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As per Daniel; Radebaugh and Sullivan "Globalization is noted as a process of integration of world economies through the reduction of barriers to the movement of trade, capital, technology and people." A process by which different companies, people around the world and information and ideas are swapped across international boundaries, i.e. influencing opportunities for growth and poverty reduction in developing countries. With a push spurred by market liberalization, international trade with increasing technology, globalization has boosted competitiveness on a worldwide scale.
Nevertheless, globalization is seen as a threat to small firms and there are Governmental assistance provided to assist these firms to compete in the globalized market. Below is a mind map produced to indicate a pathway to the entire document presented below.
Globalization and Small Firms: Linking with Economic Growth
In the vision of the threats and opportunities brought about by globalization, the question arises on if small firms and the industries they lead can dominantly compete in globalized markets, and if so, how? However with a goal of economic growth with poverty reduction, my research is mainly based on the threats that the small firms face with globalization in spite of some of the benefits that it gains from its participation in the global competitive market. The benefits however cannot be taken for granted as globalization addresses a high number of threats for which the government and other supranational organization are seen to be participated as assistance to these small firms.
Positive and Negative effects of Globalization on Small Medium Enterprises
Previously, firms were likely to compete against other firm within the same industry in the same country, with the impact of globalization; industries in one country tend to compete in opposition to the same industry in another country. As a result, firm-level competitiveness is not adequate any more rather the entire market system that conveys a product from its beginning to the consumer should be able to compete against market system elsewhere.
Therefore the globalization's impacts on the Small firms have been noted as both positive and negative.
Considering the positive effect at the first;
Opportunities for Niche Market: Globalization contributes to the ascending differentiation and segmentation of global and regional markets, henceforth building an extensive range of niche market opportunities. Niche markets are however seen as brilliant opportunities for small firm dominated industries for the reason of small production demanded.
Regardless of the positive impact mentioned above, small firms are more of to be seen effected by the negative impacts. Below are few to be considered:
Trade Liberalization: This has made it drastically difficult for small firms to survive or sustain their businesses in local or global markets, i.e. releasing of imports closure or declining of production in domestic firms producing those goods, resulting in unemployment of the domestic land.
Inequality: Globalization has resulted to widening of inequality among the rich and poor due to the broadening interaction of industries globally neglecting the small firms who are unable to extend their markets globally due to lack of capital.
Difficulty in competing: Small firms may find it difficult to compete in opposition to the much competent international and foreign firms and may be strained to undertake acquisition for survival hence losing their identity. Also noted that the tolerant international free market has advantaged multinational corporations in the western world at the rate of local enterprises, hence argued that globalization creates considerable threats to the small enterprises where weak and under developed supply chains cannot compete with high capitalized international chains.
Taking note of the impacts (positive and negative) of globalization on the small enterprises, another link that broadens the topic of "globalization and small firms", are the threats that the small firms face due to globalization. I believe small firms are at a threat as per the initial question. According to my research, below are few threats mentioned that the small firms reluctantly face in the globalized market.
Trade Liberalization: Liberalization of global markets has been seen advantaged to the most efficient producers. Market liberalization ensuing from multilateral trade agreements (tariff and non tariff barriers on imports and free trade agreements) has forced numerous small firms and industries helping local and national markets into decline due to the fact that they now have to compete in opposition to all the imports from more competent industries in other countries.
Consolidation of National and Global Retailers: This has reduced the number of markets where small firms can trade their products, while putting on more specification and control on products including quality, quantity and delivery timings. As large firm retailers increase market share, their necessity to manage product quality has forced many intermediaries out of business.
Consumer Concerns and Standards: Increased consumer concerns and awareness has given an ascendance to higher consumer standards. In reaction to that, numerous international standards have emerged forcing small scale suppliers to make intolerably high investments. As the verification costs are effectively the same as for the large firm, the small firms face high inspection cost unless they are offered compliance certificate for numerous number of firms linked by regular practice into groups, associations or cooperatives. In numerous countries, the costs of meeting the terms with cultural standards have been forcing the smallest growers out of the market.
Corporate Social Responsibility: This has been a rapidly emerging trend in retail markets and overall it has been seen as a greater threat to small firms. The foremost reasons for this are the high costs associated with certifications, training and ensuring compliances to corporate social responsibility practices by the small firms. Now that consumers have become aware of the implication of globalization trends on the small firms, there has increasingly been an urge for corporate social responsibility practices to bring in fair prices and practices for these small firms and hence mitigating the marginalization of the small enterprises due to high compliance costs.
Constant demand for Innovation: Globalization has been increasing the rate at which newer and better products are demanded and developed. Small Medium enterprises and the industries in which they participate are underprivileged in many emerging economies due to their incapability to conduct research and development into new products.
The above are the threats faced by the small firms in accordance to the research conducted.
Growth in Branding: With liberalization, an increase in competition is brought up which in turn decreases the revenue to firms that fail to differentiate their products and services using non price or branding strategies. The advantages/benefits (profits) of product branding commonly accumulate to the retailer or manufacturer possessing the brand. With brand building, arises the need for increased investments that most small medium enterprises fail to accommodate. This builds a threat of lagging behind in the market for small firms that cannot afford to brand their products and services.
Nevertheless, governmental groups have been at quite a rescue to these firms, providing them with the essential funds, and helping them compete in the global market.
Coming to the centre part of the extract of globalization and small firms, there are specific governmental organizations that at each stage of trade liberalization provide and appropriate level of control to these small firms. Bilateral Free Trade Agreement (FTA), Regional free trade blocs being as an administrative secretariat and Global free trade as global body such as the World Trade Organization are among the level of control that the government has adopted to overcome the threats that the small-medium enterprises face.
Trade blocs, i.e. intergovernmental agreements aiming to eliminate regional trade barriers among the participating states; were agreed by the government as one of the approach to support the small firms. Below are the trade blocs that have highly been taken into consideration:
The North American Free Trade Agreement (NAFTA): This was an agreement signed by the governments of Mexico, Canada and the United States of America generating a trilateral trade bloc in the North America with an aim to diminish the trade barriers among the firms participating in the trade. The NAFTA was agreed on January 1, 1994 in order to superset the Canada - United States Free Trade Agreement between the U.S. and Canada.
The goal of the North American Free Trade Agreement (NAFTA) was to diminish barriers of investment and trade between the US, Canada and Mexico. The achievement of NAFTA on the January 1st, 1994 brought in an instantaneous elimination of tariffs on more than half of the United States imports from Mexico and more than one third of the U.S exports to Mexico. Within 10 years of the execution of the United States - Mexico agreement, all U.S - Mexico tariffs would be eradicated except for some U.S agricultural exports to Mexico that were supposed to be diminished away in 15 years. Almost all the US - Canada trade were already duty free by then. Apart from that, NAFTA also seeks to eliminate non-tariffs trade barriers. The NAFTA was therefore known and is still known as one of the effective governmental trade blocs to help the small firms from the threats faced.
The European Union (EU): A union of 27 member states united together both economically and politically, primarily located in Europe. The European Union (EU) sketches its origin from the European Coal and Steel Community (ECSC) and the European Economic Community (EEC) formed by six different countries in the 1950s. In the prevailing years the European Union (EU) has developed in size by the participation of the new member states and in power by the increase of policy areas to its remit. The European Union i.e. the EU was known by its current name in 1993 by the Maastricht Treaty. It was also known that the last amendment into the European Union (EU) as a constitutional basis was the Treaty of Lisbon that into force in 2009.
The European Union (EU) functions through a hybrid system of supranational independent institutions and intergovernmental decisions agreed by the member states. It has built up a single market through a consistent system of laws which applies to all the member states including the eradication of passport controls within the Schengen area. It ensures the free movement of goods, services, capital as well as people. It also ratifies legislation in justice and home affairs and preserves the general policies on trade, regional development, fisheries as well as agriculture. The Diplomatic missions have been successfully attained around the world and the European Union (EU) is represented at the United Nations, the WTO, the G8 and the G-20.
These are the governmental, regional trade blocs that help supporting the small firms being affected by globalization with impacts such as inequality, trade liberalization and others initially mentioned above in the presented documented.
Conversely, the supranational organizations also play a role in supporting these small enterprises that face the threat of globalization.
In promoting the World Trade and minimizing the inequalities between the rich and poor, i.e. the Large and Small-medium enterprises, the supranational organizations include the World Bank, International Monetary Fund and the World Trade Organization (WTO).
The International Monetary Fund (IMF), World Bank and the World Trade Organization (WTO) share a common objective in facilitating and encouraging the balanced expansion of trade in goods and services. Responsibilities regarding trade issues are split among the three (3) institutions. With a basic overview on all the three institutions, the International Monetary Fund (IMF) focuses on the overall macroeconomic policy framework and stabilization of payments disequilibria. The World Bank aims its concentration on the long-term development and sectoral trade issues where as the World Trade Organization (WTO) focuses on the rules and regulations for multilateral trade liberalization and transparency. Each of these three institutions has a mandate for cooperation.
Below is my extended research on how each of these organizations serves a helping hand to the affected firms respectively with a basic historical overview on each.
The World Bank is known to be an international financial institution that offers loans to developing countries for capital agendas. The World Bank states publicly a goal of reducing poverty. By commandment, all its decisions must all be guided by a dedication to innovate and inspire foreign investments, international trade and aid capital investment.
Looking into the history of the World Bank, it is seen that there is no direct link with the trade but the World Bank is rather seen as assistance to bring countries to a position where they can engage in trade.
Furthermore, the World Bank is one of the five institutions generated at the Bretton Woods Conference in 1944. The International Monetary Fund (IMF), a related institution is however the second and will be further elaborated more about below.
The World Bank is different from that known as the World Bank Group; i.e. the World Bank involves only two institutions namely, the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA), whereas the latter integrates the mentioned two in addition to three more namely, International Finance Corporation (IFC), Multilateral Investment Guarantee Agency (MIGA), and International Centre for Settlement of Investment Disputes (ICSID).
Comprising of 186 members countries the World Bank generally aims to provide financial support and assistance to developing countries and helping smaller firms by investing in infrastructure.
International Monetary Fund (IMF):
The International Monetary Fund also widely known as the IMF is an intergovernmental organization that looks over the global financial system by keeping a track of the macroeconomic policies of its member countries, specifically taking note of those with an impact on exchange rates and the balance of payments. Its main aim states to soothe international exchange rates and aid development through inspiration and encouragement to liberalize economic policies in other countries, as a condition of debt relief, loans and aid. The International Monetary Fund (IMF) also offers loans with diverged levels of conditionality, specifically to poorer countries.
"The IMF comprising of 186 member countries and with resources worth US$ 600 billion and with committed loans of US$ 200 billion out with US$ 146 billion are known to be undrawn, fosters global monetary cooperation, securing financial stability, facilitating international trade, promoting high employment and sustainable economic growth, and reduce poverty around the world."
Similar to the World Bank, the International Monetary Fund (IMF) is not directly linked with trade but more of with providing assistance to the poor countries by stabilizing currency exchange rates through the release of special drawing rights (SDRs).
However the IMF does not directly show any goodwill to smaller firms but rather helps in minimizing the economic instability which harms the small firms first.
World Trade Organization (WTO):
The World Trade Organization (WTO) is an organization that aims to administer and liberalize international trade. The organization officially originated on January 1st, 1995 under the Marrakech Agreement, substituting the General Agreement on Tariffs and Trade (GATT), which officially was originated in 1948. The World Trade Organization deals with rules and restrictions of trade between the participating countries, and it provides an outline for negotiation and honoring trade agreements, and a dispute resolution process aspiring at enforcing participant's obedience to the World Trade Organization (WTO) agreements. These agreements are signed by the representative of the members and approved by the parliaments of the participating member governments.
Promoting trade without discrimination, i.e. by most favored nation (MFN) status and National treatment and building in progressive free trade through reliable negotiations is known to be the main objective of the World Trade Organization (WTO). Inspiring fair competition through binding and transparent agreements and providing provisional protection to new industries, specifically helping the small firms is what the World Trade Organization (WTO) is highly recognized with as a supranational organization supporting small firms through the negative impacts of globalization.
The World Trade Organization (WTO) is also known to settle different disagreements and dispute between countries by negotiated consultation rather than judgement and also dealing with broken promises and settling issues within 1 year of time. Trade sanctions are however permitted if the settlement is not privileged.
Hence like other governmental and supranational organizations, the World Trade Organization (WTO) also aims at promoting the world trade hence minimizing poverty in the global market.
The above are therefore the elaborated trade blocs by governmental organizations and supranational organization's assistance to the small medium enterprises (SME) in overcoming the threats faced due to globalization.
With the opportunities and increased sociality brought about globally by globalization, the above presented document is an observation on the negative impacts provided by globalization, especially those faced by small-medium enterprises (SME).
I hereby conclude that globalization is seen as a threat to the small firms with world trade being the main link between them. There are also governmental organizations supporting these affected firms hence promoting the global/world trade.