The age of globalization enables businesses to move their operations offshore with the minimum of fuss. For example, businesses in the West are moving en masse to China to take advantage of the low cost of production there (cited in Hitt, 2007). China has the largest reserve of manpower in the world. As a result, the cost of manpower in China is one of the lowest in the world. This enables businesses from the west to keep costs down. If it had not been for the process of globalization and China joining the World Trade Organization as a result of that process then the massive economic opportunities arising out of China’s meteoric rise to economic excellence would never have emerged. Because wages and salaries are very high in the West, the mature economies of the West are stagnating and not generating enough demand. Rather than generating demand for traditional goods and services, these advanced economies are creating new patterns of demand that require companies to constantly innovate on their product lines (cited in Hill and Jones, 2007). The innovation is mostly in the form of differentiation, cost minimization and quick response.
Companies that can differentiate their products or price their products less or deliver customer wants quickest are the ones which can survive. That is why competitive rivalry in the West is intense. It is not easy for the management of businesses limiting themselves to the mature economies of the West to reduce the cost of their operations because the wages and salaries are very high and they are going up all the time as a result of inflation ( cited in Griffin 2007, p. 23). The only way for these businesses to constantly keep their costs down is to fund capital intensive research in order to restructure all the time for cutting costs. International business provides the opportunities for avoiding these expensive trends of business process reengineering.
As mentioned before, China has been experiencing phenomenal economic growth as a result of the gradual process of economic liberalization that the Chinese government has undertaken. An aspect of this liberalization has been on the part of the Chinese government to allow foreign businesses to set up operations in China. This strategy has succeeded because the infrastructure within China has developed to the point that it can handle the logistics requirements of manufacturing operations that businesses around the world have been setting up in China (cited in Naughton, 2005).
The benefits of expanding to China are no secret to anyone. The rise of the middle class in China and likewise in India means that these countries are generating new patterns of demand for goods and services that businesses in the west have been manufacturing for a long time. Because wages and salaries have soared in the West, these goods and services manufactured there have become prohibitively expensive. However they become affordable when manufactured in China. India has been developing a vast pool of technically trained manpower which can address the rising needs in information technology that the West has been experiencing. Once again, technical expertise is very expensive to hire in the West which it is not in India (cited in Naughton 2005, p. 24). However benefits flow in both directions. Exports to the West from China and India have been the main engine of economic growth for these two countries as they were for the Pacific Rim nations. Therefore, international business has been the engine of growth for both the West and the East (cited in Hill, 2005). However businesses expanding offshore have to face a number of challenges, political, economic and legal, that are best showcased by the South East Asian financial crisis in 1997 (cited in Wild, 2005).
The liberalization of the international financial system led to the onset of the South East Asian financial crisis. South Korea, Indonesia and Thailand were liberalizing their economies during the latter part of the 80’s and during the 90s in an effort to attract foreign direct investment. They succeeded only too well and the massive surge of investments that characterized these three countries at the time received their financing through foreign debt. The three governments were buying massive amounts of the US dollar to keep their currencies pegged to the US dollar. This was in response to the intense demand for the South Korean, Indonesian and Thai currencies prevalent at the time in the international investor circles. The three countries at the time were showing the world an economic recipe which seemed to be immune to any sort of economic shocks.
As far as the international investor was concerned, the only safe bet for their money was to invest in the assets of these three countries because the economic growth in the three countries seemed to have no strings attached. However the unregulated nature of the international financial system ensured that it was completely vulnerable to the vagaries of the international investor psychology. The investors who had been investing in the Thai currency changed their minds overnight and decided that the Thai currency was overvalued. In fairness to them, they did ask the Thai government to devalue the currency and the Thai government refused. As a result international investors fled and the Thai currency plunged leaving the government with a pile of foreign debt that it was unable to finance. The same catastrophe played out in South Korea and Indonesia and before these economies could get back on the path of growth, they had to substantially restructure different sectors of the economy that had contributed to the development of the crisis. For example the banking sectors in all three countries suffered from unmitigated cronyism where borrowing and lending decisions were dictated to rather by relationships than by economic feasibility.
The financial crisis in 1997 presents the challenges that an international investor faces when moving his or her businesses offshore. There are political challenges in the form of government control over lending and borrowing decisions which the management of a multinational company must take into account. When doing business in a foreign country, multinational companies have to develop a firm grasp of the government rules and regulations. This is particularly relevant when it comes to the oil and gas companies moving their drilling operations offshore. The government in each country will lay down some rules and regulations regarding activities that might have a harmful effect on the state of the environment (cited in Fred, 2006)). This is however not a problem because governments want to make it easy for foreign companies to invest in their countries. This is related to the issue of attracting foreign direct investment. One of the factors contributing to the development of international business is the move towards foreign direct investment that international financial organizations have been promoting as the economic fix for economically backward regions of the world.
Most of these regions have corrupt governments which will inevitably succumb to misuse of funds as a result of internal pressure from corrupt government officials. However such corruption becomes irrelevant when it comes to foreign direct investment because the ownership of funds remains firmly in the hands of the investor. As a result corrupt governments have to clean up their act in order to attract international business the owners of which will value political stability as one of most important factors influencing their investment decision. But even in the case of foreign direct investment, the management of an international business will have to deal with government intervention in their businesses. For example, multinational companies from many countries are free to bribe local governments because their home countries have no rules to address the issue. However US multinational companies are prohibited from bribing local governments. As a result, they have to follow other means of gaining local government support which they must have if they are to conduct their operations profitably (cited in Evans, 2004)).
International business can take many forms and the challenges vary according to type followed. For example, an American business organization might set up its production facilities elsewhere. Another form of international business might be limited to sales and marketing being moved offshore while production facilities are confined to the home country. Some companies might decide to sell franchises. These are some of the patterns most prevalent in international business. All these patterns however share one feature in common: they have to take into account considerations related to the socio-cultural impact of their operations abroad (cited in Hill 2005, p. 34). The critical consideration for the management in this regard is to recognize the fact that patterns of demand are affected most strongly by cultural considerations. This is critical because this ties in directly with their promotional activities which directly affect the profitability of their multinational corporations. In order to sell their goods and services in a foreign country, the management of multinational corporations must sell their products and services in a way that takes cultural differences into account.
Logos and slogans are an important part of the promotional messages and the management must make sure that these components of their promotional activities are translated into the correct meanings. It has been known to happen that a message that catapulted the associated products and services to peak demand in one country suffered disastrously in another because the translation was done literally so that the message was misinterpreted. These are some of the socio-cultural complexities that arise as a result of the international expansion of businesses (cited in Wild 2005, p. 212). These complexities arise because of sociological and cultural considerations that vary from one country to another. Therefore it is not just the promotional campaigns that have to be redesigned in order for them to be effective in different countries. The products and services that are offered by a multinational company in different countries have to be customized as well to different customer expectations. As a result, marketing complexities multiply. In their domestic operations, business establishments can limit their worries to behavioral and psychographic segmentation. When it comes to international operations, business establishments have to take into account geographical and demographic segmentation as well (cited in Daniels 2004, p. 122).
A critical component of any business operation is to develop a vision and a mission and translate them into statements that will guide strategic focus of the company (cited in Wild 2005, p. 32). Without strategic focus, a business organization will have no means by which to define organizational effectiveness. As a result, in order to stay on top of competition, international businesses in particular must set a clear strategic direction according to which the management will conduct its operations. This is not an easy task because of the sociological and cultural differences which are found from one country to another. In this respect, the human resource department has a role to play in that it has to design the compensation policies for employees who are going abroad to work in foreign plants. International businesses must have an international compensation system and developing that is the task of strategic human resource management. This is once again fraught with complicacies because different countries have different taxation policies and different cost of living indexes. Therefore the international pay system has to take those differences into account.
The human resource department usually follows two approaches when designing the international pay system. One is the going rate approach and the other is the balance sheet approach. According to the going rate approach, the parent company employs an international consultancy service which conducts a survey in the host country to assess what the employees in certain positions are paid. The parent company then designs the pay system accordingly when it sends its employees to that country. As a result employees moving from rich countries to poor will stand to lose financially. For example, managerial salaries in the US are the highest in the world (cited in Dess, 2007). According to the going rate approach, any US national moving to Japan as an expatriate will get a lower salary. This problem is corrected in the balance sheet approach because the international salaries are pegged to what the expatriates earned in their home countries. As a result, purchasing power parity is maintained in respect of the home country. However, according to the balance sheet approach, the pay system is not equitable with that of the host country nationals.
The international compensation system is directly related to the strategic management of international business. The management community these days is focusing on those cultural aspects internationally which are aligned with the strategic focus of their companies and they are designing the compensation system to motivate employee behavior connected to those aspects. As a result, strategic human resource management can no longer afford to keep things as simple as following either the going rate approach or the balance sheet approach. Instead they are following a flexible method to align with the strategic focus of their organizations. These are complex issues and trading blocs such as NAFTA or GATT were formed to give these issues a wide berth (cited in Griffin 2007, p. 209). The North American Free Trade Agreement includes the US, Canada and Mexico and, measured according to the combined GDP of the three countries, is the largest trade bloc in the world. Its effect therefore is massive.
The NAFTA experience shows both the positive and the negative consequences of promoting globalization. For example, Mexican farmers have lost profitability in their farming business as a result of the agreement because food imports from the US and Canada are heavily subsidized. American and Canadian businesses have also lost their economic potential as a result of business operations being moved to low-cost Mexico. A lot of employees at American and Canadian plants have lost their jobs. However Mexican citizens have gained a lot because of the greater employment opportunities in their country arising out of the agreement. So opinions on whether NAFTA is good or bad for the region are divided among economists. The effects of GATT similarly suffer from a lack of agreement in the economist circles. Some economists argue that this will improve transparency of government operations worldwide as they will have to defer to the free market for their economies to survive.
Others ague argue that GATT only widens the disparity between the rich and the poor because economically backward regions, suddenly left defenseless against foreign hordes of ruthless competitors will not have the necessary infrastructure in place to adjust to the new state of affairs. However there are positive consequences in the form of international businesses being able to move to low-cost regions at a minimum of friction thereby creating new employment opportunities as the North American Free Trade Agreement did for Mexico. Countries such as China and India which liberalized gradually to the influence of GATT have performed miraculous feats of economic prosperity. The success stories in China and India are tributes to the growth potential of international business and these success stories have been made possible more or less by agreements such as GATT. At the very least, multinational organizations, which are the agents of international business, make a considerable difference not only to their own profitability, but also to the political, economic and socio-cultural framework of their host countries by globalizing their operations.
Daniels, John, et al. International Business: Environments and Operations. Prentice Hall.
Griffin, Ricky and Mike Pustay. International Business: The Challenges of Globalization.
Hill, Charles W. L. International Business. Prentice Hall. 2005.
Naughton, Barry. The Chinese Economy: Transitions & Growth . McGraw Hill/Irwin. 2005.
Wild, John J. and Kenneth L. Wild. International Business: The Challenges of Globalization.
McGraw Hill/Irwin. 2005.
Dess, Gregory G., et al. (2007). Strategic Management: Creating Competitive Advantage.
Evans, James R. (2004). Total Quality: Management, Organization, Strategy. McGraw
Fred, David. (2006). Strategic Management: Concepts and Cases. Prentice Hall.
Hill, Charles., and Gareth Jones. (2007). Strategic Management Theory: An Integrated
Approach. McGraw Hill/Irwin.
Hitt, Michael A., et al. (2007). Strategic Management Concepts. Wiley.