Globalisation

Globalisation: Globalisation is the worldwide inter connection at the cultural, political and economic level resulting from the elimination of communication and trade barriers. Dimensions of Globalisation: Most writers used the term globalisation to refer to one or more of the following elements. •

Worldwide Scope: Global can simply be used as a geographic term. A firm with operations around the world can be labelled a global company to distinguish it from the firms that are local or regional in scope. For example, Coke and McDonald are operating globally.

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Worldwide Similarities: Global can also refer to homogeneity around the world. For example, if a company decides to sell the same product in all of its international markets it is also referred to as a global product as opposed to a local product. For example, Gillette Toiletries and Kodak films.

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Worldwide Integration of business units: Global can be referred to the word as one tightly linked system. For instance a global market can be said to exist if events in one country are significantly impacted by events in other geographic markets. For example, the Whirlpool refrigerator has its R&D in the UK, its design in Canada, its marketing distribution in Australia and its compressor in Brazil.

Drivers of globalisation: According to Yip (1992) ‘to achieve the benefits of globalisation, the managers of a world wide business need to recognise when industry conditions provide the opportunity to use global strategy levers. Yip identified four drivers which determined the nature and extent of globalisation in an industry. These are market drivers, cost drivers, government drivers and competitive drivers.

Global Strategic Decision A global aspirant has to make 4 key decisions: 1. 2. 3. 4.

Which product to use for global trade? Which market to choose? Mode of entry: How to enter? Speed of entry => how fast?

1. Which Product? The most attractive product for global trade should be high in profit and low in the degree of its adaptation. For instance the Marriot Hotel in the U.S had four product line, motel, retirement home, long-term stay and 5 stars. Applying the matrix of product for global trade they realised that the retirement home was least attractive while the five star hotel was most attractive.

2. Which Market? Strategic decisions in terms of which market depends on firm’s experience with regards to operating in a particular region, market’s specific government influences, trends in general, growth and size of the economy e.g. Brick Nations. In global trade, firms should be looking for beach head/bridge head that is operating in the market similar to the target market but has lower risk. For example, the target market of Gallerie La Fayette was USA which was not the right choice because USA is the graveyard in the retail business. Therefore, the beach head for La Fayette could have been Canada because La Fayette is a French company and Canadian culture is, to some extent, similar to French culture, even the language. 3. Mode of entry: There are many ways of entering a market such as franchising, licensing, joint ventures, foreign direct investment. In global trade join ventures are the most desirable and important mode of entry because of government regulations, where the linguistic or cultural and geographical distance are great, and where the risks of asymmetric learning are low. Speed of Entry: There are two kind of movers, fast and late movers. According to Sun Tzu ‘if you want to win a battle you have to be in the battle field first’. As Michael Porter discussed ‘first mover advantage’. However, there is another argument of late mover advantage because they can avoid mistakes made by earlier movers. For example, McDonald’s as a later mover avoided the mistakes made by Wimpy. Pizza Hut learnt from the mistakes of Pizza Land.

Theories of Trade: In recent years we have experienced more globalisation. This is because of international trade. Mercantilism: 16th century philosophy that suggested that a government can improve  economic well being of the country by increasing exports and reducing imports. This theory  turned out to be a flaw strategy because the imports were taxed and thus restricted and  exports were encouraged to gain maximum gold. The theory ignore that imports are  necessary at times because if the imports are restricted too much the country’s population  has to do without some of the commodities.  Today Mercantilism theory has become protectionism because of the recent economic turmoil

Absolute Advantage: This theory was put forward by Adam Smith in the 18th century.  According to this theory, every country has an absolute advantage in supplying certain  products. Hence, the country must specialise in export of those products only. It should import  goods from countries, which have an absolute advantage in exporting the products and hence  get them at a cheaper rate.  For example, Japan has an advantage in production of high quality steel while India has huge  reserves of iron and coal mines. This advantage can be used to complement each other.

Comparative Advantage: This theory was put forward by David Ricardo in the 19th century. 

A country has a comparative advantage over another in the production of a good if it can produce it at a lower opportunity cost: i.e. it has to forego less of other goods in order to produce it.

OUTPUT    

Textiles

Books

UK

1

4

India

2

3

Total

3

7

For the UK to produce 1 unit of textiles it has an opportunity cost of 4 books.

However for India to produce 1 unit of textiles it has an opportunity cost of 1.5 books

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Therefore China has a comparative advantage in producing clothing because it  has a lower opportunity cost The UK has a comparative advantage in producing computers

 (because it has a lower opportunity cost of .025 compared to Chinas 0.66) •

If each country now specializes in one good then assuming constant returns to  scale output will double

 

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clothing

Computers

UK

0

8

CHINA

4

0

TOTAL

4

8

Therefore output of both goods has increased illustrating the gains from  comparative advantage.

 There are many examples of comparative advantage in the real world e.g. Saudi Arabia  and Oil, New Zealand and butter, USA and Soya beans, Japan and cars e.t.c

Limitations of the Theory of Comparative Advantage 1. 2. 3. 4.

Transport costs may outweigh any comparative advantage Increased specialisation may lead to diseconomies of scale Governments may restrict trade Comparative advantage measures static advantage but not any dynamic  advantage for example in the future India could become good at producing books  if it made the necessary investment

Porters Diamond Theory: The diamond model of Michael Porter (1980) for the competitive advantage of Nations offer a model that can help understand the comparative position of a nation in global competition. The factors for competitive advantage for countries are as follows: Firm strategy: structure and rivalry: the world is dominated by dynamic conditions, and it is direct competition that forces firms to work for increases in productivity and innovation Demand conditions: the more demanding the customers in an economy, the greater the pressure facing firms to constantly improve their competitiveness via innovative products, through high quality…

Related supporting industries: spatial proximity of upstream or downstream industries facilitates the exchange of information and promotes continuous exchange of ideas and innovations. Factor conditions: contrary to conventional wisdom, Porter argues that the “key” factors of production are created, not inherited. Specialized factors of production are skilled labor, capital and infrastructure. “Nonkey” factors or general use factors, such as unskilled labor and raw materials, can be obtained by any company and, hence, do not generate sustained competitive advantage. However, specialized factors involve heavy, sustained investment. They are more difficult to duplicate, this leads to a competitive advantage, because if other firms cannot easily duplicate these factors, they are valuable. The role of government in porter’s diamond Model is “acting as a catalyst and challenger; it is to encourage – or even push – companies to raise the aspirations and move to higher levels of competitive performance. They must encourage companies to raise their performance, stimulate early demand for advanced products, focus on specialized factor creation and to stimulate local rivalry by limiting direct cooperation and enforcing anti-trust regulations.

International Product Life­Cycle Theory (Verrons) –  This theory states how a country's export can later become its import through different stages: