Globalization and International Economics

This article focuses on globalization and how it affects the economic, political, and social frameworks of countries across the world. There is a discussion of the four aspects of globalization as well as the pros and cons of its implementation. In addition, the article discusses the impact of globalization on emerging markets.

Keywords Capital Movements; Direct foreign investment; Emerging Markets; Globalization; Physical Capital Stock; Trade; Trade Liberalization; World Development Report

International Business > Globalization & International Economics

Overview

Globalization, which can be defined as the growing combination of the economic and social aspects of the world, has been a point of contention in international economics. Although there has been rapid growth and reduction of poverty in countries such as China and India, there has been increasing antagonism over concerns that globalization has not improved matters of equality and environmental promotion (World Bank, n.d.). The concept of globalization has generated many different reactions. "Some view it as a process that is beneficial-a key to future world economic development-and also inevitable and irreversible. Others regard it with hostility, even fear, believing that it increases inequality within and between nations, threatens employment and living standards and thwarts social progress" (International Monetary Group, 2000, Section IV, ¶ 2).

Four Aspects of Globalization

The International Monetary Group (n.d.) defined four aspects of globalization. These aspects were trade, capital movements, movement of people and spread of knowledge and technology.

• Trade: Reports show that underdeveloped countries have started to up their portions of world trade, which can be shown through the increase in share from 19 percent in 1971 to 29 percent in 1999.
• Capital Movements: Individuals, such as venture capitalists, elevated private capital flows to developing countries throughout the 1990s.
• Movement of People: It was found that many workers in developing countries tend to relocate from one country to another in an effort to gain work experience and job opportunities. Most of the migration was found to be between developing countries.
• Spread of Knowledge: Exchanging information tends to be an overlooked aspect of globalization. Through the use of direct foreign investment, there could be opportunities for technical innovation as well as the expansion of physical capital stock.

Although globalization provides opportunities for development across the world, many believe the process has not been progressing evenly among all countries. It has been found that some countries (i.e. East Asia) are integrating into the global system at a faster pace than others. However, other countries, such as those in Latin America (other than Brazil) (Carranza Ko, 2013) and Africa, have not experienced the same level of change. Countries in these regions saw their economies stagnate or decline during the 1970s and 1980s. During the 1990s, the world experienced a crisis in the emerging markets, though the early 2000s saw robust growth in the BRIC nations. During the global financial crisis of 2008, Brazil, India and China were almost alone in the world in experiencing economic growth (Yao & Zhou, 2011; Carrasco & Williams, 2012).

Risks of Globalization

One of the lessons learned from the emerging market crisis in the 1990s was that there are risks when attempting to integrate to a global economy. Two major risks are volatile capital movements as well as social, economic, and environmental degradation as a result of poverty. Some other risks include:

Political Risks

• Instability in national governments
• War, both civil and international
• Potential nationalization of an organization's resources
• Cancellation or non-renewal of export or import licenses
• Confiscation of the importer's company
• Imposition of an import ban after the shipment of the goods
• Imposition of exchange controls by the importer's country or foreign currency shortages
• Surrendering political sovereignty

Economic Risks & Political Risks

• Differences and fluctuations in the value of different currencies
• Differences in prevailing wage rates
• Difficulties in enforcing property rights
• Unemployment
• Insolvency of the buyer
• Failure of the buyer to pay the amount due within six months after the due date
• Non-acceptance
• Surrendering economic sovereignty

Emerging Markets

Although the 1990s was not a good time for emerging markets, there was a rebound during the next decade. According to a study of multinational corporations, "two thirds of the respondents believed investment in emerging markets is likely to continue to grow, with three quarters claiming to be actively investing in Central and Eastern Europe" (“Survey reveals,” 2005, p. 43). Such optimism was borne out. Antoine van Agtmael, a senior executive at World Bank Group, was the first person to use the term "emerging markets" (Jana, 2007). Brazil, Russia, India, and China, which are known as the BRIC economies, were first identified as countries poised for large and rapid economic growth. Real GDP was expected to grow three times faster in these countries over the next six years (Goldman Sachs, 2003). South Africa was later added to the list. In fact, between 2001 and 2010 the BRICs GDP per capita growth leaped as much as 10%, a staggering rate compared with the U.S. and Europe whose average over the same period was a mere 1%. In 2013, China was projected to be the largest economy in the world by 2027, while the BRICs were expected to equal the G7 in size by 2032 (Nelson, Maniam & Leavell, 2013). The significance of emerging markets has reached a point where corporations have recognized their influence on the corporations' bottom line.

The Altradius survey reported that the highest percentage of respondents from the multinational corporations was investing as follows: 74% invested in Central and Eastern Europe, 43% invested in China, and 35% invested in India and Southeast Asia. The countries that received the most funding in Central and Eastern Europe include Poland (60%), Czech Republic (46%), Russia (40%) followed by other EU accession countries. In Southeast Asia, India was the top choice followed by Malaysia, Thailand, and Indonesia (“Survey reveals,” 2005).

Although the news appeared to be promising for emerging markets, there were some concerns that needed to be addressed. According to Olsen, Pinto and Virji (2005), some potential pitfalls included:

• Organizations must deal with the same growth challenges that they face in other markets. Some of these challenges deal with: Understanding what the customer wants, developing unique and cost effective offers, creating an effective marketing strategy and overcoming internal organizational barriers.
• Organizations must be prepared to cope with the changeability and imbalance of developing markets. Although venture capitalists are willing to fund these ventures, many seasoned venture capital managers are not willing to deal with fund management for these types of accounts.
• Corporate headquarter offices tend to take too much time when making decisions and communicating information, which hinders subsidiaries from reacting to problems in a timely manner. Organizations must eliminate the bureaucratic red tape and provide opportunities to respond quickly when solving problems. Another option would be to empower the subsidiaries to make decisions up to a certain level.

Application

Emerging Markets

According to the 1999 World Development Report, there was an increasing difference between the developed and developing countries (World Bank, 1999). Many had the perception that the international community should be doing more to close the gap since the aid per capita to developing countries was reduced by one third in the 1990s. “As developing countries made strides to open their economies and expand their exports, they were faced with significant trade barriers with no aid or trade. To many in the developing world, trade policy in the more advanced countries seems to be more a matter of self-interest than of general principle" (Stiglitz, 2000, p. 438).

It appears that if there was a good economic analysis, it is used in favor of the advanced countries in order to support their self-interests. Given the number of opportunities for developing countries to be placed at a disadvantage, supporters of trade liberalization argue that standard economic analysis will benefit a developing country. Losses in one sector will be gained in another sector (i.e. job loss in one sector will be offset by job creation in another sector). However, there is an assumption that the markets are functioning properly, which is not always the case. As a result, the anticipated jobs may not be created in another sector, and the process becomes unbalanced. When situations such as this example arise, supporters of trade liberalization must be prepared to respond to the concomitant challenges.

One could argue that developing countries are at a disadvantage and the scales are tipped against them. In order to address the different types of inequities that may arise, those in the international business arena must develop policies and procedures that address these issues and create a sense of fairness for everyone involved. Many believe that there should be standards for social responsibility and ethics in order to make sure that developing countries are not exploited. Having a formal global approach to these types of challenges can ensure a sense of fairness for everyone involved in the process.

Representational Approaches

Khan (2007) introduced an abstract framework that identified four representational avenues to comprehend how social inequities surface in developing countries as they attempt to venture into international business. When the model was created, it was established that there are many parties associated with the process. Since representation ranged from local workers to international mass media institutions, each party was defined in terms of geography. The two categories introduced are locals and foreigners. Locals were defined as individuals or entities that are primarily located in the developing countries. Locals are very diverse and have different perspectives and interests. Individuals falling into the "foreign" category are those that do not fit into the local category. Significant players in the foreign group would include international businesses that are directly involved in specific situations and their critics.

Both of these groups are considered to be "representers" as they work to resolve issues that arise. Each situation is analyzed and evaluated on the representers' role in the situation and the worldview of the situation. The approaches attempt to understand how the ethical issues regarding international business are represented in the underdeveloped world. The four different approaches are:

• Approach 1 (No-speak): Foreigners are the representers and the issue is expressed from a foreign world viewpoint. The local residents have no voice and they have no input into the world view. Local world views have no place in the development of issues and the local experience is not considered relevant in social equity issues. Most of the international business research follows this approach (i.e. Hofstede's Culture's Consequence).
• Approach 2 (Us-speak): The commonality between this approach and the first approach is that the foreigners are the representers. However, the difference is that the world view incorporates the local experience. This approach attempts to represent local realities (local view) in a way that allows the local inhabitants to understand the situation. In many instances, the representer places himself in the local's position and attempts to articulate the viewpoint based on the local's perspective.
• Approach 3 (Same-speak): The locals are the representers and the world view is the same as the foreigner's perception. Locals represent themselves based on one or more universal perceptions that originate from the West (i.e. modernism, post-structuralism, secular nationalism). Many of the most influential representations of ethical issues that affect global organizations in underdeveloped nations are based on this approach.
• Approach 4 (Other-speak): Locals are the representers, and international business issues are explained in the context of local viewpoints. When evaluating this approach, representation is being explained by locals using local concepts.

The above approaches provide an explanation as to how foreigners and locals perceive the severity of social issues, which is important to the interactions of the business community. Multinational corporations have to understand the culture and values of the countries in which they do business. Otherwise, the corporation may suffer as a result of conflict on social and business ethics issues. There has to be some sense of social responsibility on the part of the multinational corporation.

Integrative Justice Model

Santos and Laczniak (2013) suggest a normative ethics approach to constructing a framework for multinational corporations to use in order to avoid the tendency to exploit unsophisticated, low-income consumers while establishing a profitable new market.

• Engage impoverished consumers with nonexploitative intent
• Work with customers to cocreate value
• Invest in long-term consumption while protecting the environment
• Recruit representation by all stakeholders
• Plan for long-term profit management instead of short-term profit maximization

Viewpoint

Corporate & Local Leadership

Olsen, Pinto & Virgi (2005) strongly believed that it was critical to develop a set of practices that would assist local and corporate leaders with achieving long-term success. Six practices were identified to aid these businesses with developing new models on how to make the process successful and profitable. The six practices were:

• Establishing & Reviewing Long-term Direction

Given the level of uncertainty in emerging markets, it is almost impossible to predict what the future will hold and many managers find it difficult to develop a long-term strategy about what direction the project should go. In lieu of a traditional approach to strategic management, the researchers have determined that managers can develop some sort of direction by outlining:

• Opportunities for a future market as well an a SWOT analysis
• A broad, tangible plan that addresses financial, competitive and operational needs
• A two to four year short-term plan that will allow the organization to obtain its short-term goals.

Once these objectives have been obtained, the organization can focus on developing strategies over a period of time. These plans should allow the organization to adjust its strategy to new conditions. As the business continues to grow and be responsible for addressing issues as they arise, it will be in a better position to develop long-term strategies. Long term strategies “(a) serve as an anchor against which decisions can be tested, (b) align expectations between local and corporate leaders, (c) define the criteria for when local market change should trigger a change in the strategy” (Olsen, Pinto & Virji, 2005, p. 39).

• Fitting the Emerging Market Business Within the Organizational Structure

Many multinational corporations hinder the decision making process of their subsidiaries that function in the emerging markets. This type of problem may occur in three ways such as (a) grouping emerging market subsidiaries with subsidiaries in the larger developed markets, (b) units cannot learn from one another when the organizations allow the structure or a process to minimize opportunities of sharing information, and (c) the organizational structure is outdated for the current trends and there is a constant need to make adjustments in the organizational design.

• Defining Roles & Decision Rights Between Headquarters & the Local Leadership

Many organizations may encounter problems when they attempt to divide decision making rights regarding the corporate office and the local subsidiaries. The two extreme approaches are when the corporate office micromanages the subsidiaries and when the corporate office gives too much freedom to the subsidiaries and does not keep the senior management informed as to what is going on in the business. It is important for these organizations to create an organizational design and structure that will allow the two entities to share and divide the different levels of responsibility and decision making rights so that the emerging market can respond to the trends and conditions in the market.

• Prioritizing Local Decisions

Subsidiaries must develop an agenda that prioritizes the different levels of strategies that need to be performed in order to reach long term objectives. A potential process for the agenda may be to (a) place issues on the agenda list when they are recorded and described by local and corporate managers and (b) move the issues off the list when they have been dissolved.

• Making Resource Allocation More Flexible

Many multinational corporations do not have a resource allocation system that can meet the needs of the emerging market subsidiaries. Therefore, these organizations will need to define the criteria for emerging market subsidiaries and align them with the corporate standards. In order to meet this need, some MNCs are using the stage-gated funding method and linking it to specific performance indicators.

• Monitoring & Managing Performance

Performance needs to be measured based on the economic market conditions in the local nation.

In order to fully experience the emerging market growth experience, multinational corporations will be required to balance each of the areas mentioned above.

Conclusion

Trade liberalization should prove an asset to third world nations and the world at large. However, it must be "balanced in agenda, process, and outcomes, including not only sectors in which developed countries have a comparative advantage, like financial services, but also those in which developing countries have a special interest, like agriculture and construction services" (Stiglitz, 2000, p. 437). One could argue that developing countries are at a disadvantage and that the scales are tipped against them. In order to address the different types of inequities that may arise, those in the international business arena must develop policies and procedures that address these issues and create a sense of fairness for everyone involved.

Globalization can prosper when there is consideration for the whole package. According to the International Monetary Group, the entire package should include strategies, rules, financial and technical aid, and help in erasing debt if possible and needed. Other factors within the package could include:

• Macroeconomic stability to create the right conditions for investment and saving;
• Outward oriented policies to promote efficiency through increased trade and investment;
• Structural reform to encourage domestic competition;
• Strong institutions and an effective government to foster good governance;
• Education, training, and research and development to promote productivity;
• External debt management to ensure adequate resources for sustainable development (International Monetary Group, 2000, “How can the poorest”).

Khan (2007) introduced a conceptual framework that identified four representational approaches to understanding how social inequities surface in developing countries as they attempt to venture into international business. The approaches provide an explanation as to how foreigners and locals perceive the severity of social issues, which is important to the interactions in the business community.

Terms & Concepts

Capital Movements: Capital movements define the economic status and position of a nation as it relates to other countries. Capital movements are comprised of both the current account as well as the capital account.

Direct Foreign Investment: Direct foreign investment involves a company from one nation that makes some form of investment into a different nation that is not its own. In other words, it is the creation of some enterprise or business venture by a foreign institution or individual. The parent enterprise has authority over the foreign affiliate, which forms the basis of the direct foreign investment relationship that occurs between the two.

Emerging Markets: Emerging markets are defined as a foreign financial market that is adapting to the emerging capitalism by initiating its own form of stock market. They are analogous to smaller growth companies, which involve high gains and high risks.

Globalization: Globalization involves a combination of economic, social, technological, cultural, and political adjustments that are often found in developing countries that are advancing their integration, independence, and relationships with other countries.

Physical Capital Stock: Physical capital stock is one example of an economic aggregate. The stock is needed in order to divide the total output among various other factors that may be involved. It is used also to evaluate the advancement of capital and the productivity of labor.

Trade: Trade or commerce, in its simplest form, is the agreed transaction of good and services from one willing party to another. Trade is facilitated through a working market. Traditionally, trade involved bartering, but modern times have called for negotiating through a similar medium like money.

Trade Liberalization: Trade liberalization is a policy or arrangement that allows domestic providers to involve themselves in competing world markets without restriction. Similarly, foreign providers can compete at their own volition within domestic markets.

World Development Report: The World Bank's annual World Development Report (WDR) is a crucial source of information regarding the current economic, social, and environmental condition of the world. The WDR analyzes one detailed factor of development per year; reports in the past have involved subjects like labor, health, poverty, and the role of the state, to name a few.

Bibliography

Carranza Ko, N. (2013). Cementing class differences: Globalization in Peru. Perspectives on Global Development & Technology, 12, 411-426. Retrieved November 15, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=87628116&site=ehost-live

Carrasco, E. R., & Williams, S. (2012). Emerging economies after the global financial crisis: The case of Brazil. Northwestern Journal of International Law & Business, 33, 81-119. Retrieved November 15, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=86925761&site=ehost-live

Darwis, Y. (2013). Communication media (e-commerce) as a supporting factor in Indonesia's fashion industry in the international business competition. International Journal of Organizational Innovation, 5, 206-220. Retrieved November 15, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=89082605&site=ehost-live

International Monetary Group. (2000, April 12). Threat or opportunity? Retrieved September 7, 2007, from http://www.imf.org/external/np/exr/ib/2000/041200.htm

Jana, R. (2007, January 10). Lessons from emerging-market leaders. Business Week Online, 22.

Khan, F. (2006). Representational approaches matter. Journal of Business Ethics, 73, 77-89.

Nelson, G., Maniam, B., & Leavell, H. (2013). BRIC: Overview and future outlook. Journal of International Finance & Economics, 13, 137-144. Retrieved November 15, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=91830977&site=ehost-live

Olsen, T., Pinto, M., & Virji, S. (2005). Navigating growth in emerging markets: Six rules for improving decision making between corporate and local leadership. Journal of Business Strategy, 26, 37-44.

Reforming policies for the business sector to harvest the benefits of globalisation. (2012). OECD Economic Surveys: Netherlands, 2012, 41-70. Retrieved November 15, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=87334974&site=ehost-live

Santos, N. C., & Laczniak, G. R. (2012). Marketing to the base of the pyramid: A corporate responsibility approach with case inspired strategies. Business & Politics, 14, -1. Retrieved November 15, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=90366015&site=ehost-live

Stiglitz, J. (2000). Two principles for the next round or, how to bring developing countries in from the cold. World Economy, 23, 437-455. Retrieved June 7, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=31112173&site=ehost-live

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Yao, X., & Zhou, M. (2011). China's economic and trade development: Imbalance to equilibrium. World Economy, 34, 2081-2096. Retrieved November 15, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=69948021&site=ehost-live

Suggested Reading

Driga, I. (2011). FDI flows and host country economic development. Annals of the University of Petrosani Economics, 11, 101-108. Retrieved November 15, 2013, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=86180055&site=ehost-live

Eckhardt, G., & Mahi, H. (2004). The role of consumer agency in the globalization process in emerging markets. Journal of Macromarketing, 24, 136-146.

Kaminsky, G. (2007). Emerging markets and financial globalization sovereign bond spreads in 1870-1913 and today. Journal of International Economics, 73, 219-222.

Martin, P., & Rey, H. (2006). Globalization and emerging markets: With or without crash? American Economic Review, 96, 1631-1651.