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Massive deregulation
Collapse of Communism
Worldwide sale of state-owned firms in privatizations
Revolution in information technologies
Rise in the market for corporate control takeovers, mergers,
leveraged buyout and private equity transactions with the objective
to widen market share.
Replacement of statist policies by free-market policies in many
Third-World economies and with nations putting themselves like
giant corporation enforcing the standard and competitiveness of the
global marketplace.
IMPLICATIONS OF GLOBALISATION
Todays firm is part of an extremely competitive and integrated world economic
system. They must increasingly turn to foreign market to source capital and
technology and sell their products. They must be able to utilize resources from
around the world in order to operate efficiently and effectively, obtain superlative
performance, achieve competitive advantage in an increasingly competitive
business world. The key to international competitiveness is the ability of
management to adjust to change and volatility at ever faster rate.
The rapid pace of change means the global managers need detailed knowledge
of their operations; how to make the products, where the raw materials and parts
come from and how they get there, the alternatives, where the funds come from,
what their changing relative values do to the bottom line.
Firms need great flexibility; they must be able to change corporate policies
quickly, as the world market creates new opportunities and challenges. They
must understand the political and economic choices facing key nations and how
those choices will affect the outcomes of their decisions.
The international mobility of capital has provided more financial options while
simultaneously increasing complexity.
Where in the world should the plant be located? Which global market segments
should the firm seek to penetrate? Where in the world should the firm raise its
finances? The firm must be aware of the constant changes of the option and the
subsequent decisions/choices to be made in respect of plant locations worldwide,
most cost-effective mix of supplies, components, transports and funds. Global
managers must anticipate, understand and deal with changes and make
decisions to enhance the companys prospect for survival, growth and
profitability.
On the
Critics label local firms that invest abroad as job exporter and the sale of local
assets to foreign ownership as sale of sovereignty. However, it was proven that
foreign-owned companies are more productive and yet no loss of sovereignty is
experienced by the home countries. Global rationalization of production will
continue, as it is driven by global competition. The end result will be higher living
standards brought about by improvement in workers productivity and private
sector efficiency.
Free trade and competition allocate resources to the highest valued use.
Companies have to adopt new technologies, improve production methods,
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explore new market and introduce new and better products. Consumers benefit
from lower prices and expanded choices. Workers benefit by doing things that
they are best suited.
Critics also cited that by going overseas, home countries are losing jobs as well
as forced down average worker compensation (wages and benefit) due to
competition from low-cost foreign workers. Record however indicated that
productivity increased and compensation risen in line with increased productivity
in order to starve off the foreign competition. Globalization is not a zero-sum
game; where wins for some must be result in loses for others. Instead,
globalization expanded the total economic pie, enabling nations to get rich
together.
THE RISE OF MULTINATIONAL CORPORATION
A Multinational Corporation (MNC) is a company engaged in producing and
selling goods and services in more than one country. It consists of a parent
company located in the home country and foreign subsidiaries, typically with a
high degree of strategic interaction among the units e.g. sourcing in one country,
production in another country, distribution and retail in still another country ; a
commercial mix that best suited the MNCs. What differentiates the multinational
enterprise from other firms engaged in international business is the globally coordinated allocation of resources by a single centralized management. MNC
emphasizes group performance rather than the performance of its individual
parts.
Industries differ in their importance to foreign operations e.g. oil and gas are
more global than automakers. Even within industries, companies differ in their
degree of internationalisation. In oil and gas for example, PETRONAS and
ExxonMobil
generated 40% and 70% revenue from foreign operation
respectively. Foreign operation can be from internationalization of home
companies or foreign direct investment i.e. the acquisition abroad of companies,
properties or physical assets .
RATIONALE FOR MULTINATIONAL CORPORATIONS
The classical theory of international trade rest on comparative advantage,
where each nation should specialize in the production and export of those goods
that it can produce with the highest relative efficiency and import those goods
that other nations can produce relatively more efficiently. The theory was made
on the assumption that goods and services can move internationally but factors
of production, such as capital, labour and land are immobile. Classical theory
assumes that countries differ enough in terms of resources endowment and
economic skills to be the centre of economic competitiveness.
The above classical theory is becoming increasingly irrelevant as differences
among corporations are becoming more important than aggregate differences
among countries. Countries now move their factors of production more rapidly in
search of higher returns.
Search for Raw Materials raw material seekers were the earliest MNCs
e.g. East India Companies, that exploit raw materials that could be found
overseas. This continued with petroleum exploration by MNCs like
Standard Oil and British Petroleum. The role of natural resources has
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however diminished in national specialization as advanced, knowledgebased societies move rapidly toward artificial materials and genetic
engineering.
flow is relatively low, risk of product quality problems and the d ifficulty of
the licensor in controlling exports by the foreign licensee resulting in the
licensee may become a competitor to the licensor in the world market.
BETWEEN
ALTERNATIVE
MODES
OF
OVERSEAS
Certain general circumstances of the firm can be used to decide whether its
overseas expansion should be in the form of exporting, licensing or local
production. The key factor is the MNCs intangible capital that is, trademarks,
patterns, general marketing skills and other organizational abilities.
If this intangible capital can be incorporated into a standardized products
without adaptation, then the mode of overseas penetration should be
exporting. Where the firms intangible capital is in the form of knowledge on
product/process technology that can be codified , written down and
transmitted objectively, the foreign expansion will be licensing.
Where intangible capital takes the form of organizational skills that are
inseparable from the home firm itself, where the home expertise is critical to
support operations then establishment of overseas production is the
option provided that the benefits of circumventing market imperfections
outweigh the costs of central control.
Where economic imperfection make it difficult to expand overseas, firms can
consider internalization and hence foreign direct investment (FDI) i.e. the
acquisition abroad of companies, properties and physical assets. Two types of
overseas investments are available namely vertical investment and
horizontal investment.
Vertical Integration
Direct investment across industries that are related to different stages of
production of a particular goods, enables the MNCs to substitute internal
production and distribution systems for inefficient markets. For example,
Proton which manufacture cars also own a company that make tyres.
Horizontal Integration
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