Multinational companies and the challenge of globalization - Globalization Essay Example

 

 

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INTRODUCTION
A multinational company (MNC) is defined as company that owns or controls its productions or service facilities in more than one country. In plain words, a multinational company not only owns (partly or jointly) a branch or productive facilities outside its country. A few examples of such companies can be Ford, BMW, and Coca-Cola etc. According to an estimate 200 MNC control about one third of global production and half of the world economic units are multinational companies. There are only 14 countries whose GDP exceeds to the turnover of Exxon. The world top 100 MNCs own about US$2 trillion assets outside their home countries, which form about a quarter of world stock in foreign direct investment (FDI). The recent wave of mega-mergers has made many MNCs much larger and powerful than ever increasing their power many fold.

The MNCs have played an important role in creating globolisation. Given their international reach and mobility, prospective countries and regions often have to compete with each other to have MNCs locate their facilities as they contribute in tax, revenue, employment and economic activities to host countries (Stopford, 1998).

 

Such development has led to globalization that refers to the worldwide economical, political and technological exchange of ideas among the states in the modern world. It is used to describe, how world is becoming economically and politically unified. The economic aspects of globalization include trade, investment and migration across the countries. Globalization believes that human being should have greater access to vast number of goods ranging from cheap labour in third world countries to bigger overseas
investments. Multinational companies invest directly in different kind of assets in foreign countries, where free migration allows individuals to find employment in areas, where there is labour shortage (Soysa, 2003).

 

Globalization and internationalization increase opportunities for cross-cultural contact.

Despite all the benefits MNCs are foreign companies setup in a foreign cultural environments that also give rise to different set of problems and misunderstanding.

The problem arises due to differences in language, values and behavioural norms, which some times leads to failed negotiation and failed investment plan.  This report will initially discuss the role of MNC in economic development and then look up at problems in terms of socialization in the wake of globloization.

 
MNCs AND ECONOMIC GLOBALIZATION

The history of MNCs coincides with the rise of globolisation, which is a non-linear process. It was the eve of Word War I, which spurred the entrepreneurs and firms to drive the manufacturing and production at global scale. However, the true global economy started to take place between 1950s and 1970, which was initially resisted by the Communist bloc, but the Japan economic miracle made it possible to drive the global integration of capital and commodity throughout the world (Geoffrey, 2005).

 

 

MNCs are the most powerful institutes in the world, which in the process of globalization are transforming the world through rapid growth. The reason for such growth is the process of globalization that started after end of Cold War in 1991.  Since the end of Cold War, states all over the world removed barriers to the international movement of goods, services, capital and technology. As the walls of nations and state crumbled MNCs
thrived and spread across the borders in two ways trade and foreign direct investment (FDI). Both these factors have given enormous benefits to the world economy during the 1990s (Soysa, 2003).

 

This process of expansion not only increased economic pace of various countries, but it also brought the world together in many ways. For example the arrival of information technology made a way for new breed of corporation (Microsoft and Cisco etc) that changed the competitive landscape dramatically. This new age of digital revolution allowed these corporations to develop and run complex productions and networks spanned all over the world. As the world came closer together, new managerial techniques were invented with the foreign partners to cater for the local customers, while polices were made and dispersed from home. By the early 1990s, much of the developing world welcomed foreign goods and services. During the decade the firms also entered through FDI into Eastern Europe and Soviet Union to develop their economies (UNCTAD, 1999).

 

The foreign direct investment involves a long reflects a lasting interest in the host country. It implies that the investors have enormous control in another country’s economy due to its own interest, which ultimately leads to economic development. Thus any increase in FDI flow is directly associated with increase in GDP. FDI is undertaken by large and technologically advanced firm, which accelerate the speed of economic pace on one sided and also helps in transfer of technology in the host country with heavy return for the firms (Soysa, 2003).

 

For example the world top 100 non-financial firms have foreign assets worth US$1.9 trillion employing about 6.5 million people, which results in foreign sales of $2.1 trillion. Majority of these MNCs are from US and Japan (89 percent). MNCs are the main conduits of FDI and cash flow in the developing countries. This the speed has accelerated since 1980s gaining momentum in 1990s and is the main driving force of globalization.

The worldwide flow of FDI tripled between 1993 and 1999, even in the middle of Asian financial crisis, the developing world received $165 billion, which was an average of $35 billion from 1987 to 1992. In recent times China and Brazil received huge amount of FDI due to their rapid economic growth. In 1998, China and Brazil alone received about $45 billion and $28 billion respectively. The figures below shows the world FDI stock in 1997 was estimated at 3.5 trillion, out of which about $1 trillion was located in developing countries such China, Singapore, Indonesia, Saudi Arabia and Poland boosting their economies (Savitsky & Burki, 2000).

 

 
Globalization is identified with many trends since World War II, which includes international movement of commodities, money, information and people. One of the most important roles of globalization is its increasing economic role in international trade in world economy.  Free trade is strongly supported by economically powerful nations, such as US, UK and Japan as they own 89 percent of MNCs.  In recent days China and India are also becoming advocates of free trade as their economies are opening up to the international market. Free trade   allows not only free flow of commodities across the borders, but it also increases the pressure to raise the tariff to protect domestic products (Kennedy, 2001).

 

The firms who are investing overseas are accelerating the pace of globalization making world trade and financial markets more integrated. For example some countries in Asia have been more swiftly integrated their per captia income have increased since 1970 at the same level as developed countries as shown in the chart below (IMF, 2000).

Source: IMF 2000

 

If FDI helps the host country only, the globalization helps multiple countries to better manager their output and consumption volatility, which means that the countries are able to diversify its income risk to world markets. Hence developing countries are basically specialized in their output, and according to the theory, they can obtain greater gains through international gains. According to IMF (2000) study the developing countries as a whole have increased their share of world trade from 19 to 29 percent between 1971
to1999 with variations, such as Asian countries have done better compared to African countries. In the end it also depends what kind of product, countries are importing. Singapore, Japan and Korea are more into manufacturing which has brought them progress and development more quickly compared to other developing countries. Majority of the developing countries economies are based on agricultural commodities, such as food and raw material that proves less beneficial for these poor countries, unless they change their economic structure.

 

During the 20th century world income per captia has grown considerably, even though the income gap is huge between the developed and developing countries, however the recent development has increased income level considerably, especially in the last two decades due to free trade and massive flow of FDI. However, it is not mere income level which has been on the rise only, the poor countries in the past two decades have improved a lot. For example countries like Sri Lanka and India and China have moved ahead and are showing considerable development over all. Even though the gap between poor and rich countries is still considerable, yet poor countries are still have a better standard of life and enormously improved in health and living in the past fifty years.

 

 

 

The foreign firm investment not only brings expansion in capital, but it also increases technical skill and innovation of the host country. It enables the local population to learn business skills, such as production methods, management techniques, access to export markets and so on, which are highly valuable for developing countries economies. For example when Toyota setup car plants in countries outside Japan, it required higher level of standard to maintain the quality of it products, which means training the local workers. Thus if Toyota gets the competitive advantage, the host countries gets the skills and jobs. The recent of joint ventures in China with Japanese companies is also one of such move
by the Chinese entrepreneurs to get skill directly by working with Japanese. And for Japanese it means lesser investment and more profit (Lall, 2002;  Urakami, 2006).

 

One of such successful examples are the Asian Tigers; Singapore, Korea and Taiwan. The economies of these countries prospered through export led strategies with the use of cheap labour, which became skillful, and in the end became creative in itself. Korean firm Samsung, Kia, Hyundai and Singapore’s Creative are few examples of successful local companies. Similar policy has been adopted by China, which has attracted huge amount of FDI at the cost of cheap labour. While the Asean economies, such as Malaysia, Thailand, Indonesia and the Philippines are moving towards the status of new industrlized countries and following the path of Singapore and Korea. These countries have competitive edge and market efficiency and their governments are flexible and open to foreign firms. It is predicted that within a decade they would be in much more advanced stage primarily due to the skill and technology being acquired from foreign firms (Yussof, 2002)…

 

The globolisation of multinational corporations has allowed FDI (foreign direct investment) flow into developing countries as depicted in the chart (above) boosting their revenue and economies. There has been intensive FDI flow during 1990s and the cash flow has been increased, which helped developing countries to stabilize their economies. For the investors, such investments bring huge return in short time due to the rapid growth in developing countries economies, while host country gets skills and job, thus making it a win win situation for both parties (IMF, 2000).

 

GLOBALIZATION AND EMERGING PROBLEMS
Socialization is a process by which an individual learns behaviour that is acceptable in an organization (Doz and Prahalad, 1984).   Social control gives power to the norms, which are acceptable inside in organization and guide the behaviour of its members.  Thus we can say that MNCs makes it ascertain that behaviour of the mangers in company is in the best interest and which do not require any intervention from headquarter.

 

The companies who desire to achieve social control emphasize the creation of shared norms and values and use it as mechanism to control overseas branches. For example Japanese firms send their managers overseas to establish control to promote company culture, which is closer to headquarter. However the process of socialization differs from company to company, for example Unilever which is a UK firm groups top managers in international training camps in order to homogenize corporate culture, who in return propagate the same culture in their own working environments ( Cieri and Dowling, 1994). Thus in this way MNCs make it certain provide control by providing means without creating the stifling conditions in working environments. Despite such ways there are many problems that MNCs are facing due to the global expansion are discussed below.

 

 

Expats relocation problem

Even though firms constantly train their staff and send them for trading, in recent years,

expat refusal  rate has been on the rise, especially when it comes to developing countries. This refusal is forcing international organization to develop a multi-cultural management teams to increase management effectiveness. Normally companies have difficulties in managing operation in countries such as China, India, Russia, Turkey and Eastern European countries.  The reason for Expats refusal are several such as less develop economic infrastructure, cultural distance, higher personal risk (social, legal and safety etc) and increased business complexity, all of these factors makes managing the subsidiary more complex to manage an outsider. Added to these are the cultural distance that makes the overseas destination less desirable for expatriates and his family to relocate (Doz, and Prahalad,1984).

 

 

Cross Cultural Shock
If globalization has increased opportunities for firms, it has also increased misunderstanding in cross-cultural contacts. For example the relocated firms manager find it hard to understand the cross-border working due to differences in language, values and norms..  For example the problems in communication often occurs when there is cultural asymmetry, which results in the mistrust between the local workers and the headquarters representative. The problem arises when parent company want to enforce headquarter norms in their foreign branches which may not be culturally acceptable in the culture leading to frustration and mistrust between the workers and management.

 

Often the parent company underestimates a social political or environmental problem and asks its manager to implement without understanding the mores and norms of the host country. Such misunderstanding sometimes leads to failed negotiation and failure in to become successful in the market (Dowling and Schuler, 1994).

 

 

Gender Issues
Masculine cultures tend to be more patriarchal, while feminine cultures tend to have greater inequality between the sexes. For example Japan has the highest amount of masculinity dimension in workplaces. Compared to West, majority of the Asian countries have similar way of working, while Scandinavian countries have more feminine cultures. National culture is a system of values, thoughts and beliefs of members of a society.

Even though masculinity and femininity are not related to way of working, but the fact is that individualistic cultures are more open for women. Masculinity/femininity dimension seems unrelated to the proportion of managers. Thus in the wake of globalizations any introduction of management techniques which conflicts between MNC and its employee can create problem in working environment. Normally MNCs follow host country culture regarding the employment opportunities, while in some cases corporate culture is carried over to the host countries  and no limitation  is kept on employment opportunities as  study in Taiwan and Thailand suggests (Deva  and Lawler,1998)

 

 

Power Distance
Power distance is related to the extent to which a lower status person is accepted and how he legitimizes power and influences a high status person.  Power distance is greater in collective societies such as India, China, Singapore and other Asian countries, where individuality is not allowed. Such relations depend on MNCs culture, how they view a host country. But the normal way for a foreign firm is to accept the host culture or accept part of it and incorporate it in such way that company culture does not seem alien in the particular country. Normally MNCs are open and there is little power distance in Western companies and working environment is more relaxed as a result for most of the people in developing country, working in an MNC is the first choice (Cushner and Brislin, 1996).

 

The challenge of globalization is not just economic, but it also includes political, cultural and orientation to work place. Even though organization have adopted strategies to tackle the issues related to workers and their working right, but global firms main emphasis is on cost reduction, quality curtailing and cutting jobs, which are meant to save their revenue. Such policies have put firms to try all kind of tactics, such as hiring workers on short term and contract.  (Cooper, 2000). Faced with globalization, the management seeks more wage flexibility, induced more to shift work and internal deployment of workforce, to cut down the cost. Such trends have given rise to less secure and part time jobs where workers do not feel themselves attached to the firms they are working with. The result of such trends is leading to the erosion of loyalty between employer and employee due to the lack of job security.  The trend of globalization has resulted in job losses in some countries. For example in Ghana 132 state companies were sold, which resulted in job loss for 100,000 thousand people  (Debrah, 2001).

Even though globalization is accelerating pace of international migration of workers and creating skill shortages in both developed and developing countries. For example in developed countries, there is a lot of emphasis on out sourcing to developing countries, such as India and China, which is cutting jobs in Europe and US creating job problems at home .The economic globloization is even changing the concept of workplace as virtual workplace helps in combining multiple production sites allowing producers to cut cost using cheap labour for themselves and low wages for workers. (Horton, 1998).  This increasing competition is leading to unethical practices and pushing the downward labour standards in developing countries.

 

Globloization of business have changed the labour unions making them powerless. The problem in developing countries is joblessness, if workers protest, they loose job or firms move to some other destination, such tactics have led to creation of negative influence of transnational companies. For trade union workplace no longer represents a place where they can defend their right or ask for more benefits and share profits, instead workers have become disposable items (Bhagwati, 1994).
THE CHALLENGE ARISING FROM THE DIFFERENT ORIENTATIONS TO WORK

The global firms are influencing local employment practices as well. The local branches emulate headquarters norms and apply the same standards and practices over the workers. Such over employment practices across division and national locations enhance the corporation power. It has been observed that globloization has reversed the diffusion process that was linked with multi-culturism. The workers feel themselves a small part of a bigger corporation, where they are little understood, used and then dumped.  Such thinking runs contrary to the idea of cultural integration, which the proponents of the anti-globalization often mention.

 

CONCLUSION
The globolisation has helped in creating new ideas and business through media at a very swift speed developing a global culture. For example consumer all over the world can have access to similar products or same information. The other aspects of globalization include revolution in information technology and transportation, which has a given rise to the concept of global village, where information travels across the globe at lightening speed.

 

Multinational Corporations are growing and spreading the global economy that was never adopted in the past, however going to an alien culture also gives rise to a host of problems as discussed earlier which in tackled in many ways. In some cases they are accepted as per host country culture, while in some firms mix host country culture with their own culture creating a mix a culture so as not to alienate their workers in the middle of foreign culture. Such different strategies allows foreign companies to work smoothly facing the challenges in the wake of globloization, yet contributing to the host country economy smoothly.

 

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Graham and Erika Wada (2001), Foreign Direct Investment in China: Effects on Growth and Economic Performance, Institute for International Economics, Washington.

 

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