With the globalization of the world economy, there has been a concomitant rise in the number of companies that operate globally. Though international business as a concept has been around since the time of the East India Company and continued into the early decades of the 20th century, there was a lull in the international expansion of companies because of the Two World Wars. After that, there was a hesitant move towards internationalizing the operations of multinational companies.
What really provided a fillip to the global expansion of companies was the Chicago School of Economic Thought propelled by the legendary economist, Milton Friedman, which championed neoliberal globalization. This ideology, which started in the early 1970s gradually, became a major force to reckon with in the 1980s and became the norm in the 1990s. The result of all this was the frenzied expansion of global companies across the world. Thus, international businesses grew in scope and size to the point where at the moment; the global economy is dominated by multinationals from all countries in the world. What was primarily a phenomenon of western corporations has now expanded to include companies from the East (from countries like India and China). This module examines the phenomenon of international businesses from different aspects like the characteristics of international business, their effect on the local, target economies, and the ways and means with which they would have to operate and succeed in the global competition for ideas and profits.
Above all, international businesses have to ensure that they blend the global outlook and the local adaptation resulting in a “Glocal” phenomenon wherein they would have to think global and act local. Further, international businesses need to ensure that they do not fall afoul of local laws and at the same time repatriate profits back to their home countries. Apart from this, the questions of employability and employment conditions that dictate the operations of global businesses have to be taken into consideration as well.
Considering the fact that many third world countries are liberalizing and opening up their economies, there can be no better time than now for international businesses. This is balanced by the countervailing force of the ongoing economic crisis that has dealt a severe blow to the global economy. The third force that determines international businesses are that not only is the third world countries eager to welcome foreign investment, they seek to emulate the international businesses and become like them. Hence, these aspects would be discussed in detail in the subsequent articles.
Finally, international businesses have to ensure that they have a set of operating procedures and norms that are sensitive to the local culture and customs and at the same time, they stick to their brand that has been developed for global markets. This is the challenge that we discussed earlier as “Glocal” orientation.
2. Emerging Markets and International Business
International Businesses and the Opening up of Emerging Economies
The previous articles in this module have discussed the contours of international business and the key drivers of the phenomenon. This article discusses how international businesses are affected by the rise of the emerging markets especially the BRICS (Brazil, Russia, India, China, and South Africa) and the next “Breakout Nations” from the second tier of the emerging markets. The point to note is that ever since the emerging markets opened up their economies and liberalized their procedures, international businesses have found a readymade market for themselves in which they can operate in, make, and sell goods. Often, it is the case that emerging markets provide the international businesses with the right opportunities to expand and grow further. When considered against the backdrop of falling growth rates in the West, the western multinationals could not have asked for more with countries like China and India opening up like never before. For instance, the recent decision by the government to push for FDI (Foreign Direct Investment) in most sectors is a step in the direction of benefit to western multinationals.
Growth of International Businesses in the Opening Decades of this Century
Though globalization picked up in the 1990s and gathered steam subsequently, the recession following the dotcom bust proved to be a setback to international businesses. Further, the 911 attacks proved to be another obstacle to the expansion of international businesses. The closing years of the first decade witnesses the 2008 Great Recession, which dealt a decisive blow to international businesses. In this gloomy scenario, the growth in the emerging markets was the silver lining for the international businesses, which was captured well by experts like Ruchir Sharma in his book, The Breakout Nations, who pointed out that western capital had no choice but to migrate to countries like India and China.
The Future Prospects of International Businesses in the Emerging Markets
If we look into the future (though predicting the future is hazardous in these fast changing times) we find, the next frontier for international businesses is the tier two emerging economies like Vietnam, Ireland, and African countries. Without being too optimistic, it is clear that the growth in these markets would drive the expansion plans of international businesses. it is also clear that international businesses can leverage on the demographic dividend that these countries. To explain the term, the higher proportion of young people in the country’s population is called the dividend that these countries get because of their demography. Hence, with so many young people joining the workforce, it is apparent that the emerging economies offer the best possible means of growth for the international businesses.
Finally, western multinationals have to contend with the international ambitions of emerging market companies as well. in recent years, there has been a trend wherein companies from India and China as well as Brazil and Russia have started to make rapid strides in their expansion plans overseas. Hence, it cannot be said that the flow of capital is unidirectional alone. In many ways, it can be said that the global economy is now at a stage where it is anybody’s game and hence, the world is indeed flat for those with the innovative edge, hard work, and sustainable business models.
3. Threats to National Sovereignty
It is not only about Profits
Of the many criticisms of globalization, the prominent critique relates to the fact that globalization erodes national sovereignty and takes away the power of governments. By allowing international corporations and multinational businesses to set the economic (and often, the political agenda), critics argue that the nation state becomes irrelevant. The point to be noted is that if global corporations can set the agenda, there is nothing inherently wrong about that. Just that capitalism runs on the profit motive to the exclusion of everything else and hence, businesses simply cannot be allowed to set the terms of the political and economic discourse because the nation state is answerable to all citizens and not just to the wealthy and privileged. It needs to be mentioned that nation states exist for welfare of the citizens and not for making profits alone. By usurping the powers of the nation state, the corporations reduce everything to money and profits and this has a corrosive effect on the welfare of the citizens.
One World Market
Ever since the 1990s, it has become fashionable for corporations to demand global rules of doing business that are uniform across the world. In other words, international businesses want the same set of rules and procedures in all countries i.e. the right to repatriate profits, the right to exploit natural resources, uniform taxes, and tax structures, the removal of barriers on entry and exit, among other things. This means that the notion of a global marketplace that is consistent across nations and one that is friendly to the corporations is the aim of this endeavor. This is definitely a plan to take away the power of the governments to set the rules and though there are many experts who point to the enabling features of globalization especially where lifting billions of people out of poverty is concerned, critics are aghast that the poor and underprivileged who are already suffering would be hit by a double whammy.
National Sovereignty vs. Supranational Corporations
Given the fact that some multinationals have more revenues than some countries entire economic output, the power of these companies is indeed deep and wide. Hence, the temptation to override national governments and instead, set supranational rules to be followed results in the ceding of sovereignty by the governments. As has been discussed in the previous sections, this results in the notion of profits before people and does away with the basic humanitarian impulse that is behind the modern concept of democratic states. Further, the supranational economic order does not have allegiance to nations or nationalities but to super elite whose interests span across countries and whose loyalties lie to the economic principles that are devoid of humane and social objectives.
Finally, global corporations have grown in power in recent decades and this trend while contributing to global growth has also produced sharp inequalities and led to exacerbation of ethnic and social tensions between the haves and the have-nots. Hence, there needs to be a moderation in the way global corporations are allowed to usurp the power of national governments and the way in which national sovereignty is ceded to the international businesses.
4. The Role of Governments in Encouraging or Discouraging International Businesses
The Need to Encourage Foreign Investment
The previous articles have discussed how international businesses need supporting ecosystems and business friendly policies if they are to succeed in emerging markets. Of particular importance is the role of governments in deciding whether they would allow international businesses to setup their operations and encourage them to grow and succeed. Often, the governments of many countries do not have a choice but to welcome international businesses as they need the “hard cash” or the Dollars, as they are also known. For instance, the difference between exports and imports is known as the Current Account Deficit or CAD. Since many emerging markets (except China which has a positive CAD) have deficits that need to be financed with Dollars. Then, the governments can either borrow these Dollars at high rates or finance the deficit through FDI or Foreign Direct Investment and Equity flows into the stock markets from FIIs or Foreign Institutional Investors.
The Role of the Government
Apart from this, the domestic industry might not have the capabilities to succeed in a particular sector nor the expertise to develop that sector. Therefore, FDI becomes necessary for the growth of that sector. Moreover, opening up of the economy is needed for admission into the WTO or the World Trade Organization, which means that in order to export to other countries, emerging and developing market economies have to open up. These are some of the reasons why many governments in developing countries encourage foreign investment and allow international businesses to setup operations in their countries. However, whether the successive governments continue the same policies or not depends on a host of factors that include the ideological bent of the governments, the compulsions of politics, and the fact that foreign investment might not have succeeded in kick starting the economy as planned.
Process must be continuous and consensual
The key aspect here is that many governments of the emerging economies often welcome the international businesses with open arms because of the reasons listed above. However, midway through the process, some of them develop cold feet because of policy paralysis, and the factors listed above. It needs to be understood that allowing international businesses to enter into the emerging economies must be bipartisan meaning that there must be broad consensus on the issue from all stakeholders. Only then would the international businesses thrive in the emerging market economies. Further, the competition for foreign capital is so intense that any let up in the process adversely affects the economy and hence, the process must be continued and the international businesses given due encouragement.
Finally, the examples of China, Brazil, South Africa, and Vietnam (which is still emerging) illustrate the need for consensus on opening up of the economies and following through the process. On the other hand, the examples of India and Russia are the other way around as these countries opened up their economies due to compulsions and then with open arms but failed to keep up the momentum. This means that the integration into the global economy would happen only when the reforms process is done wholeheartedly and without pauses or U-turns.
What is the future of international business??
he last decades of the previous millennium were characterized by “future shock” where the anticipation of the future to come absorbed businesses and policymakers alike. The current decade is characterized by what can be called “present shock” wherein the arrival of the long anticipated future has happened already. This means that the long awaited future has arrived yesterday to use the phrase, which means that businesses have to constantly be on the move to reap the benefits of the current rapid changes. Present shock refers to a phenomenon wherein the merging of the past, present, and the future into the instantaneous moment means that more and more businesses are thinking of the immediate quarter instead of the longer term that all of us were accustomed to earlier. In other words, whereas in earlier decades, it was quite common to think about a horizon of decades, now businesses typically think of the next five years or the next decade at the maximum the case.
The Problem of Too Much at Too Fast
Moreover, this phenomenon is not restricted to businesses alone as the current generation thinks in terms of nanoseconds and seconds instead of minutes and hours. In other words, with the advent of Twitter, Facebook, and social media, we are all in the process of a continuous present where the past does not hold relevance and the future is something that is beyond one’s immediate concerns. This has implications for the business world as resource depletion, the ability to solve problems that require patience and time, and the fact that change happens in a glacial manner mean that we need to devote time to the tasks at hand instead of flitting from fad to fad and from trend to trend. No wonder many businesses and their employees are left with stressed out lives where the performance of the past does not guarantee success and where the longer-term future is too distant to behold.
The Digital Revolution
The point here is that because of the many converging trends of technology and the digital revolution, time itself is compressed and the companies that have done well in the past are replaced continuously with those who manage to grab the present and these in turn are replaced with those that are incrementally better than they are. With so much of change happening so fast, it becomes imperative for businesses to get a grip on themselves and the fast changing business landscape. This is at the core of the present crisis in the corporate world where even the most successful executives are unable to hold on to the ephemeral present.
Finally, as mentioned earlier, we can only solve problems if we devote time and energy and in the fast-paced world where the present shock is hitting us hard, business leaders need to ensure that their business models stand the test of time and are not geared towards the immediate gratification that has become the hallmark of the present times.
Source: Harvard Business Review, Investopedia and Financial Times