Globalization Has Negative Impacts On Businesses As Well Economics Essay
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Globalization has played a vital role in the development of international business. No doubt, international business has a long history, but the real development of international business was possible because of globalization.
Even after that it doesn't mean globalization only has positive effects; it does have negative effects on business.
In this study, secondary data has been used for analysing the effects of globalization and for studying the extent of globalization on financial services industry. This study discuss the following point; (I) Globalization - Introduction, (Ii) Positive Effects of Globalization, (Iii) Negative Effects of Globalization, (Iv) Financial Services Industry - Introduction, (V) Globalization Drivers, and (Vi) Consequences of Globalization on the Major Stakeholders.
Globalization is a widely used term in different contexts. Globalization definition available in some general dictionaries is not very clear. Some dictionaries define globalization as 'the act of globalizing' or 'to render global' (Waters, 2001). Many people accepted globalization as a vague concept and don't try to define it precisely.
By this way globalization is a catch all, malleable concept which can be interpreted the way user wants (Scholte, J., 2000). Robertson (1992) says Globalization refers both the world's escalation and compression of consciousness as a whole. Global compression reminds the dependency and system theories' arguments. It points out the rising level of dependency between countries in term of cultural, military alliance, trade, and domination.
International trade has benefited the most from the wave of globalization and has increased the dependency among countries. The dependency of any country for other country can have both type of effect negative and positive. It depends on the countries, how much and for what, they are dependent on one-another. International business has increase significantly after Globalization. But, it is not always beneficial, it can be harmful also. Before globalizing economy a country should understand it clearly that how it is going to take benefits out of globalization and it should be ready with a contingency plan.
Positive Effects of Globalization
It is believed that globalization has increase economic opportunity and prosperity in the world. Now the markets are open for trade and resources are used efficiently. Due to this, prices have come down, employment has increased, and life standard has become better.
Globalization has helped to remove poverty form the developing countries, in 1980 - 2001 people living on $1 or less than that per day has come down 1.1 billion from 1.5 billion (Burande, 2007). It's not the developing countries who has benefited from globalization, developed economies have also enjoyed the fruits of globalization. It's very difficult to explain all the positive effect of globalization on culture, human mindset, trade, employment, capital market and on the other fields. Still, we have tried to summarize the positive effect of globalization. Some of the positive effects are following;
Free Capital Market - With the introduction of globalization countries opened their capital market. This helped companies to operate easily in many countries, as they could change the currency as per their choice to get it out of the country. It also helped to attract foreign investors to invest in their capital market which provided funds for developing infrastructure (Rugman, 2002).
Common Market Regulations - In the era of globalization when it became very difficult to operate in multiple countries due to different requirements of regulation, then countries felt need of easing regulations and agreed for common market regulations (Rugman, 2002). Now, many countries use same accounting and tax standards by which it become easy for companies to operate. Later on countries formed groups according to their trade needs like OPEC, NAFTA, etc.
Wide Operation Field - Globalization widens the operation field of a country, the people of a global economy can operates in many countries, thus it opens door of opportunities to increase their market size and profit. Within the country an organization wouldn't get much scope for increasing it operation but in a globalized economy it can go mile for increasing it operations (Tanzi, 2004).
Spread of Education - Education is the best positive effect of globalization. Today one can go around the world for best learning and training facilities. If one is interested in the subject that is not available in the country, one can go to the country for learning that indigenous subject and spread the knowledge in one's home country. There are several examples where people learnt the subject from other countries and earned name in their own country (Kulkarni, 2009).
Boosts Export - Globalization helped in two ways to boost export; first by free capital flow, and open market for increasing operation. Some countries set-up special economy zones for giving extra boost to export (Rugman, 2002). In these zones companies where given tax shops and subsidized facilities with the condition to export the maximum production form these units.
Flexible Labour market - Globalization helped people to learn multiple skills, while doing different jobs. By this people moved from one job to another easily. It shows a more open and flexible labour market with a regulated system to increase investment. When companies moved from one country to another, they also shifted their people and trained people from that country to get their work done (Carbaugh, 2008).
Curb on Inflation - When companies moved from one country to other in search of market, they launched their product on competitive rates. The availability of cheap consumer goods helped those nations to lower down inflation, which was disturbing their economic growth. Because of their increasing influence the domestic companies also searched for innovative and better technology for reducing cost (Carbaugh, 2008).
Economies of Scale - Large companies may not be able to utilize full capacity of their manufacturing units due to closed economy and small market. Globalization provided score to these large companies to operate with full capacity, which helped them to reduce cost further (Rugman, 2002). By globalization not only the companies were able to get economies of scale but also the consumers.
Technological Improvement - Countries those adopt globalization, opens doors for advanced technology. When large companies start their operations in developing or under developed countries, they use advanced technology for operations. Govt. can also access new technology by agreement with large groups after negotiation for their operations in their countries. Technological improvement is also possible by to running R&D programme in collaboration with big companies and by providing training to its people (Tanzi, 2004).
Better Uses of Resources - Resources are scare but still the countries were not able to utilize them efficiently, in the lack of technology. When they got access on technology, the proper use of the resources was started. Companies started use capital intensive technology on the place of labour intensive technology, which saved on cost and helped them to use the man force in other productive activities (Carbaugh, 2008).
Spread of Culture - Globalization has also affected culture! It is not that every civilization has all good practices. Today the culture, in which we live, is the contribution of many cultures. Humans tend to pick new and correct things from other cultures and drop the flaws in their culture.
Societies welcome people from other cultures and backgrounds to form a new culture. Languages, cooking styles, customs, and dressing styles all have spread from globalization. The other cultural forms like movies, music and art are also affected by globalization. Now, movies are launched worldwide, which leave an impression on people and culture (Kulkarni, 2009).
Negative effects of globalization
Globalization has both positive and negative effects. But, for the poor and developing countries negative effects seems very large (Future-econ, 2009). Economic, political and social unification was expected from globalization. But, strong and developed economies continue to exploit underdeveloped and developing countries on the name of business sharing. Power reallocation is happing in the form of technological and industrial competition (Borade, 2009). Most economists argue that the positive effects of globalization are more than the negative effects (Future-econ, 2009). Whatever is the truth behind all these arguments can be analysed by discussing these points :
Dumping - Dumping has emerged as a big problem in front of developing countries. By dumping the developed countries exploit the market in the developing countries by charging low price for its products, on which price local producer can't sell its product. In this way, the developed and advanced countries get a large share of market for their products (Boudreaux, 2008).
Unemployment - Globalization helped many countries to develop technology very fast. Due to use of advanced technology the use of labour reduce significantly. Because of that the unskilled employees lost their jobs. Use of capital intensive technology also helped to reduce production cost, but most of the benefits were retained as increased profit by the manufacturers. One more reason, behind unemployment was shifting of job location in search of skilled and cheap manpower (Carbaugh, 2008).
Environment Disaster - Climate change has become a "hot" topic. Global warming is also a part of global economies. In search of advance and capital intensive technology, countries have established many industries; those industries are increase pollution rapidly (Lane, 2006). Traditional labour intensive technologies were based on low power and machines, so the pollution was not an issue from those industries. Moreover, the products of factories are also polluting the environment.
Limited Natural Resources - In the race of globalization and development, every country is exploiting its natural resources extensively, due to that in near future these resources will be finished. Petroleum is a very important source of energy in present but it will not last long if the alternative source of energy is not searched (Lane, 2006).
Competition - To globalize their economy countries opened their market for foreign companies, these companies were large and were using high technologies. Domestic companies were not able to produce goods on that cost, which put a question mark on the sustainability of these companies. Competition increased with the entry of new companies in the market. Many home companies were not able to compete with these multinational companies, so they have to close their business. Dumping also enhanced completion in these markets (Lane, 2006).
Spread of Diseases - Globalization helped first mobility, due to that unknowingly diseases are spreading very fast from one country to another (www.darkseptemberrain.com). When people enters into a new environment he may faces several types of health problems, because of change in environment. Recently H1N1 flue was also a result of fast and increased movement of people. Earlier when where no such health facilities were available people used to consume homeopathic medicines but now on one side where the health facilities have improved a lot the fear of fast spread of transmittable diseases have also increase (Lane, 2006).
Inequality - Economic development is successful in reality, when it is able to generate equal opportunities without any consideration. But globalization has increased inequalities, now the gap between the poor and the rich has increased. No, doubts there are improvement in the overall living styles but the way it was expected to improve that couldn't be achieved. Inequality has also increased in terms of skilled jobs. Those who are skilled can get better jobs, but those who are not updated with new skills find it difficult to change their jobs (Sharma, and Starik, 2002).
All these points clearly indicate the negative and positive effects of globalization. Like any other thing globalization also has both aspects which are bad and good for mankind. It the human being who has created this global phenomenon, so he can also control it and use it for the betterment of the world without any discrimination.
Financial services industry
Financial services industry provides services related to money, for money, with money. Financial services are utilization, manipulation, management, storage, and creation of money. There are many companies to serve the market for financial services for different needs, but no single company has the dominance in the financial services industry (Globaledge, 2010a). Financial services industry is more open than ever before.
Definitely globalization is one of the reasons behind this growth. The member countries of WTO opened their economy for increase world trade and free market. International trade needs currency transactions, which is not possible without global financial services. When we say global financial services, it means any one can access the services in any country any time after paying the applicable charges.
Information technology is playing a crucial role in delivery these services. Plastic money has made transaction easy which carrying cash. It not only helped to access financial service round the clock but also around the world (Dolan and Lindsey 1991). This was possible because of globalization of financial services and financial industry.
Globalization affect on financial services industry is not equal in all the countries and regions. Where in some countries it is intensively used, in some countries financial services are still the in the infant stage. Globalization is not simply about the presence of any business in many countries around the world.
A global company or an industry need to satisfy some important characteristics for it. A global industry takes advantages of environment and satisfies customers' needs and wants around the world. The effect of globalization on the financial services, in this study, is analysed through Yip's framework "Drivers of Globalization" (Yip, 2003).
Yip's framework on globalization driver is very useful for analysing the level of globalization in an industry (Yip, 2003). It is also helpful to understand markets' or industries' different aspects. Before reaching on a conclusion, each globalization driver should be analysed properly. Yip in his framework explains the factors behind the globalization of business. Yip calls these factors, drivers of globalization and divides them into four categories. Figure 1 shows all these drivers of globalization.
Figure 1: Divers of Globalization
Source: Johnson et al (2008)
Market Globalization talks about the extent, that effect globalization in any of the industry. It considers the factors like the similar customer needs, global customers, and transferable marketing (Yip, 2003).
Similar customer needs - Similar customer needs indicates that in a global industry the customer from different countries share common needs. Their needs may vary in term of frequency and quality, but have same kind of requirements. Financial services can't be possible without a proper transaction system around the world, as different countries have different currencies. But, foreign exchange made it possible and that is also due to globalization when countries find it difficult to do transaction in Gold. Similar need of customers may include credit cards, debit cards, deposit accounts, banking transactions, online banking, loan, advances, etc. customers in all the countries requires all these services, wherever the banking and non-banking facilities are available. There is no doubt that some countries in the world still don't have intensive banking system. They are regions where people even don't aware about the proper banking system.
Global customers - By the effect of globalization, customers buy services and products around the world, from where they can best the best services.
Yip (2003) defines global customers in two ways.
Multinational global customers - These types of customers look for best available services in the world. Even now companies are providing the services on a world standard. Some financial conglomerates like Citi Bank, HSBC, are providing same services to their customers.
National global customers - These types of customers also look for best services around the world but they remain in one country.
The big financial companies develops innovative services and technology use that in all the countries where are the present. The noticeable difference here is the time of services introduction, in developed and their home countries services are introduced as there are developed but it takes times for other countries.
Transferable marketing - When due to globalization marketing mix elements are used in many countries without considering their local aspects, it is named as transferable marketing (Campell et.al., 2004). If one sees financial services industry in this context, one finds that in this industry most of the marketing activities are designed for world level, while accepting the necessary aspects like language of that country, available media etc.
Cost is major concern for the companies to increase profitability. By globalization financial services industries have the potential to reduce cost. There are reasons on the world level to drive this industry towards globalization (Smith, 2002):
Scale of economies - There are certain constraints for every industry to expend market. In financial services industry the use of technology is very high, when this industry provide services at world level it can get maximum profit from its R & D investment. That is also a reason for globalizing the financial services.
Sourcing efficiencies - Production factor efficiencies are not equal in every country. When financial series industry is operating on world level it can provide the services, where it gets highest source efficiencies. Business process outsourcing is good examples by which services are delivered form the location where the productivity is maximum.
Country specific costs - Cost of financial services are near about similar around the world. Most of the financial services are based on information technology, so the costs of these services are similar in all the countries where these are delivered. The use of internet and plastic money is the best example here.
High product development costs - Financial services unlike product manufacturing doesn't required much expenditure on production. But these services do need continuous development of high end services, which cost a lot. To recover this cost industry tends to go global, which was also a reason behind the globalization of financial services industry.
Globalization of competition
Competition also forces industries to go global In search of new markets for their products. High will be the competition higher the companies or industries will go for global business. The factors which drive competition level are the following (Campell et al., 2004):
Interdependence - Every industry has some links in other countries in one way or other. When it goes on multinational level it forces company of that industry to go global, which works as a stimulus for globalization (Campell et.al., 2004). The same is happing in the field of financial services. Financial services have strong relation with other industries, so when those industries go global financial services industry also has to global to provide the services.
Global Competitors - Global competitors have more power to compete with local companies as they can get profit from other countries where the competition is not as high as in that country. Competition has put pressure on investment bank, banks and non-banking financial companies to create and provide sophisticated financial services to their customers. So, the global competitors also compel financial services to globalize its presence.
High imports and exports - Import or export what the way an industry is running business, it is connected with other countries. Financial services are very important for every kind of business. To serve this purpose financial services industry has to adopt globalization, which strengths the competition drivers.
Globalization of government policies
After the second world war, when Governments of most of the countries felt need of trade with other countries they opened there economy and reduced trade barriers.
Trade policies - The trade barriers were removed after the formation of World Trade Organization (WTO). The member countries who signed on the trade agreements were forced to reduce trade barriers in stages. As the countries reduced trade barriers the industries form those countries start going global. Floating exchange rate was a great booster for financial services industry (Globaledge, 2010b). In the present time else than some restrictions on currency transfer financial services are freely available around the world .
Technical standards - With the spread of information technology, countries started using the same technical standards. Information technology is very crucial for the development of financial services, so this industry gets new door for globalization (Globaledge, 2010b). If one tries to find the technical standards in today's financial services industries, one finds that almost all the countries are using same technical standards. The reasons behind are the development of the software and the innovation of the new financial product and services (Campell et.al., 2004). There are few companies who have the credit or debit card ownership. When the companies from the other countries found it very cost effective they licensed that technology and now providing these services to their customer. It shows the depth of globalization in financial services industry.
Host government policies - The entry of foreign companies was restricted earlier but when countries understood the value of foreign investment of infrastructure development, many countries opened their economies for foreign investment. This was an opportunity for financial services industry, which it utilized and went on international level with the help of globalization.
Consequences of globalization on the major stakeholders
It is not always that everything has positive effect on all related things. In the same way, globalization has affected different things in different ways. Globalization has positive effect on some stakeholders and negative effect on some others. How it affects stakeholders of financial services industry are followings;
Firms - When it comes to provided services on the world level, the small and local firms of the industry are not capable for it. The reasons for this are limited resources and the infrastructure; because of this these firm are not able to attract more customers, which restrict firms' growth prospective (Hoekman et.al., 2004).
Suppliers - Suppliers have to provide fulfil their customers need if they want business from them. Now with the globalization of financial services, the suppliers of the industry also need to provide the services on the world level, which has reduced their profitability (Johnson et. al. 2008). However, the suppliers of financial services industry are not as affected as the suppliers of the other manufacturing industries.
Customers - The user of financial services are benefiting from the competition in the financial services industry. As the number of financial institutions is increasing and they are coming with new and innovative services, financial institutions have to provide qualitative services on reasonable prices (Smith, 2002). Overall scenario of the financial services industry is pointing towards the benefits of customers, because of globalization of the industry.
Governments - Govt. has played a significant role in promoting globalization, as it is the sovereign body of any country. When a country opens its economy for multi-nation companies, it considers negative and positive both aspects. With the globalization of financial services government has to pay more attention on the transfer of the currency. Most of the countries have their own rules and regulation for monitoring the flow of money, out the country and investment in the country from abroad (Dunning, 2001). Govt. has to introduce some restriction and define transfer modes to keep check on flow of money.
Globalization has its affect on every industry; the difference is in the extent of the affect and in the aspects of its effect, positive or negative. Where globalization has some positive effect, it does have negative effect. Because of globalization countries have opened their door for multinational companies; market for business is free and wide now. Globalization has also increased the gap between haves and haves not. Financial services industry is not an exception in this globalized world. Globalization has also forced world economies to free financial market. Most of the countries are enjoying modern and advanced technologies for financial transactions. People of different countries from the different regions of the world have access on similar financial service. Use of information technology and plastic money has played a significant role in the globalization financial services industry. Financial services industry is globalized to some extent, but the restrictions on the flow of money from one country to another limits its globalization.
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