Globalization

Globalization
Globalization in its literal sense is the process of transformation of local and regional phenomena into global ones. It can be described as a process by which the people of the world are unified into a single society and function together.
This process is a combination of economical, technological, sociocultural and political forces.
GLOBALISATION PERSPECTIVE

• Transformation from national and regional markets into ‘global’ market without national boundaries
• ‘Free Flow’ envisaged among WTO member countries includes goods, services, technology, Foreign Direct Investment, human-capital and Intellectual property
• However, regional trade blocks like EU, ASEAN, NAFTA, GCC and MERCOSUR polarize world trade and commerce, limiting market access for India based companies, since India is not a member of any of these trade blocks

World Trade Organization (WTO) promotes free trade among countries. Based in Genva, Switzerland. Currently 152+ countries are members of WTO.
Trade Blocks: In trade blocks free trade happens among the member countries. Common external tariffs are imposed on non member countries. In trade blocks countries promote trade among themselves. India is not a part of major trade blocks so limiting market access to these countries. But the markets can be accessed through FDIs.
GLOBALISATION IMPACT
Globalization is cutting across all product and service sectors worldwide forcing industries and corporations to re-structure and re-think their strategies in the face of shortening product and technology life cycles, increasing scale of operations required for global competitiveness while simultaneously requiring flexible manufacturing systems for quicker deliveries and customization.
Due to Globalization technological lifecycles are changing. Product life cycles are getting shortened.So simultaneous launch in different countries are required. Here markets are large and scale economies are also at a global level.
Effects of Globalization
Globalization has various aspects which affect the world in several different ways.
Industrial: Emergence of worldwide production market and movement of materials and goods between and within national boundaries
Financial: Emergence of worldwide financial markets and better access to external financing for borrowers
Economical: Freedom of exchange of goods and capital.
Political: Better relationship among governments and guarantees rights arising from social and economical globalization.
Competition: Survival of the fittest calls for improved productivity and competition
Technical: Development of a global telecommunications infrastructure and greater trans border data flow using technologies.
IMPACT OF TECHNOLOGY ON A GLOBAL SCALE

• Efficient scale for production of color TVs rose from 50,000 sets/ year in 1960 to 500,000 sets in early 1980s.
• Meanwhile global scale economies in R&D & marketing (due to giant retail chains) were also increasing, raising breakeven volumes up further.
• Breakeven volume now 2.5 to 3 million sets/ annum for global competitiveness I.e. increase of over 40 times volumes in 1960

Importance of Education & HRD in Globalization

Globalization needs to have not just a human face but also a “conscience” which recognizes the responsibility and accountability to all fellow human beings.

• Focus therefore is necessary on education to sustain the benefits of globalization and promote balanced growth for all at the national level
• At the corporate level focus on HRD is essential, in particular development of professionals for a global mindset, current generation skills & proficiency in technology and skills for achieving global levels of productivity in all operations, is essential
• It is now possible to deliver education electronically through distance learning, as has been shown in India by recent initiatives of certain universities in the U.S
• This opportunity for “continuing education” through “distance learning” could help professionals in India & their organizations to gear up for the globalization challenge

Drivers of Globalization & the Emerging Trends
KEY DRIVERS

• Increasing availability of capital ‘seeking optimal long term returns’ across national boundaries & integration of capital markets worldwide
• WTO mandated liberalization and phased reduction in trade & investment barriers among WTO member countries
• Advances in information & communications technology (ICT) enabling reliable & speedy information flow worldwide
• Technological advances revolutionizing manufacturing & service sectors thereby necessitating global ‘efficiency’ & productivity gains through global scale

EMERGING TRENDS

• Increasing dominance of global brands
• Increasingly effective global supply chains of transnationals & other corporations
• Greater focus on R&D & technology for development of globally adaptable world class products & flexibility for adapting to shorter life cycles
• Greater use of flexible manufacturing systems for J.I.T deliveries & customisation

GLOBALISATION – Opportunities & Threats

• The WTO mandated global free trade from 1 January, 2005 is a significant opportunity for companies based in India to become “global manufacturing hubs”/ software development parks/ Business Process Outsourcing” centers catering to global giants and customers worldwide.
• While the annual global trade in merchandise and services is currently U.S $ 7.5 Trillion, the global opportunity for annual business open to global competition in products, services and assets, is estimated at over US $ 21 Trillion.
• SURVIVAL OF THE FITTEST - Only globally competitive units/ companies will survive even in their domestic economies.

Emerging Opportunities from Outsourcing Merchandise, Goods, Components for Indian Companies
Outsourcing annual opportunity in Europe alone is estimated at
over US $ 250 Billion and in Asia US $ 300 Billion
A) Computer Software & Solutions

A recent McKinsey & Co./ NASSCOM report has estimated India’s potential for exports of I.T services & software at US $ 31 Billion by 2008
B) Technology Services

India with its brainpower of engineers, technologists and other professionals is eminently poised to offer specialised technology services in high technology specialised areas like ‘Contract Research’

C) IT Enabled Services

The recent McKinsey & Company/ NASSCOM survey on worldwide potential of IT Enabled Services at US $ 142 Billion by 2008
D) Hospitality Sector Services
Several service areas like reservations & Accounting Services could be outsourced to Indian Companies.
E) Medical Services
Hospitals are poised for opportunities in the areas of administration, nursing, pharmacy, physiotherapy, respiratory therapy & bio-medical engineering services

GLOBALISATION - Challenges for Indian Companies

• Intense international competition in a “borderless” free market. Dominance of global brands/ global technology leaders and Transnationals with deep pockets
• Need marketing/ customer support network & supply chain in major trade blocks like EU, NAFTA, ASEAN & MERCOSUR. Prohibitive entry cost for EU/ NAFTA (accounting for 70% of world trade)& uncertainties of MERCOSUR countries.
• Attract & retain talented and competent professionals with global mindset. Innovation, R&D and “core competence” requires best minds and committed and competent “hands"

Prerequisites for Sustainable Competitive Advantage

• In-depth knowledge and insight/ understanding of the relevant global markets including customers, competition and technology trends
• Contemporary product/ service design/ features for the global/ niche market segments chosen through market led R&D and consistently world class products/ service quality
• ‘Scale’ through ‘selective’ manufacturing backed by global supply chain
• Distribution and customer support/ service covering effectively all relevant countries/ market segments
• Information Technology (IT) capability for reliable and speedy information flow for tracking shipments/ service flows/ documentation and financial transactions worldwide

STRATEGIC ALLIANCE with Global Leaders

• Achieving & sustaining global competitiveness may need co-operation with a global leader with complementary skills and technology strength or marketing reach worldwide. Some Indian companies offer the global partner a low cost manufacturing base and a large Indian market. It would also enable the Indian companies have access to management practices of the global leader & some of its strategic information & knowledge base
• The combination of the global partner’s technology/ marketing strength & the Indian company’s low cost manufacturing capability would enable the ‘alliance’ to enter & sustain new markets worldwide.

Building Global Competitiveness - Safeguards in International Business

• Prudent choice of customers, suppliers, shipping agents & business associates
• Use of credit rating services for client evaluation
• Risk cover for countries with political/ economic uncertainty
• Total compliance with & documentation for all statutory requirements
• Forex Risk cover for exports & imports
• ‘Watchdog’ like monitoring of each export/ import./ international business transaction till financial & statutory closure

Major Challenges for Indian based Companies
A) GLOBAL UNCERTAINTIES & RISKS
1. A cost effective & comprehensive risk cover for :

• country risk in terms of political & economic risk
• currency risks
• the client risk
• distribution/ logistics risk for emerging markets

2. Impact of perils like theft, pilferage, accidents/ mishaps for cargo gets magnified in case of developing countries due to longer supply chain/ uncompetitive logistics and inadequate distribution and other infrastructure
B) LOGISTICS & INFRASTRUCTURE
India’s infrastructure in terms of roads, ports, airports, storage facilities at ports and airports including for inflammable cargo as also cold storages in transit and at shipment points is inadequate compared to India’s leading competitors like U.S, European countries, Singapore, Hong Kong, Japan, Taiwan & S. Korea. This results in higher freight costs and longer delivery.
C) R&D AND TECHNOLOGY NOT IN TUNE WITH GLOBAL TRENDS
Innovation and technology are key business drivers for long term success.

India’s Economic & Industrial Perspective in the Fifties & the Sixties

• India is a ‘planned’ economy envisaging co-existence of public sector, private sector & co-operative sector
• The focus immediately after our independence was on self-reliance through import substitution. Substantial investments were made by the Government in the public sector for basic industries like steel & fertilisers This focus on industrialisation was necessary then as India in 1947 was only an exporter of raw materials like iron ore & agro-commodities like cotton
• The protected industrial environment of the fifties & sixties by way of industrial licensing and quantitative restrictions and tariffs on imports nurtured an inward looking private sector with fragmented capacities
• There was no necessity or incentive for exports in view of sufficient demand in the protected Indian market, which virtually shut out all but “essential” imports

India’s Economic & Industrial Perspective in the Seventies & the Eighties

• Industrial development & technology up gradation in India made significant strides including through transfer of technology from abroad by way of technical collaborations and joint ventures.
• However, the capacities in the private sector continued to be fragmented due to the MRTP Act, which inhibited Indian corporate sector from planning global scale operations even in sectors with comparative advantage for India
• For the first time exports began to be recognised by the Government as important in view of the foreign exchange requirement for India’s essential imports like petroleum products, fertilisers, edible oil and “high tech” engineering products & services
• Export house scheme introduced in early seventies followed by trading house scheme in1978 for the first time encouraged merchant exporters recognising their ability in effectively reaching foreign shores for promoting India’s exports India’s Liberalisation during early Nineties & the WTO Mandate.
• With the introduction of economic reforms in India in 1991, Indian economy has opened up to the world economy, thereby changing significantly industrial and competition scenario in India
• Competition within India increased significantly due to inflow of foreign investments & technology and creation of additional capacities with current generation technology from abroad during the late nineties
• The Indian industry & commerce recognised at the turn of the millenium that WTO mandated free trade by 1/1/2005 means “survival of the fittest” & gearing up for global competition a necessity

BUSINESS ENVIRONMENT IN INDIA TODAY

• Ongoing Economic Reforms
• Services Sector opening up
• India proactively seeking Regional and Bilateral trade agreements
• Continuing encouragement for international trade and investments
• Higher disposable income leading to rising consumer expectations
• Industry buoyant

SOURCES OF INDIA’S COMPARATIVE ADVANTAGE

• Strategic location
• Long coastline
• Climate
• Rich in natural resources
• Large tracts of agricultural and forest lands
• Large and diverse livestock population
• Strong Human Resources base
  · Large and rising middle class
  · Large pool of qualified and competent English speaking professionals
  · Inexpensive Human Resources
• Cultural diversity and heritage
• Scenic beauty

Opportunities For Improvements - INDIA

• Infrastructure
• Commercial Services
• Industrial Culture
• R&D/Technology below the level of global leaders
  

Introduction on International business

What is International Business?
Any Commercial transaction between two or more countries is known as International Business. The parties of the transaction could be either companies or Governments.
Necessity of International Business:

• Raw Materials required from abroad
• Processes acquired from abroad. Eg-WalMart
• Advanced technologies required from abroad
• Competition-There will always be competition. Even if the company does not enter into foreign territory, foreign companies will enter into the host country.

So baring some very local businesses, it is not possible to stay insulated from international business because of the above mentioned reasons.

Features of International Business (Distinction b/w Domestic and IB):

• World is the Market
• Global scale of operation
• Ample number of opportunities
• World class products/services
• International level of productivity
• Efficient/Productive value chain

International Business by its very nature is a primary determinant of International Trade. One of the reasons of the increasing success of international business ventures is globalization.
Competitions due to global Opportunities
There are four level of competitions due to global opportunities
1. From host country suppliers- If a company from india wants to manufacture or export its products to US then the existing US suppliers will have advantage over the indian company in terms of zero custom tax, minimum transportation cost and a popular brand name.

2. From domestic players of home countries - In home country multiple companies with similar products having same pricing start competing.
3. Free trade agreements/ trade blocks - The advantages of Manufacturers belonging to a trade block is they don't have to pay any custom duty. The only cost incurred by them is the transportation cost. Eg-NAFTA.
4. International Players - apart from the company from home country, a number of other companies across the world would also like to sell their product in a particular host country. So there exists competition from international players.

Why Companies engage in International Business
The following are the factors for companies engaging in International Business

1. To increase sales

• Scale Economy
• International Product Life Cycle--IPLC stages followed by a product are different in different countries. These differences provide different market opportunities in different countries.
• Lead Market--companies want to be leaders in some market and just want to present in some other lead markets. If a company wants to be global, then it has to know what is happening in the lead market for its product. For this the compny needs to have a presence in the lead market.
• Following the Customer -- Every company has some core customers. Companies follow their core customers whereever they go in the international arena.

2. To acquire resources

• Better quality or competitive resources at lower cost
• Global sourcing-- not to depend on a few countries. companies want to spread risks in acquiring resources.

3. Reducing Risk-- companies try to reduce risk by spreading operations around the world .

Modes of International Business
There are basically two aspects of international business

1. Supplying to host country
2. Manufacturing in host country

1. Supplying to host country -- In this case the products are manufactured in home country and then exported to host country. It is feasible when the labor costs are low in home country, transportation costs are not high and no tariff barriers to exports.The advantage of this method is scale economy and excess capacity utilization.

2. Manufacturing in host country -- The manufacturing in the host country can be done either by contract manufacturing or by licensing.

• contract Manufacturing-- In contract manufacturing the company gives a contract to local manufacturers instead of setting up a factory. The advantage is the companies will have low level of involvement and in turn get a taste of the market first. The disadvantages being sharing of profits and the manufacturers might take over the market.
• Licensing-- In licensing the licensor permits the use of technology for a certain period of time to the licenseefor the manufacturing of licensed products and sale in the licensed territories. Here the licensor owns the technology. The licensee is permitted to use the technology. For this the licensee pays down payment as well as royalty to the licensor.

Foreign Country Entry Strategies

1. Exports
2. Contract Manufacturing
3. Licensing
4. Assembly
5. Joint Venture
6. Wholly owned subsidiary
7. Acquisition

1.Exports
The company goes for exports because it has higher competitive advantage. The transportation costs are low. The tariff rates are also low.
2. Contract Manufacturing
In contract manufacturing the parent/hiring company approaches a firm known as contract manufacturer with a design/formula. Once the contract is finalised then the contract manufacturer manufactures the components/products for the hiring company.
3. Licensing
In licensing, first the licensor searches for a potential licensee. Then the licensor permits the use of technology for manufacturing a component/product to the licensee for a definite period at a certain location.
A contract manufacturer only produces products where as a licensee produces as well as sells for the licensor. The advantage in licensing being the licensor gets tie ups with best distributors, knows local market and has cost advantage.The disadvantage is at the expiry of the licensing agreement the licensee will become the competitor to the licensor. So the market presence increases with licensing.

4.Assembly

In case of assembly, different parts of the product are manufactured in different countries. The assembly of the parts takes place in the host country. Over a period of time the product becomes local to the host country.
5.Joint Venture
In a Joint Venture, both the parties contribute a certain amount of equity and form a new company.
Reasons for forming Joint Venture:

• To enter into a foreign country
• Sharing risks as well as costs
• Good brand name and relations
• Suppliers, distributors and established channel partners
• Cultural bridge
• Unable to get 100% FDI since government restrictions
• Joint ventures are a necessity by government
• Profit sharing/market sharing

Why Joint Ventures Fail

• Change in external environment
• Conflict of vision/interest
• Both parties not contributing equally
• sharing or market, there by Market contraction
• Global competitiveness requires control, which is not entirely present with either party.
• JV might be due to govt. regulations so might be a compulsion.

6.Wholly Owned Subsidiary
A wholly owned subsidiary is a subsidiary whose parent company owns 100 percent of its common stock and there are no minority owners.
Advantages

• Freedom in designing the plant
• No dilution of brand image
• No dilution of profits
• Total control over operations
• No dilution of system processes
• Processes are standardised

Disadvantages

• Total risk ownership. No risk sharing
• Less knowledge of the market
• Degree of competition increases

7. Acquisition
Acquisition may be defined as a corporate action in which a company buys most, if not all, of the target company’s ownership stakes in order to assume the control of the target firm.
Advantages

• Acquiring the entire target company
• Saves time
• Quick to the market-due to well established distribution and sales channel
• The competition in the market remains unchanged

Disadvantages

• Obsolete technology
• Resources might not be best in class
• Processes and practices might not be world class

Expropriation vs. Nationalisation
If the government of any country takes over any foreign company, then it is known as expropriation where as if the government takes over any localised company, then it is known as Nationalisation.
Wholly owned subsidiaries are exposed to expropriation where as joint venture agreements protect firms from expropriation.

International Business vs. Domestic Business
The following factors distinguish International business from domestic business

• World market
• Political environment
• Legal system
• Cultural difference
• Communication
• Distance are higher
• Diversity
• Uncertainty-Political, economical and currency risks
• Uncontrollability-The degree of Uncontrollability is higher in host countries
• Competitions
• Competence-people in different countries are at different levels of competence.

Multinational Enterprises (MNE)
Multinational Enterprise is a firm that has engaged in foreign direct investment (FDI). Equivalently, an MNE is a company that owns (a significant part of) and operates facilities in nations other than the one in which it is based.
Multinational company (MNC)
A MNC is a company which has its own presence in at least two countries. MNEs are partnerships. MNEs include MNCs but not viceversa.
Types of MNEs

• Global
• Multi-domestic
• Transnational

Global Company

• Integrates its operations around the world
• Produces for the world market
• Utilises best resrouces
• Operates on scale economies
• It has a global brand
• The dark side is- no customization of global brands so might lose some segment of the market
• Eg-Mc Donalds, intel

Multi Domestic Company

• Operates in different countries
• Customises its product for different countries
• Better customer loyalty
• Larger scales and better margins/profitability.
• Takes into account cultural differences, temperature variations
• Products are customized to the extent necessary
• Advantages are- greater market share, client loyalty, long term market share, better margins
• Eg-Unilever, P&G

Transnational Company

• World is the market
• Learns the best practices from anywhere in the worldwide operations
• Leverages learning
• Integrates operations worldwide to reduce cost.
• lower the cost of customization
• Eg-Caterpillar, GE