Globalization Benefits and Challenges

Globalization creates opportunities for many countries to experience economic growth. Economic growth is the increase in the amount of the goods and services produced by an economy over time. It is conventionally measured as a percentage change in the Gross Domestic Product (GDP) or Gross National Product (GNP). These two measures, which are calculated slightly differently, total the amounts paid for the goods and services that a country produced. As an example of measuring economic growth, a country that creates $9,000,000 in goods and services in 2010 and then creates $9,090,000 in 2011 has a nominal economic growth rate of 1 percent for 2011.

A way of classifying the economic growth of countries is to divide them into three groups: (a) industrialized, (b) developing, and (c) less-developed nations.

• Industrialized nations have economies characterized by a healthy climate for private enterprise (business) and a consumer orientation, meaning the business climate focuses on meeting consumers’ long-term wants and needs. These nations have high literacy rates, modem technology, and higher per capita incomes. Historically, industrialized nations include United States, Canada, Japan, South Korea, Australia, New Zealand, and most Western European nations. Newly industrialized countries include Russia and most other eastern European countries, Turkey, South Africa, China, India, and Brazil, among others.
• Less-developed nations, also known as least-developed countries (LDCs) have extensive poverty, low per capita income and standards of living, low literacy rates, and very limited technology. Often these nations lack strong government, financial, and economic systems to support a healthy business community. Their economies tend to be focused on agriculture and production of raw materials (such as the mining and timber industries). There are many less-developed nations in the world, with most located in Africa and Asia.
• Developing nations are those that are making the transition from economies based on agricultural and raw-materials production to industrialized economies. They exhibit rising levels of education, technology, and per capita incomes. Governments in these nations typically have made strong progress to improve the climate for business in order to attract business and economic investment. There is a growing list of developing nations, including many countries in Latin America and Asia.

Those in favor of globalization theorize that a wider array of products, services, technologies, medicines, and knowledge will become available, and that these developments will have the potential to reach significantly larger customer bases. This means larger volumes of sales and exchange, larger growth rates in GDP, and more empowerment of individuals and political systems through the acquisition of additional resources and capital. These benefits of globalization are viewed as utilitarian, providing the best possible benefits for the largest number of people.

For global companies, often referred to as multinational corporations (MNCs), common benefits of expanding into developing markets include unsaturated demand for new products, lower labor costs, less expensive natural resources, and other inputs to products. Technological developments have made doing business internationally much more convenient than in the past. MNCs seek to benefit from globalism by selling goods in multiple countries, as well as sourcing production in areas that can produce goods more profitably. In other words, organizations choose to operate internationally either because they can achieve higher levels of revenue or because they can achieve a lower cost structure within their operations.

MNCs look for opportunities to realize economies of scale by mass-producing goods in markets that have substantially cheaper costs for labor or other inputs. Or they may look for economies of scope, through horizontal expansion into new geographic markets. If successful, both of these strategies lead to business growth, with stronger margins and/or larger revenues. There is particularly strong opportunity for business growth in markets where strong economic growth is also projected. In these areas, incomes are rising. In many cases, local populations can now afford goods and services that were previously out-of-reach, including many good produced in industrialized countries. Global companies stand to capture stronger growth and profitability if they can make headway into these markets.

At the same time, international operations contain innate risk in developing new opportunities in foreign countries.

• Ethical Business Practices: Arguably the most substantial of the challenges faced by MNCs, ethical business practices in areas such as labor, product safety, environmental stewardship, corruption, and regulatory compliance have historically played a dramatic role in the success or failure of global players. For example, Nike’s brand image was hugely damaged by reports that it utilized sweatshops and low-wage workers in developing countries. In some nations, particularly those without a strong rule of law, bribing public officials (e.g., paying them off with gifts or money) is relatively common by those seeking favorable business terms. Although national and international laws exist to crack down on bribery and corruption, some businesspeople and organizations are pressured to go along with locally accepted practices. Maintaining the highest ethical standards while operating in any nation is an important consideration for all MNCs.
• Organizational Structure: Another significant hurdle is the ability to efficiently and effectively incorporate new regions within the value chain and corporate structure. International expansion requires enormous capital investments in many cases, along with the development of a specific strategic business unit (SBU) in order to manage these accounts and operations. Finding a way to capture value despite this fixed organizational investment is an important initiative for global corporations.
• Public Relations: Public image and branding are critical components of most businesses. Building this public relations potential in a new geographic region is an enormous challenge, both in effectively localizing the message and in the capital expenditures necessary to create momentum.
• Leadership: It can be difficult for businesses to find effective organizational leadership with the appropriate knowledge and skills to approach a given geographic market successfully. For every geography worldwide, unique sets of strategies and approaches apply to language, culture, business networks, management style, and so forth. Attracting talented managers with high intercultural competence is a critical step in developing an effective global strategy.
• Legal and Regulatory Structure: Every nation has unique laws and regulations governing business. MNCs need access to legal expertise to help them understand in-country laws and comply with applicable regulations. It is important for businesses to understand the legal and regulatory climate for their industry and type of organization before entering a new market, so that this information can be factored into the business case and strategic decisions about where and how to expand globally, as well as strategic and operational planning to ensure profitability.

Potholes in Poland: Poor road infrastructure can be difficult for businesses that rely on road transportation.

For organizations operating in developing and less-developed countries, additional challenges can arise, particularly in the following areas:

• Infrastructure: Infrastructure includes the basic physical and organizational structures needed for a society to operate and for an economy to function. It can be generally defined as the set of interconnected structural elements that provide a framework supporting an entire structure of development, such as roads, bridges, water supply, sewers, electrical grids, telecommunications, and so forth. It also includes organizational structures such as a stable government, property rights, judicial system, banking and financial systems, and basic social services such as schools and hospitals. A country’s infrastructure will help determine the ease of doing business within that nation. For example, a country with poor road conditions and intense traffic may not be the best place to conduct business that requires goods to be transported from city to city by land. Poor infrastructure makes it difficult for businesses to operate effectively because they have to shoulder additional cost and risk to make up for what the country’s society does not provide.

• Technology: The level of technological development of a nation affects the attractiveness of doing business there, as well as the type of operations that are possible. Companies may encounter a variety of technological challenges doing business in foreign countries, such as training workers on unfamiliar equipment; poor transportation systems that increase production and distribution costs; poor communication facilities and infrastructure; challenges with technology literacy; lack of reliable access to broad-band Internet and related technologies that facilitate business planning, implementation, and control.