Conditions led to the development of global market
The conditions which led to the development of the global market are:
- Increase in the number of foreign companies building and manufacturing plants: Many companies and organizations in United States are giving the contract of their buildings to foreign organizations like Emaar Pvt. Ltd. Emaar is known as the leading manufacturing company. They have created many magnificent master pieces which human history will always remember. By looking into such reputation of Emaar, many big organizations are giving their contracts for the head office building to them. This generates revenue and helps in creating the global market for Emaar Pvt. Ltd.
- Increase in the number of companies controlled by citizens outside the country: There are many companies in United States that are controlled by foreign citizens i.e. the head is not of the same country. This is an important aspect as it also shows the nature of human behavior to be tending towards one's own country.
- Difficulty of domestic market to sustain the customer rates of growth. The domestic market available may not be capable enough to cope up with the production rate of the product. So to gain more profit organizations generally prefer globalization. It extends the reach of product to the common man in different countries. It also helps in analyzing what is co - competitors are doing in other parts of the world.
- Rapid increase in globalization. There is a huge increase in the rate of globalization. Governments in different countries are now having flexible plans for foreign companies. The companies controlled or governed by foreign citizen today are not restricted to any boundaries as it was before.
Four risk of International business
The risks in international business are:
- Economic risk: It comes in consideration when the desired country in which we are selling our product is not economically capable enough to purchase the same. Also the effect of the interest rate and exchange rate makes it very difficult to continue in the international market.
- Political risk: Political instability or actions can make the international business difficult for the company to operate in these countries. This may be so because of the impact created by the individuals in the top government and / or the negative publicity of the organization.
- Technological risk: Security and creativeness are one of the key features of any business policy. Cost of creating and implementing new technology and the lack of security in transaction of revenue electronically may also result in dangerous effects while doing business at the world level.
- Terrorism risk: Attacks that maybe due to the mere hatred of companies by local citizens of the host country or maybe a result of difference in the religious policy, culture etc. Terrorism leads to the sabotage of foreign citizens, kidnapping of employees, etc. Such kind of situation is very frustrating and makes the operation of the organization very difficult in these countries.
Why do firm Internationalize?
The main reasons for firm or organization to internationalize themselves are:
- High growth rate of the regional trade areas and also the World Trade Organization. There is much more market in the international arena than in the domestic market. Firms want to capture that market to make hold in their home country and also lead in the foreign countries. An example for this is Coca- Cola.
- There is a huge impact of mobile phones, internet and other international media of communication for diluting the national borders of countries. This results in the ease of communication between different branches of the organization without much hassle.
- Free market system present in the developing countries of Asia, Latin America and Eastern Europe signifies as a pot of gold for the organizations. They try to capture the market in these areas as much as they could because these markets have very less competition as compared to the developed countries like United States.
- To properly manage the global environment and resources, the firms go for globalization. It results in different set of answers from different people across many nations. It gives the global scenario of what is happening around the globe and utilizing the resources in much more efficient way.
There are various participants in the international business like:
- Multinational Enterprises
- Small and Medium Sized Enterprise
- Born Global Firm etc.
- Multinational Enterprises: It is an enterprise or corporation that delivers services and / or manages the production of products in different countries. They have their headquarters in a single country also known as home country which governs the working of the organization in several other different countries known as the host countries. First known MNE or the Multinational Enterprise is the Dutch East India Company.
- Small and Medium Sized Enterprise: These are the companies or organizations whose turnover also known as the headcount falls below a certain limit. This term is mainly used in United States of America to judge various aspects of the organization.
- Born Global Firm: Many SME's i.e. the small and medium sized enterprise are launching them in the international market and are successful too. These groups of organizations are termed as the born global firms.
Why do firms internationalize?
Social Consequences of Market Globalization
Globalization denotes an ongoing process which integrates different societies, cultures and regional economics by a medium of globe - spanning network of trade and communication. It sometimes also referred specifically as the economic globalization i.e. the integration of national economies by trade, capital flow, migration etc. But in general globalization is a combination of technological, economic, political, biological and social factors.
Various social consequences of market globalization are:
- Positive consequences:
- Technological advancement: Society is becoming more technically advanced as the research from one part of the world takes no time to reach to the other part. Scientist and researchers now work in hand in hand with each other no matter how far they are to develop and invent something new. Mobile phone is a clear example for the technological advancement of the society. As soon as Apple launches its new iPhone, it is delivered to the doorsteps of the person living in China, Japan, or even to the remote places like India.
- High standard of living: Globalization helped in raising the standard of living. The transaction of money from one country to another generates revenue which in turn helps the host country to raise the standard of living for the local peoples. The new technology when comes into the market also leads to local people come up to that standard and mark their presence. This requires them to be much more technically and economically strong which is known as the standard of living.
- Negative consequences:
- Inequality: After all these positive impacts, globalization also leads to the inequality in the system. It treats a layman as different and engineer as different. Thus creates a large gap between the groups of communities if they are not ready to accept the change.
- Un-employment: Globalization also leads to the unemployment in host countries. Efficient work force from host countries are taken to their headquarters in the home country thereby creating a large set of vacant positions in the host countries. Un- employment is not a big issue if the organization is local and does not drain the power to their home country.
Firm level consequences of market globalization
The unintended consequence of globalization which includes domestic job losses i.e. un- employment, cultural extinction, worker exploitation, higher oil prices, etc. results in the amalgam of basic compliments against IMF, WTO and others. Protest of different groups like a campaign 'ant sweatshop' in America which is mostly student lead has made an impact much beyond the boundaries of campus.
Terrorism is also the result of the firm consequence of market globalization. Recent attack in London was likely to coincide with the Scotland meeting of G-8 in 2005. This shows that the consequence of market globalization is not only in context with the firm but also affects the whole society.
Firm when considered internally, have many positive impact of globalization like:
- Knowledge and culture sharing across nations.
- Generating revenue.
- Cross- cultural talks and seminars.
- More involved to user groups of the host countries
All these points help the firm to gain market share in home and host countries.
Three types of participants in International Business
The three types of participants in international business are:
- Focal firm: It is the initiator or the starter of the business in the international arena which includes many SMEs and MNEs. It may also consists of some of the privately owned organization and others that are not public but still the organization like state enterprises could be owned by the government.
- Distribution channel intermediary: This is a specialist firm which is used to provide different marketing services and logistics for the focal firms. It serves as the part of the international supply chain both in the host countries and the home country. Intermediary has their independent market and works for the focal firms on the contracts signed under the mutual agreement of both organizations.
- Facilitator: This firm or an individual has special expertise in banking, customs clearance, legal advice etc. which helps the focal firm for performing the international business transactions across different nations. They may also arrange shipping on behalf of the focal firm or the exporting firms mostly like travel agents.
International business involves transaction from many focal firms, intermediaries and facilitators. So they must coordinate them well to grow and gain market share internationally. (Three types of participants in business) Common characteristics of Born Global firm
The characteristics of born global firm are:
- They should be SMEs i.e. small and medium sized enterprise.
- Should gain market share as soon as entry into the market.
- May contain many facilitators and intermediaries.
- Globally recognized as a winner.
- New technology and generate high market revenue.
A known example for born global firm is "Google Inc". When it was launched it had 2 employees and after it was made global it didn't constitutes more than 20 employees. So, it was for sure a small and medium sized enterprise. Now Google provides innovation and technology at a much faster pace than others making it as a brand or fate to be recognized as a born global organization. (Rasmussen, 2010)
Foreign Market Entry Strategies of Focal Firms
Some of the key points what focal firms should kept in mind while entering the foreign market are:
- History: History plays a crucial role in selecting location of host or market for the focal firm. It is important as it gives us a clear picture of what local thinks of organizations like them and how they will react while the organization is being set up.
- Geographic and Climatic conditions: The employees working in the home country are not capable to cope up with the weather or the climatic conditions of the host country. It may slow down the work process and may lead to huge loss of the organization. Also, a check is required for the natural disasters happened in that area. For example, earthquake may shatter all the headquarter buildings of the host country.
- Social responsibility: The social responsibility for the focal firm is must and should take it into consideration. The local people must want to know what they will get if they allow the firm to be set up in that location. Focal firms must be prepared for all these.
- Collaboration: Focal firms may try to collaborate with other firms locally present in those areas to create an element of trust amongst the localities. This helps in gaining the market share faster than any other SMEs foreign organization.
- Eric S. Rasmussen. (2002). The born global concept, Retrieved on April 1, 2010 from https://docs.google.com/viewer?url=http://www.aueb.gr/deos/EIBA2002.files/PAPERS/S4.pdf
- Three types of participants in business. (n.d.). Retrieved on April 1, 2010 from https://docs.google.com/viewer?url=http://www.decon.unipd.it/info/sid/materiale10/belussi_international_business/3%2520week/Theory-value-chain.pdf