MOB Unit 1 – Module 1: Business and Its Environment

Topic 6 – Impact of Globalization on Business

1. Definition of Globalization

Globalization is a process by which the economies and societies are integrated into one world economy.
Globalization has been facilitated by many factors including:

 Technological advancement
 Removal of Trade Barriers
 Growth of Multinational Corporations
 Information and Communications Technology Advancements

2. The Rise of Multinational Corporations

As a result of globalization, there has been an increase in multinational corporations (MNCs). A multinational
corporation is an organization with headquarters in one country and several production operations in different
countries across the world. The emergence of MNCs affects the way in which business activity is conducted as
well as the role of government in regulating business activity. This is increasingly so given the increased flows of
foreign direct investment provided by MNCs which gives them more power and greater involvement in the host
country and therefore being able to influence production, distribution, prices, employment, as well as other
socioeconomic conditions in the host country.

There are several factors that have encouraged the rapid growth in multinational corporations in recent times.
These factors include the following:

 The Removal of Trade Barriers: The reduction and removal of trade barriers to facilitate greater trade
among countries have made it easier and cheaper for multinational corporations to enter host countries.
 The Provision of Incentives by Government: In developing countries, government encourage foreign
direct investments from multinational corporations by providing incentives such as tax holiday which allows
these corporations to establish in the host country without paying taxes for a specific period. This may be
necessary to develop key industries in the region where they lack the necessary resources.
 Cost Economies: Many multinational corporations will establish in countries with a low production cost.
This includes low cost of raw material, labor, transport, and other costs involved in the production process.
This allows the company to benefit from economies of scale which is the reduction in cost as output
increase.
 Rapid Improvement in Technology and Communication: Advances in ICTs have provided greater
opportunities for MNCs to establish operation around the world. The development of the World Wide Web
 and online shopping and banking makes it easier to facilitate commerce. Such advances allow for the
rapid dispersal of information and communication in real time and make it easier for multinational
corporations to manage its production operations across multiple countries. MNCs are very advanced
when it comes to technologies as they spend lots of money in research and development.
 Establishment of Trading Blocs and Integration: The creation of trading blocks and regional integration
has facilitated an increase in multinational corporations as they can move freely between member
countries of these blocs, for example, the Caribbean Single Market and Economy (CSME).
 The Growth of Some Developing Economies: As some countries experience expanding growth in GDP
and per capita income which led to an increase in the standard of living for citizens, this led to the
expansion in the multinational corporation market. This provided opportunities for them to capitalize on the
growth and to gain an advantage over domestic firms.

 Benefits of MNCs to Caribbean Economies

 Increase access to employment for citizens

 Increase access to a wider variety of goods and services available to consumers

 Stimulate growth and development

 Increase government revenue through taxation

 Improve and increase infrastructure

 Improve research and development and the knowledge base and training of citizens

 Improve technology and innovation

 Have a positive impact on the balance of payment through increased exports

 Help to remove domestic monopolies and provide competition which benefits consumers

 Drawbacks of MNCs to Caribbean Economies

 Stifles infant industries in the Caribbean

 Profits are repatriated and are not reinvested in the Caribbean
 Natural resources are overexploited
 MNCs may leave suddenly and hence leave many people unemployed
 MNCs may exploit workers as they may want cheap labor at low cost
 MNCs may destroy the environment through pollution and poor waste disposal
  MNCs may develop into monopolies especially if their competitor leaves the market
 MNCs reduce foreign reserves
 If given a tax holiday, MNCs may not be liable to pay taxes in the host country

3. Challenges Faced by MNCs operating in the Caribbean

 Lack of Infrastructure: This would result in high setup cost. Infrastructure, technology, and the
necessary expertise may not be readily available in the host country. This will result in the
multinational corporation having to make high initial investments and therefore may have high start
cost. The existing infrastructure may not be able to support the advance technology needed for the
MNC to operate and hence may drive up cost.
 Lack of Human Capital: This is another challenge faced by multinational corporations in the
region. The host country may not have the intellectual capital needed and the MNCs may have to
import labor to serve their needs. Some MNCs may not be comfortable with the filling key positions
from the local workforce and may want to bring in expatriates to fill these positions. However, there
may also be restrictions and stipulations in place by the government as to the labor requirement for
the local workforce.
 Unstable Political Environment: This is another problem that the multinational firms may
encounter as there are frequent changes in the government in some Caribbean countries. MNCs
may have a good relationship with one government and when there is a change this relationship
may be at risk and the same formalities offered to them by one government may change when
another government is in power.
 Fear of Nationalization: This is also another challenge faced by multinational corporations. In
countries where the multinational business may be providing a key commodity they may be at risk
of the government taking over their operations especially if it is in the best interest of the country.

4. The Government as a Facilitator of Globalization

The government can serve as a facilitator to take advantage of the opportunities offered by globalization
through MNCs. Within the Caribbean, the government role as a facilitator requires them to establish the legal,
regulatory, and institutional infrastructure necessary to accommodate MNCs. This will require the necessary
resources and expertise as well as a commitment for implementation within a specified timeframe. To create a
facilitating environment effective incentives and strategies must be developed to engage the MNCs in a
positive way.

Governments of the region must also be careful in when effecting legislature and policies in facilitating the
process of globalization. They must be aware of the negative consequences of globalization and how
vulnerable the Caribbean is to the process especially given that the countries of the region are not able to
benefit from economies of scale because of their size and hence higher production cost and higher prices for
its key commodities. They must put in place measures that will protect its local industries and the wider
society from the negative implications of globalization. They must establish regulations and legislature for
operation for foreign investors which governs their social and ethical behavior.

5. The Impact of Globalization on the Caribbean Business Environment

The impacts of globalization on businesses within the Caribbean region can be examined through two
components of globalization: globalization of markets and globalization of production.

 Globalization of Markets: This refers to the coming together of distinct and separate markets into one
big global market place. This involves market access to businesses across the globe to meet
consumer demands. Caribbean businesses are no longer limited to their local home market but
instead have access to a global market place when conducting business.
 Globalization of Production: It refers to the increased ability of firms to source goods and services
from varying locations across the globe to benefit from low cost of production and high-quality raw
materials. This enables firms to lower their cost of operation and increase the quality of products
offered and hence give them a competitive advantage over their rivals.

 Positive Impacts of Globalization to Caribbean Businesses

 Increase access to different types of business start-ups such as franchise, licenses, and strategic
alliances, for example, in Trinidad Starbucks will become one of the latest franchises acquired

 Increased access to low-cost raw materials through outsourcing

 Increased access to low-cost labor

 Increased access to a global market place via the World Wide Web

 Access to a global consumer base

 Access to financial technologies and financial capital which allows them to gain a competitive
advantage

 Increased access to linkages and strategic relations between suppliers and manufacturers

 Increased access to lower cost manufacturers and suppliers

 Increased access to international networks and alliances

 Increased quality of goods and services offered because of competition

  Reduction in the cost of production

 Lower prices and increased quality of products

 Positive Impact of Globalization on Consumers

 Increased access to new and latest products
 Increased access to communication and information of products
 Access to a global market
 Access to experience other cultures
 Cheaper travel
 Ease of communication and access to information of goods and services
 Access to lowers prices of goods and services
 Access to higher quality goods and services
 Enhance decision-making in purchasing goods and services
 Access to a wide variety of goods and services

6. Trade Liberalization

A key component of globalization is trade liberalization that refers to the removal of barriers to trade which will
allow for free trade to take place among countries. These trade barriers are usually classified as tariff and nontariff
barriers.

 Tariff Barriers: These are tax impositions made by the government on the import of goods and services
to reduce the amount of goods imported into the country. The tariff makes imported goods more expensive
and therefore would be less competitive among local products.
 Nontariff Barriers: These are measures imposed by the government that does not include taxes but are
geared toward helping the local industry, for example, quotas, embargoes, voluntary agreement,
exchange rate controls, and public procurement. Nontariff barriers help make trading more difficult and
sometimes costlier, therefore discouraging trade.

 Importance of Protectionist Measures

Protectionist measures are implemented by the government to control and restrict the amount of foreign goods
imported into country. There are many reasons why the government of a country implements protectionist
measures. This may include the following:
  To protect the local and infant industries

 To prevent dumping by multinational corporations. This is where goods are sold at a price lower
than the marginal cost of producing the good

 To protect consumers and citizens from exploitation

 To encourage a positive balance of payment

 To encourage a trade surplus

 To create jobs for the domestic labor force

 To allow for the development and creation of new industries

 To give the local industry a competitive advantage

 The Move Towards Trade Liberalization

The move toward trade liberalization has been driven by several factors that include the
following:

 The establishment of economic trading agreement and integrating blocs. The

creation of the Caribbean Single Market and Economy has facilitated the removal of
restrictions to allow for the free movement of goods, services, people, capital, and
technology across the member countries. The CSME is a key element of the
integrating institution of CARICOM. The establishment of such institutions
promotes trade liberalization among its member countries. A similar example is seen
in the European Union which is a free trade bloc promoting free trade among its
members. The North American Free Trade Agreemen (NAFTA) and the Economic
Partnership Agreement (EPA) are some of the agreements that support and gave rise
to trade liberalization.

 The creation of global institutions such as the World Trade Organization has
become a great influence and advocate of trade liberalization. Established in 1995
and replacing the General Agreement of Tariff and Trade (GATT), the World Trade
Organization deals with regulating and governing the rules of trading between its
members’ states to ensure a smooth process
 Improved international relations between governments have also had a positive
impact on trade liberalization. This has facilitated many trading agreements and
fostered bilateral relationships between countries.

 The advancement of communication technologies has helped removed barriers

between countries and now consumers can access products from around the world

 Benefits of Trade Liberalization to Caribbean Economies: Trade liberalization has fostered many
benefits to countries in the Caribbean. It has helped with efficiency, increased innovation, and the increase
in consumer choices. Some of these benefits include the following:

 It allows countries to specialize in goods and services for which they have a comparative
advantage.

 It provides access to a greater variety of goods and services.

 Increased competition stimulates efficiency in the local industry and allow the domestic firms to
increase their standard to compete.

 It increases competition which help eliminate domestic monopolies from being established in the
local industry which prevents exploitation of customers.

 It allows countries to benefit from economies of scale which is the decrease in cost as output
increase.

 It encourages and fosters better trading and political relationship among countries.

 It allows consumers to benefit from lower prices and better quality goods and services.

 It allows local companies to become more innovative and gives them access to the international
market.

 It increases foreign exchange in the country.

 It increases government revenue through taxes.

 Drawbacks of Trade Liberalization to Caribbean Economies: While there are several benefits to trade
liberalization, there are also many drawbacks that can negatively impact the citizens, businesses, and
country. Some of these drawbacks include the following:
 It leads to exploitation of the environment and workers.

 Destroys the infant industry because of high levels of competition which may force firms out of the
market.

 Businesses and industries become susceptible to international shocks.

 It increases the level of dependence on other countries.

 This may encourage dumping.

 It may increase the level of inequality among countries.

 It encourages migration, which results in a reduction in the human capital of a country.

 This may lead to a balance of payment deficit especially if a country becomes dependent of
imports.

 This may encourage the trading of illegal products.

 This may stimulate trade wars which may have negative implications for a country.