Why Do Companies Globalize/Offshore Overview
Business globalization, according to the business dictionary, is been defined as a worldwide movement towards achievement of economic, financial, trade and the communication integration. Therefore, in order to take advantage of the free movement of capital and commodities that includes both goods and services, businesses are forced to change their perspectives on how they view businesses from local and nationalistic view to a broader worldwide outlook (Yusuf 2003, p. 35). Hence they should view businesses being both interconnected and also interdependent worldwide. This paper shall explore the reasons for globalization, the merits of globalization and its demerits and factors that promote globalization and its challenges.
According to Sydney Okollo (2006, p. 23), in the article, reasons for globalization, he explains that companies globalize for two major reasons; defensive or aggressive. These therefore, form the basis of formulation of the two main approaches of globalization. First, it is the defensive or the reactive approach. In this approach, the company mainly reacts after actions from their competitors or the government which controls the environment which the company operates or the dynamism of the client’s demands (Bardouille 2005, p. 108). One of the major actions of the competitors that may provoke a reaction from the company is that if the competitors have already set up their investments in the world market. If this company leaves the competing company to operate in the global market for so long, then it might be difficult to challenge them since, their investments will have a tighter grip of the market.
On the case of barriers to trade, companies shift from exporting manufactured products to the importing countries, to producing the products there (Haynes 2010, p. 56). The main aim of this is to offset the problems of increased tariffs and quotas, or policies that are designed to discourage importations and other implemented restrictions which make exportations to other countries too expensive. Moreover, the local government may have policies that are exploitative in that they encroach on the companies’ profits, make the cost of production to skyrocket or hamper expansion of the company locally (Ross 2003, p. 1). Customer dynamism revolve around their demand for assurance on products, operations that are effective and efficient, reliability and problems involving logistics i.e. the foreign based clients who may request that their supplier be accessible at all times. This therefore, forces companies to set up overseas for customer retention purposes. The second approach is the proactive or the aggressive approach (Kaur 2001, p. 23). In this approach, the company takes the initiative of exploring the global market but not out of reaction from any player in the business market (Adnan & Ali 1996, p. 54). A company may decide to invest their excess profits with an aim of expansion. They therefore, view the foreign markets as the avenue which will provide such opportunity for growth. In the process, the companies endeavor to up their efficiency by the employment of underutilized resources such as the human and the capital assets. They also seek to increase their economies of scale of production where there is a low fixed cost of production per unit output.
The main challenges to globalization, according to Mussa (2003, p.23), are the integration of both the capital and the money markets. This is mostly in terms of the flow of capital to and from a country. It is highlighted that this challenge is more conspicuous in the emerging market economies, and it mostly involves the third world countries, whose markets for international trade are not yet fully developed (Stolovitsky 2012, p.8). Developed countries are using better policies that the developing countries should copy and improve (Cox 2007, par. 4). Other challenges include education and training where the overseas countries manpower is not adequately trained to provide the labor that the company desires. Research and development in the new state may be inadequate to warranty investments (Adnan & Ali 1996,p.29).
According to Lovekar (2011, July 10), the realities of globalization to this firm will be massive. One of the advantages is the scope or the coverage of the firm. It will widen its operation and have a wide market base for its product hence an increase in its demand. The company will also enjoy the economies of scale since it will be producing in large quantities. The cost of production per unit output will therefore, drop. According to Krueger (2003, p. 21), the image of the company will improve due to continuous production of quality products, which are being received in a wide area of coverage. Since there is a wide coverage, various development strategies will be developed. These strategies are planned to give the company variety to from where they can choose.
According to Stolovitsky (2012, p.34), the cultural aspects that will affect globalization are the language and management styles. The new country may be having management culture that may not be similar to that of the investing country. The language will also be a factor to consider since not all countries use the same language. Culture in terms of preference is also very important to consider. The new products may not be well received in the new region because of their cultural beliefs.
The main challenges of this business are the movement of the technology and processes to the new site. As explained earlier, the countries may not have developed structures that will support the free flow of capital assets and exchange in the money markets (Garrett, Evans and Williams 2006, p. 392). Hence, it may bring problems to the business in terms of moving the whole production process. This is because, in the new location, people need to be trained and be acquainted with the facilities that the business will set up. The business in this instance will be forced to create workforce in the new region by the use of the existing ones. A lot of training and supervision will be involved, and this may be time consuming but relevant if the company wants to succeed in the global market.
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