Unit 3: Globalization Meaning of Globalization Features of ...skpodder.co.in/pdf/u8-Unit-3.pdf ·...

International Business

Prof. Suplab Podder E-Mail: [email protected] Page | 33

Unit 3: Globalization

Meaning of Globalization Globalization is a process of interaction and integration among the people, companies and

governments of different nations through the global network of trade and commerce. This

process has effects on the environment, culture, political systems, economic development,

prosperity and social well-being around the world.

Features of Globalisation The features of globalization may be discussed as follows:

1. Interaction

Globalization facilitates the interaction (communication) among the people, companies and

governments of different nations.

2. Global Integration

Global integration is the process by which a company combines different activities around the

world so that they operate using the same methods, etc. Global integration can involve the

processes of product standardization and technology development centralization.

3. Global network of trade and commerce

Globalization facilitates the exchange of capital, goods, and services across international borders

or territories. In most countries, such trade represents a significant share of gross domestic

product (GDP).

4. Open Market with variety of goods and services

Open Market is an economic system with no barriers to free market activity. An open market is

characterized by the absence of tariffs, taxes, licensing requirements, subsidies, unionization and

any other regulations or practices that interfere with the natural functioning of the free market.

Anyone can participate in an open market. There may be competitive barriers to entry, but there

are no regulatory barriers to entry.

5. Proper utilization of resources: Resources of different countries are used for producing

goods and services.

6. More competition: Companies face much greater competition. This can put smaller

companies, at a disadvantage as they do not have resources to compete at global scale.

7. Cultural diversity: Cultural diversity is a form of appreciating the differences in individuals.

The differences can be based on gender, age, sex, ethnicity, sexual orientation, and social status.

8. Globally standardized products: Globally standardized products need be marketed ail over

the world. There are already many such products having world market. It includes the "lead"

products in a region taking care of dominant needs of that region.

mailto:[email protected]



Stages of Globalization The various stages of Globalization are as follows:

Stage 1: Domestic Companies

Domestic companies are those companies focus on domestic operations only. The orientation of

a domestic company essentially is ethnocentric. A purely domestic company operates

domestically because it never considers the alternative of going international. The growing stage-

one company, when it reaches growth limits in its primary market, diversifies into new markets,

products technologies instead of focusing on penetrating international markets.

Stage-2: International Company

International company is the second stage in the development of a company towards the

transitional corporation. The orientation of the company is basically ethnocentric and the

marketing strategy is extension, i.e., the marketing mix developed for the home market is

extended into the foreign markets. International companies normally rely on the international

business. These companies are ethnocentric and their business strategy is extension.

Stage-3: Multinational Company

When the orientation shifts from ethnocentric to polycentric, the international company becomes

multinational. In other words, when a company decides to respond to market differences, it

evolves into a stage three multinational that pursues a multi-domestic strategy. The focus of the

stage three company is multinational that pursues a multinational or, in strategic terms, multi-

domestic. The marketing strategy of the multidimensional company is adaptation. In

multinational companies each foreign subsidiary is managed as if it were an independent city

state. The subsidiaries are part of an area structure in which each country is part of a regional

organization that reports to world headquarters.

Stage-4: Global Company

The global company will have either a global marketing strategy or a global sourcing strategy

but not both. It will either focus on global markets and source from the home or a single country

to supply these markets, or it will focus on the domestic market and source from the world to

supply its domestic channel. However, according to the interpretation of some others all

strategies product development, production marketing etc- will be global in respect of the global

corporation.

Stage-5: Transnational Company

The transitional corporation is much more than a company with sales, investments and

operations in many countries. This company, which is increasingly dominating markets and

industries around the world, is an integrated world enterprise that links global resources with

global markets at a profit. Operations are highly decentralized, with each business unit free to

make personnel decisions with very loose control from corporation headquarters.




Evolution of Globalization Stage-1: Imperialism

Imperialism refers to political or economic control, either formally or informally. Imperialism is

just exercising power over the conquered regions either through sovereignty or indirect

mechanisms of control.

Phase one begins in 1492, with the journey of Christopher Columbus to the new world and

continues with later European voyages of exploration that eventually made possible the

formation of Europe’s colonial empires.

The Italian explorer Christopher Columbus, financed by the Spanish crown, completed four

voyages across the Atlantic Ocean that created a European awareness of the North and South

American continents. The Portuguese explorer Vasco DA Gama was the first to lead a maritime

expedition to India in 1498. The conquistador Hernan Cortes brought much of Mexico under

Spanish control in the early 16th century.

Stage-2: Colonialism

Colonialism is a term where a country conquers and rules over other regions. Colonialism is

termed as building and maintaining colonies in one territory by people from another territory.

Colonialism can altogether alter the social structure, physical structure and economics of a

region. It is quite normal that in the long run, the traits of the conqueror are inherited by the

conquered. Colonialism is a term used to describe the settlement of places like India, Australia,

North America, Algeria, New Zealand and Brazil, which were all controlled by the Europeans.

The second phase of globalization covers the period of intensive internationalization of

transportation systems, communications, commerce, science, and many other human activities

that unfolded between the middle of the 19th century and the collapse of second phase

globalization that resulted from the outbreak of war in August of 1914. During the second half of

the 19th century, the Western world experienced a dramatic intensification of international

connectivity due to four advancing technologies–trains, steamships, the telegraph, and the postal

system. The period 1880 to 1914 saw a level of global economic integration that matched or

even exceeded that of the global economy today.

Stage-3: The take off phase

The third phase of globalization began after world war- II. The consequences of war transformed

the political and economic land scale. The rehabilitation and reconstruction of the ravaged

European economies through America’s Marshall Aid helped stimulate economic activity in

Europe. Before the world war, the countries across Atlantic prospected their economies by

raising tariff barriers in order to have strict control on currency and capital movements.

The emergence during the post-war period of many Non-Governmental Organizations, or NGOs,

has been a response to the limitations of international institutions, such as the United Nations.

NGOs also respond to the fact that many nation-states are unwilling or unable to formulate or

carry out a variety of important humanitarian and environmental projects.

Stage-4: Westernization

The international economic movement, which follows Globalization, is Westernization. The

whole world is not becoming a part of the West, but westernized. This means that countries are

becoming directly influenced by the process of modernity. Modernity is the basis of the western

model of culture and civilization. As we noticed, Globalization is a world movement with a




specific direction: from the West to the East, but this movement is never limited to only an

economic sphere. Westernization is responsible for the domination of English language in the

world. This movement has been highly developed since the 1980s, the starting period of

Globalization. Today English language has become the major language of business and

international communication. About 85% of the web-sites on the Internet are in English. English

language is taught as a second language in many schools all over the world. American film

industry, during the last two decades has achieved a total domination of the world movie

industries. From a political point of view, we can assert that nowadays almost all countries even

the Islamic Republic of Iran, but with the exception of Cuba and North Korea, are talking about

democracy.

Stage-5: Easternization

Easternization is a term that has only come to prominence since the mid 1990s. Originally used

very specifically to refer the spread of oriental (mainly Japanese) management techniques to the

West or alternatively to the manner in which Western modes of economic practice may be

modified when adopted by countries in the Far East, its use has been expanded in recent years to

refer to more general processes of cultural change as opposed simply to those relating to

economic matters. “Easternization” may refer either to processes that are perceived to be

occurring in the East itself (which is usually understood in this context as the orient), or to

processes occurring in the West. In the former case, use of the term is often related to the

ongoing debate over “Asian Values,” while in the latter it overlaps with the debate over the

direction of cultural change in the West, and hence debates such as those concerning

secularization or the spiritual revolution.

Stage-6: Globalization in 21st Century

Globalisation in 21st Century discover its own recognition with the process of change, increasing

interconnectedness and interdependence among countries and economies, bringing the world

closer through better world-wide communication, transport and trade links. This process is

changing the world dramatically and quickly, affecting economic, social, political and cultural

aspects of life.

Manifestation of Globalization The various manifestations of Globalization are:

1. Economic manifestations of globalization

Economic manifestation of globalization is the increasing economic integration and

interdependence of national, regional and local economies across the world through the

strengthening of cross-border movement of goods, services, technologies and capital.

International economic institutions, such as the World Trade Organization (WTO) and the

International Monetary Fund (IMF), facilitate this increasingly barrier-free flow of goods,

services, and money (capital) internationally. Regionally, too, organizations like the North

America Free Trade Association (NAFTA), the European Union (EU) and the Association of

South East Asian Nations (ASEAN), South Asian Association for Regional Cooperation

(SAARC) towards economic integration within their respective geographical regions.

International economic institutions, such as the World Trade Organization (WTO) and the

International Monetary Fund (IMF), facilitate this increasingly barrier-free flow of goods,

services, and money (capital) internationally. Regionally, too, organizations like the North




America Free Trade Association (NAFTA), the European Union (EU), and the Association of

South East Asian Nations (ASEAN) work towards economic integration within their respective

geographical regions.

2. Political manifestations of globalization

Globalization has impacts in the political ground. National governments have been ultimately

responsible for maintaining the security and economic welfare of their citizens, as well as the

protection of human rights and the environment within their borders. Under globalization,

politics can take place above the state through political integration schemes such as the European

Union and through intergovernmental organizations such as the International Monetary Fund, the

World Bank and the World Trade Organization.

Industrial development brought with it social dislocations that necessitated state intervention in

the form of public education and social "safety nets" for health care, housing, and other social

services. Consequently, the development of the contemporary nation-state, nationalism, inter-

state alliances, colonization and the great wars of the nineteenth and twentieth centuries were in

part political manifestations of changes in the structure of economic production.

3. Social and cultural manifestations of globalization

Cultural globalization refers to the transmission of ideas, meanings and values around the world

in such a way as to extend and intensify social relations. Socio-cultural globalization is likely to

happen in addition to the globalization of information and trading products. Global

communications play an extremely important role in the cultural dimensions of globalization.

Cultural globalization includes the use of new information communication technologies such as

the Internet, smart phones, e-mail and satellite TV. Though there are many social and cultural

manifestations of globalization, here are some of the major ones:

i) Informational services: The past two decades have seen an internationalization of information

services involving the exponential expansion of computer-based communication through the

Internet and electronic mail.

ii) Culture: The contemporary revolution in communication technology has had a dramatic

impact in the arena of popular culture. Information technology enables a wide diversity of

locally-based popular culture to develop and reach a larger audience. For example, "world

music" has developed a major international audience. Old and new musical traditions that a few

years ago were limited to a small local audience are now playing on the world stage.

4. Technological Manifestation of Globalization

Advance in technology is the main reason that globalisation has risen in the past decade. In

information and communication technology, innovations have become smaller in size, more

efficient and often more affordable. In transport technology, vehicles have tended to become

larger and faster, as well as becoming more environmentally friendly and cheaper to run. Though

there are many technological manifestations of globalization, here are some of the major ones:

i) Information and communication technology

Developments in information and communication technology have changed our way of life,

whether it is at home, at work, at school or at leisure. The internet and the development of digital

technology (computer-based technology) in particular, have made the most significant impact in

the field of information and communication technology in the past decade.




The internet is essentially a network of computers across the world which is linked through

global telecommunications. Although it was originally only used by defence personnel in the

United States, easy access to computers and related technology have made using the internet a

common activity in more recent times.

The World Wide Web (www) is a collection of interconnected documents which are accessible

using the internet. It enables people from almost anywhere in the world to access information on

almost any topic from shopping to weather forecasts; and from research to downloading music

and movies.

ii) Transport technology

Developments in transport technology have played a major role in globalisation. Over 100 years

ago, the Industrial Revolution changed the nature of transport with the invention of the steam

engine and the combustion engine. Since then, technological development in the transportation

industry has affected transformation in road, rail, sea and air travel.

Transport for personal use has improved dramatically. Cars are now built to be faster, safer, more

fuel efficient and therefore cheaper to run, as well as being more environmentally friendly and

costing less to purchase.

Airline transport has also enabled the expansion of tourism and trade across continents. Although

passenger planes only began to move groups of people around half a century ago, they have

dramatically improved within that time.

Airline travel has not only become more affordable in the last 20 years but it has also become

faster. In the mid-1930s, eleven people could fit into an aircraft on a flight from London to

Bangkok which took eight days. In 2002, almost 400 passengers could take the same journey in

just ten hours.

Essential Conditions for Globalization The essential conditions for Globalization are:

1. Government Support

Although unnecessary government interference is a hindrance to globalisation, government

support can encourage Globalisation. Government support may take the form of policy and

procedural reforms, development of common facilities like infrastructural facilities, R&D

support and financial market reforms and so on.

2. Resources

Resources are one of the important factors which often decide the ability of a firm to globalise.

Resourceful companies may find it easier to thrust ahead in the global market. Resources include

finance, technology, R&D capabilities, managerial expertise, company and brand image, human

resource etc.

3. Business autonomy

There should not be unnecessary government restrictions which come in way of globalisation,

like import restriction, restrictions on sourcing finance or other factors from abroad, foreign

investments etc.

4. Facilities

The extent to which an enterprise can develop globally from home country base depends on the

facilities available like the infrastructural facilities.




5. Competitiveness

The competitive advantage of the company is very important determinant of success in global

business. A firm may derive competitive advantage from any one or more of the factors such as

low costs and price, product quality, product differentiation, technological superiority, after sales

service, marketing strength etc.

6. Global Orientation

A global orientation on the part of the business firms and suitable globalisation strategies are

essential for globalisation.

Advantages of Globalization The advantages of globalization can be summarized as follows:

(i) Globalization ensures more Employment Opportunities

Globalization leads to the generation of several employment opportunities. Companies are

moving towards the developing countries to acquire labour force. This obviously caters to

employment and income generation to the people in the host country.

(ii) Product Quality

Globalization encourages manufacturing best quality of goods and provides best services

because of the highly competitive market. A particular commodity may carry hundreds of

options with different prices. The better product or service quality helps to retain the customers.

(iii) Free Movement of Capital

Globalization ensures the free movement of capital among various countries. Transferring money

through banks is possible just by the click of a button, all due to the electronic transfer that has

made life very comfortable. Many huge firms are investing in the developing countries by setting

up industrial units outside their home country. This leads to Foreign Direct Investment, which

helps in promoting economic growth in the host country.

(iv) Effective Communication between countries

Information technology has played a vital role in bringing the countries closer in terms of

communication. The recent market information is easily accessible from almost every corner of

the world through Internet. The Internet has significantly affected the global economy, thereby

providing direct access to information and products.

(v) Better Transportation Facilities

Today with various modes of transportation available, business organization can conveniently

deliver the products to a customer located at any part of the world. Besides, other infrastructural

facilities like, distribution, supply chain and logistics have become extremely efficient and fast.

(vi) Globalization helps to increase Productivity and improve living standards

Globalization brings in new opportunities such as access to markets and technology transfer.

These opportunities hold out the promise of increased productivity and higher living standards.




Disadvantages of Globalization The universal acceptance of the market economy and the Globalization led by private enterprises

tend to have some harmful effects on the economy of developing countries. They are discussed

below:

(i) Globalization damages of Traditional Crafts and Industries

Globalization leads to the replacement of traditional and original products by modern products.

This results in destroy of traditional crafts and industries and the livelihood of the people

depended on these sectors.

(ii) Unemployment in industrialized countries

Globalization causes unemployment in industrialized countries because firms move their

factories to places where they can get cheaper workers.

(iii) Increases environmental problems

Globalization leads to more environmental problems. A company may want to build factories in

other countries because environmental laws are not as strict as they are at home. Poor countries

in the Third World may have to cut down more trees so that they can sell wood to richer

countries.

(iv) Increases Poverty

Globalization has resulted in increased poverty and difficulties among particular populations in

the Indian society.

(v) Brings Instability: Globalization sometimes brings instability and unwelcome change in the

economy. It exposes workers to meet competition from outsiders which can threaten their jobs.

The inflow of foreign capital into the country through Globalization may weaken national banks.

India and Globalization The liberalization of the domestic economy and the increasing integration of India with the

global economy have helped step up GDP growth rates, which picked up from 5.6% in 1990-91

to a peak level of 77.8% in 1996-97. Growth rates have slowed down since the country has still

been able to achieve 5-6% growth rate in three of the last six years. Though growth rates has

slumped to the lowest level 4.3% in 2002-03 mainly because of the worst droughts in two

decades the growth rates are expected to go up close to 70% in 2003-04. A Global comparison

shows that India is now the fastest growing just after China.

Agricultural Sector is the mainstay of the rural Indian economy around which socio-economic

privileges and deprivations revolve and any change in its structure is likely to have a

corresponding impact on the existing pattern of Social equity. The liberalization of India’s

economy was adopted by India in 1991. Facing a severe economic crisis, India approached the

IMF for a loan, and the IMF granted what is called a ‘structural adjustment’ loan, which is a loan

with certain conditions attached which relate to a structural change in the economy.

Effects of Globalization on Indian Industry started when the government opened the country's

markets to foreign investments in the early 1990s. Globalization of the Indian Industry took

place in its various sectors such as steel, pharmaceutical, petroleum, chemical, textile, cement,

retail, and BPO.




Impact of Globalization of Indian Economy The impact of globalisation has been highly positive in almost all spheres of economic and social

life which are summarized as follows:

1. Greater competition among producers resulting from Globalisation is a great advantage to

consumers as there is greater choice before them. Consumers now enjoy improved quality and

lower prices for several products.

2. Globalisation has created new opportunities for Indian companies providing services,

particularly in the IT field. Services such as data entry, accounting, and administrative tasks, are

now being done cheaply in India and exported to the developed countries. This has generated

thousands of jobs.

3. Due to globalisation many MNCs have increased their investments in India. This means

thousands of people are getting highly paid jobs and, enjoy much higher standards of living than

was possible earlier.

4. Top Indian Companies have benefit from increased competition. They have invested in newer

technology and production methods and raised their production standards.

5. India's economic growth has been high, exports have boomed, incidence of poverty has been

reduced, employment has surged, begging by India for economic aid has stopped, long-term

inflation rate has gone down, scarcity of goods have disappeared, the quality of products

available have improved substantially and overall India has become progressively vibrant and

internationally competititive.

6. Local companies supplying raw materials to these industries have prospered. Some Indian

companies have gained from successful collaborations with foreign companies. Large Indian

companies have emerged as multinationals like Tata Motors.

MNCs and International Business

Meaning of Multinational Corporations

A multinational corporation is a corporation enterprise that manages production or delivers

services in more than one country. Example: TATA Group, Reliance Group, Infosys, Coca-

Cola, Samsung etc.

Characteristics of Multinational Corporations (MNCs)

Characteristics of Multinational Corporations can be summarized as follows:

1. Manages production in more than one country.

2. Delivers services in more than one country.

3. Optimum utilization of Resources.

4. Lead to more production.

5. Increased Sales.

6. Profit Maximization.

7. Brand Loyalty.

8. Tax Benefits.




Reasons for the Growth of MNCs

The important reasons for the growth of multinationals are as follows:

i) Innovation

Companies such as IBM, Philips and Sony create barriers to entry for others, by continually

introducing new products and differentiating existing ones. Both domestically and international

companies in this category spend large amounts on R&D and have a high ratio of technical to

factory personnel. Their products are typically designed to fill a need perceived locally that often

exists abroad as well.

ii) Availability of Capital

The fact that MNCs have access to capital markets has been advocated as another reason why

firms themselves moved abroad. A firm operating in only one country does not have the same

access to cheaper funds as a larger firm. However, this argument, which has been put forward for

the growth of MNCs has been rejected by many critics.

iii) Technology Advantages

Multinational Corporations establish production units across the nations which facilitates the

technological advantages from various countries.

iv) Systematic Relationship among investors, companies and countries.

Some firms have followed clients who have made direct investment. This is especially true in the

case of accountancy and consulting firms. Large US accounting firms, which know the parent

companies special needs and practices have opened offices in countries where their clients have

opened subsidiaries.

These US accounting firms have an advantage over local firms because of their knowledge of the

parent company and because the client may prefer to engage only one firm in order to reduce the

number of people with access to sensitive information. Templeton, Goldman Sachs and Earnest

and Young are moving with their clients even to small countries like Sri Lanka, Panama and

Mauritius.

v) Goodwill

Normally, products develop a good or bad name, which transcends international boundaries. It

would be very difficult for an MNC to protect in reputation if a foreign licensee does an inferior

job. Therefore, MNCs prefer to invest in a country rather than licensing and transfer expertise, to

ensure the maintenance of their goodwill.

vi) International Product Life Cycle

It has been argued that opportunities for further gains at home eventually dry up. To maintain the

growth of profits, a corporation must venture abroad where markets are not so well penetrated

and where there is perhaps less competition.




Distinction between Domestic & Foreign Companies

Sl.

No.

Domestic Company Foreign Company

1. Domestic company is the exchange of goods,

services, or both within the confines of a

national territory.

International company exchange of

capital, goods, and services across

nations is called International Trade.

2. Domestic company pertains to a limited

territory. Though the firm has many business

establishments in different locations all the

trading activities are inside a single boundary.

Scope of international company is quite

wide. It includes not only merchandise

exports, but also trade in services,

licensing and franchising as well as

foreign investments.

3. Domestic company has lesser benefits when

compared to the former.

International company benefits both the

nations and firms.

4. Domestic company as it is conducted locally

there would be no much involvement of

foreign currency. It can create employment

opportunities too and the most important part

is business since carried locally and always

dealt with local resources the perfection in

utilization of the same resources would

obviously reap the benefits.

Through international company nations

gain by way of earning foreign exchange,

more efficient use of domestic resources,

greater prospects of growth and creation

of employment opportunities.

5. Profits in domestic trade are always lesser

when compared to the profits of the firms

dealing transactions globally.

The advantages to the firms carrying

business globally include prospects for

higher profits, greater utilization of

production capacities, way out to intense

competition in domestic market and

improved business vision.

6. Firms going for domestic trade does have the

options but not too many as the former one.

A firm desirous of entering into

international company has several

options available to it. These range from

exporting/importing to contract

manufacturing abroad, licensing and

franchising, joint ventures and setting up

wholly owned subsidiaries abroad.

7. Firms carrying business locally have to face

this situation which results in low profits and

in some cases losses too.

Firms conducting trade internationally

can withstand these situations and huge

losses as their operations are wide spread.

Though they face losses in one area they

may get profits in other areas, this

provides for stabilizing during seasonal

market fluctuations

8. Providing goods and services as a business

within a territory is much easier than doing

the same globally.

Globally operating firms need to follow

complicated customs procedures and

trade barriers like tariff etc.




Features of Multinational Corporations

Main feature of MNCs are as follow:

1. International Operation

A multinational corporation operates in more than one country. It has branches, factories, offices

in several countries. It operates through a network of branches and subsidiaries in host countries.

They sell their products in different countries. For e.g.: Coca Cola, apple etc.

2. Professional Management

A Multinational corporation employs professional experts, specialised people. MNCs try to keep

their employees updated by imparting them training from time to time. It employs professionals

to handle the advance in technology effectively.

3. Centralized Control

The branches of Multinational companies spread in different countries are controlled and

managed from the headquarters situated in the home country. Headquarters in the home country

is the is the main branch. All branches operate within the policy framework formed by

headquarters.

4. Oligopolistic Powers

Oligopoly means power in the hands of few companies only. Due to their giant size, the

multinational companies occupy dominating position in the market .They join hands with big

business houses and give rise to monopoly. They also take over other firms to acquire huge

power and improve market share.

5. Sophisticated Technology

Multinational companies make use of latest and advanced technology to supply world class

products. They use capital-intensive technology and innovative techniques of production.

Types of MNCS

The various types of MNCs are:

1. Vertical Integrated MNCs

Vertical integration is the process in which several steps in the production and/or distribution of

a product or service are controlled by a single company or entity, in order to increase that

company’s or entity’s power in the marketplace.

2. Horizontal Integration

Horizontal integration means a strategy to increase your market share by taking over a similar

company. This takes over / merger / buyout can be done in the same geography or probably in

other countries to increase your reach.




Examples of Horizontal Integration are many and available in plenty. Especially in case of the

technology industry, where mergers and acquisitions happen in order to increase the reach of an

entity.

3. Equity-based MNCs

Many older MNCs obtained their multinational capacities through direct foreign investments.

They either built from ground up or bought the equity of the desired capital assets, such as

assembly plants, pharmaceutical laboratories, department stores, banks, flour mill, or whatever

operating facilities they use. Equity ownership provides the basis for managerial control over the

foreign based entities and opens the way for their affiliation or integration with one another

internationally by the headquarters firm.

4. Technology-based MNCs

A new generation of MNCs has started to emerge in which the source of multinational

managerial control is technology, including management expertise, instead of ownership of

operating assets. These are known as no equity MNCs. The hotel, mining, and construction

industries have pioneered this new generation of MNCs. They offer an increasingly viable

alternative to the older, equity-based model.

3. Management Contracts

A management contract is an agreement between a hotel owner and hotel management company

under which, for a fee, the management company operates the hotel. The main vehicles of the no

equity MNC are long-term contracts with owners of suitable operating facilities, such as hotels

or mining properties. Often the contracts are either formally or informally sanctioned by the host

government.

Under such a contract the owners will let the MNC take over possession and management of the

business and the MNC will obligate itself to share profits with the owners by some agreed-upon

formula. The management contract model of the hotel industry has become the basis for a

number of variations that are rapidly gaining status not only in other service industries but also in

the manufacturing and high-technology sectors, where they the potential for even greater

importance.

Organizational Structure of MNCS

Organization is the social and economic voids in which a number of persons perform different

suites in order to attain common goals. Organizations also help individuals in attuning those

personal objectives which they cannot achieve alone. Organization is only means to an end.

Organization design is the process in which roles and relationships are analyzed to achieve

specific collectively. It leads to the definition and description of more or less formal structure.




1. Functionally organized Multinational Corporations

A functionally organized multinational corporations use corporate functions as the basis for its

organizational structure. Production, human resources, design and customer service are typical

functional units.

If a functionally organized company has a centralized structure, all operations are based in the

home country and individual employees have responsibilities for different national markets. This

type of organization is efficient and effective for companies that are too small to have overseas

subsidiaries. Larger companies can have this type of organization, but in a decentralized form,

where foreign employees carry out some of the work in their own countries. In this case,

companies have to pay special attention to coordinating activities.

2. Product organizational structure

A product organizational structure has managers reporting to the president or head of the

company by product type. Product organizational structures are primarily used by retail

companies that have stores in various cities. However, stores in each city may still need a local

human resources or marketing department to carry out functions locally. For example, a small

department store company may have a vice president of sporting goods, house wares and general

merchandise at the corporate office. One manager may report to each vice president. However,

each manager may oversee the work of one or more field marketing employees who travel and

handle local marketing stores in several states.

These field marketing employees may work for the sporting goods manager one week in League

City, Texas, then do merchandising for the house wares manager another week in the Sugarland,

Texas, market.




3. Geographical organization structure

A common form of organizational structure for larger companies and businesses that require a

presence in the foreign markets is one that's based in geography. In addition to the home office

or headquarters, semi-independent operations are established in the countries where the company

is active. For larger corporations, these can take the form of subsidiaries, while smaller

companies can have something as simple as an agent or a small office.

This structure affords flexibility; the head office can transfer responsibilities abroad if required

by local conditions and if the foreign operation is competent, but it can also take over local

operations if needed.

4. Matrix Organizational Structure

A matrix organizational structure combines the efficiency of the functionally organized company

with the flexibility of extensive local operations. Foreign workers report to local managers for

questions about their work, while they report to the head office for all other functions.




The home organization retains control of disciplinary matters, pay and promotions, while the

employees carry out the work according to local requirements. This is a suitable organizational

form for smaller companies active in only one or two foreign markets, but it is mainly used by

larger corporations who have extensive foreign operations.

Advantages of MNCS

Multinational corporations have unique and empirical capacity to increase production and

distribution. Whatever they make radical charges in the existing productions system of that

country. Their superior technologies professional approach managerial competence and quality

are of paramount importance of the country. The several advantages and disadvantages of MNCs

are as follows:

Advantages of MNCs to the Host Country

i) The investment level employment level and income level of the host country increases due to

the operations of MNC in the country.

ii) The ancillary and service industry of the host country increases and thus the level of industrial

and economic development increase.

iii) Modern technology and managerial services are made available to enterprises established by

MNCs. It is through the medium of MNCs that technology has been transferred to other

countries.




iv) Latest and sophisticated management techniques can also be obtained by the host country

form the management practice of MNCs.

v) MNCs make available marketing services especially export related marketing research

advertisement spread of marketing information storage facilities transport packing design etc.

vi) Countries where in MNCs establish their subsidiaries have more employment opportunities.

vii) Domestic industry can make use of the R& D outcome of MNCs.

viii) The host country can reduce its imports due to production of those goods by MNCs which

otherwise were not available in the country.

Advantages of MNCs to the Home Country

Home country also gets some advantages from the operations of MNCs. They are:

i) The marketing of goods produced in the home country becomes possible throughout the world

through MNCs.

ii) Employment opportunities both at home and abroad to the home country people also increase

due to large scale operations of the MNCs.

iii) MNCs contribute to the favourable balance of payments for the home country in the long-run.

iv) MNCs also help in activating the industrial activity of the home country.

Disadvantages of MNCs

Disadvantages of MNCs to the Host Country

i) The main objective of the MNCs is to earn maximum profit. To achieve this objective they

invest their capital in underdeveloped countries. The reason being that labor is very cheap in

these countries.

ii) MNCs kill the domestic industry by monopolizing the host country’s market.

iii) Development of scare resources is adversely affected by managerial abilities technology and

foreign contacts made available by MNCs. Local industry cannot face their competition as such

the same remain underdeveloped.

iv) MNCs by making capital investment in the host country discourage the domestic rate of

saving in investment. Domestic investment is discouraged because it cannot complete with

MNCs.

v) Although MNCs prove helpful in improving foreign exchange situation of the underdeveloped

countries for the short-period but the y prove harmful in the long-run.

vi) Adoption of ethnocentric approach in staffing by the MNCs causes unemployment in the host

country.

vii) Indiscriminate use of natural resources by MNCs may cause fast depletion of the resources

of the host county.

viii) MNCs also influence the decision-making process of the governments of developing

countries through their financial and other resources.




ix) MNCs evade their tax liability by adopting transfer pricing methods. According to this

method MNCs buy intermediate goods from their subsidiaries abroad at high price and thus

reduce their local profits.

x) The MNCs do not engage in R&D activities relevant to the development countries. Their

R&B efforts are relevant to advantages countries. The MNCs transfer the technology

development in advanced countries to the developing countries through it is not conducive to

their development.

Disadvantage of MNCs to the Home Country

i) The transfer of capital from the home county to various host countries by MNCs causes

unfavourable balance of payment position.

ii) Industrial and economic development of the home country in neglected as MNCs invest the

capital in more profitable countries.

iii) Foreign culture brought by MNCs may prove detrimental to the interest of the home country.

Role of MNCs in the development of International Business

The Role of MNCs in the development of international business can be summarized as

follows:

i) MNC's directly and indirectly helps both the home country and the host country. The

investment level, employment level, and income level of the host country increases due to the

operation of MNC's.

ii) As the borderless economy advances throughout major economic regions, most globally

minded companies are expanding their businesses across national borders in order to maintain

competitiveness. The number of MNCs operating in major markets, without regard to the level of

technological development, is rapidly increasing.

iii) It is desirable from the basic industrial operation point of view that end user products should

be manufactured as close as possible to the local market since it permits providing products to

meet local users' needs, minimizes energy use for transportation, and hence reduces air pollution,

and provides jobs to local people.

iv) The role of MNCs in the global community has to increase dramatically. Since the end of the

Cold War, the world economy has been strongly distorted by political intervention. Even though

politically oriented trade frictions are being heightened at the government level between Japan

and the United States, industrial leaders of the two countries are aggressively forming strategic

alliances and promoting friendly collaboration. This tide of corporate level competitive

interdependence and global alliance activity is gradually becoming a significant element in the

world economy. Indeed it is paradoxical, but relying on corporate alliances and interdependence

is perhaps a better strategy for increasing industrial strength than economic nationalism.




v) The science community has long enjoyed a favourable climate for international

communications and collaboration. Unfortunately, the engineering community has experienced

numerous constraints due to national economic and security reasons. These constraints may not

be removed in the foreseeable future. However, without better management of international

engineering and science relationships for improving R&D productivity, we cannot cope with the

crucial problems that have put world peace and the survival of the human race at risk.

vi) Modern MNCs are desperately seeking many ways to ensure their own survival. They no

longer can survive considering only their own and their national interests, but they need to be

good citizens in their host countries as well. They have to receive full support from the

engineering community and customers in order to be successful. Hence they are establishing

better engineering and science relationships in local communities.

vii) Strategic alliances in business and technological development are a step forward. R&D

cooperation between Japan and the United States and further with all nations throughout the

world should aim to solve global environmental problems such as acid rain, global warming, and

preserving the rain forests, as well as developing a cure for AIDS, an epidemic that continues to

grow rapidly on a global scale.

viii) In industrially advanced countries, the people demand highly sophisticated information

products since their societies are rapidly becoming highly-information oriented societies. The

application software of such products is very much dependent on local culture and is very

difficult for engineers from different cultures to develop. Such software has to be developed by

local engineers with knowledge of the market.

Role of MNCs in the development of Indian business

The role of MNC’s in the development of Indian business can be explained as follows:

i) The Indian multinational companies are an invaluable dynamic force and instrument for wider

distribution of capital, technology and employment that play a vital of Indian Economic

development.

ii) Government of India makes continuous efforts to attract foreign investments by relaxing

many of its policies. As a result, a number of multinational companies have shown interest in

Indian market.

iii) The multinational companies in India represent a diversified portfolio of companies from

different countries. Though the American companies - the majority of the MNC in India, account

for about 37% of the turnover of the top 20 firms operating in India, but the scenario has changed

a lot off late. More enterprises from European Union like Britain, France, Netherlands, Italy,

Germany, Belgium and Finland have come to India or have outsourced their works to this




country. Finnish mobile giant Nokia has their second largest base in this country. There are also

MNCs like British Petroleum and Vodafone that represent Britain.

iv) India has a huge market for automobiles and hence a number of automobile giants have

stepped in to this country to reap the market. One can easily find the showrooms of the

multinational automobile companies like Fiat, Piaggio, and Ford Motors in India.

v) French Heavy Engineering major Alstom and Pharma major Sanofi Aventis have also started

their operations in this country. The later one is in fact one of the earliest entrants in the list of

multinational companies in India, which is currently growing at a very enviable rate. There are

also a number of oil companies and infrastructure builders from Middle East.

vi) Electronics giants like Samsung and LG Electronics from South Korea have already made a

substantial impact on the Indian electronics market. Hyundai Motors has also done well in mid-

segment car market in India.

vii) It is to specify that the companies come and settle in India to earn profit. A company

enlarges its jurisdiction of work beyond its native place when they get a wide scope to earn a

profit and such is the case of the MNCs that have flourished here.

viii) India has wide market for different and new goods and services due to the ever increasing

population and the varying consumer taste. The government FDI policies have somehow

benefited them and drawn their attention too.

ix) India has got a huge market. It has also got one of the fastest growing economies in the

world. Besides, the policy of the government towards FDI has also played a major role in

attracting the multinational companies in India.

x) Multinational corporations have played an important role in globalization. Countries and

sometimes sub national regions must compete against one another for the establishment of MNC

facilities, and the subsequent tax revenue, employment, and economic activity.

Important Questions

Conceptual Type

1. Define globalisation.

2. Give any two reasons for firms going global.

3. State any two features of globalization.

4. Mention any two stages of globalization.

5. State any two manifestations of globalization.

6. Mention any two essential conditions for globalization.




7. State any two advantages of globalization.

8. Write any four disadvantages of globalisation.

9. Give the meaning of Multinational Corporations (MNCs).

10. Define the term MNCs.

11. What is Foreign Company?

12. What is functionally organized Multinational Corporations?

13. What is Product oriented organization?

14. State any two roles of MNCs in the development of Indian business.

Analytical Type

1. Discuss important features of globalization.

2. Discuss the process of globalisation.

3. Explain the reasons for globalisation of production.

4. Explain the essential conditions for globalisation.

5. Explain impact of globalization in India.

6. Discuss the history of MNCs.

7. Distinction between Domestic & Foreign Companies.

8. Discuss functionally organized Multinational Corporations.

9. Explain vertically organized MNCs.

10. Discuss role of MNCs in the development of international business.

Descriptive Type

1. What is globalisation? Discuss various stages of globalization.

2. Explain the manifestations of globalisation.

3. Explain the advantages/merits of globalisation.

4. Explain briefly the disadvantages/demerits of globalisation.

5. Discuss about India and globalization.

6. Explain in details various types of MNCs.

7. Discuss various Organizational Structures of MNCs.

8. Explain role of MNCs in the development of international business.

9. Discuss role of MNCs in the development of Indian business.


Unit 3: Globalization Meaning of Globalization Features of ...skpodder.co.in/pdf/u8-Unit-3.pdf ·...

Documents

Transcript of Unit 3: Globalization Meaning of Globalization Features of ...skpodder.co.in/pdf/u8-Unit-3.pdf ·...