Globalisation and Business.

Assignment 1

Globalisation and Business

BU5302

Ian Shotton

Word count: 2035

1602929

In an ever changing world economy, managers of worldwide organizations must make important and decisive decisions that will, without doubt, influence how the business will perform in the foreseeable future.

“Globalization has become a worldwide phenomenon that has cultural, political, economic, and social dimensions” (Solakoglu, 2016).

With such a phenomenon, there are differing views and perspectives to this theory.

One such view` is the Hyperglobalist view. Hyper globalists believe globalization is a positive process that leads directly to economic growth, increasing prosperity and spread of democracy. This view believes in the end of the ‘nation-state’ and the denationalization of economies via neoliberal economic policies. They believe in a ‘borderless’ world in which free trade is possible all over the world as nation governments will no longer control their geographically bounded economies but rather they will encourage connections throughout the world via supranational organizations, a multinational political union ("Between the borders", 2018), such as the EU. Hyper globalists believe that the spread of democracy will eventually lead to the replacement of the nation-states with global institutions such as the International Monetary Fund (IMF), the World Trade Organization (WTO) and the World Bank.

Evidence to support this view is over whelming. For example, China’s GDP per capita has almost doubled from 2008 to 2016 ("China GDP per capita | 1960-2018 | Data | Chart | Calendar | Forecast", 2018) and this has been directly linked to its growth in exports.

However, with Britain now exiting the EU and some countries also debating on a referendum, this view may be difficult to put into action if no trade deals are made – making free trade between these countries more difficult. Also, with the increase in trade barriers put up by some countries, this makes free trade more difficult, thus opposing this view ("Watchdogs warn of a world trade slowdown", 2016).

In complete contrast to the hyperglobalist view, the Skeptical perspective believes that the newness of globalization is greatly exaggerated. It believes that globalization had already peaked in the past, more specifically during the 19th century – before World War 1 (Parker, 2005). For example, Worcester sauce was developed in the late 1800’s and its ingredients derived from different parts of the world. This view argues that the world was more integrated in the 19th century when the world shared a common monetary system called ‘gold standard’ (standard, 2018) where most paper money had an equal value in gold. This lead to integration as countries would be able to trade overseas using gold rather than having to use an exchange rate. They believe that the modern world economy is experiencing, not globalization but rather ‘regionalization’ as the world economy is largely dominated by 3 major financial and trading blocs; Europe, North America and East Asia. Due to the dominance of these regions, worldwide integration is more difficult as these 3 regions control the world economy, therefore limiting the participation of other regions, such as Africa, in that economy. Skeptics also believe that nation-states are not in decline as Hyper globalists would argue, instead they would argue that nation-states are, in terms of globalization, a major player (Solakoglu, 2016).

This view has been criticized by Van Berjeik and Mensink (1997) (Parker, 2005), who argue that when trade figures from Krugman (1996) are re calculated to current dollars, the figures show growth of trade to be stronger than it initially was.

A Transnational corporation refers to a business that is based or registered in one country but also has power to co-ordinate and control operations in other countries (Dicken, 2007).

Many TNC’s globalize in order to expand or improve upon the business i.e improve economies of scale, enter new markets or for technological innovation.

An example of a TNC would be Volkswagen, whose headquarters is based in Germany but owns 99 production factories over the world and employs over half a million employees ("Transnational Corporations", 2012).

Volkswagen has utilized globalization greatly. This is shown by the vast amount of brands it has under its name. Although Volkswagen itself is a German brand, it owns an Italian automobile brand, Lamborghini, through the utilization of globalization by purchasing the brand from its Italian owner (Harrison, 1998). This gave Volkswagen access to the Italian market and also another production country.

Another way Volkswagen has used globalization to its advantage is when it set up a joint venture with Ford in 1995 ("European Commission”, 2017). This meant setting up a plant near Setubal where both companies manufactured their own vehicles and sold through their own sales networks. This benefitted both companies as it meant they had access to each others machinery and materials.

Volkswagen has made a huge impact in the Chinese automotive industry, especially since Chinas accession into the WTO (Moon, 2005). To further understand why Volkswagen decided to transnationalise, the Dunning OLI model can be used. This refers to the Foreign Direct Investment in China when Volkswagen transnationlise. The first stage is ownership where VW used its knowledge, capital resources and technology to keep a competitive advantage over foreign competitors. The second stage is location-specific where VW looked to the advantages of moving to the chosen location. There were many advantages of moving to China but 2 main points for VW were the low cost labor and also to gain a first mover advantage as one of the first companies invested in Chinas car market. The final stage is internationalization, in which VW decided that production in China would be more cost efficient as the import tax was almost 30% thus it would have been more efficient to produce in the country as it lead to economies of scale and economies of scope (Nowak, 2013).

Some countries may incentivize for a company to set up in their country as this may improve the local economy as it may lead to job creation. Incentives may include grants, tax incentives and subsidies for infrastructure. There are many examples of countries doing this such as Ireland giving Apple generous tax incentives. However, this has lead to the EU taking legal action as the low level tax maybe considered illegal ("EU takes Ireland to court over Apple taxes", 2018). In the case of Volkswagen, they have also received incentives to set up abroad. Volkswagen were offered $577m to set up a plant in Chattanooga, Tennessee as part of their incentive package ("US: Incentives for Chattanooga VW plant total US$577m - Automotive World", 2018).