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Globalization trends and activities of MNCs in the UK

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Published: Mon, 5 Dec 2016

Introduction

Globalization is a phenomenon of rapid expansion of countries and their businesses across the world. A corporation becomes multinational when it expands globally. The trend of globalization was started by the US, which led to many countries spreading all over the world in their quest to flourish trade. Companies are making huge profits after expanding globally specifically targeting Asian countries due to cheap labor cost and minimum infrastructure development cost. However, whenever a global event occurs, MNCs (Multinational Corporations) are also the ones which shoulder the huge losses. It has a large impact on the MNCs specifically based in US and UK. Furthermore, the process of globalization has reversed due to recession. Companies from Asia Pacific and European region are entering into the US and UK. Altadox electronic is a Russia based firm and specializes in manufacturing consumer electronic goods. The company wanted to enter into UK, which is why this report identifies the recent trends of globalization and MNC activities in UK with the view of investment from Altadox.

Recent Trends in Globalization:

As per the common perception of the word globalization, it simply means that the companies have a presence across the globe. The managers, leaders and cultures have become most successful due to the emotional intelligence in the arena of globalization. However, due to recent down turn of economies there have been significant changes in the globalization trends. The U.S. and UK are the strongest economies of the world though due to recession; there have been significant impacts on the economic growth of these countries. Presently, there are numerous companies which are now becoming global specifically from Asia Pacific and other European regions. There have been two interrelated processes which can be seen as changes in the globalization trends. The first one is the change in the efficiency and second one is the change in the allocation and coordination of system. It means that the MNCs have lost their efficiency due to poor demand in the market and dismantling of purchasing power of consumers due to economic misbalance. In the early start of recession all the countries have experienced a substantial decline in the output. Despite having the trade liberalization, changing consumption pattern of consumers, new power of consumer preferences and cut back of spending on defense the companies are struggling with the growth and expansion of the business. Service and manufacturing industry have experienced a significant decline in the demand and excessive output which increased the inventory cost and holding cost of companies, employee salaries and wages. In addition to this high attrition rate has also impacted over all profitability of the company as it leads with high cost of production and manufacturing. Apart from this the sustainability issue has taken a seat back towards the economic and financial issues which emphasize on bringing the sustainability in the forefront. The issue of sustainability is in the mainstream of global consciousness where the companies do not have much in the choices which consumers are demanding. Therefore it would be a challenge to further expand.

MNC Activity in UK

As discussed in the above section, globalization has taken phenomenal shift after recession, which consequences a gap between the strategies space of multinational corporations. Bartlett and Ghoshal (1986) argued that the MNC with lower level of importance must have low strategic impact on their business after economic slowdown. However the MNC with high level of competitiveness and competency are affected significantly and the process of low integration has been started in the UK economy. The MNCs are actively involved in developing the new strategies and competencies to overcome from the loss occurred due to recession. Companies are focusing on preparing the new marketing campaign, product development and advertisement and other promotional activities to attract the customers across the globe. In addition to this the MNCs in UK are also looking for cost effective solution which can impact on their business profitability and achieve their sales targets. Some of the companies are emphasizing on the development of skill sets by restructuring the workforce, training and development, organization restructuring for the purpose of meeting the business objectives. MNCs in UK are also actively involved in merger and acquisition activities in order to wipe out the competition. Bartlett (1986) has identified some of the corporate strategies of MNCs among which global, multinational and transnational are given more importance. Large MNCs are currently operating under the low integration and low responsiveness. Companies are currently exploring the knowledge from other subsidiaries and capabilities through worldwide adaptation and diffusion. There has been a huge gap between the integration of business process and responsiveness in consumer demand. It have become a major reason that why MNCs are not focusing towards the strategy building exercise to remove the barriers and challenges as either they do not have the resources or they are lacking with suitable skill sets. At present most of the MNCs are focusing towards the business outsourcing model where they can actually outsource the major cost bearing activity to reduce their overall cost of producing the goods and services and incorporate into pricing strategy to offer goods and services at competitive prices to the customers. Outsourcing strategies is most popular among UK MNC as they are outsourcing their most difficult process with their counterparts in other countries to make it more comprehensive and effective to deliver the services to the customers with quality. However due to tough competition there have been a challenge for the new entrant to establish its business in UK.

Major Challenges while Entering into UK:

Apart from the changing trends in globalization and current activities of MNCs in UK, there have been some common challenges that an MNC might face while entering into UK as listed below:

Market Imperfection

Tax Competition

Cultural Challenges

Market Withdrawal

Lobbying

Patents

Government Power

It could be a strange position that the company decide to initiate the business process from different countries where the company does not have any idea about the laws, culture, policies, business practice and local custom. However it could be more efficient to integrate the valuable assets overseas with the local factors of production at minimal cost through selling or renting it to the native investors.

A major reason is that the utilisation of markets for coordinating the behaviour of agents situated in various countries is less productive than coordinating them by an MNE as an institution. The extra expenses introduced to MNEs by the entry into a foreign environment are relatively lower than local enterprises. With reference to Hymer, Kindleberger and Caves, the functioning of MNEs is explained by structural market imperfections for the end product. Hymer’s example states that there are acknowledged as two firms as monopolists in their own market and separated from competition by transportation expenditures and various tariff and non-tariff barriers. In case these expenditures drop off, both are compelled to compete; which in turn will automatically lessen their profits. The companies can magnify their individual incomes by a merger or acquisition, leading to a decline in the competition as a result shared market. Due to the coalition of two different companies into an unified single global enterprise the financial costs will be neutralised.

There could also be a scenario where the licences are restricted or substitutes are scarce in a foreign market. The inevitable solution is the acquisition, merger or the vertical integration of the licensee in question into overseas manufacturing. Hence, the multinational corporation paves the way to implement price discrimination policies in different markets. As a result, Humyer considered the growth MNCs as a negative impact for controlling competition between companies belonging to different countries.

As discussed earlier, Hymer claimed that market imperfections were structural. It was his understanding that market imperfections were created by deviations from perfect competition in the final product markets. Other factors for their existence are the regulations of proprietary technology and distribution systems, scale economies, favored access to inputs and product differentiation. The market runs without any imbalance or difficulty if these determinants are not present. The transaction costs theories of MNCs was established by McManus (1972), Buckley & Casson (1976) Brown (1976) and Hennart (1977, 1982). They were of the opinion that market imperfections scenarios were inevitable in markets and multinationals as organisations attempt to avoid them. These imperfections in markets areas are as impending as the neoclassical theories like complete knowledge and enforcement cease to exist in real markets.

International power

Tax competition

The importance of MNCs in globalisation is unquestionable. There have been instances where nations and regional areas within the nation have fought with each other for the right to facilitate MNCs, and the resultant tax revenue, employment, and economic process. In their quest for success, nations and local states provide lucrative add ons to foreign companies in the form of tax leniency, assurances of governmental help or better infrastructure, or unrestrictive environmental and labor standards enforcement. This open armed practice of luring MNCs to invest in the country of business is lucrative and beneficial for both. In other words, it represents a race to the bottom, a stride towards attaining greater autonomy for all corporate organisations and nations.

However, experts like Columbia economist J.Bhagwati differ in their opinion and cotradict by stating that MNCs concentrate in a ‘race to the top.’ Although, MNCs welcome leniency in taxes or cheap labor costs as a comparative incentive, there is no proof that multinationals consciously avail themselves of favorable environmental rules or cheaper labour standards. He further claims that global firms focus on operational efficiency, which is based on high amount of standardization. Therefore, global firms inevitably adjust production operations in most of their practices in accordance to the jurisdictions where they function. This will most likely lead to regions in the Eurpean Union, United States of America or Japan because of higher standards. The issue of labor costs could be understood better with the following example. In Vietnam, the multinational enterprises give wages but it would be considerably less than the wages paid in the UK, although the European productivity would more due to technology; which implies that comparing the two would lead to confusing and unsubstantial outcomes. A company in UK would most likely use lesser employees for the same work through capital intensive methods as compared to the labour intensive techniques in Vietnam. There may also be a scenario where they would end up paying premiums of 10% to 100% on local labor wages. Furthermore, most multinational enterprises foray into a foreign market is for the long haul. They expect to sustain long term revenues and returns. They invest considerably in setting up of plants, training employees, etc., which can take its toll; once implanted in a jurisdiction, which is why, many corporate bodies fall prey to predatory practices like, e.g., expropriation, unexpected contract renegotiation, the arbitrary withdrawal or mandatory purchase of unwanted ‘licenses,’ etc. Therefore, it can be safely stated that the negotiating power of MNCs as well as the supposed ‘race to the bottom’ may be exaggerated; whereas the considerable advantages that MNCs have to offer are more often under exaggerated.

Market withdrawal

Due to the sheer size and impact of the MNCs in an investing economy, the constitution of government policies are inclined towards favorable market entry otherwise any unfavorable signs maybe seen as bad omen to their business leading to withdrawal. In some cases, in an attempt to lessen health care costs, a few governments experimented by imposing pharmaceutical firms to license their patented drugs to regional competitors for a miniscule fee, in the process artificially reducing the price. This almost led to a mass exodus of global pharmaceutical firms from the country resulting in lack of unavailability of essential medicines and drugs. As a result the government had to restrain in their attempts. Corresponding conflict of interest cases have taken place where a government attempted to impose foreign firms to avail their intellectual property to the public (regional businesses) so that the local businessmen also flourish through the influx of technology. The MNCs decided it was in their best interest to withdraw from such a market where they might have to give up on their core technological advantage. These kindof reactions often lead governments to rethink their strategies. These struggles for better conditions often go in favour of the MNCs simply because of the fact that too much is at stake for the smaller countries, whereas some large and solid economies like the USA or Brazil with viable indegenous market players have been known to come out victorious at times.

Lobbying

Multinational corporate lobbying is directed at a range of business concerns, from tariff structures to environmental regulations. There is no unified multinational perspective on any of these issues. Companies that have invested heavily in pollution control mechanisms may lobby for very tough environmental standards in an effort to force non-compliant competitors into a weaker position. Corporations lobby tariffs to restrict competition of foreign industries. For every tariff category that one multinational wants to have reduced, there is another multinational that wants the tariff raised. Even within the U.S. auto industry, the fraction of a company’s imported components will vary, so some firms favor tighter import restrictions, while others favor looser ones.


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