Globalization brings some potential benefits to both international producers and national economies. Globalization provides an incentive for countries to specialize and benefit from the principle of comparative advantage. The access to larger markets increases the demand for products and firms benefit from economies of scale which results in a reduction in the average production costs. Internationalization enables easier access to cheap raw materials which enables firms to become cost competitive in both the domestic and overseas markets. Finally, globalization leads to increased flows of inward investments between countries which create benefits for recipient countries such as sharing of technology between countries.
Potential disadvantages of globalization include: the over-standardization of products through global branding is a common criticism associated with globalization. A good example is the worldwide use of Microsoft’s Windows operating systems in computers which leads to lack of product diversity as well as presenting barriers to entry for other producers. Globalization increases the risks associated with the interdependence of economies. Since countries become increasingly dependent on each other, a negative economic outcome in one country quickly spreads to other countries, for example, a decrease in vehicle sales in the UK affects the entire Europe since most of the vehicles sold in the UK are imported from the European Union. In the European Union, countries have a degree of specialization with cause by factors such as labor, and capital but the countries are dependent on each other for products and services such as clothing (Surugiu and Surugiu, 2015). In conclusion, globalization increase power and influence of multinationals since large multinational firms can switch their investments between countries in search of the most favorable regulatory areas.
Globalization is the integration of markets in the global economy that results in an increased connection of the national economies. Globalization is particularly common in financial markets such as the capital and insurance markets, commodity markets such as the oil and the product markets such as motor vehicles.
Globalization is driven by various development and gradual changes in the international business economy. In general, organizations go global for expanding their markets and increasing their sales and profits (globalization101, n.d). One of the key forces of internationalization is the expansion of communication systems. Some of the important forces behind globalization include:
Advancement of technology is one of the vital factors of globalization. Since the early 90’s, the advancement in telecommunications and information technology has undergone remarkable improvements in access of information and in the increase in economic activities. The advancement in technologies has contributed to the growth of various sectors of the economies in different parts of the world. In addition, the advancement in technology and the improvement in the communication networks have further facilitated the exchange of goods and services, resources and ideas regardless of the geographical location. In this way, the advancement of technology has greatly contributed to economic globalization. The reduction in cross trade barriers in another factor that drive globalization. Each country has laws that restrict the movement of goods and services across its borders. Different countries have imposed different tariffs and quotas on the goods and services that can be imported in the country. Furthermore, the random changes in the regulations create chaos in the global business environment. The random changes in the regulations impose limits on the international business activities. The gradual relief in the cross-border trade restrictions by many countries has however induced free trade which has resulted in increased growth rates of an economy. The increase in consumer demand acts as a driver to facilitate the process of globalization. Over the years, the increase in the levels of income and the standards of living has caused a general increase in the demand for various products by consumers. In the current years, the consumers are aware about the products and services that are available in other countries which have forced most organizations to work with foreign players in order to cater for the needs of their respective domestic markets. Lastly, high competition is a force that bringing about globalization. Every organization strives hard to gain a competitive edge in the market and the frequent increase in competition in the domestic market forces organizations to go global. In other words, different firms penetrate other countries markets for the purpose of selling goods and services in order to expand their market share. The firms export goods in foreign markets where the prices of goods and services are higher compared to their countries. Most organizations have achieved larger global market shares through mergers, strategic alliances and joint ventures.
According to the economics online, the rise of social media has made national boundaries irrelevant as producers use new forms of communication and marketing to target international consumers. The increasingly widespread use of smart phones has also enabled global shoppers to have easier access to virtual global markets. The rise of new electronic payment systems such as the e-wallets and mobile payment apps has also greatly facilitated the increase in global trade. Following the collapse of communism, many of the former communist countries opened up to inward investment and global trade. Over the last 30 years, the ratio of exports and imports to the national income (trade openness) has grown from 25% to around 40% for industrialized economies and from 15% to 60% for emerging economies. The emergence of multinational and transnational companies and the rise in the impact of global brands such as Apple has played a central role in the emergence of globalization. The drive to reduce the tax burden and circumvent regulation has also influenced the establishment of complex international business structures.
The positive impacts of FDI on host countries economic growth depends on factors such as human capital, trading systems, the extent of openness of the economy, economic and technological factors and the political stability. According to Moura and Forte (2010), the impact of FDI on host countries is subject to a direct relationship with the existing skills of the labor force since if the skills are low, the host country cannot assimilate and copy the knowledge transmitted by multinationals. However, the impact of FDI on the host countries economic growth is divergent.
Raymond Vernon published a model in 1966 that described internationalization patterns of organizations. Vernon focused on how U.S companies developed into multinational corporations (MNCs) at a time when American firms dominated global trade. The intent of the international product life cycle (IPLC) was to improve the trade theory beyond the static framework of comparative advantages. The IPLC described an internationalization process whereby a local manufacturer in a developed country begun selling a new technologically advanced product to the upper-class consumers in its home market. The production capabilities would be built locally to stay in close contact with the clients and also to reduce risks and uncertainty. As the demand from consumers in international market increases, production shifts abroad to enable the firms to maximize the economies of scale and to surpass trade barriers. However, as the product matures and becomes more of a commodity, the number of competitors also increases. The increase in competition challenged the innovator of the product in the home market forcing the advanced country to become a key importer or the product. The product is produced either by competitors in developing countries or by foreign-based production facilities if the innovator has developed into a multinational manufacturer (Vernon, 1979).
When a firm has developed a product successfully, it is introduced into the national and international outlets. To create demand for the product, investments are made concerning consumer awareness and promotion of the product. At the introduction stage, the profits are low, and there are only a few competitors. For example, when the grecotel hotel opened for the first time after renovation, it offered luxury and exemplary services to its guest’s something that came as a surprise to many since the concept was yet to be established in the Greek market. The introduction of new services meant that the hotel had to advertise to sell their products as the sales were minimal. At the introduction stage, the organizations are composed of high costs and inefficient production levels and high demand for capital. There are few, or hardly any competitors and the product awareness and knowledge are limited. The demand for the product is also very low. The marketing efforts that are put in place need to stimulate demand for the product, establish high prices, offer limited product variety and also increase distribution of the product.
In the growth stage, the demand for the product increases which in turn increases the sales. As a result, the production costs also decrease, and the higher profits are generated (Suttle, n.d).The product, therefore, becomes widely known, and competitors start to enter the market with their versions of the product. In most cases, the competitors offer the product at a lower sales price as compared to the innovator. The innovator company, therefore, has to increase its promotional spending if it has to retain and attract as many customers as possible.
In the maturity stage, the marketing objective is to consolidate the market share and maximize the profits. The exports to markets in advanced countries have increased making it economically possible to start local production. The product design and the production process has become stable, and the foreign direct investments in the production plants have driven the costs down because the labor and transportation costs have decreased. The offshore production facilities serve the local markets and substitute exports from the firm’s home market. The product becomes widely known and is purchased by many. Competition from other firms is intense, and the firm has to remain stable as a market leader. The product is therefore sold at low prices, and the company begins to source for other commercial opportunities such as innovations to the existing product or the production of by-products. At this stage, the consumers are asked to replace their current product with the new one. Since there is fear of the decline of the product, all measures will be put in place to boost the sales (Vernon, 1966). The marketing and promotion costs are also very high at the maturity stage. At the initial stages of maturity, growth is slow and is accompanied by strong competition and an expanded market. During late maturity, the competition is intense, and the number of competitors has decreased, and the distribution pattern is established. The marketing efforts at the initial maturity stages emphasize on market segmentation, reducing the prices and improving the services and warranty. During late maturity, the marketing efforts encompass competitive pricing and retail distribution of the product.
In the decline stage, the key markets have become saturated, and the innovator’s original comparative advantage with regards to the functional benefits has worn out. The company, therefore, begins to focus on the reduction of the processing costs instead of addition of new product features. As a result, the production process and the product become standardized which enables economies of scale and increases the mobility of the manufacturing operations. The demand for the original product in the home country declines from the arrival of new technologies and other established markets becoming price sensitive. The remaining market left is shared between the competitors who are mainly foreign. MNC therefore internally maximizes the offshore production to low wage counties because it can move capital and technology but not labor. The domestic market move to importing capital intensive products from the low-income counties. Interestingly, the machines that operated the production plants often remain in the countries where the technology was first invented. A good example is the once flourishing Daphnila bay hotel which has continues to offers products that are outdated which have been overshadowed by the new luxury hotels. At the decline stage, the product the hotel offers has to be managed carefully if the proprietor wishes to lengthen the survival of the hotel’s product. The management can endure continued survival of the product through trying to decrease the production costs such as retrenching staff, offering their product at lower prices to attract more guest and by approaching other cheaper markets such as the all inclusive.
A product lifecycle is an important tool that is useful in analyzing and interpreting of market dynamics and also assists business leaders in planning and strategy formulation for their products according to the various stages of the life cycle. In spite of its usefulness, there are key limitations to the concept. The product cycle is a theoretical concept that is difficult to implement in a real-life situation about a specific product. The concept is not always a reliable indicator of the actual lifespan of as product and adhering to the concept may lead to failure. Finally, the concept is not a certainty and is based on false assumptions (Joseph, n.d).
The electric paradigm also referred to as the OLI paradigm was put together by john dunning as an improvement of other theories. Dunning’s earlier research focused on American affiliates in the UK and the reasons for their higher productivity compared to their local competitors. He questioned the ability of the firms to compete with indigenous firms and raised questions about the advantages of multinationals as an outcome of their activities abroad (Dunning, 2001).
The eclectic paradigm has for long been the most influential framework for empirical investigations of the determinants of foreign direct investment. The eclectic paradigm offers a framework to investigate the significance of factors that influence both the initial expansion of multinational companies by foreign production and the growth associated with the activities. The framework provides a comparison between different theories by establishing a common ground between various approaches and also by clarifying the specific questions posed and finally clarify the different levels of analysis. Since the OLI is very general, it has only limited power to explain specific kinds of foreign production or behaviors of certain enterprises unless the framework is applied to a predefined specific context. The framework is context specific, and its configuration is likely to vary across firms or countries. Its applicability depends on the motivations for FDI. The basic assumption of the eclectic paradigm is that the returns to the FDI can be explained by a set of three factors: the ownership advantages of firms, location factors, and the internalization factor.
Firms must possess certain ownership advantages that are referred to as competitive or monopolistic advantages to compete in a foreign location. The advantages can compensate for additional costs that are associated with setting up and operating abroad. Such costs are however not faced by domestic producers while other advantages may also arise from the nationality of the firm involved. The second condition for international production is that the firm should be better off transferring its advantage within the firm across borders instead of selling it to a third party either via licensing or franchising.
“Internalization is the choice between investing abroad and or licensing a firm to exploit the ownership advantages possessed by the licensor,” Dunning (1993). The internationalization of ownership advantages occurs when the international market is not the best platform for transacting intermediate goods and services. Lack of an external market for firms in ownership advantages makes the distinction between internalization and ownership irrelevant. The third condition of the framework is concerned with the location of production. Some of the location advantages include a patent system, tax and exchange rate policies that multinational may either avoid or exploit among others. Although in this framework the location advantages are treated independently from ownership advantages, the decision of where to expand internationally is however not independent of ownership advantages.
It is important to note that institutions affect the capacity of firms to interact and affect the relative transaction and cost of production and innovation. With institutional ownership-specific advantages, the incentives and restrictions created by institutions favor some opportunities while at the same time discouraging others. The institutional advantages force investing firms in planning strategically on how to avoid the limits imposed by domestic laws as well as reap the benefits (Strain and Filippaios, 2008).
The concept of ownership advantage is important to the eclectic paradigm since it draws the line with the internalization theory. According to Dunning (1979), there are two sets of ownership advantages. One, those that result from exclusive access to inputs or markets and two, those that are directly associated with multi-nationality. Dunning argued that the eclectic paradigm is an alternative theory of the international production which pinpoints the essential characteristic of the mainstream ideas. The eclectic paradigm internalization advantages can be attributed to the conditions of improved organizational learning and technology development and not to the conditions for a more cost-efficient established set of transactions (Tolentino, 2001).
An interesting aspect of the eclectic paradigm elements is that they are not independent but interact with each other. For example, the value-added activities brought about by location advantages interact with the ownership advantages. The Interdependence is often misunderstood and with the ownership element creating criticism. However, in the later years, Dunning expanded the ownership advantages to including firm-specific and other advantages such as the ones that occur from engaging in foreign production.
The framework comes from other international business theories which are also influenced by economic and organizational theories. The OLI is drawn from theories of individual firms such as internalization and market power theories and their relationships with markets and integrates the theories with macroeconomic approaches to foreign products such as product life theory (Cantwell and Narula, 2001). The encompassing aspect of the OLI created many criticisms with Dunning responding to the criticism by clarifying that each variable of the OLI was constructed from well known and accepted economic and organizational theories. Dunning further clarified that the objective of the framework was to offer a platform that would help in organizing a methodology that can lead to a better understanding of the various kinds of foreign production. The internalization theory of FDI involves comparing gains from foreign direct investments and the non-FDI modes of expansion. Critics argue that the non-FDI modes of expansion such as sales and contracts are preferable because of the high costs of decentralization associated with FDI modes such as joint ventures and subsidiaries (Waheed, 1992).
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