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Challenges of Globalization-International Business
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Abstract
This process of globalization is supported by the technological changes that are happening at a very fast pace in the world, the prices of the products in the international markets and the liberalization of trade between countries. The trade liberalization or the international business has the greatest contribution in the emergence and popularity of globalization. The research has been made using the secondary sources. The literature from various sources has been studied and reviewed for analyzing the challenges of globalization that the companies face worldwide and the implications of those challenges on their business. It has been concluded that the globalization is a very attractive process for the developed countries. But there are many challenges of globalization including differences in the regulations of different countries, the inflation and exchange rate fluctuation challenges, changes in price and taxation, the strategic, the challenge related to positioning of their product in the international markets. The minor challenges are related to the ethical consideration, the maintenance of environmental standards in different countries and the challenge related to the demographics of the countries.
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Introduction
The concept of globalization is strongly underway in almost every part of the globe. Globalization is the process of continuous integration of the countries in the world. This process is supported by the technological changes that are happening at a very fast in the world, the prices of the products in the international markets and the liberalization of trade between countries. The trade liberalization or the international business has the greatest contribution in the emergence and popularity of globalization. International business involves performing the activities of trade and investment by the firms across the national borders. With globalization, the tendency of the companies to think, operate, plan and grab the opportunities has increased but, it is not a panacea, brings with it many challenges that have to be dealt with. It is important to determine these challenges because they have a major impact on the way businesses are done internationally. With globalization, many countries become susceptible to shocks and they need to put in place the required rules or legislations so that they protect their sovereignty.
The purpose of this research paper is to determine the challenges of globalization so that the countries can be given a perspective about how they can deal with the same and what are the things that are needed to be taken care of when they are indulging in international business or going global.
Literature Review
The globalization of business and commerce has become an increasingly significant reality worldwide: in 2010, the global trade in goods and services reached 25% of world GDP (Govidarajan & Gupta 2010), while in terms of manufactured goods, international trade has multiplied by more than 100 times since 1955 (Schifferes 2007). The rise of globalization posits a number of important challenges to a business seeking international presence. Numerous strategic aspects must be taken into account prior to commitment at an international level, and afterwards. Constant flexibility is required to adapt to changing patterns at local, regional and international levels. This research paper seeks to identify the main issues affecting international businesses, including accounting practices, cultural issues, strategic choices and political risk.
Globalization has significantly impacted on the business environment, prompting the development of the multinational enterprise (MNE). The governance of the MNE is recognized as being different than that of a national company. For instance, Bartlett and Ghoshal (1998) have introduced the influential concept of the transnational model, which allows the transfer of knowledge developed and jointly shared on a worldwide basis. In order to create a successful global business, Bengley and Boyd (2003) have underlined the importance of a global mindset, defined as the ability to develop and interpret criteria for business performance that are not dependent on the assumptions of a single country, culture or context. Corporate management must not automatically assume that the culture of the home office is equally applicable elsewhere (Bradley 2005). An important new development in the international business arena has been the rise of ‘mini-multinationals’ – small and medium-sized enterprises that do business on a global basis (Hill 2005)
Culture is an elusive term that has received hundreds of definitions. Hofstede’s (1984, p. 21) influential definition is that culture is “the collective programming of the mind which distinguishes the members of one human group from another” Hofstede (1984) identified the main dimensions of culture that affect work practices in different countries: Power distance, uncertainty avoidance, individualism vs. collectivism, masculinity vs. femininity, long vs. short-term orientation.
In a national culture framework, large power distance can translate into potential corruptive practices. Takyi-Asiedu (1993) associated power distance to corruption in sub-Saharan Africa. Cohen, Pant and Sharp (1996) also found that high power-distance culture people tend to view unethical practices as acceptable. On the other hand, Gray (1988) correlated high power distance with uniformity of financial and accounting practices, which may be more or less costly to a company depending on its manner of doing business.
Uncertainty avoiding countries tend to have solid legal frameworks and strict rules of doing business (Pagell & Halperin 2001). In such countries, thorough auditing tends to be carried out to ascertain compliance with rules (Hill 2004). These countries tend to have uniform accounting procedures and low disclosure levels (Gray 1988). Coming from a different cultural perspective, international business may find it costly to adapt to the national standards and rules of the country it wishes to do business in. Paradoxically, uncertainty avoidance can also translate into unethical practices as persons seek to secure a more certain result through corruption (Husted 1999). In terms of entry modes into the country, businesses may find that uncertainty avoidant countries favor solid frameworks such as established subsidiaries or local ownership, which are more costly and risky.
Then, political risk implies negative business consequences due to the behavior of governments and public sector organizations (Suder 2004). The most important political risk has been the threat of nationalization (Brooks et al 2004). The extreme threat of nationalization sometimes takes milder forms as when, in times of crisis, some governments resort to exchange rate controls. Another source of political risk is wars or civil strife. Another important political risk is represented by corruption practices (Hill 2005). For instance, a company may lose a contract because of a government’s unethical dealings (Madura 2006). Political risk can also translate in the change in tariff barriers, which make a company more or less competitive globally.
Empirical trade analysis has concluded that the traditional trade models must be adjusted to fit the trade data (Rivera-Batiz & Oliva 2003). Such modifications should include technology differentials, home biases in consumption, trade costs and distance and intermediate outputs. Trefler (1993) created a modified H-O model that accounted for a difference in technologies and home bias. Rivera-Batiz and Oliva (2003) maintain that, once such model modifications are introduced, the H-O model appears to hold fairly well. Davis and Weinstein (2001) and Trefler and Zhu (2000) have achieved up to 74% correlation between predictions and measurements under the modified H-O model. Despite this, the H-O model continues to fail to account for intra-industry trade and increasing returns to scale in major industries (Rivera-Batiz & Oliva 2003, Dunning 2009).
Methodology
The research has been made using secondary sources. The literature from various sources has been studies and reviewed for analyzing the challenges of globalization that the companies face worldwide and the implications of those challenges on their business. The secondary sources have helped in establishing the analysis of the research. The challenges have been picked from various books, research paper and articles and they have been complied here in the literature review. This research is descriptive in nature because it tries to describe the nature of globalization and the challenges that are posed by it in the international business.
Analysis and Findings
Analysis:
From the literature that has been reviewed above, it has been analyzed that:
- The process of advancement of globalization has not been smooth and pain free. The changes that have been brought by globalization have spurred a political backlash, which can be seen during the street protests at the WTO ministerial.
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Broadly, there are two greatest challenges of globalization, one is the undetermined labor and other is the poor maintenance of the environmental standards. With globalization, the gap between the rich and the poor has been exacerbated among and within the countries.
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The countries have become interdependent on each other. They have to design public policies so that maximum potential benefits can be obtained from globalization. The countries that are not much developed face the downside risks of marginalization and destabilization.
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The benefits related to globalization are not extended to all the countries, they are provided much to the developing countries. Instead, the developed countries reap most of the benefits of the globalization. So, they see globalization as a challenge rather than useful thing.
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The globalization leads to integration of firms and movement of people. They have to move to various countries for doing business and job. When people from one culture moves to another culture while changing the organization, he faces various risks that arise from the differences in lifestyle, languages, religion, attitudes, customs etc. Thus, cultural miss-communication happens and that can jeopardize the culturally valued behavior or mindset. The people also have to deal with the different negotiation patterns of different countries. For example, in Mexico, social relations are given importance and people are friendly there, so the negotiation should be done in that way and American are assertive so there, the pattern of negotiation is different.
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When the globalization opens the boundaries for the countries to do with business with each other, there is a challenge of political environment that is faced by the companies. The intervention by government, barriers to trade etc. are different in different countries. The companies face red tapeism, corruption issues, administrative delays etc. when they do business with the global companies. There are less legal safeguards that are provided to the companies abroad and if some company wants to obtain the intellectual property rights in some other country, then the procedure are lengthy and it is difficult to get that. Sometimes, the economic failures happen and miss-management is there in global companies that again pose a challenge for the firm who is planning to do or is presently doing business internationally.
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The exchange rate keeps on fluctuating on daily basis. So, there is challenge of dealing with the unfavorable exchange rate fluctuations. The change in the rate of exchange in globalization, changes the value of the assets that adversely affect the assets and liabilities of the companies who are involved in the international business. They also suffer from the risk of paying the different foreign taxation. Then when the rate of inflation changes, the planning of business in the international markets becomes complicated, there is also change in the pricing of inputs and the finished goods.
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The companies face challenge of commercial activities. Their business partner is unknown in the international market and he may be weak as compared to the other company which may not be known in advance. This can create operational problems. The strategy may get executed poorly.
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The global demographics have to be approached differently in globalization. In this, the international product and the service are considered and it needs to be localized successfully. This is a significant challenge related to globalization. When any strategy is implemented in globalization, the various tastes and strategies have to be considered during the implementation of that strategy.
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The ethical and environment constraints are also faced by the countries. The global culture has to be adopted which is particular to every individual country. It is very difficult to retain the cultural identity during the globalization phase.
Findings:
From the above discussion, it has been found that globalization is a very attractive process and must to adopt for those countries and businesses that have resources, capabilities and skills to go global. They are benefitted because they have everything with which they can compete in the global market. But, the developing countries face the challenges of globalization as they are incompetent in the international markets. They lack the necessary skills to compete. Apart from this, the challenges of globalization includes the cultural challenges where the employees are suffered the most, the political challenges due to differences in the regulations of different countries, the inflation and exchange rate fluctuation challenges that makes the companies suffer losses due to changes in price and taxation, the strategic challenges because the companies continuously have to change their strategies as per the needs of global markets, then the companies also face the challenge related to positioning of their product in the international markets. The minor challenges are related to the ethical consideration that differ in every country, the maintenance of environmental standards in different countries and the challenge related to the demographics of the countries.
Conclusion
From the above discussion, it can be concluded that the trade liberalization or international business has the greatest contribution in the emergence and popularity of globalization. From the above discussion, it can be concluded that the globalization is a very attractive process for the developed countries. But there are many challenges of globalization including differences in the regulations of different countries, the inflation and exchange rate fluctuation challenges, changes in price and taxation, the strategic, the challenge related to positioning of their product in the international markets. The minor challenges are related to the ethical consideration, the maintenance of environmental standards in different countries and the challenge related to the demographics of the countries.
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