global is at ion notes

8/8/2019 Global is at Ion Notes

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Chapter 2: GLOBALISATION

Q.1.GLOBALISATION OF INDIAN BUSINESS:

Globalization, liberalization and privatization were the three cornerstones of Indias New EconomicPolicy of 1991. The year 1991 marks the beginning of a new era in the Indian economy. The new objective to be

pursued by the policy makers, strategists and executives was to make India the largest free market economy of the 21 st

century. In pursuit of this objective, the Indian economy was to be integrated with the world economy through aprogramme of structural adjustment and stabilization. While the stabilization programme included inflation control,fiscal adjustment and BOP adjustment, the structural reforms included trade and capital flows reforms, industrialderegulation, disinvestment and public enterprise reforms and financial sector reforms. The programme of economicreforms has not been entirely successful and as a result, the globalization process of the Indian economy has notgathered momentum. Indian business continues to face a number of difficulties and obstacles in their effort to globalizetheir business. These obstacles are as follows:

GOVERNMENT POLICY AND PROCEDURES:Government policy and procedures in India are extremely complex and confusing. Swift and efficient action is a pre-requisite for globalization- which sadly missing. The procedures and practice continue to be bureaucratic and hence a

speed breaker in the globalization effort.

HIGH COST OF INPUTS AND INFRASRUCTURAL FACILITIES:The cost of raw materials, intermediate goods, power, finance, infrastructural facilities etc. in India is high whichreduces the global competitiveness of Indian business. The quality and adequacy of infrastructural facilities in India isfar from satisfactory. Further the technology employed by Indian industries and the style of operation is generally outdated.

RESISTANCE TO CHANGE:The pre-reform era (1951- 1991) breeded lethargy, created rigid structures, systems, practices and procedures andgenerally instilled a laid back attitude. These factors are a hindrance to the processes of modernization, rationalizationand efficiency improvement. Technological change is generally perceived to be employment reducing and hence

resisted to the extent possible. For instance, information technology was introduced in India in the early eighties.However, computerization process of nationalized banks began only in the mid nineties. Excess labour is particularlyemployed in the public sectors in areas such as banking, insurance, and the railways and Indian industry in general. As aresult, labour productivity is low and cheap labour in many a cases turns out to be dear.

SMALL SIZE AND POOR IMAGE:Grant Indian firms are known to be global pygmies. A look at the fortune 500 list would reveal all to you. On a globalscale, Indian firms are found to be small in size with low availability of resources. Indian firms there for cannot competesuccessfully in the international market. Indian products suffer from a poor image in the international market for bothreasons valid and otherwise. Indian firms continue to miss consumer focus both domestically and internationally. Thevalue-money equilibrium is missing in Indian products. Further, Indian firms are do not have the where- withal to keepup to the delivery schedule, accepts large orders and match up to international specifications.

GROWING COMPETITION AND POOR R & D SPEND:Indian firms are not only up and against competition from developed countries but also emerging Asian powerhousessuch as South Korea and China. Continuous improvement in quality and usefulness and competitive costs withcompetitive pricing can only keep you afloat and in order to remain afloat, one has to spend quite a lot on R & D. both

public and private sector outlays on research in India is deliberately low when compared to the developed countries.

NON TARIFF BARRIERS (NTBs)Member nations of the World Trade Organizations are bound to progressively reduce tariff rates across the board over adefinite period of time so that level playing field is created in global trade. Tariff barriers are therefore not of much

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concern. What concerns developing nations in particular, are non- tariff barriers imposed by the developed countries.Issues such as child labor content in some of the products exported by India to the developed nations had cropped upand remain unresolved.

Q.2. ADVANTAGES OF GLOBALISATION:

For successful globalization, countries need to chalk out strategies and policies to open up the doorsfor the inflows of foreign direct investment (FDI). The FDI by the MNCs brings with it flow of foreign exchange/foreign capital, inflow of technology, real capital goods, managerial and technical skills and know- how.

Globalization can easily promote exports of the country by exploiting its export potentials in a rightway. Globalization can be the engine of growth by facilitating export- led growth strategy of developing country.ASEAN countries such as Indonesia, Malaysia and Thailand have demonstrated their success of export- led growthstrategy supported by the FDI under globalization approach.

Globalization can provide sophisticated job opportunities to the qualified people and check braindrain in a country. Globalization would provide varieties of products to consumers at a cheaper rate when theyare domestically produced rather than imported. This would help in improving the economic welfare of the consumerclass.

Under globalization, the rising inflow of capital would bring foreign exchange into the country.

Consequently, the exchange reserve and balance of payments position of the country can improve. This also helps instabilizing the external value of the countrys currency.

Under global finance, companies can meet their financial requirements easily. Global banking sectorwould facilitate e banking and e-business. This would integrate countries economy globally and its prosperity would beenhanced.

DISADVANTAGES OF GLOBALIZATION

Globalization is never accepted as unmixed blending. Critics have pessimistic views about its ill-consequences.

When a country is opened up and its market economy and financial sectors are well liberalized, itsdomestic economy may suffer owing to foreign economic invasion.

A developing economy hen lacks sufficient maturity; globalization may have adverse effect on itsgrowth.

Globalization may kill domestic industries when they fail to improve and compete with foreign well-managed,well-established firms.

Globalization may result into economic imperialism.Unguarded openness may become a playground for speculators. Currency speculation and speculators

attacks, as happened in case of Indonesia, Malaysia, Philippines, Thailand, etc. recently, may lead to economic crisis. Itmay lead to unemployment, poverty and growing economic inequalities.

Q.3. STRATEGIES FOR GLOBALISATION:

Ans. When a company makes the commitment to go international, it must choose an entry strategy.This decision should reflect an analysis of market potential, company capabilities and the degree of

marketing involvement and commitment management is prepared to make. The approach to foreignmarketing can range from minimal investment with infrequent and indirect exporting with littlethought given to market development, to large investments of capital and management in an effort tocapture and maintain a permanent, specific share of world markets. Depending on the firms objectivesand market characteristics, either approach can be profitable. In fact, a company in various countrymarkets may employ a variety of entry modes since each country market poses a different set ofconditions. Having more than one strategy allows the company to match its expertise with the specificneeds of each country market.

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The various strategies available to Indian firms to enter the international environment are discussed asfollows:

1. EXPORTING

Exporting is perhaps the first step for a company to go global. It is the first of the attempts tounderstand the international environment develop markets abroad.

Exporting can be direct or indirect. With direct exporting the company sells to a customer in anothercountry. This is the most common approach employed by companies taking their first internationalstep because the risks of financial loss can be minimized. In contrast, indirect exporting usually meansthat the company sells to a buyer in the home country who in turn exports the product. Customersinclude large retailers like Wal-Mart or Sears, Wholesale supply houses, trading companies, and othersthat buy to supply customers abroad.In a global environment, the sourcing of finance, materials, managerial inputs etc. will also be global.However, with 0.5 percent share in the world trade, India is an insignificant player. There are a numberof products with large export potential but these have not been tapped properly. With a more

pragmatic and realistic export policy, procedural reforms and institutional support, with technologicaldevelopment, modernization and expansion of production facilities, India can definitely improve itsshare in the world trade from its present poor status. There are three strategies to increase exportrevenue. These are:

1. increase the average unit value realization,2. increase the quantity of exports and

3. Export new products.Value added exports assume significance in the context of increasing the average unit valuerealization. The bulk of Indias manufactured exports constitute the low price segment of internationalmarkets. Quality improvement and aggressive marketing is required to enter the high price segments ofthe markets. This can be achieved by technology imports and or foreign collaborations.The size of Indias export basket needs to be expanded by adding new products. In order to identifynew products for exports, export opportunities needs to be explored and products with high foreigndemand also need to be identified.There are also market segments, and industries which are abandoned by the developed countries onaccount of factors such as environmental consideration, lack of competitiveness etc. For instance,

developed countries are progressively vacating production of a range of chemicals due to higherexpenditure on overheads and wages. Yet another strategy available to Indian Companies is NicheMarketing.

2. FOREIGN INVESTMENT

It refers to investment in foreign country. Foreign investment by Indian Companies have beennegligible because of factors such as assured domestic market, want of global orientation, protectivegovernment regulation etc. However, this inward orientation has undergone substantial change afterthe adoption of the new economic policy 1991. With the economic liberalization and growing globalorientation, many Indian firms are setting up manufacturing, assembling and trading bases overseas.These facilities are either wholly owned or foreign partnership firms.Further, through acquisition route, Indian companies have made substantial investments abroad. TheAditya Birla Group has been pioneer in making foreign investments much before the adoption of the

new economic credo. Indian companies are also setting up production bases in foreign countries to getan easy entry into the regional trade blocks. For instance, a production facility in Mexico opens thedoors to the NAFTA area for Arvind Mills. Yet another example is that of Cheminoor Drugs by Dr.Reddys Labs in New Jersey which is set up as a subsidiary.

3. MERGERS AND ACQUISITIONS

In merger, two companies come together but only one survives and the other goes out of existence as itis merged in the other company. While in acquisition, one company (acquirer) gets control over theother company (acquired) at the willingness of each of the companies.

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Mergers and acquisitions is an important entry strategy in international business. Mergers andacquisitions can be used to acquire new technology, reduce the level of competition and provides quickaccess to markets and distribution network. Many Indian firms have resorted to the acquisition route togain a foothold in the foreign market. For instance, Indian companies had spent $ 711.4 million inacquisitions abroad in 2000 in industries such as InfoTech, drugs and pharmaceuticals, paints, tele-communication, petroleum and broadcasting. Some of the major acquisitions include investments by

Zee Telefilms, Leading Edge System BPL Software and Tata Tea. Dataline Transcription, Teamasiasemiconductors, Goa Carbons, Wockhordt and Acro lab are few other firms to name from a long list.A very important acquisition has been the $ 271 billion leveraged buy out of Tetley by Tata Tea. Withthe acquisition of Tetley, Tata Tea, having been the largest integrated tea producer in the world, alsogot possession of the second largest global tea marketer.Indian companies have also acquired foreign brands. Nicholas Piramal India has acquired the Indianrights for three anti-infective brands from the US firm Eli Lilly.Ranbaxy interred the German pharma market by acquiring the generics business of Bager Ali.The Indian Rayon acquired Madura Garments; a subsidiary of the UK based coats Viyella and alsoacquired global rights for Coats Viyella brands such as Louis Phillipe, Allen Solly and Peter England.

4. JOINT VENTURES

Joint Ventures as a means of foreign market entry have accelerated sharply since the 970s. Joint

ventures refer to joining with foreign companies to produce or market the products or services.Besides serving as a means of lessening political and economical risks by the amount of the partnerscontribution to the venture, JVs provide a less risky way to enter markets that pose legal and cultural

barriers than would be the case in an acquisition of an existing company.There are two types of JVs, namely:

1. Contractual JVs and2. Equity based JVs.

A contractual JV consists of a contractual arrangement between two or more companies in whichcertain assets and liabilities are shared for a specific purpose and time. Contractual JVs are common inthe construction, extractive and consultancy services.An equity JV is a capital sharing arrangement between an MNC and a local company or another MNCor even a foreign government. Each partner holds share in the subsidiary and shares the profits in

proportion to its ownership share.The advantage of a JV for MNC is that it can spread its investment across locations, and therebyminimize its risks.The liberalization of policy towards the foreign investment by Indian firms along with the neweconomic environment seems to have given joint venture a boost. At the beginning of 1995 althoughthere were 177 JVs in operation, there were 347 under implementation. Not only the number of JVs isincreasing but also the number of countries and industries in the map of Indian JVs is expanding.Companies like Ranbaxy, Dr. Reddys Lab, Lupin etc. have taken the JV route to mark their presencein the overseas market.

5. STRATEGIC ALLIANCE:

A Strategic International Alliance (SIA) is a business relationship established by two or morecompanies to cooperate out of mutual need and to share risk in achieving a common objective.

It is an agreement between companies that is of strategic importance to one or both companiescompetitive viability. Strategy refers to the means to fulfill companys objectives. In every day

business, the term strategic alliance is generally used to describe a wide variety of collaborations,irrespective of strategic importance. In a strategic alliance, a firm could establish relationships withorganization that have the potential to add values. Bench marking, re-engineering, outsourcing, mergerand acquisition are examples of strategic alliance.On the basis of structure, strategic alliances can be classified into equity based and non- equity based.

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Non-equity based alliances such as licensing agreements, marketing agreements, technology transferagreements etc. are found to be more dynamic, constructive and strategic. The scope of strategicalliance ranges from Research and Development to distribution.

6. LICENSING AND FRANCHISING:

A means of establishing a foothold in foreign markets without large capital outlays is licensing. It

is a favorite strategy for small and medium sized companies. International licensing helps a firm fromone country (licensor) to permit another firm in a foreign country (licensee) to use its intellectualproperty such as patents, trademarks, copyrights, technology, technical know-how, marketing skill etc.in return for royal payments. Royal payments or license fee is regulated in most of the countries.The advantages of licensing are most apparent when: capital is scarce, import restrictions forbid othermeans of entry, a country is sensitive to foreign ownership, or it is necessary to protect trademarks and

patents against cancellation of nonuse.An important risk of licensing is that the licensor may give birth to his own competitor i.e. the licenseecan become a competitor after the expiry of the licensing agreement. The only anti-dote that isavailable to the licensor to pre-empt any potential or actual competition is continuous innovation. Onlyinnovation will provide sustainable competitive advantage.Franchising is a form of licensing in which a parent company (franchiser) grants another

company (franchisee) the right to do business in a specific manner. Franchising can assume

various forms such as selling the franchisers products, using the name of the franchiser, productionand marketing techniques etc. Important forms of franchising are:

1. Manufacturer- retailer systems e.g. automobile dealership2. Manufacturer- wholesaler system e.g. soft drink companies3. Service firm- retailer systems e.g. lodging and fast food outlets.

Potentially, the franchise system provides an effective blending of skill centralization and operationaldecentralization, and has become increasingly important form of international marketing.

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