Reasons for Globalization
November 28, 2017
Most companies move their business operations to foreign countries by going global. They take their business overseas for different reasons. These companies adopt the reactive or defensive approach to stay ahead of the competition. A few of them take the proactive or aggressive approach to accomplish the same purpose. A majority of them choose to adopt both approaches to avoid a decrease in their competition. In order to remain competitive, companies move as quickly as possible to secure a strong position in some of the key world or emerging markets with products customized for the need of the people in such areas in which they plan to establish. Most of these world markets are attracting companies with new capital investments with very good incentives. Some of the reactive or defensive reasons for going global are:
(1) Trade Barriers
(2) Customer Demands
(3) Globalization of Competitors
(4) Regulations and Restrictions
In the case of trade barriers, companies move from exporting their products to manufacturing them overseas in order to avoid the burden of tariffs, quotas, the policy of buy-local and other restrictions that make export too expensive to foreign markets. Companies respond to customer demands for effective operations and product assurance and reliability, or/and logistical problem solutions. Most foreign customers, who seek accessibility to suppliers may request that supply stay local in order to enhance the flow of production. Companies usually follow that request to avoid losing the business. For the globalization of competitors, companies are aware that if they leave companies overseas too long without challenge or competition, their investments or foreign operations in the world market may be so solid that competition will be difficult. Therefore, they try to act quickly. Most companies’ home government may have regulations and restrictions that are so inconvenient and expensive, thus limiting the expansion, encroaching in the companies’ profits, and making their costs uncontrollable. Hence the reason for the companies moving to different market environment with few foreign restrictive operations. The proactive or aggressive reasons for going global are:
(a) Growth opportunities
(b) Economies of Scale
(d) Resource assess and Cost Savings
Many companies will prefer to invest their excess profits in order to expand, but sometimes they are limited because of the maturity of the markets in their area. Therefore, they seek the overseas new markets to provide such growth opportunities. So, these companies, in addition to investing their excess profits, also try to maximize efficiency by employing their underutilized resources in human and capital assets such as management, machinery, and technology. Companies seek economies of scale in order to achieve a higher level of output spread over large fixed costs to lower the per-unit cost. They also, want to maximize the use of their manufacturing equipment and spread the high costs of research and development over the product life cycle. Some of the developing countries that need improvement and development through capital infusion, skills, and technology voluntarily provide incentives such as fixed assets, tax exemptions, subsidies, tax holidays, human capital, and low wages. These incentives seem attractive to these companies due to their increase in profits and reduction of risks. Caution: The repatriation of profits and foreign exchange risks due to instability in leadership of these developing countries should be put into consideration in negotiation. Access to raw materials and low operational costs in financing, transportation, low wages, lower unit costs, and power are attractive in terms of resource access and cost savings. Most companies move their headquarters to overseas to avoid their respective home countries’ high taxes and other costs associated in business operation in those countries.
Companies need to develop strategies, design and operate systems, and also work with people, different companies, and countries around the world in the form of strategic alliance to ensure sustained competitive advantage. Global management and management functions are usually formed by the prevailing conditions and ongoing stable and unstable developments in the world. A few countries take advantage of these companies, but when companies become aware that they are being used, they should then learn how they can be useful in that different cultural environment in order to make a lot of profits.