Impact of Economic Globalisation on Economic Welfare

Role of MNCs

The activities of MNCs drive the economic globalization process to a great degree. Deepening of worldwide economic integration has increased the flow of FDI between the countries over the last two decades (Jensen 2003). MNCs have played a key role in the flow of FDIs as they now increasingly invest in other countries and grow rapidly. For E.g. Most of the new industrial growth now seen in China is based on investments from MNCs. MNCs also aided in the growth of globalization by facilitating the free transfer of knowledge and technology across the borders (Lane 1998). Transfer of such knowledge made developing countries to effectively compete with developed countries by producing world class goods and services. A clear evidence for the growth in the transfer of such technology is the growth in royalties and licensing fees flowing from developing countries to MNCs in developed countries. For E.g. Transfer of crucial technology from MNCs is now enabling Indian companies to compete successfully in the international markets in sectors like manufacturing of automobile components.

Introduction

Globalization is the latest buzzword that has dominated the global business for the greater part of the last two decades. Forces like the progressive globalization of trade and finance have reshaped the global economy which surpassed the peak levels that were reached during the pre-World War I period. Academic researchers have tried to define globalization in many ways with little success. The result was that globalization became a term with a bewildering range of definitions and meanings.

Many economists now recognize economic globalization as an inescapable feature of the global economy today. Many economists and academicians argue that there are a lot of potential advantages of globalization. For instance, it is widely noted that globalization and capital investments it brings from rich countries to poorer ones contributes to the economies of the latter countries by stimulating domestic demand, improving productivity through the use of efficient manufacturing practices and improved access to sophisticated technologies. Globalization can also have a lot of harmful effects on businesses that are operating across the world. Companies which are operating in the foreign markets can be exposed to a varied range of political, economic, and social risks. The problems that businesses face when operating in foreign markets range from dealing with hostile and unfriendly governments, dealing with financial risks like exchange rate risk and the failure to understand the tastes and preferences of customers in the foreign markets. Since the governments of their home countries often have a limited say in the affairs of a foreign country, many companies end up suffering at the hands of foreign governments or even totally lose their investments made in those countries.

THEORITICAL FRAMEWORK

There is large scale evidence pointing out to the negative effects of globalization. The economics literature is full of evidence pointing out to the various risks that businesses operating in the global market are exposed to (Krugman and Venables 1995 & Rodrik 1997). In this assignment, an attempt will be made to analyse the harmful effects that globalization has on the businesses (MNCs) operating across the world. Support for the argument will be built through a thorough review of the extant academic literature. This report builds its arguments by drawing from the existing economics literature on globalization and its damaging effects.

NEGATIVE EFFECTS OF GLOBALIZATION

Globalization can lead to a number of negative effects on the people and the countries which are thrown open to the global forces. Some of the negative effects of globalization are:

• Globalization can also lead to higher poverty rates in poor countries by decreasing the demand for unskilled labourers in the economy. During the 1980s and 1990s, trade liberalization lead to an increase in the demand for skilled labourers relative to unskilled labourers, and deterioration in income distribution (Figini and Gorg 1999).  Sophisticated technology (machinery) introduced by MNCs needs more number of skilled labourers to work on it.

• MNCs need to acquire vast swathes of land when start their operations in poor developing countries. Many people like agricultural labourers and tribal people are dependent upon these lands which are rich of minerals and other natural resources. The acquisition and conversion of these fertile lands into commercial hubs takes away the livelihood of people who are depended upon them (Bardhan 2004). For E.g. the expected entry of Posco into the Indian market led to allegations of the MNC taking away the livelihood of tribals who are depended on the land.

• Rich countries like USA and UK try to keep the gap between skilled and unskilled workers by keeping a tab on the immigration of low skilled workers into the country. But globalization made it possible to offshore many semi-skilled jobs (Tang and Wood 2000). For E.g. a lot of semiskilled jobs like data entry and call centre jobs have been moved from the west to low cost countries like India and Philippines resulting in job losses in the developed world. This made many semi-skilled workers in the rich countries to lose their bargaining power and an increase in their wage gap with skilled workers.

• Outward FDI from rich countries due to globalization leads to loss of productivity job losses in the developed countries. Outward FDI in many cases is directed at establishing manufacturing facilities and offshore customer care call centres in other markets where labour costs are cheaper (Tung 2007). For E.g. Microsoft has established its biggest development centre out of Redmond in Hyderabad, India. As a result lot of its software development jobs have been moved to Hyderabad.

GLOBALIZATION AND ITS ASSOCIATED RISKS

Below are some of the ways in which globalization exposes businesses to political, social, and economic risks:  

Economic Globalization and Financial Risks

Globalization makes it imperative for firms which are operating in countries across the world to deal with different currencies, tax structures, accounting policies, and other financial regulations that are in place in a country. Dealing with these kind of monetary intricacies pose significant financial risks for businesses (Das 2006). Operating in multiple countries exposes businesses to adverse changes in forex rates. Unfavourable exchange rates can hit the margins of businesses as well as lead to fluctuations in the prices of goods sold in those countries. MNCs generally enter countries which have low tax rates and which make it simple to take the profits back home. A sudden change in the tax structure in countries can adversely affect the performance of MNCs. For E.g. the Indian government decided to retrospectively change the tax rules for foreign acquisitions of domestic companies. This had suddenly raised the tax liability of MNCs like Vodafone which acquired some businesses in India (Times of India 2013). Businesses operating in multiple countries also need to prepare their books of accounts as per multiple accounting policies followed in different countries. Noncompliance with both domestic and internationally acceptable accounting policies can pose different types of legal risks for MNCs.

Infrastructure Risk

Globalization has led to the global integration of societies on a scale which was never seen before. While providing the engine for rapid economic growth, global integration of societies meant that the efficiency of infrastructure is the key to the competitiveness of businesses. In some of the fastest developing parts of the world, the availability of important infrastructure resources is already falling short of the demand. Energy supply and transport are two of the important resources which have failed to keep up with the growing population, urbanization, and growing commerce. Globalization led to the expansion of businesses across the world rapidly. This global reach made MNCs more and more dependent on global infrastructure and consequently more prone to the risks resulting from the failing infrastructure in both the rich and poor world. For E.g. India, a fast growing developing economy faces severe shortage of electricity (Overview of power sector in India 2005). India faces acute power shortages due to a number of reasons like widespread theft of power, inefficient power transmission system, bad government policies related to power, and less reliance on nuclear energy for power generation. As many MNCs like G.E. and IBM outsource their business operations to India, frequent power cuts forced them to invest heavily in building their own standby power generation capacity. Many developed countries like Japan too heavily rely on the import of energy resources. As the demand for energy resources is growing due to the increased demand from emerging economies like China and India, energy supplies have become increasingly vulnerable. Transport networks in developing countries are also coming under strain due to the growing number of vehicles that are entering the roads in these countries. This is putting additional strain on the additional stress on the already limited transport infrastructure and threatening the supply chains of businesses which are operating in these countries. The consequence of such infrastructure risks arising due to globalization for businesses is either costly disruptions to their business processes or the need to invest in building their own infrastructure.

Political Instability

The march of globalization has facilitated the free movement of capital, innovation, labour, and other resources across the borders freely. The end result of all this free flow of resources across the borders for MNCs was that most many of their assets were permanently based in developing countries with unreliable governments. Assets which are based in these countries are vulnerable to expropriation by the nationalist governments there. Many populist parties in developing countries ride on the waves of discontent against foreign companies to wrest power from the existing governments that had earlier embraced globalization (Ian Goldin 2010). For E.g. Hugo Chavez’s Bolivarian revolution of 1999, resulted in many of the businesses owned by foreign companies (like Sidor of Argentina) being nationalized (Martinez 2008). Governments of home countries of MNCs often have very limited or no influence over such authoritarian regimes and hence can’t help the MNCs in times of trouble. For E.g. assets of the Indian based Jindal group were seized and its equipment seized when it had differences with the Bolivian government over a contract signed between them (Jamasmie 2012). But the Indian government could not come to the rescue of Jindal Group as it had little influence over the latter. The result of all this is that businesses may permanently lose their investments made in these countries. In addition to the risk of expropriation, political instability and civilian unrest will have an impact on businesses which depend on these countries for raw materials, safe passage of goods, and business processes like production and IT support which were outsourced to these countries. In certain cases, MNCs may be forced to relocate their facilities to other safer countries.

Interconnectedness Increases Risks for Businesses

History abounds with examples of civilizations that were initially small, but later grew big enough to utilize their resource base and then end up collapsing. The same is the case with businesses which are now expanding across the globe. Economic globalization makes businesses being interconnected where the components and other inputs made in one country are utilized in products being made in other countries. Companies like IKEA and Dell utilize component manufacturers located in different parts of the world for the products they make. This simply results in the supply chains of companies getting stretched across the countries. A simple disruption in the business operations in one part of the globe can impact the businesses in the other part of the world. Natural disasters, political instability, and economic crisis can lead to a temporary or even permanent disruption in the business operations in certain parts of the world (Schaeffer 2003). For E.g. Honda depends on its plant in Thailand for the supply of certain key parts used in the cars made in India. The severe floods of 2011 in Thailand disrupted the manufacturing operations in Thailand and lead to a disruption in the supply of components to India (Honda Car India 2011). Honda had to stall its manufacturing for some months, resulting in a huge loss of trust with the consumers. There is also strong evidence that supply chains are growing more and more complex. Such extensive supply chains increase the risk of cascade failure. Cascade failure refers to the system-wide shut down due to the failure of one or more critical elements and pose a grave threat to lean and long supply chains. The causes of cascade failures in supply chains are numerous and include operational technological risks, natural hazards, economic crisis and political disruptions. In 2000, an accidental fire in the factory of a component supplier which supplied some important parts to Ericsson resulted in a loss of US$ 390 million and production shutdown for some days.

Difficulty in Understanding the Consumers’ in Other Markets

One of the key arguments in favour of globalization is that as businesses expand globally, it increases its total market. This can give them good economies of scale as well as give a boost in their revenues. But this comes at a big cost in the form of dealing with consumers with consumers with multiple cultural backgrounds (Cui and Liu 2000). Exposure to consumers in multiple countries can pose a big social risk for businesses. Products which are suitable in one country may not be liked by consumers in other countries. Apart from just the products, the marketing activities of businesses used in one country may not be suitable for other countries. For E.g. Consumers in India don’t prefer Beef and Pork products which are highly preferred in western markets. Western fast-food restaurant chains operating in India had to come up with new recipes like Chicken Hamburgers to consumers in India. Such kind of modifications like ethical segmentation of consumers in developing countries can sometimes be quite expensive (Khatib, Stanton, and Rawwas 2005). Despite of all these efforts, businesses could still be accused of products and practices which are supposed to hurt the sentiments of consumers in such countries.

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Increased Health Risks to Human Resources

As the borders of countries open up to welcome the businesses and facilitate a more profitable exchange, countries also expose themselves to a range of parasites and pathogens. Recent pandemics like SARS and Swine Flu spread globally, mainly because of the business executives who were moving across the borders. Pandemics pose a severe risk to the human resources of the businesses if the pathogen targets people of the working age. A report by the U.S. department of health advised MNCs to assume that a global pandemic like influenza can result in 50 percent of the total workforce needing a break from work for at least seven to ten working days (Department of Health 2007). As the functioning of any business is totally tied up with the workforce, employers also need to incur additional costs towards implementing preventive measures and for treating the infected employees. A reduced availability of workforce in the event of an outbreak of a global pandemic can have knock-off effects on the delivery of crucial supplies and provision of services. Businesses in the automotive sectors which follow just-in-time inventory supply models will be vulnerable to any extended product shortages. Just like in the case of natural disasters discussed above, the outbreak of a global pandemic can lead to a shortage of some key goods and services essential for many manufacturing processes. Health risks not only impact the Human Resources of businesses but also the customers and markets. Illness, fear, and restrictions on the movement of people and goods can influence the choices made by the customers. Businesses who are used to the economies of scale resulting from global operations may be forced to rethink their business strategies. For E.g. as per a report by Morgan Stanley, the outbreak of foot-and-mouth disease in 1995 has cost the UK beef industry US$ 5.8 billion due to fall in exports and sales (Morgan Stanley 2006).

DISCUSSION AND CONCLUSION

From the above discussion, it is clear that economic globalization is like a double edged sword and has its own share of disadvantages. It can have both positive as well as negative effects on the businesses which are operating across the borders. The dynamic power of globalization has increased the source and speed of the transmission of risks impacting the businesses faster than before. Globalization can have a number of harmful effects in both the developing and developed countries and expose the MNCs (businesses) to political, social, and economic risks. While some of the risks can cause some minor problems in the smooth functioning of businesses, others like the risk of expropriation of property by foreign governments and failure to understand the social and cultural conditions prevalent in a foreign market can threaten the very long term survival of the business. The question whether the cons of globalization outweigh the pros   depends upon the business organization in question and the countries in which it operates. Both the businesses and governments should strive hard to minimize the risks that firms operating across the borders are exposed to. Governments should make it easy for businesses to operate in the global markets by formulating business friendly policies. Similarly, executives should come out with innovative business strategies to effectively handle various risks that businesses are exposed in foreign markets. Such steps from governments and businesses will make it hassle-free for businesses to expand across the globe and boost the global economic development.