The free flow of capital, labor, commodities, information and people within the international economy is a powerful reality of the modern world, since it has generated a complex interdependence not only between players from the same industry, but also between representatives of the public, business and financial sectors. Globalization was encouraged by the liberalization of international trade, which enabled businesses (and forced them at the same time) to explore new markets in order to gain a competitive edge. At the macroeconomic level, globalization brings the increase of exports as part of GDP which is beneficial for economic growth, as well as a redirected cash-flow towards the developing countries. This is believed to reduce poverty and increase living standards in underdeveloped and developing countries, however, possibly undermining the power of the governments and shaking the foundations of the welfare state (Kim and Zurlo, 2007, p.137). In the private sector, integrated global industries struggle to maximize the economic advantage resulting from country variations in costs and labor, product diversification opportunities and national differentiations in business conditions with pressures to optimize the costs of geographical dispersion and fund innovation (Karimi and Konsynski, 1991, p.17). As the impact of globalization grows on, businesses start to focus more on global sales and marketing strategies, global brand management and the standardization of different logistic processes through effective control and coordination. It is necessary that they follow an efficient integration model, whether it is based on information systems, the formalization of business functions or the transfer of competent managers across borders (Kim, Park and Prescott, 2003, p.328). Successful global businesses, at their turn, give customers access to cheaper and more diversified and utility-maximizing products.
However, the recent financial crisis had demonstrated that this interdependent exposure to the international markets, combined with the lack of proper risk mitigation and management techniques can have adverse effects on business performance and profitability. Setting aside the financial crisis, multinational companies can pose a serious threat to local businesses that do not dispose of the financial and human resources to compete with them. At the same time, certain regulations and pressures from within international organizations such as the World Trade Organization impose trade standards that cannot be fulfilled by developing countries and therefore significantly affect their trade through a form of neo-protectionism. Moreover, the World Bank, as the main long-term lender to the developing countries, sometimes fails to accomplish its goals since many of the lent funds end up being used on projects that are unsustainable and unbeneficial for the general society, but extremely profitable for a corrupt government. Therefore, this paper sets out to analyze the pros and the cons of globalization and aims to present creative ideas on the so-intensively discussed topic. The impact of international organizations such as the WTO and the World Bank on international business will also be discussed, with a further expansion on the challenges faced by product development and supply-chain management in the globalization era.
One of the principal advantages of globalization stands in the liberalization of markets, ‘particularly through the elimination of barriers to trade in goods and services and the development of an integrated international financial market’ (Figini and Santarelli, 2006, p.135). The process of trade liberalization was possible due to international organizations such as the GATT and the WTO, which actively promoted open trade and emphasized the necessity of transparent trade legislation within all member countries (Irwin, 2000, p.353). Moreover, while GATT was an organization that only suggested free trade regulations, being however unable to impose them on member countries, the WTO is certainly a more ‘law-governed system’ (Sally, 2004, p.6) with trade regulations that have to be respected by all signatory countries. Due to the work of the WTO, as well as the influence of Regional Trade Agreement, the exports volume significantly increased in the last half of the century. For example, in 1947 exports accounted for only 10% of the GDP, while in 2011 the ratio exceeded 25% (Pangetsu, 2010, p.3). This statement is supported by compelling statistical evidence from the World Bank, presented in the chart below:
Graph 1:
World Development Indicators – The World Bank Statistical Database
An increase in a country’s exports ultimately means that its products are more competitive on the international market and are therefore preferred by the consumers. An increase in world exports demonstrates the fact that countries have found the recipe for profitable trade by specializing in the production of those goods that offer them the biggest competitive advantage in cost, quality or both. For example, Asian countries have specialized in the production of components of electronics, cars and other kind of machinery, ‘with parts of production migrating from Japan to Taiwan, Hong Kong, and Singapore, and then to China and other parts of Southeast Asia’ (Pangetsu, 2010, p.6). This process triggered a certain economic integration in Asia, helping countries benefit from their comparatively low labor and manufacturing costs which made the production of such components much more advantageous that it would have been in western developed countries. This global competition trend within the growing exports trend beneficiates the consumer, who has access to a variety of products (both domestic and foreign) at correspondent competitive prices. The average labor remunerations in export-related sectors also increase, raising living standards for the working population.
At the same time, a raise in global exports facilitates the transmission of information, innovation and know-how across borders and determines the development of all economic sectors. Andrew Beer (2012, p. 270) argues that in years preceding the 1970s, Australia was a country with an underdeveloped tertiary sector as well as an economy mostly reliant on manufacturing and agriculture. This correlates to the fact that Australia was also a highly protectionist country (Rich, cited in Beer 2012, p.270) and most importantly, Australia was ‘until the early 1970s [] distanced from the global economy by layers of government regulation and a policy focus on national economic development that was separate from notions of productivity or efficiency’ (Beer, p.271). The following decades, marked by the process of globalization, brought a new age of deregulation and lower import tariffs (as seen in the graph below).
Graph 2:
Lloyd, 2007, p. 40
Consequently, Australia’s economy suffered important industrial structural changes: the development of the tertiary sector that helped the country become a leading provider of retail, business and financial services. The incoming flow of business knowledge and innovational processes significantly extended the Australian tourism sector and transformed the once protectionist agricultural sector into an efficient and modern world competitor. As Beer (2012, p.271) mentions, globalization ‘changed business models in many parts of the economy’ and further promoted economic growth. Moreover, the ease of doing business is also an important factor in international business, since companies might shift towards countries where the regulatory framework facilitates entrepreneurial ventures. According to a report published by the World Bank in 2012, Australia ranked 15 in the ‘ease of doing business’ top, demonstrating, again, that it is a country that has embraced globalization and it is opened to international business.
Not only national economies faced several structural changes that optimized their performance, businesses also had to face many challenges when adapting to the international entrepreneurial environment. First of all, the advancement of internet technologies has given firms the possibility to outsource many of their processes to countries that offer cheap, yet skilled labor force (Friedman, 2005, p.126). This has meant a significant cut in operational costs and therefore a positive impact on cash-flows, as well as annual profits. Moreover, the cost cuts made possible several investments in research and development for a proper product line optimization as well as investments in market research and analysis for a good market penetration. This expansion of international business is readily reflected by the increase of the value added by multinational companies to the world economy in the past 10 years, as presented in the graph below:
Graph 3:
U.S. Department of Commerce, Statistical Data, 2012
Facing the need in geographical dispersation, coping with an increasing sophistication in consumer preferences and leading the trend of strategies through global integration (Sheppard, 2002, p.310), multinational companies have started to outsource logistics operations in order to cut costs and operational complications. I believe that this can be considered a beneficial effect of globalization: the development of specialized firms and even niche firms that provide logistics services. Multinational companies, such as FMCG companies – that need to deliver products in time all around the world – can easily outsource the logistics operations to a different company that offers competitive prices and qualitative services. This way the multinational company can focus more on product development and market research, than on logistic problems. In the end, it is still the consumer that senses the benefits in both cost and quality, while the international firms profit from an increase in sales due to satisfied customers.
Still, even if the businesses have significantly benefited from globalization as well as new open markets, they also face several difficulties, since globalization increases risks and it demands more efforts to be put into the constant re-evaluation of business models. (Fan and Phan, 2007, p.1116). When conducting business in different geographical locations homogeneity in strategy is not advised, however companies struggle to find the appropriate value proposition that is valid in all markets or easily adaptable (Collins and Ruksad, 2008, p. 5). As technologies in manufacture and logistics become more advanced, production and distribution shift towards a smaller volume and clients need more ‘customized’ products, a trend in the global economy towards more flexible and responsive supply chains emerges. A McKinsey (2010) survey cited in Pangetsu (2010, p.4) talks about an increasing supply chain risk in the following years, due to the shocks brought on by the financial crisis, as well as changes in regulation and the rise of labor costs. Supply chains have to be reconstructed as a result of factor such as outsourcing opportunities, new information technologies, the gap between consumer and supplier prices, risk management and product life-cycle management (Johnson, 2006, p.192). Business models have to be evaluated through specific methods that would tackle operational issues such as end-product quality, throughput, distribution channels and customer service, as well as financial performance indicators such as gross margins, rates of return and profitability indices of product promotions and advertisement (Johnson, Christensen and Kagermann, 2008, p.59). At the same time, it is important for businesses to vary their product portfolios across industries in order to diversify risks by lowering the leverage of their investments across different market segments (Shenkar, 2004, p.163).
Other globalization disadvantages surface by looking at the way WTO regulations have influenced trade in developing countries on one side and at how successful is the World Bank in fostering economic growth in underdeveloped countries on the other side. These two international organizations are both a cause and a means of propagation for the process of globalization and there has been a fair amount of criticism towards their actions coming from scholarly sources, lobbyists and activists. Even if these opinion groups might sometime want to direct the WTO and World Bank decision towards their own interests (Lal, 2006, p. 88), I believe that some of the regulations imposed by the WTO can be considered as a form of neo-protectionism.
The WTO has so far acted significantly in two directions: standards harmonization and trade legislation. Trade legislation concerned the destruction of regulatory barriers at the borders by the reduction of tariff and non-tariff regulations (Sally 2003, p. 11). However, certain developing countries continued to produce low-priced goods due to low wages for workers, as well as low work standards. The developed countries saw this situation as a threat to the profitability and competitiveness of their own trade, so they pressured the WTO to introduce standard harmonization. This concept concerns the standards related to methods of production and processing, as well as sanitary and work-wages standards that have to be met by a product in order to enter the global trade. The problem is evident here: the developing countries do not have the financial, human and administrative resources to invest in their businesses in order to meet all the standards required by the WTO. This way, the volume of their exports declines, as more investments are for new production lines and the improvement of work conditions in factories.
This is obviously a negative effect of globalization, since an “intrusive, one-size-fits all” regulatory approach, driven by country benchmarks and political agendas” (Sally, 2004, p.9) is definitely not beneficial to developing countries, who struggle to reach the economic stability and power that is so relentlessly used by developed countries. Razeen Sally (2004) brilliantly compared this situation to “the Damoclean Sword” of trade transactions.
Since the influence and power of both WTO and World Bank is a clear result of the rapidly developing process of globalization, like in any functional economy, their positive agenda cannot go by without causing some negative externalities. If in the case of the WTO the externalities are related to the intransigent standard harmonization that causes the developing countries to stagnate, in case of the World Bank is the misuse of the long-term lent fund by the beneficiary countries. In the modern times, when globalization grants access to many other funding sources, the World Bank has ended up with its status quo seriously questioned (Leeson, 2008, p.41). The problem is that the underdeveloped countries can access external private funds only if they demonstrate that the money will be invested in feasible projects and only if they agree to a serious financial follow-up. However, since underdeveloped countries are mostly governed by corrupt politicians that invest in unnecessary projects, or worse, keep the money for themselves, no other lending institution besides the World Bank will give them money (Shleifer, 2009, p.383). Therefore, instead of being “a financial powerhouse governed by marked discipline and exercising investment prowess”, the World Bank misuses the funds gathered through international cooperation to finance countries that that misuse the money and make no substantial progress in improving health standards, the access to education as well as in reducing poverty.
In conclusion, it is no doubt that globalization is one of the most important driving forces of the world around us. According Ikenson and James in the Cato Institute Handbook for Policy Makers (2007) “the emergence of previously moribund economies has expanded the labor pool and has permitted a much more diversified and stratified division of labor, which has created scope for elaborate, dispersed, transnational production processes where countries specialize in particular value-added operations”. This paper has clearly illustrated that countries have benefited significantly from the liberalization of trade and businesses have flourished through the exploration of new markets and new global opportunities. However, the question of negative externalities still remains: are all the WTO actions sustainable and trade enhancing? Is the World Bank redirecting the funds into sustainable projects? I believe that this paper has presented some valuable insights into these subjects. However, there is still room for further exploration and interpretation.
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