The New Paradigm of Globalisation

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Introduction

The subject that will be reviewed in this paper is the impact globalisation is having on governments and multinational firms within developing economies, as well as the new risks and costs associated with the globalisation. This review is based on Ian Bremmer’s Harvard Business Review article ‘The New Rules of Globalisation’ published 2014, in volume 92, January-February, pages 103-107. Globalisation has made developing nations’ governments reluctant to grant multinationals unbridled access to their local industries, resulting in the implementation of state capitalism. With the 2008 decline of the globalisation trend, the world has seemed to enter a phase of ‘guarded globalisation’. Indeed, emerging economies specifically, are taking steps to ensure the strategic protection of essential local industries, and to prevent foreign firms from pushing their agendas domestically. In order to better accommodate these new risks, Bremmer suggests the contributing factors to this variation of globalisation, illustrates several strategic approaches executives may follow to lessen the impact of guarded globalisation. These approaches highlight multinationals’ strategic value to the host government and domestic government.

Body

Bremmer argues that one of the main reasons for guarded globalisation is that governments in various developing economies are inclined to change laws or rules regarding the way business may be conducted within their borders. This potentially gives local firms the advantage while erecting financial and political barriers for foreign firms. State capitalism differs from the regular sense of the word, in that the government will seek to control the nation’s market wealth and dominate its economic development, whereas in free markets, the goal is profitability and widespread economic growth. The resurgence of state capitalism influences free markets, thus changing the known globalisation paradigm. A valid point stressed by Bremmer is that if foreign firms wish to cope with the new rules of globalisation they must not only contend with locally-backed firms, but also express their strategic value in the host market.

Nevertheless, foreign firms still have a fighting chance. The author elaborates several strategies for riding the wave of guarded globalisation in the article.

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The author distinguishes guarded globalisation as a different essence of globalisation; one that is slow-moving, selective and prone to nationalism. This suggests that governments pick the nations they wish to do business with, where they place state investments, and select the state-owned firms they want to support.

The movement of guarded globalisation may be attributed to the following factors.

  1. Governments are now discovering threats from opening industries to foreign firms because domestic businesses and customers often boycott the foreign entrants.
  2. Certain countries have amassed hefty foreign exchange reserves and increased exports. As such those nations are not looking to draw large foreign investments.
  3. Governments’ national security interests have expanded because of modern threats such as cyber espionage, telecommunications, information technology and financial instability.
  4. China doesn’t follow but instead institutes new international business rules and its socialistic proclivities may threaten globalisation.
  5. Developing economies’ leaders are strategically intervening to create one-sided playing fields that lend the upper-hand to domestic players.

These five factors are fairly comprehensive list of influences, however a 6th factor may be that governments in all developing economies (Middle East, Asia, South America, Africa), not just the largest BRICS economies, are realizing the strategic importance and economic value of their industries, and are no longer content with allowing foreign multinationals to exploit these sectors. Having obtained strategic industry assistance from previously invited foreign entrants (Pfizer, p103, column 1), they are now learning to ‘ride the bike’ without training wheels, desiring to operate their important industries themselves (Cipla, p103, column 1).

Bremmer makes good on his introductory assurance by describing how the plates have shifted with regards to the rise of state capitalism in important emerging markets giving strong examples Russia, China and the UAE, where the degree of state-ownership has become valuable and economically beneficial. Costs and risks associated with state capitalism include but aren’t limited to: having to compete with state-backed firms, competing for scarce resources, contending with local price ceilings, and increased government corruption—countries tend to differ in the degree of state capitalism.

A major finding in this article proposes that although in the recent past, MNEs were granted entry to worldwide industries (food products, clothing), other more key sectors (aircraft manufacturing) were inaccessible. However, in the current environment of guarded globalisation, any industry sector could be deemed as having strategic interest to the state depending on the local government’s approach and political disposition. In conclusion, many host countries are now drawing official scrutiny, now that the state’s interests have consciously extended beyond previously vital sectors.

Whereas state capitalism aims to control market wealth through governments playing a dominant role in public sector firms, free market capitalism proposes maximized profits and economic growth for all parties involved. The article clearly reflects the popularity of the state controlling the market, among nations such as China, Russia, India and Brazil, and that controlled markets are crucial to their sustained economic growth and increasing the autocratic regime’s chances of staying in power, allowing greater control to be exercised over job creation and local living standards.

Developing Economies & State Capitalism

Bremmer declares that Chinese firms account for more than half of the nation’s GDP and jobs, the majority of which are state owned, but didn’t provide adequate referencing to back this claim. An implied limiting factor is the effect a nation’s GDP data has on its market, considering these statistics are ‘regressive’ and generally there is a time difference between the end of the financial quarter and the release date of the GDP figures. Economic challenges for China not listed by Bremmer are: their misleading economic policies which result in China’s dependence on investments and exports, particularly from West, for the growth of their economy, broadening of national income gaps, China’s frail banking system, and the threat of rising environmental pollution. (Source: http://fas.org/sgp/crs/row/RL33534.pdf)

Although China, Russia and the UAE have encountered considerable economic success related to state-owned industries and key companies, and have passed legislation to support state capitalism, other large emergent economies such as Brazil and South Africa show a far lesser degree of success in these endeavors. South African state-owned electricity enterprise Eskom, faces much competition from private sector firms and faces the pressures of not being able to provide sufficient power to the nation by 2016. In contrast, China’s dominant majority of state-run firms account for more than 50% of the nation’s GDP & employment. (Original HBR page 104, column 3, paragraph 2)

Perhaps Walmart’s 2012 deal with South Africa to set up local supermarket chains wasn’t the best long-term deal for the economic sustainability of the state, considering the emergence of Walmart as a giant low-priced supermarket competitor will pressure domestically supported supermarkets such as Checkers, Spar and Woolworths.

Bremmer reminds readers of the importance of not over-paying domestic suppliers of national energy, as the country needs to power its economy. This is certainly an interesting point when contrasted governments such as South Africa, where the private enterprises heavily compete for the control of the energy industry, and if successful would lead to the privatization, and consumers paying overpriced rates for energy.

There is a limit to how much state-backed companies can contribute to growth, because if the government is not able to allocate national resources as well as the market can state-capitalist economies grow less innovative and transparent. Perhaps this implication cannot be assumed for all state capitalist nations. Is Bremmer suggesting the UAE is quickly becoming less innovative, despite Dubai and Abu Dhabi boasting one of the most developed economies in the Arab Gulf and claims one of the world’s highest GDP per capita? (Source: http://www.tradingeconomics.com/united-arab-emirates/gdp-growth)

We have gained valuable insight as a group from Bremmer’s opinion on growing doubts linked to American capitalism. The U.S. government’s recently publicized activities of spying on citizens, scandalized by Snowden, makes a large portion of the international community view US firms as proponents of an American variation of state capitalism (gathering data rather than profits). The result is increased scrutiny abroad for U.S. firms, and foreign governments opting to choose to support local companies instead. U.S. telecommunication and IT companies in particular will now face much distrust from the governments in the developing economic sectors they wish to operate.

Strength of this article is Bremmer’s caution to executives to recognize and anticipate the ways governments in developing nations redefine national interests, and form new restrictive policies against foreign MNEs. Halting foreign expansion could give rivals all the business, and impulsive foreign market pursuing may be detrimental in the long-run. Further strengths include Bremmer’s caution to keep costs of nationally provided energy as low as possible, and the identification of today’s new global risks for MNEs. (HBR page 106)

Weaknesses of this article may include Bremmer voicing that JVs haven’t been popular for years without providing evidence for this claim. Additionally the article draws comparisons between emerging economies’ state-run companies, and how their contribution to GDP varies, however is this not to be expected, taking into account the contrasting differences in population, natural resources, and exports? (Original HBR page 104, column 3, paragraph 2&3) Is it meaningful to draw conclusions of how effective state capitalism is for developing economies based on the percentage each nation’s state-backed firms contribute to the GDP?

What Bremmer wishes managers would learn from this article is to ask themselves: 1) Is our industry strategically important to the government of the host country? 2) Is our industry strategically important to our home government? His 2x2 matrix is helpful in visualizing a firm’s globalisation positioning relative to how mangers answer those questions

Strategies for Managing Guarded Globalisation

Managers and MNE executives in industries strategically important to home government are urged to consider the following approaches to managing the risks of guarded globalisation.

STAYING HOME: Many industry sectors are becoming more politically sensitive. If a firm enters a strategic foreign sector it should as a requisite take into account the possible policy changes that would force it to leave, and develop exit strategies and contingency plans.

BECOME MORE ‘STRATEGIC’ AT HOME: Companies making the choice to boost value to home government rather than creating value abroad. They vie for state attention to view their product/services sector as strategic and valuable in hopes of blocking out foreign competition and bolstering profits through creating government relationship ties.

USE OF STATE TO FIGHT OTHER STATES: use of government-government relations to sort out problems (BP-UAE oil concession ordeal HBR page 106, column 1 paragraph 2) Companies must choose which bait to offer to (appease) the host government. Truly, firms in host nations are at the political liberty of the state. They must operate according to set regulations, adapt local perception and act according to host country sensitivities if they wish to continue operating profitably abroad.

STRIKE ALLIANCES: Firms partnering with other local player(s) to share risks and profits with the aim of benefiting the industry. Many companies will have to strike partnership deals with local players if they wish to enter the host market.

Bremmer’s additional strategies for executives include: adding value to the state through a firm’s products or services, developing multi-business strategies and investments to diversify and spread risk, building strategic value in developing nations to secure a firm’s right to stay within that country where local competitors can’t provide, capitalizing on state capitalism, or firms committing to using local resources to endure state scrutiny

Bremmer’s findings build upon Verbeke’s question of ‘where to locate what type of activity in which way, and what effect it will have on the company and its environment. We have read about market seeking MNEs and export platforms, penetrating emerging state capitalist industries, through varying modes of entry, their impact in the host economy and how they dealt with competition, changing politics and adaptation to new rules of international business. Moreover we can relate Bartlett and Ghoshal’s argument of autonomy to the strategic importance of each market, determined by the firm, and the availability of autonomy boosting resources to the firm, such as resources, labor, information flows, and labor.

Conclusion

To conclude this review, an organisation willing to operate in emerging markets, where the state capital and the political influence of firms is high, has to account for some setbacks. The political system in the home country of a firm can and will likely back local players, because they want their domestic companies and economy to flourish. These setbacks can be the objection of licenses, new business laws, and price limit on certain goods. To adapt to these setbacks and to obtain a better market position in these emerging markets Bremmer has some tactics for organisations to use. In short, the article is current and valuable for managers and students, providing an update on pertinent changes of the new rules of capitalism and the way developing economies are altering the perception of international business. There are however some questions left unanswered, which we would like to ask the author:

You do give some specific examples of strategic firm tactics you propose will aid executives in dealing with guarded globalisation, but what tactic would you recommend for what size of organisation? And can it also be an aggregation of multiple tactics?

Do you think that a worldwide organisation should intervene in the emerging markets, as a third party that erects financial and political barriers for exploitive foreign firms trying to enter? And why or why not?

What do you propose will happen to the American version of state capitalism, which you suggest focuses on gathering data rather than profits, now that their reputation has been damaged by global distrust due to the recent IT/internet privacy scandals?

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