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Just look around you, wherever you are, what are you surrounded with? What do you see? Believe it or not almost half of the things you see around you are because of globalization which has brought upon an increase in international trade, foreign direct investment as well as increase in free trade. Globalization has brought upon an increase in the mobility of goods and services. Hence as much as it threatens the smaller firms it is still the best alternative way of countries to depend on each other in terms of trade, services and relationship, it is also good for people as in the end they are able to get international services or foreign goods at a lower price e.g. if a big foreign clothing industry comes and expand its industry in your country, the price you will be charged to pay for the cloth they are selling will be a bit cheaper than what you would pay to a an industry which depends on importing that particular clothes. This is so because big firms focus on having an extensive cheap labor than a small firm which depends on the same firm as its supplier. Imagine if someone was importing Coca-Cola and there was no coca cola industry in your host country, do you think he could be selling coca-cola the same price as you pay now? It is known that globalization lead to an increase in economic growth (increase in the production of goods and services) of the country; therefore governments don't try hard to block the increase of globalization. E.g. China experienced an increase in economic growth when it opened its markets to international business. In this essay I give you a brief description of Globalization, its major aspects, the impact of it on small firms, the way in which it can affect smaller firms as well as how the government and supranational authorities can support these firms.
Globalization goes hand in hand with business and this has brought upon an increase in international trade. Globalization refers to the broadening of interdependent relationships among people from different parts of a world that involves many nations. It's the increase in mobility of goods, services, labor, technology and capital throughout the world. Because of globalization companies are able to produce goods or provide services, invest capital and build factories all over the world. In the end, globalization has made the whole world as one, in terms of trading. In order for globalization to work, countries need to come together and sign agreements to stimulate trading without restrictions, being superstitious, mutual distrust and ambition. However, this seems to benefit the big firms more than the small firms. In general, developed countries benefit more from globalization than developing countries. With Globalization, large firms tend to have a big impact worldwide and hence more probability of having their products and services sold in new markets. Their brand names are widely known which attracts more customers and therefore tend to have lower cost of goods because of mass production which reduces cost. This threatens the smaller firms as they are forced to lower the prices of their products and services in order to keep their clients which in the end can lead to the down fall of the firm. For a firm to expand it need to go globally. Going global can help the firm to create value; this can lead to increase in sales. By going global a firm can acquire resources that would cut costs e.g. cheap labor. Sometimes firms can also gain competitive advantage by improving product quality or by differentiating their products from competitors. If a firm go global it can minimize risk, because sales decrease or grow more slowly in a country that's in a recession and increase or grow more rapidly in one that's expanding economically. This has not been easy for smaller firms as they have big companies to compete with and not enough investment for expansion of business abroad. Bigger firms tend to have more money to invest in research, technology, knowledge and the improvements of their products. Unlike the smaller firms, they tend to attract more customers with their brand names.
This makes it difficult for small firms to rise up and get recognized on a large scale and in the end this gives smaller firms so much pressure to compete and if they don't have enough support they easily collapse. Globalization can be challenging because of national differences in tastes, lifestyles and preferences of goods and services and the different aspects a company has to take into consideration before one can think of entering into foreign markets
-With globalization, information and money flow more quickly than ever.
-Goods and services produced in one part of the world are increasingly available in all parts of the world.
-International travel is more frequent and easy.
-International communication in common place
-Globalization brings upon increase in integration of the world economy
-Globalization has brought upon the continuing decline in transportation and communication cost, and the reduction of man-made barriers to the flow of goods, services and capital.
1.1 MAJOR ASPECTS OF GLOBALIZATION
1.1.1 International trade
Every time you walk in to any supermarket or shop and are able to purchase something that the home country doesn't make then you are experiencing one of the effects of international trade. International trade is the exchanging of goods, products and services between countries or across borders. This type of trade gives rise to a world economy in which prices, or supply and demand affect and are affected by global events, they experience the end result of international trade. International trade gives both the consumer and supplier an opportunity for expanding their markets for both goods and services which could not have easily been made available to them. Because of international trade the market contains greater competition and hence more competitive prices, which bring a cheaper product home to the consumer. Trading globally gives consumers and countries the opportunity to be exposed to goods and services not available in the host country.
1.1.2 Foreign Direct Investment
This is the amount of money that individuals invest into foreign companies and other assets. In theory economies can therefore grow more efficiently and can more easily become competitive economic participants.
For the government, which receives these FDIs, it's a means by which foreign currency and expertise can enter the country. For the investor FDI offers company expansion and growth, which means higher revenues.
1.2 IMPACT OF GLOBALIZATION ON SMALLER FIRMS
- Globalization has brought in large firms to move trade internationally; in the end small firms find it increasingly hard to compete internationally.
- Globalization is challenging for smaller firms because they are being forced by the competitive environment to sell products and services to their customers at lower prices. This is because if they don't, some vendors from another part of the world will steal away their customers.
- Increase market competition may cause small firms to reduce their price markups. However the pressure to survive may speed up the adoption of new technologies and thereby enhance the productivity of Small enterprises.
1.3 WAYS HOW GLOBALIZATION CAN AFFECT SMALLER FIRMS
Bigger firms are more linked to powerful people; hence have a chance of getting market information much easier than smaller firms. They have a connection with governments since they have more capital and investment, in the end they have quick access to certain markets as the government are willing to help since they know they are going to earn a lot of taxes and revenues from it once it expand its sales in the host country. This affects the smaller firms as when the big firm enters the market it already knows more of that chosen market while the smaller firms are still finding links of information for that market. In the end the small firms are not able to compete with it.
Globalization brings in more competition in the markets as more firms are able to expand their sales in new markets, new environments and foreign countries. The higher the competition is the more small firms are put under pressure to survive.
1.3.3 Labor Market
Most of the times big companies tend to have their products done in countries which offer cheap labor. In the end they sell their products at a cheap price and this forces small firm to lower prices too, because if they don't, they lose customers hence not making enough profit and being put at a risk of closing the business.
2. SMALL FIRMS
All companies with smaller market capitalization can be recognized as small firms. They are usually run by a small group of people. Most of the times small firms are privately owned either by one person or two or one family. It can be called a family business or personal owned business. As I said before, small firms don't have much capital or investment hence can easily fall down or crash when big competition with big companies arises. However there are many organizations nowadays that are willing to support these firms including the government itself. Examples of these organizations are IMF (International monetary fund) WB (World Bank) and WTO (World Trade Organization). These organizations mainly give money to the governments to help the communities, but do not directly support the poor people. Globalization is good for internal business, hence the smaller firms have no big influence or market wise in international business, this makes the smaller firms collapse as they are not able to participate internationally either due to financial reasons in terms of expenses or lack of knowledge in trading abroad as well as lack of capital to expand. Globalization is a process itself, so the smaller firms cannot just start today and go big. They need time to grow and the longer they take to grow the more they are being threatened by the big firms globally. Small firms find it hard to go globally as they lack globally marketed technique which has to be critically analyzed. Examples of small firms include convenience stores e.g. Bakery, trades men, restaurants, guest houses, photographers etc. they can be describing according to other methods such as sales, assets or net profits.
2.1 CHARECTERISTICS OF SMALL FIRMS
-They have limited technology
- Run by a few number of people
- Privately owned
- Small investment/capital
- Small profits
2.2 RISKS FOR SMALLER FIRMS TO INVEST IN FOREIGN COUNTRY
International investing can be powerful way to boost up the performance of your business. However it can have its own disadvantage and major risk.
-Small firms are at high risk when investing in foreign countries as they mostly do not invest in long run. This can be a disaster if a dramatic change in market value arises.
- It is hard for smaller firms to get market information of the foreign country they want to invest in and this can lead to a down fall of the firm if it did not do a complete investigation. It may even be more difficult to locate up to date information.
2.3 HOW CAN SMALL FIRMS SURVIVE IN FOREIGN MARKETS
Survival is one of the biggest strategies that a firm has to make in order not to collapse either when competing with big companies or smaller ones. Small firms should make use of the concept of comparative advantage and value chains in order to survive.
2.3.1 Value chain
Creating a value can spur the firm to develop a compelling value proposition that specifies its targeted customer markets, whether on a nation -by-nation or worldwide basis and how it sees itself making and selling a product that exceeds customers' expectations. The more successfully the company does so the greater the profit it earns.
The firm should think itself as a value chain. The value chain represents a straight forward framework that lets managers deconstruct the general idea of "create value" into series of discrete activities that their company actually does to create value. So, on specifying their company's value chain, managers can then target their insights and investment toward those activities that create value and avoid those that do not.
How well a company designs and manages its value chain determines its competitiveness. The value chain helps managers integrate the knowledge and skills of employs around the world in the way that helps them leverage the company's global reach. Value chains analysis anchors managers' effort, to expertise in those activities that reduce costs or improve differentiation.
2.3.2. Comparative advantage
This theory says that global efficiency gains may still result from trade if a country specializes in those products it can produce more efficiently than other products, regardless of whether other countries can produce those same products even more efficiently. A firm should focus more on this theory as it can help to determine which goods you can export in a certain country so that you have an advantage of trading fairly in that particular country regardless of if you are competing with a big firm or small. With comparative advantage country is able to produce more goods at a lower cost than the other nation or where it wants to locate its resources.
3 GOVERNMENTS AND SUPRANATIONAL AUTHORITIES SUPPORT ON SMALL FIRMS
Small firms have to be protected until they are strong enough to compete with established international giants. A small firm struggles to access finance to start exporting and this is threatening. However the government can be able to support them and push them up to start exporting. The Government provides the policies, the institutions and processes that societies employ to organize their affairs and to protect them from internal and external threats. Small firms tend to depend on government for support because the government can put on rules and regulations that can sometimes be the driver to help them go global and survive. These regulations sometimes ease out the pressures and make it easier for them to operate and go global. A national political policy influences the ways in which international business takes place within its borders. Government can promote or impede development by implementing particular policies. Government policies may affect the ability of foreign producers to compete in another country. They may limit or enhance facility to sell abroad, such as prohibiting or subsidizing the export of certain products to certain countries or by making it so difficult or easy for you to buy what you need from foreign suppliers. Collectively these governmental restrictions and competitive support actions are known as protectionism. Government officials put in some policies that they believe have the best chance to benefit their nation and its citizens and in some cases their personal political longevity.
-small firms need greater access to bank financing this is so because they face difficulties raising capital despite providing numerous jobs.
-The government can offer loan guarantees thorough banks and venture capital trusts to small firms generously depending with their condition opposed to the large firms
-Government can help the smaller firms by collecting information for them about foreign markets or big companies, furnishing contacts with potential buyers abroad and offering insurance against nonpayment in the home country currency
-The government offer grants to small firms to help them expand. - It can increase tariffs; this will result in higher prices- high enough that the small firm can cover costs invest on research and make the other investments that they need in order to stand on their own feet
- Government can reduce taxes for SME's in their initial years, till they acquire a minimum of revenue and profit
3.2 SUPRENATIONAL AUTHORITIES
3.2.1 The World Bank
The World Bank original mission is in development. The World Bank has the power to provide broad based support in the form of structural adjustment loans to the government for them to implement their own people.
The World Bank can push the government to provide loans. It can help smaller firms by investing in infrastructure, especially roads, electricity and water and communication facilities. (Power cuts in Tanzania, increase in petrol prices)
3.2.2 The IMF
The IMF carries the more task of ensuring global economic stability. It provides liquidity in the foam of loans. The IMF is a public institution established with money provided by tax payers around the world. However it does not report directly to either the citizens who finance it or whose lives it affects but rather it reports to the ministry of finance and the central government of the world. The IMF helps reduce economic instability which would injure small firms.
This organization deals with rules of trade between nations.
It provides temporary protection of infant industries to specifically help small firms. It is the successor to the general agreement on tariffs and trade and the major multilateral forum through which government can come to agreements and can settle disputes regarding trade.
Globalization is increasingly rapidly that it is so hard for small firms to keep up. This is because of new advanced technology, cheap labor markets and a decrease in trading barriers. Do you think it's a good idea for the small firms to depend on government intervention and supranational authorities for their survival? Let's face it; globalization is like increasing each and every second that passes by, how far do you think government intervention will go on to protects these SME's? The government wants foreign income, and even when they increase tariffs, quotas or revenues who do you think benefits more from this? Well, it of course the government. There are big firms with big brand names and more capital out there who are willing to pay as much tariff as they can be charged knowing that they will still get it back, and yes they get it back from our pockets and yes they threaten these small firms until they can't keep up, in the end the small firms collapse.
Supranational authorities are there to help the development of the country by introducing new trading policies or giving out fund either through banks, so that these countries can be able to support the small firms, in terms of loans. With all the support but still in the end if the firm doesn't have a good strategic management and knowledge of trading internationally how can they survive? Small companies should work hard on taking a worldwide view and adopt any of the operating models it thinks can help survive in globalization or trading internationally. This can be like exporting and importing, FDI even while remaining within its resource capabilities. These small firms should look beyond their national borders for markets and suppliers if they do want to remain competitive. Small firms can more easily personalize in the area of customer service; therefore they should embrace this as their survival weapon to survive in the market on their own. They should take advantage of their agility and flexibility to establish a permanent position in niche markets. Small firms suffer a different set of problems than larger firms. For example, they tend to lack resources. Most of the times these small firms seek out markets which are able to avoid competition with larger firms and with the increase in globalization this is not being easy. I strongly believe that it is important that the government should offer free courses to the small firms on how to trade globally, how to deal with big competitors in order to survive as well as on how to expand their sales so that they can support themselves and stand on their own feet when big competition arises.