GLOBALIZATION

GLOBALIZATION

•Defined as the growing integration and interdependence of the

world's economies.•Lead national economies to integrate

towards a single global economy, where consumers have ever- increasingly having similar habit and tastes.

•Economic and political decisions taken in one region of the world are likely to affect those in other parts of the world

too.

FACTORS CONTRIBUTING TO THE GROWTH IN GLOBALISATION

1. Liberalization of international trade

Encouraged more trade in exports and imports.

Trade protection method has been reduced (tariffs,quotas) through the cooperation of the member states of the World Trade Organization.

Multinational company have been more able to set up overseas trading facilities and outlets

2.Technological progress Reduced the cost of information interchange.

By internet, business are able to sell product to a world wide market if the have the online presence.

Convergence of consumer habits and tastes all across the world.

Ex : mobile phones, video-conferencing, etc

Reduced barriers to international trade as cost of production are decreased.

3. Deregulation Cost of transportation and distribution have fallen.

With the opening up of competition of previously state-owned monopolies in the transport market, business are able to distribute products worldwide at lower cost than before.

Encouraged the growth of multinational corporations to enjoy more of a global presence.

4. Cultural awareness and recognition

Consumers around the world have increasingly similar taste.

Consumers also more willing to buy foreign products that led to a huge increase in the market for cultural exports.

5. Language English – official business language in many parts of

the world

In much Asia , English speakers are the ones targeted for fast-track promotion.

Organisation can have the benefit from the EOS - no need to produce different promotional advertisements , information of products in so many languages

THE EFFECTS OF GLOBALIZATION ON BUSINESS ACTIVITY

1. Increase the level of competition

As internet has reduced the costs for many industries, thereby reducing barriers to entry and opening up competition.

2. Meeting customers expectations and need becomes increasingly more demanding.

Demands for the quality, customer service, price and after sales care.

Business must meet the demands of their customers in order to compete with other business.

3. Benefits of EOS A global business can take advantage of global

marketing economies and risk bearing EOS.

4. Greater choice of location of their production facilities.

China- low cost of labour and rent.Reduced the firm's costs of production.

5. Mergers, acquisitions and joint venture- allow business to grow at faster pace.

With globalization, business have more choice in their expansion plans

6. Increased the customer base

With globalization, business have higher number of customers.

MULTINATIONAL CORPORATION (MNC)

Company that operates in two or more countries.

Other term : Transnational corporation.

WHY BECOME A MNC?

1) Business can increase sale by

expanding internationally. Widen customer's base and International brand recognition.

2) Benefit from economy of scale Larger customer base, high production level, larger economies of scale to be

exploited ( benefit from host country) and Infrastructure and financial incentive.

3) Can avoid protectionist policies If production within the country

4) Benefit from cheaper production cost Especially inexpensive labour

5) Able spread the risk Can still survive if there is country or region suffering recession or disaster

6) Globalization of market

7) World is smaller Time, distance

PROBLEM MAY FACED IN

EXPANSION

1) Lack of local knowledge(eg: Lack of brand recognition)

2) Storage, transportation and distribution cost may increase

3) External factors (eg; legal restrictions, language barriers, and cultural differences)

4) Political and economical condition in foreign country

5) Infrastructure may limit the efficiency

EFFECTS OF MULTINATIONAL ON

HOST COUNTRY

REGIONAL TRADING BLOCS (RTB)

1. RTB is also known as Regional Economic Blocs.

2. Members of RTB strive to eliminate trade barriers on the movement of goods, services, labour and capital.

3. A regional trading bloc will impose physical barriers to internal trade.

4. The imposition of tariffs increases the price exports,

thereby reducing the competitiveness of the product.

5. Quotas are the limits on the volume or value of foreign goods and services.

6. Three different levels of ‘free’ trade within trading blocs :

• Closer Economic Partnership Agreement (CEPA)

• Free Trade Area (FTA)

• Common Market

EXAMPLE OF MAIN RTB

1. The European Union (EU)

- member states charge a common external tariff to non-member countries.

- major advantage for businesses operating in the EU is the potential to exploit economies of scale.

- membership of the trading bloc increases the customer base for businesses operating throughout Europe.

-Changes in economic activity and/or economic policy in member countries will affect the economic performance of those member states.

 

2. The European Free Trade Association

(EFTA)- there are no import restrictions between these members.

- European Community signed agreements with EFTA members, setting up a free-trade area over 100 million customers.

- signed further treaty which provided for the creation of a European Economic Area (EEA), allowing EFTA members freer trade with the EU states.

3. The North American Free Trade Agreement

(NAFTA)- was set up between USA, Canada and Mexico with the aim to promote

trade and investment between the members.

- NAFTA members have more multinationals and a higher GDP (gross domestic product) per capita than any other trading bloc.

4. The Association of South East Asian Nations (ASEAN)

- one of the largest regional trading blocs in the world.

- member nations were Indonesia, Malaysia, Philippines, Singapore, Thailand, Brunei, Vietnam, Laos, Myanmar and Cambodia.

- there are large economic and social disparities between the ASEAN countries which makes conducting business in these countries less predictable.

5. Closer Economic Partnership Agreement

(CEPA)-CEPA is an economic agreement between two countries.

-CEPA is a WTO-compliant free trade agreement

- the purpose of signing the CEPA is to strengthen their trade and investment cooperation. This can be achieved by :

Steadily reducing or eliminating tariffs and non-tariff barriers

Promoting trade and investment facilitation

- trade creation takes place when a country switches from buying commodities from a high cost country to buying them from a lower cost country.

- trade diversion results in losers in a trading bloc when a country switches from buying commodities from a lower cost country to buying them from a higher cost country.