition of democracy †¢ By global community we mean a civil society that makes possible long-term cooperation at the global level; not only inter-governmental but also inter-organizational, social, and transnational in the broadest sense. For such a community to endure, it would have to be democratic. 4. The emergence of global political institutions. †¢ The emergence of global political institutions will be the fourth dimension of the globalization, the policies that are made at the global level will regulate the business at the global level †¢ These institutions will safe guards the country from various operations like dumping, supply of low quality which will became a comparative advantages to develop and developing countries. 1. 5 Stages of Globalisation Domestic Company International Company(Transfer skills and products) MNC (Products manufactured in the parent country and HR is from the parent country and markets in other countries) Global Company (Either markets or resources are globally sourced E. g. Coke) Transnational Company (Both markets resources globally sourced E. g. Microsoft) 1. Domestic Company: †¢ Limits its operations, mission Vision to the national political boundaries. †¢ These companies focus its view on the domestic opportunities, domestic suppliers, domestic customers etc. †¢ These companies analyze the national environment to exploit the opportunities. The domestic company†™s unconscious motto is that â€Å"if its happening in the home country its not happening any where†. 2. International Company: †¢ Companies who divide to exploit the opportunities outside the domestic country are start two companies. †¢ Focus of their companies in domestic but extends its wing to foreign countries. †¢ They select the strategy of locating the branch in foreign country extend domestic operation to foreign markets and extend domestic price and product and promotion practice to foreign markets. Company follows these strategies due to limited resources and to learn from foreign market gradually before becoming a global company without much risk. 3. Multinational Company: †¢ Formulates different strategies for different market thus orientation shift from ethnocentric to polycentric orientation. †¢ Under polycentric orientation the office and the subsidiaries of multinational companies work like domestic company in each country where they operate with distinct policies and strategies suitable to that country concerned. 4. Global Company: A Company, which has either global marketing or global strategy †¢ Either produce in home country or a single country and focus on marketing products globally †¢ Produce the products globally and focus on marketing the products domestically Ex. Dr. Reddy’s lab designs and produces drugs in India and markets globally. 5. Transnational Company: †¢ Produces, markets, invest and operate across the world. †¢ It’s an integrated global enterprise which links global resource with global markets at profits. †¢ There is no pure transnational corporation. Most of the transnational companies satisfy many of the characteristic the global corporation. †¢ It’s geocentric in approach. 1. 6 Introduction to Theories of International Trade The fundamental question that arises for most of us at this juncture is why should the business firms of on e country should go to the country, when the industries of that country also produce goods and market them. What is the basis for international business? A number of theories have been developed to explain the basis for international business. 1. 6. 1 Absolute Advantage Theory (By Adam Smith) Adam Smith the well known economist stated the theory in his book ‘The Wealth of Nations’ in 1776. †¢ The theory is that nation should produce goods in which it has greatest relative advantage. †¢ For Adam Smith the important point in International Business in one of absolute cost advantage. †¢ According to Adam Smith theory Trade can happen between two countries if one country is able to produce at absolute low price and offer to second and second country similarly produce another commodity at absolute low price and offer to first country. †¢ In other words each country will import goods from the cheapest overseas source. Similarly, it exports goods that hav e cost advantage. It is also called classical Trade Theory. The theory of Adam Smith can be explained by hypothetical simple example of two countries wherein each produces one commodity cheap. Absolute cost advantage in Man hours per unit of output. |Country |Rice |Electronic Chip Boards | |Taiwan |60 |30 | |India |18 |71 | The above example shows two countries Taiwan and India producing two goods rice and electronic chip boards. ? In case of rice, India produces cheaper as compared to Taiwan India has an absolute advantage. ? In case of Electronic chip boards Taiwan produces cheaper as compared to India. Taiwan enjoys an absolute cost advantage. †¢ Hence India should produce more rice than its local consumption. This will help India to export its surplus rice to Taiwan. †¢ Similarly Taiwan should produce more electronic chip than its domestic demand for export to India. Both India and Taiwan will specialize in their absolute cost advantage area of production. More pro duction will lead to more specialization. †¢ Adam Smith pointed out that the scope for specialization depends on the size of the market. †¢ Free international trade increases economic efficiency and consequently economic welfare. Critical assumptions and limitations: o 2 countries and 2 goods in the world o No transportation costs o Constant (linear) returns to scale 1. 6. 2 Comparative Cost Advantage Theory by David Ricardo When each country has an absolute advantage in one of the products, it is clear that trade is beneficial. However, what if one country has an absolute advantage in both products? Then we should consider the country’s comparative advantage. David Ricardo illustrated Comparative cost advantage theory in 1817. He used two countries two commodity model. The conclusions of his model are †¢ Business between two countries is profitable when a country produces one good at a lower cost than other country and that other produces another good at l ower cost than the former country. Business between two countries is profitable when a country produces more than one product efficiently, but, when it produce one of these product comparatively at greater efficiency than the other product. †¢ Both the nations can engage in international business when one country specializes in the production in which it has greater efficiency in production. Assumptions of the Theory: †¢ The only element of cost of production is labor. †¢ Production is subject to the law of constant returns. †¢ There are no trade barriers. †¢ Trade is free from cost of transportation. Ricardo takes above assumption and explains his theory by an example. The cost conditions of producing cloth and wine prevailing in England and Portugal are assumed: | Country |Man hours per unit output | | |Cloth |Wine | |Portugal |9 |8 | |England |10 |12 | †¢ It may be seen that Portugal has absolute cost advantage in both cloth and wine and England i s in disadvantage position. Hence as per Adam Smith’s absolute cost advantage no trade should take place under above conditions. England has wants to sell to Portugal and Portugal cannot get anything cheap for England. By taking above figures we can see if trade can take place between the two countries and benefit both. †¢ Establish domestic exchange ratio in Portugal as 1 unit of wine against 0. 88 of cloth (that is 8/9 = 0. 88). †¢ England establishes an exchange ratio 1 unit of wine against 1. 2 units of cloth (that is 12/10 = 1. 2). By this method Portugal gains if it trades 1 unit of wine that commands little more than 0. 88 unit of cloth. †¢ For England little less than 1. 2 units of cloth per unit of wine will give benefit. †¢ It may be seen that exchange ration between 0. 88 to 1. 2 unit of clothe to 1 unit of wine represents gain to both England and Portugal. †¢ To get benefits of quantity manufacture and specialization both the countries sho uld specialize in one commodity each. The corner stone of specialization is comparative cost difference. †¢ Portugal is lowest list in both commodities. Its cost difference is greater in wine 12-8=4 man hours as compared to cloth 10-9=1 man hour. †¢ Similarly England has disadvantage in both commodities. For England comparative cost disadvantage in case of clothe is lower than that of wine. †¢ Hence Portugal should specialize in wine production as comparative cost difference is greater in wine than cloth. England should specialize in clothe as it has comparative cost difference is less in case of clothe than in wine. †¢ Ricardo proved that an international division of labor would take place and this would benefit both countries. The location of production of commodities in difference countries follows the principle of comparative cost advantages. Derivates of the Theory: †¢ Efficient allocation of global resources. †¢ Maximization of global produc tion at the least possible cost. †¢ Product prices become more or less equal among world markets. †¢ Demand for resources and products among world nations will be optimized. 1. 6. 3 Factor Endowment Theory (Heckscher-Ohlin Thesis) †¢ Swedish economists Eli Heckscher (in 1919) and Bertil Ohlin (in 1933) put forward a different explanation of comparative advantage. They argued that comparative advantage arise from differences in national factor endowments. †¢ By factor endowments they meant the extent to which a country is endowed with such resources as land , labor and capital. Nations have varying factor endowments, and different factor endowments explain differences in factor costs. The more abundant a factor, the lower its cost. †¢ The Heckscher Ohlin theory predicts that countries will export those goods that make intensive use of factors that are locally abundant, while importing goods that make intensive use of factors that are locally scarce. Thus, the Heckscher-Ohlin theory attempts to explain the pattern of international trade that we observe in the world economy. Like Ricardo’s theory, the Heckscher-Ohlin theory argues that free trade is beneficial. †¢ Unlike Ricardo’s theory, however, the Heckscher-Ohlin theory argues that the pattern of international trade is determined by differences in factor endowments, rather than difference is productivity. Assumptions: Heckscher-Ohlin theory is built on the following assumptions. †¢ Perfect competition is in existence for both product and factors in both the countries. Factors of production are perfectly mobile within each country only. †¢ Factors supplies are fixed in each country. †¢ Factors of production are of equal quality in both the countries. †¢ Factors of production have full employment in both the countries. †¢ Factors endowments very from one country to another country. †¢ Business between two countries is free from all barrie rs. †¢ There is no cost of transportation. †¢ Production in both the countries is subject to law of returns. †¢ Factor intensity varies between goods. Merits: Despite the assumptions, this theory enjoys the following merits: †¢ This theory provides more valid basis for the existence of international business compared to the other theories. †¢ This theory is superior to the comparative cost theory as it provides the reasons for the difference in cost of production is two countries in terms of differences in factor endowments. †¢ The theory specifies that international business is an extension to domestic or inter-regional trade. †¢ Hence, this theory is viewed as the modern theory of international business. This theory is also called General Equilibrium Theory of international business as it deals with the equilibrium between demand for and supply of the products. †¢ This theory indicates the impact of international business on product an d factor prices. Derivatives: The ultimate conclusions we draw from this theory are: †¢ Price of the internationally traded products tends to be equalized in all the countries of the globe and in all the regions of each country. However, existence of the cost of transportation and the non-existence of the perfect competition are the limitations to this conclusion. Prices of factors of production also tend to equalize across the globe. However, existence of the cost of transportation and the non-existence of the perfect competition are the limitations to this conclusion also. 1. 7 Trading Environment of International Trade †¢ The international trading environment includes important factors such as the trade policies, trade barriers, trade agreements, trading blocs, cartels and multinational trade negotiations. †¢ An international trading firm encounters three sets of environments, viz. , the domestic environment, the foreign environment and the global environment. An I ndian firm which wants to do international trade is governed by Indian laws like the Foreign Trade Development and Regulation Act, Foreign Exchange Management Act, etc. Some times there are also regulations like the minimum export price. Exports are also affected by the export promotion measures and the general business environment in the country. o Foreign environment here refers to the environment of the relevant foreign market, like the international trade regulations and other business environments of the foreign country concerned. The global environment refers to those global factors which affects international trade such as WTO principles and agreements; other international conventions/treaties/agreements/declarations/protocols, etc. 1. 7. 1 Tariff and Non Tariff Barriers Tariff Tariffs in international trade refer to the duties or taxes imposed on internationally traded goods when they cross the national boundaries. There are various types of tariffs 1. An ad valorem tariff i s a set percentage of the value of the good that is being imported. Example: imposition of 30 per cent tax on the value of computers imported. 2. A specific tariff is a tariff of a specific amount of money that does not vary with the price of the good. In other words specific tariffs are levied as a fixed charge for each unit of product imported. Example: a tariff of Rs. 1,000 on each TV imported. Non Tariff Barriers (NTBs) †¢ Non-tariff barriers to trade are trade barriers that restrict imports but are not in the usual form of a tariff †¢ NTBs, some of which are described as new protectionism measures ( as against tariffs which are regarded as traditional barriers), have grown considerably, particularly since around the beginning if the 1980s. The export growth of many developing countries has been seriously affected by the NTBs. Types of Non Tariff Barriers 1. Subsidies †¢ In order to encourage domestic productions or to protect the domestic producer from the for eign competitors, government pays to a domestic producer by reducing operations cost. Such payments are called subsidies. †¢ Subsidies are in different forms. They are: cash grants, loans and advances at low rate of interest, tax holiday, and government procurement of output at a higher rate, equity participation and supply of inputs at lower prices. For Example: To purchase agricultural equipment government provide some subsidies. most of the industrialized countries provided subsidies between 2 to 3 per cent of other industrial out puts Subsidies help the domestic producers in the following ways. †¢ Acquire the character of a low cost producer and have all the advantages of a low cost producer like high profit margin or fixing the price at lower level. †¢ Compete with a foreign producer in the domestic market. †¢ Enter the foreign markets. 2. Import Quotas †¢ Import quota is direct restriction on the quantity of goods which are imported into a country. Th ere restrictions are imposed by issuing licenses to certain firms and individuals to import certain quantity of the goods. †¢ India has quotas of imports of various goods like cars, motor cycles, milk etc. unto 31st March 2001. Import quotas provide the protection to the domestic firms from the foreign competitions. 3. Voluntary Export Restraints †¢ A voluntary export restraint is the opposite from of import quotas. †¢ A voluntary export restraint is quota on exports of the domestic firm imposed by the exporting country. †¢ Exporting country imposes such restriction, mostly at the request of the importing country. For example: Japanese automobile exporters had such restraint in 1981 due to the request of the US government. Foreign exporters mostly accept for the voluntary export restraint as its violation lead to imposition of import tariffs, import quotas etc. †¢ Import quotas and voluntary export restraints help the domestic firms by providing protection f rom the foreign competitors. These enhance the prices of import goods and make the domestic goods cheap. 4. Local Content Requirements †¢ Local content requirement is a condition that requires some specific fraction of a product imported be produced domestically. The requirement may be in physical terms (50% of the components should be from the domestic country) or in value terms (50% of the value of the product should be produced domestically). 5. Administrative Policies †¢ Governments, in addition to the quotas and other restrictions, use formal and informal policies to restrict imports and boost exports. †¢ Administrative policies are bureaucratic rules and procedures which are formulated to make it difficult to imports to enter the country. †¢ Formal trade barriers like tariffs and quotas are lowest in Japan. Japan mostly uses the administrative policies. 1. 7. 2 Trade Blocs – Regional Economic Integration †¢ A trade bloc is the proliferation o f economic integration schemes. †¢ It is also referred as Regional Integration Agreements (RIAs), Regional Trading Agreements (RTA). †¢ â€Å"Economic integration (trade bloc) is a general term which covers several kinds of arrangements by which two or more countries can agree to draw their economies close together. All of these arrangements have one common feature, the use of tariffs to discriminate against goods produced by countries not party to the agreement†. There are different degrees or levels of economic integration. They are: †¢ Free trade area o A free trade area is grouping of countries to bring about free trade between them. o The free trade area abolishes all restrictions on trade among the members but each member is left free to determine its own commercial policy with nonmembers. †¢ Customs union o A custom union is more advanced level of economic integration than the free trade area. o It not only eliminates all restrictions on trade am ong members but also adopts a uniform commercial policy against the nonmembers. Common market o The common market is a step ahead of the customs union. o A common market allows free movement of labor and capital within the common market, besides having the two characteristics of customs union, namely, free trade among members and uniform tariff policy towards outsiders. †¢ Economic union o It is more advanced level of integration. o Apart from satisfying the conditions of the common market mentioned above, the economic union achieves some degree of harmonization of national income policies, through a common central bank, unified monetary and fiscal policy etc. Example: Europe Union(EU) †¢ Economic integration o It is characterized by the completion of the removal of all barriers to intra-block movement of goods and factors, unification of social as well as economic policies and all the members bounded by decisions of super national authority consisting of executive, jud icial and legislative branches. Major Regional Integration Agreements are: †¢ Europe Union (EU) formerly it was called as European Economic Community (EEC) †¢ European Economic Area †¢ Euro-Mediterranean Economic Area (Euro-Maghreb) †¢ EU Bilateral Agreements with Eastern Europe Canada US. Free Trade Area †¢ North American Free Trade Area (NAFTA) †¢ Asia Pacific Economic Cooperation (APEC) †¢ Central American Common Market (CACM) †¢ Cross-Border Initiative †¢ Economic Community of West African States (ECOWAS) †¢ Association of Southeast Asian Nations (ASEAN) †¢ Gulf Cooperation Council (GCC) 1. 7. 3 Raising of New Economies The Association of South-East Asian Nations (ASEAN) †¢ A group of six countries, viz. , Singapore, Brunei, Malaysia, Philippines, Thailand and Indonesia, agreed in January 1992 to establish a Common Effective Preferential Tariffs (CEPT) plan. This plan helped to create an Association of South-East Asian Nations (ASEAN) free trade area in 15 years with effect from January 1993. The CEPT allows for tariffs cut ranging from 0. 50 percent to 20. 00 percent beginning with 15 products. †¢ The emergence and successful operation of EEC and NAFTA gave impetus for the forming of ASEAN. †¢ The ASEAN member countries have developed economically at a fast rate in the globe. Their strength is well educated and skilled human resources. This strength enabled them to achieve faster industrialization. Further the ASEAN member countries are rich in oil, mineral resources, agricultural goods and modern industrial products. †¢ These countries invite and allow the free-flow of foreign capital. †¢ The formation of ASEAN enables the member counties to have close cohesiveness, share their economic and human resources and achieves synergy in the development of their agricultural sectors, industrial sectors and service sectors. †¢ The common historical and cultural background made the member counties to maintain their unity and solidarity by establishing a trade block. ASEAN countries have the determination to develop south-east Asia a nuclear weapons free area and a zone of peace, freedom and neutrality. Asian Free Trade Area (AFTA) The ASEAN countries are vigilant of the developments in the international environment like the formation NAFTA, SAARC and the introduction of Euro. In view of these developments, the ASEAN counties formed the Asian Free Trade Area (AFTA) in September 1994. The AFTA initially set to function for 10 years in order to develop inter ASEAN trade. The objectives of the AFTA are: †¢ To encourage inflow of foreign investment into this region. To establish free trade area in the member countries. †¢ To reduce tariff of the products produced in ASEAN countries. 40% value addition in the ASEAN counties to the product value is treated as manufactured in ASEAN Countries. The Chinese Market †¢ China is a vast country in term s of geographical area (9,571,300 sq. kms. ) and population. Only 10 per cent of China is suitable for agriculture, yet the country is self-sufficient in food. †¢ China started to introduce capitalist business methods in 1978. Privatization of some public sector undertakings began in 1984. Legal protection of intellectual property began in 1988. Internal private sector is restricted to retail business, personal services, food outlets, handicrafts and enterprise with not more than seven employees. †¢ China’s recent economic growth is in private sector. China’s economic reforms are proceeding without publicity. China saw unprecedented economic growth (average annual growth rate of 8%) next only to South Korea. †¢ Chinese economy is enormous. Industry accounts for 45% agriculture for 28%. Major industries include: machinery and metal products (25%), textile and clothing (15%) and agricultural equipment and food processing (10%). According to the World Ba nk, China’s recent economic growth is mostly in Guangdong Province. SEZs / ETDZs: The special Economic Zones (SEZs) have played a crucial role in China’s rapid economic growth. They also attracted heavy foreign investments. SEZs were supplemented by 14 Economic and Technical Development Zones (ETDZs) in towns and cities along China’s coast. SEZs and ETDZs are free zones, have very low tax rates for local business and accepts any amount of foreign investment. These zones allow the business operations without red tape. Each zone has a special regulatory authority. It supervises joint-ventures. Special tax reductions are applicable to 100% exporting units and units with complete new technology. This experiment was successful and contributed to the economic growth of these regions. The growth rate of SEZs is 20% per annum and living standards of the people of these regions increased more than that of the other areas of China. Foreign Investment: Nearly 75 percent of China’s foreign investment derives from companies owned by Non-Resident Chinese in Hong Kong, Taiwan, Singapore and other countries in the Pacific Rim. These people have roots in various regions of China. China is keen to attract foreign investment in order to: †¢ Generate hard currency earnings. †¢ Train the Chinese workforce in new methods. †¢ To accelerate the learning curve of Chinese business. However, there are certain problems associated with the foreign investment in China. They are: †¢ Foreign investors still have to get the approval of the Chinese bureaucracy. †¢ Skilled manpower is not available. The Japanese Market †¢ Japan rose from the ashes of World War II to the second largest economy of the world. Its GDP was $ 4. 6 trillion in 1996 and its population was 126 million. The per capita GDP of Japanese was $ 40,726 in 1996. †¢ Ministry of International Trade and Investment (MITI) maintained close links with Japanese co rporate sector and directed in its strategies. This factor helped for the rapid growth of Japan during the past fifty years. †¢ MITI encouraged Japanese industry to concentrate on the basic industries like steel and shipbuilding immediately after World War II. †¢ Later, MITI and Japanese industry shifted their concentration to automobiles, consumer electronics and machinery. †¢ Japan’s concentrated industrial structure helped MITI. Large families of interrelated companies called, â€Å"Keiretsu† control the Japanese industry. This industry is centered on a major Japanese bank which meets financial needs of this industry. †¢ Exports are just 9. 9 per cent of the Japan’s GDP. Exports: Japans main export goods are cars, electronic devices and computers. Most important single trade partner is the USA which imports more than one quarter of all Japanese exports. Other major export countries are Taiwan, Hong Kong, South Korea, China and Singapore. I mports: Japan has a large surplus in its export/import balance. The most important import goods are raw materials such as oil, foodstuffs, and wood. Major suppliers are the USA, China, Indonesia, South Korea, and Australia. Industries: Manufacturing, construction, distribution, real estate, services, and communication are Japans major industries today. Agriculture makes up only about 2% of the GNP. Most important agricultural product is rice. Resources of raw materials are very limited and the mining industry rather small. 1. 8 Self Assessment Questions 1. Globalization refers to _________________________________. 2. Globalization is beneficial for firms because ________________________. . Globalization can create problems for business because ____________________. 4. The main aim of global marketing is to _________________________. 5. _________typically offer more flexibility in international markets. 6. From the point of view of marketing, an organization that enjoys competitiv e advantage in an industry has done so by ________________. 7. Being a global organization means _______________________________. 8. The work of an international marketer is mainly concerned with ________. 9. The United States former absolute advantage in producing oil drilling equipment is being challenged by which country? 0. A fixed amount of money levied on each unit of a product brought into the country is a(n) ______________. 1. 9 Answers A. Self Assessment Questions 1. a more integrated and interdependent world 2. it opens up new market opportunities 3. it can result in more competition 4. satisfy global customers better than competition 5. SMEs 6. creating superior value for customers 7. creating both standardized and customized products 8. adapting a marketing mix to enter a market in another country 9. Japan 10. specific tariff. 1. 10 Case Studies Case – 1 BPO – Bane or Boon! Several MNCs are increasingly unbundling or vertical disintegrating their activit ies. Put in simple language, they have begun outsourcing (also called business process outsourcing) activities formerly performed in-house and concentrating their energies on a few functions. Outsourcing involves withdrawing form certain stages / activities and relaying on outside vendors to supply the needed products, support services, or functional activities. Take Infosys, its 250 engineers develop IT applications for BO / FA (Bank of America). Elsewhere, Infosys staffers process home loans for green point mortgage of Novato, California. At Wipro, five radiologists interpret 30 CT scans a day for Massachusetts General Hospital. 2500 college educated men and women are buzzing at midnight at Wipro Spectramind at Delhi. They are busy processing claims for a major US insurance company and providing help-desk support for a big US internet services provider-all at a cost up to 60 percent lower than in the US. Seven Wipro Spectramind staff with Ph. Ds in molecular biology sifts throu gh scientific research for western pharmaceutical companies. Another activist in BPO is Evalueserve, headquartered in Bermuda and having main operations near Delhi. It also has US subsidiary based in New York and a marketing office in Australia to cover the European market. As Alok Aggarwal (Co-founder and Chairman) says, his company supplies a range of value-added services to clients that include a dozen Fortune 500 companies and seven global consulting firms, besides market research and venture capital firms. Much of its work involves dealing with CEOs, CFOs, CTOs, CIOs, and other so called C-level executives. Evalueserve provides services like patent writing, evaluation and assessment of their commercialization potential for law firms and entrepreneurs. Its market research services are aimed at top0rung financial service firms, to which it provides analysis of investment opportunities and business plans. Another major offering is multilingual services. Evalueserve trains an d qualifies employees to communicate in Chinese, Spanish, German, Japanese and Italian, among other languages. That skill set has opened market opportunities in Europe and elsewhere, especially with global corporations. ICICI Infotech Services in Edison, New Jersey, is another BPO services provider that is offering marketing software products and diversifying into markets outside the US. The firm has been promoted by $2-billion ICICI Bank, a large financial institution in Mumbai that is listed on the New York Stock Exchange. In its first year after setting up shop in March 1999, ICICI Infotech spent $33 million acquiring two information technology services firms in New Jersy-Object Experts an lvory Consulting-and Command Systems in Connecticut. These acquisitions were to help ICICI Infotech hit the ground in the US with a ready book of contracts. But it soon found US companies increasingly outsourcing their requirements to offshore locations, instead of hiring foreign employees t o work onsite at their offices. The company found other native modes for growth. It has started marketing its products in banking, insurance and enterprise resource planning among others. It has earmarked $10 million for its next US market offensive, which would go towards R D and back0-end infrastructure support and creating new versions of its products to comply with US market requirements. It also has a joint venture-Semantik Solutions GmbH in Berlin, Germany with the Fraunhofer institute for Software and Systems Engineering, which is based in Berlin and Dortmund, Germany. Fraunhofer is a leading institute in applied research and development with 200 experts in software engineering and evolutionary information. A relatively late entrant to the US market, ICICI Infotech started out with plain vanilla IT services, including operating call centers. As the market for traditional IT services started weakening around mid-2000, ICICI Infotech repositioned itself as a â€Å"Solut ions† firm offering both products and services. Today, it offers bundles packages of products and services in corporate and retail banking and insurance, among other areas. The new offerings include data center and disaster recovery management and value chain management services. ICICI Infotech’s expansion into new overseas markets has paid off. Its $50 million revenue for its latest financial year ending March 2003 has the US operations generating some $15 million, while the Middle East and Far East markets brought in another $9 million. It now boasts more than 700 customers in 30 countries, including Dow Jones, Glaxo-Smithkline, Panasonic and American Insurance Group. The outsourcing industry is needed growing from strength. Through technical support and financial services have dominated India’s outsourcing industry, newer fields are emerging which are expected to boost the industry many times over. Outsourcing of human resource services or HR BPO is emer ging as big opportunity for Indian BPOs with global market in this segment estimated at $40-60 billion per annum. HR BPO comes to about 33 percent of the outsourcing revenue and India has immense potential as more than 80 percent of Fortune 1000 companies discuss offshore BPO as a way to cut costs and increase productivity. Another potential area is ITES / BPO industry. According to a NASSCOM survey, the global ITES / BPO industry was valued at around $773 billion during 2002 and its is expected to grow at a compounded annual growth rate of nine percent during the period 2002-06. NASSCOM lists the major indicators of the high growth potential of ITES / BPO industry in India as the following: During 2003-04, the ITES / BPO segment is estimated to have achieved a 54 percent growth in revenues as compared to the previous year. ITES exports accounted for $3. 6 billion in revenues, up from $2. billion in 2002-03. The ITES-BPO segment also proved to be a major opportunity for job seeke rs, creating employment for around 74,400 additional personnel in India during 2003-04. The number of Indians working for this sector jumped to 245,500 by March 2004. By the year 2008, the segment is expected to employ over 1. 1 million Indians, according to studies conducted by NASSCOM and McKinsey Co. Market research show that in terms of job creation, the ITES-BPO industry is growing at over 50 percent. Local outsourcing sector is another area India can look for. Legal transcription involves conversion of interviews with clients or witnesses by lawyers into documents which can be presented in courts. It is no different from any other transcription work carried out in India. The bottom-line here is again cheap service. There is a strong reason why India can prove to be a big legal outsourcing industry. India, like the US, is a common-law jurisdiction rooted in the British legal tradition. Indian legal training is conducted solely in English. Appellate and Supreme Court proceed ings in India take place exclusive in English. Indian legal opinions are written exclusively in English. Due to the time zone differences, night time in the US is daytime in India which means that clients get 24 hour attention, and some projects can be completed overnight. Small and mid-sized business offices can solve staff problems as the outsourced lawyers from India take on the time consuming labor intensive legal research and writing projects. Large law firms also can solve problems of overstaffing by using the on-call lawyers. Research firms such as Forrester Research, predict that by 2015, more than 489,000 US lawyer jobs, nearly eight percent of the field, will shift abroad. Many more new avenues are opening up for BPO services providers. Patent writing and evaluation services are markets set to boom. Some 200,000 patent applications are written in the western world annually, making for a market size of between $5 billion and $7 billion. Outsourcing patent writing serv ice could significantly lower the cost of each patent $15,000 apiece-which would help expand the market. Offshoring of equity research is another major growth area. Translation services are also becoming a big Indian plus. India produces some 3,000 graduates in German each year, which is more than that is Switzerland. Though going is good, the Indian BPO services providers cannot afford to be complacent. Philippines, Mexico and Hungary are emerging as potential offshore locations. Likely competitor is Russia, although the absence of English speaking people there holds the country back. But the dark horse could be South Africa and even China. BPO is based on sound economic reasons. Outsourcing helps gain cost advantage. If an activity can be performed better or more cheaply by an outside supplier, why not outsource it? Many PC makers, for example, have shifted from in-house assemble to utilizing contract assemblers to make their PCs. CISCO outsources all productions and assembl y of its routers and switching equipment to contract manufactures that operate 37 factories, all linked via the internet. Secondly, the activity (outsourced) is not crucial to the firm’s ability to gain sustainable competitive advantage and won’t hollow out its core competence, capabilities or technical know how. Outsourcing of maintenance services, data processing, accounting, and other administrative support activities to companies specializing in these services has become common place. Thirdly, outsourcing reduces the company’s risk exposure to changing technology and / or changing buyer preferences. Fourthly, BPO streamlines company operations in way that improve organizational flexibility, cut cycle time, speedup decision making and reduce coordination costs. Finally, outsourcing allows a company to concentrate on its core business and do what it does best. Are Indian companies listening? If they listen, BPO is a boon to them and not a bane. Case Questio ns 1. Which of the theories of international trade can help Indian services providers gain competitive edge over their competitors? . Pick up some Indian services providers. Which the help of Michael Porter’s diamond, analyze their strengths and weaknesses as active players in BPO. 3. Compare this case with the case give at the beginning of this unit. What similarities and dissimilarities do you notice? Your analysis should be based on the theories explained in this unit. BRIC Countries In economics, BRIC (typically rendered as the BRICs or the BRIC countries) is an acronym that refers to the fast-growing developing economies of Brazil, Russia, India, and China. The acronym was first coined and prominently used by Goldman Sachs in 2001. Goldman Sachs argued that, since they are developing rapidly, by 2050 the combined economies of the BRICs could eclipse the combined economies of the current richest countries of the world. The four countries, combined, currently account f or more than a quarter of the worlds land area and more than 40% of the world population. India has stressed the need for the four-nation grouping, BRIC, comprising Brazil, Russia, India and China, to strengthen their bilateral relationships that will help them to be more effective collectively. BRIC accounts for 40 percent of the world’s population, 25. 9 percent of its total geographic area, and 40 percent of global Gross Domestic Product (GDP). According to leading global investment banking and securities firm, Goldman Sachs, BRIC can become collectively bigger than the G7 by 2035. Exhibit 1. 3 The United States has long been a substantial exporter of agricultural goods, reflecting in part its unusual abundance of arable land. In contrast, China excels in the export of goods produced in labor-intensive manufacturing industries, such as textiles and footwear. This reflects china’s relative bundance of low-cost labor. The United States, which lacks abundant low-cos t labor, has been a primary importer of these goods. Note that it is relative, not absolute, endowments that are important; a country may have larger absolute amounts of land and labor than another country, but be relatively abundant in one of them. Exhibit 1. 2 Globalization does not take place in a single instance. It takes place gradually through an evolutionary approach. According to Ohamae, globalization has five stages. They are; i. Domestic company exports to foreign countries through the dealers or distributors of the home country. i. In the second stage, the domestic company exports to foreign countries directly on its own. iii. In the third stage, the domestic company becomes an international company by establishing production and marketing operations in various key foreign countries. iv. In the fourth stage, the company replicates a foreign company in the foreign country by having all the facilities including R, full-fledged human resources etc. v. In the fifth stage, the company becomes a true foreign company by serving the needs of foreign customers just like the host country’s company serves. Exhibit 1. 1 Business firms want to globalize in order to expand their markets, increase sales, and increase profits. Free trade agreements facilitate those activities and promote economic globalization. Such agreements vary in scope. Some are bilateral such as the U. S. -Canada Free Trade Agreement and the U. S. -Israel Free Trade Agreement. Others are multilateral and regional such as the North American Free Trade Agreement (NAFTA), Mercosur (including Argentina, Brazil, Paraguay, and Uruguay as full members and Chile as an associate member), and the 18-member Asia Pacific Economic Cooperation Group (APEC). The European Union (EU) goes further by creating a supranational government. And the World Trade Organization (WTO) includes more than 120 nations from around the world. These agreements and organizations are facilitating economic integrati on on a regional and worldwide basis. Trade agreements facilitate the activities of major companies. For example, Ford Motor Company is working to create a world car that can be sold and used throughout the global village. Trade agreements facilitate distribution systems, franchising, joint ventures, and other cross-border collaborations between and among businesses. Coca-Cola and Pepsi-Cola are sold in hundreds of countries throughout the world. Franchises for McDonalds hamburgers, Pizza Hut, Subway, Burger King, and others carry U. S. trade names as well as U. S. -style fast foods (and fast eating styles) throughout the world. One of the major forces facilitating such globalization is the expansion of communication systems. During the final decades of the 20th century, the Internet globalized communications. One document can be distributed throughout the world in seconds. Using computer software, that document can be converted quickly to various languages for use almost any where in world. Telecommunications systems allow radio and television transmissions to be broadcast throughout the world within seconds. For example, the Cable News Network (CNN), based in the United States, produces 24-hour news broadcasts that can be seen around the world by traveling businesspeople and others. CNNs 24-hour coverage of the Persian Gulf War in 1991 established the network as one that serves global audiences. It is not viewed as foreign when it broadcasts to and from countries other than the United States