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Globalization, Liberalization and Privatization Dr. Shaker Turki Amin Globalizaion Integration of National economies with international Economy. The closer integration of the economies of the world as a result of the reduction of transportation and communication costs and the reduction of manmade barriers to the movements of goods, services and capital throughout the world. Globalization refers to the shift toward a more integrated and interdependent world economy Globalization of Market refers to the merging of historically distinct and separate national markets into one huge global marketplace. Falling barriers to crossborder trade have made it easier to sell internationally. Globalization of production refers to the sourcing of goods and services from locations around the globe to take advantage of national differences in the cost and quality of factors of production (such as labor, energy, land and capital ) Privatization The term “Privatization” refers to “The transfer of ownership of property or businesses from government to a privately owned entity.” a The transition from a publicly traded and owned company to a company which is privately owned and no longer trades publicly on a stock exchange. When a publicly traded company becomes private, investors can no longer purchase a stake in that company.” The process of converting or "selling off" government-owned assets, properties, or production activities to private ownership. After several decades of increasing government control over productive activities, privatization came into vogue in the 1980s, along with business deregulation and an overall movement toward greater use of markets.” Privatization is frequently associated with industrial or service-oriented enterprises, such as mining, manufacturing or power generation, but it can also apply to any asset, such as land, roads, or even rights to water. In recent years, government services such as health, sanitation, and education have been particularly targeted for privatization in many countries.” Privatization helps establish a "free market", as well as fostering capitalist competition, تعزيز المنافسة الرأسمالية which its supporters argue will give the public greater choice at a competitive price. Conversely, socialists view privatization negatively, arguing that entrusting private businesses with control of essential services reduces the public's control over them and leads to excessive cost cutting in order to achieve profit and a resulting poor quality service.” Liberalization The term “Liberalization” stands for “the act of making less strict”. Liberalization in Economy stands for “The process of making policies less constraining of economic activity." And also “Reduction of tariffs and/or removal of non-tariff barriers.” Economic liberalization is a very broad term that usually refers to fewer government regulations and restrictions in the economy in exchange for greater participation of private entities; the doctrine is associated with neoliberalism. The arguments for economic liberalization include greater efficiency and effectiveness that would translate to a "bigger pie" for everybody. In developing countries, economic liberalization refers more to liberalization or further "opening up" of their respective economies to foreign capital and investments. Three of the fastest growing developing economies today; Brazil, China and India, have achieved rapid economic growth in the past several years or decades after they have "liberalized" their economies to foreign capital. Most first world countries, in order to remain globally competitive, have pursued the path of economic liberalization: partial or full privatization of government institutions and assets, greater labor-market flexibility, lower tax rates for businesses, less restriction on both domestic and foreign capital, open markets, etc. that: "Success will go to those companies and countries which are swift to adapt, slow to complain, open and willing to change. The task of modern governments is to ensure that our countries can rise to this challenge Globalization Globalization of Market refers to the merging of historically distinct and separate national markets into one huge global marketplace. Falling barriers to crossborder trade have made it easier to sell internationally. Globalization of production refers to the sourcing of goods and services from locations around the globe to take advantage of national differences in the cost and quality of factors of production (such as labor, energy, land and capital ) Globalization Advocates of Globalization see not only the increases in incomes but also the spread of democratic values. Opponents of the globalization worry not just about the loss of jobs but about loss of local culture. Agent/Facilitator of Globalization World Trade Organization (WTO) Rule based international Organization deals with free and fair trade among member nations. Currently, there are 153 members in WTO Established in 1995, successor of General Agreement of Tariffs and Trade (GATT) GATT was formed in 1947. Agent/Facilitator of Globalization United Nations (UN)- Although the UN is perhaps best known for its peacekeeping role, one of the organization’s central mandates is the promotion of higher standards of living, full employment, and conditions of economic and social progress and development all issues that are central to the creation of a vibrant global economy. World Bank World Bank is taken as a lending institution, development agency, think tank, forum for international governmental politics and economic diplomacy. Formed in 1944 as International Bank of Reconstruction and Development (IBRD). From 1970’s bank started the process called ‘Structural Adjustment’ program, under which infrastructure, telecommunications and some social services are privatized, labour, the civil service and judiciary are revamped. Other facets are lowering deficits and tariff barrier, opening the economy to short term capital flows. In return IMF and World Bank provides assistance to the economies. It offers highly leveraged loan to poor countries. International Monetary fund (IMF) Its an organization that oversees the global financial system by following the macroeconomic policies of its member countries, in particular those with an impact on exchange rates and the balance of payments. Designer of Structural Adjustment Program. (Sister Org. of World Bank). IMF is often seen as the lender of last resort to nation state whose economies are in turmoil and currencies are losing value against those of other nations A free trade area occurs when a group of countries agree to eliminate tariffs between themselves but maintain their own external tariff on imports from the rest of the world. The north American free trade area (NAFTA), South Asian Free Trade Area (SAFTA) are FTA’s. A regional Economic integration agreement is the next step to Regional Economic Agreement (RTA), it can include the free movement of capital as well as goods and services, a common currency and a common economic policy. European Union. Effects of Globalization Industrial- Movement of material and goods between and within national boundaries. International Trade in manufactured goods increased more than 100 times (from $95 billion to $12 trillion) in the 50 years since 1955. Financial- It is the world where $1.2 billion in foreign exchange transactions are made everyday. Current economic crisis is the example of financial integration Economic- Four Indians were among the world's top 10 richest in 2008, worth a combined $160 billion. In 2007, China had 415,000 millionaires and India 123,000. 300 million Indians lifted up from poverty during 1991 to 2008. On the global scale, health becomes a commodity. In developing nations under the demands of Structural Adjustment Programs, health systems are fragmented and privatized Political- China and India are emerging as a political power. Their rapid economic growth provided them space in global arena. Effects of Globalization The most popular language is Mandarin (845 million speakers) followed by Spanish (329 million speakers) and English (328 million speakers). About 35% of the world's mail, telexes, and cables are in English. Approximately 40% of the world's radio programs are in English. About 50% of all Internet traffic uses English. Effects of Globalization WHO estimates that up to 500,000 people are on planes at any one time, in 2008. The IOM estimates there are more than 200 million migrants around the world today. Newly available data show that remittance flows to developing countries reached $328 billion in 2008. Around 2.5 millions people are working abroad. Remittance inflow per year is around 209 bn. Effects of Globalization Farmers are loosing market due to cheaper (subsidized) products coming from outside, mainly in developing nations Globalization has led to exploitation of labor. Prisoners and child workers are used to work in inhumane conditions. Job insecurity, Increased job competition has led to reduction in wages and consequently lower standards of living. Effects of Globalization Companies have set up industries causing pollution in countries with poor regulation of pollution The benefits of globalization is not universal. The rich are getting richer and the poor are becoming poorer. 20 percent of rich people utilizing 80 percent of resources. Effects of Globalization Poorer countries suffering disadvantages : The main export of poorer countries is usually agricultural goods. Larger countries often subsidies their farmers (like the EU Common Agricultural Policy), which lowers the market price for the poor farmer's crops compared to what it would be under free trade. Effects of Globalization Bad aspects of foreign cultures are affecting the local cultures through TV and the Internet Local industries are being taken over by foreign multinationals Multinational Companies and corporations which were previously restricted to commercial activities are increasingly influencing political decisions Meaning and Definition of Multinational Company A multinational corporation/company is an organization doing business in more than one country. 'In other words it is an organization or enterprise carrying on business in not only the country where it is registered but also in several other countries. According to the United Nations a multinational corporation is "an enterprise which owns or controls production or service facilities outside the country in which it is based". "Multinational Corporations or Companies are those enterprises whose management, ownership and controls are spread in more than one foreign country". Thus a multinational company carries on business operations in two or more countries. Its headquarters are located in one country (home country) but its activities are spread over in other countries (host countries). MNC's may engage in various activities like exporting, importing, manufacturing in different countries. It may also lend its patents, licenses and managerial services to firms in host countries. Characteristics of Multinational Companies (MNCs) The distinctive features of multinational companies are as follows. 1. Large Size: A multinational company is generally big in size. Some of the multinational companies own and control assets worth billions of dollars. Their annual sales turnover is more than the gross national product of many small countries. 2. Worldwide operations: A multinational corporation carries on business in more than one country. Multinational corporations such as Coco cola has branches in as many as seventy countries around the world. 3. International management: The management of multinational companies are international in character. It operates on the basis of best possible alternative available any where in the world. Its local subsidiaries are managed generally by the nationals of the host country. For example the management of Hindustan Lever lies with Indians. The parent company Unilever is in The United States of America. 4. Mobility of resources: The operation of multinational company involves the mobility of capital, technology, entrepreneurship and other factors of production across the territories. 5. Integrated activities: A multinational company is usually a complete organization comprising تضمmanufacturing, marketing, research and development and other facilities. 6. Several forms: A multinational company may operate in host countries in several ways i.e., branches, subsidiaries الشركات التابعة, franchise, joint ventures. Turn key projects تحويل المشاريع الرئيسية. Aims Multinational companies make investments in different countries with the following aims. (a) To take tax benefits in host countries; (b) To exploit the natural resources of the host country; (c) To take advantage of Government concessions تنازالتin host country; (d) To mitigate تخفيفthe impact of regulations االنظمةin the home country; (e) To reduce cost of production by making use of cheap labour and low transportation expenses in the host country. (f) To gain dominance لكسب الهيمنة السيطرةin foreign markets; (g) To expand activities vertically Merger and Acquisition A general term used to refer to the consolidation of companies. A merger is a combination of two companies to form a new company, while an acquisition is the purchase of one company by another in which no new company is formed. Distinction Distinction between Mergers and Acquisitions Although they are often uttered in the same breath and used as though they were synonymous مرادفة, the terms merger and acquisition mean slightly قليالdifferent things. التمييز بين عمليات االندماج واالستحواذ؟ على الرغم من أنها غالبا ما تلفظ في نفس الوقت واستخدامها كما ؟. واالندماج واالستحواذ حيث تعني أشياء مختلفة قليال،لو كانت مرادفا When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded. In the pure sense of the term, a merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals اإلندماج "بين نظراءBoth companies' stocks are surrendered تلغى and new company stock is issued in its place. For example, both Daimler-Benz and Chrysler ceased توقفتto exist when the two firms merged, and a new company, Daimler Chrysler, was created. ،كل من دايملر بنز وكرايسلر لم تعد موجودة عندما اندمجت الشركتان .، دايملر كرايسلر،وشركة وتم انشاء شركة جديدة In practice, however, actual mergers of equals don't happen very often. Usually, one company will buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim that the action is a merger of equals, even if it's technically an acquisition. Being bought out often carries negative connotations, therefore, by describing the deal as a merger, deal makers and top managers try to make the takeover more palatable. A purchase deal will also be called a merger when both CEOs agree that joining together is in the best interest of both of their companies. But when the deal is unfriendly - that is, when the target company does not want to be purchased it is always regarded as an acquisition. Whether a purchase is considered a merger or an acquisition really depends on whether the purchase is friendly or hostile and how it is announced. In other words, the real difference lies in how the purchase is communicated to and received by the target company's board of directors, employees and shareholders. Synergy Synergy is the magic force that allows for enhanced cost efficiencies of the new business. Synergy takes the form of revenue enhancement and cost savings. By merging, the companies hope to benefit from the following: Staff reductions - As every employee knows, mergers tend to mean job losses. Consider all the money saved from reducing the number of staff members from accounting, marketing and other departments. Job cuts will also include the former CEO, who typically leaves with a compensation package. Economies of scale - Yes, size matters. Whether it's purchasing stationery or a new corporate IT system, a bigger company placing the orders can save more on costs. Mergers also translate into improved purchasing power to buy equipment or office supplies - when placing larger orders, companies have a greater ability to negotiate prices with their suppliers. Acquiring new technology - To stay competitive, companies need to stay on top of technological developments and their business applications. By buying a smaller company with unique technologies, a large company can maintain or develop a competitive edge. Improved market reach and industry visibility رؤية- Companies buy companies to reach new markets and grow revenues and earnings. A merge may expand two companies' marketing and distribution, giving them new sales opportunities. A merger can also improve a company's standing in the investment community: bigger firms often have an easier time raising capital than smaller ones. Varieties of Mergers From the perspective of business structures, there is a whole host of different mergers. Here are a few types, distinguished by the relationship between the two companies that are merging: Horizontal merger - Two companies that are in direct competition and share the same product lines and markets. Vertical merger - A customer and company or a supplier and company. Think of a cone supplier merging with an ice cream maker. Market-extension merger - Two companies that sell the same products in different markets. Product-extension merger - Two companies selling different but related products in the same market. Conglomeration خليط- Two companies that have no common business areas. Common goal All mergers and acquisitions have one common goal: they are all meant to create synergy that makes the value of the combined companies greater than the sum of the two parts 2+2= 5 The success of a merger or acquisition depends on whether this synergy is achieved. The Global Marketplace Learning Objectives After studying this chapter, you should be able to: 1. Discuss how the international trade system, economic, political-legal, and cultural environments affect a company’s international marketing decisions 2. Describe three key approaches to entering international markets 3. Explain how companies adapt their marketing mixes for international markets 4. Identify the three major forms of international marketing organizations 19-2 Global Marketing Today A global firm is one that, by operating in more than one country, gains marketing, production, R&D, and financial advantages that are not available to purely domestic competitors The global firms sees the world as one market 19-4 Global Marketing Today Global firms ask a number of basic questions • What market position should we try to establish in our own country, in our economic region, and globally? • Who will our global competitors be, and what are their strategies and resources? • Where should we produce or source our product? • What strategic alliances should we form with other firms around the world? 19-5 Looking at the Global Marketing Environment The International Trade System Restrictions on trade between nations include: • Tariffs • Quotas • Exchange rate controls • Non-tariff trade barriers 19-6 Looking at the Global Marketing Environment The International Trade System Tariffs are taxes on certain imported products designed to raise revenue or to protect domestic firms Quotas are limits on the amount of foreign imports a country will accept in certain product categories to conserve on foreign exchange and protect domestic industry and employment 19-7 Looking at the Global Marketing Environment The International Trade System Exchange controls are a limit on the amount of foreign exchange and the exchange rate against other currencies Nontariff trade barriers are biases against bids or restrictive product standards that go against American product features 19-8 Looking at the Global Marketing Environment The International Trade System The World Trade Organization and GATT The General Agreement on Tariffs and Trade (GATT) is a 59-year-old treaty designed to promote world trade by reducing tariffs and other international trade barriers • Uruguay Round reduced merchandise tariffs by 30 percent and set up the World Trade Organization to enforce GATT rules 19-9 Looking at the Global Marketing Environment The International Trade System The World Trade Organization and GATT World Trade Organization • Enforces GATT rules • Mediates disputes • Imposes trade sanctions 19-10 Looking at the Global Marketing Environment The International Trade System Regional Free Trade Zones Economic communities are free trade zones created by nations to work toward common goals in the regulation of international trade • • • • European Union (EU) North American Free Trade Agreement (NAFTA) Caribbean Free Trade Agreement (CAFTA) South American Community of Nations (CSN) 19-11 Looking at the Global Marketing Environment Economic Environment Economic factors reflect a country’s attractiveness as a market • Industrial structure • Income distribution 19-12 Looking at the Global Marketing Environment Economic Environment Industrial Structure • • • • Subsistence economies Raw material exporting economies Industrializing economies Industrial economies 19-13 Looking at the Global Marketing Environment Economic Environment Industrial Structure Subsistence economies have a large majority of people engaged in agriculture. They consume most of their output and barter the rest for simple goods and services. They offer few market opportunities. Raw material exporting economies are rich in one or more natural resources. They are good markets for large equipment, tools, supplies, and trucks. If there is a wealthy upper class, then they are also a market for luxury goods. 19-14 Looking at the Global Marketing Environment Economic Environment Industrial Structure Industrializing economies have manufacturing that represents 10 percent to 20 percent of the economy and needs imports of raw textile materials, steel, and heavy machinery and fewer imports of finished textiles, paper products, and automobiles. These economies create a rich upper class and a small but growing middle class that demand new types of imported goods. Industrial economies are major exporters of manufactured goods, services, and investment funds. They trade among themselves and export to other economies. They represent an attractive market for all types of goods and services. 19-15 Looking at the Global Marketing Environment Economic Environment Income Distribution • • • Low-income households Middle-income households High-income households 19-16 Looking at the Global Marketing Environment Political-Legal Environment • • • • Country’s attitude toward international buying Government bureaucracy Political stability Monetary regulations 19-17 Looking at the Global Marketing Environment Political-Legal Environment Country’s attitude toward international buying involves the country’s receptiveness to foreign business Monetary regulations involve the stability of exchange rates and currency limitations 19-18 Looking at the Global Marketing Environment Political-Legal Environment Countertrade is a non-cash payment • Barter is the exchange of goods or services • Compensation or buyback is the sale of a plant or equipment and the payment in resulting products • Counterpurchase is when the seller receives payment and agrees to spend some of the money in the other country 19-19 Looking at the Global Marketing Environment Cultural Environment Impact of Culture on Marketing Strategy • • Business norms Cultural preferences, traditions, and behaviors 19-20 Deciding Whether to Go Global Factors to consider • Global competition in the home market • Stagnant or shrinking home market • Foreign markets with more opportunity • Expansion of customers to international markets 19-21 Deciding Which Markets to Enter Define international marketing objectives and policies • Foreign sales volume • How many countries to market to • Types of countries to market to based on: • • • Geography Income and population Political climate 19-22 Deciding Which Markets to Enter Rank potential global markets based on: • Market size • Market growth • Cost of doing business • Competitive advantage • Risk level 19-23 Deciding How to Enter the Market • • • Ways to enter global markets include: Exporting Joint venturing Direct investment 19-24 Deciding How to Enter the Market Exporting is when the company produces its goods in the home country and sells them in a foreign market. It is the simplest means involving the least change in the company’s product lines, organization, investments, or mission. • Indirect exporting • Direct exporting 19-25 Deciding How to Enter the Market Exporting Indirect exporting is when the firm works through an independent international marketing intermediary. This requires less investment and risk since the firm does not require an overseas organization or network. Direct exporting is when the firm handles its own exports. This requires a greater investment and risk. • Domestic export department • Send home-based salespeople abroad • Use of foreign distributors 19-26 Deciding How to Enter the Market Joint venturing is when a firm joins with foreign companies to produce or market products or services • Licensing • Contract manufacturing • Management contracting • Joint ownership Joint venturing differs from exporting in that the company joins with a host country partner to sell or market abroad 19-27 Deciding How to Enter the Market Joint Venturing Licensing is when a firm enters into an agreement with a licensee in a foreign market. For a fee or royalty, the licensee buys the right to sue the company’s process, trademark, patent, trade secret, or other item of value 19-28 Deciding How to Enter the Market Joint Venturing Contract manufacturing is when a firm contracts with manufacturers in the foreign market to product its product or provide its service. Benefits include faster startup, less risk, and the opportunity to form a partnership or to buy out the local manufacturer. 19-29 Deciding How to Enter the Market Joint Venturing Management contracting is when the domestic firm supplies management skill to a foreign company that supplies capital. The domestic firm is exporting management services rather than products. Joint ownership is when one company joins forces with foreign investors to create a local business in which they share joint ownership and control. Joint ownership is sometimes required for economic or political reasons. 19-30 Deciding How to Enter the Market Direct investment is the development of foreign-based assembly or manufacturing facilities and offers a number of advantages: Lower costs • Raw material • Labor • Government incentives • Logistics • Control 19-31 Deciding on the Global Marketing Program Standardize marketing mix involves selling the same products and using the same marketing approaches worldwide Adapted marketing mix involves adjusting the marketing mix elements in each target market, bearing more costs but hoping for a larger market share and ROI 19-32 Deciding on the Global Marketing Program Product Strategies Straight product extension means marketing a product in a foreign market without any change Product adaptation involves changing the product to meet local conditions or wants Product invention consists of creating something new for a specific country market • Maintain or reintroduce earlier products • Create new products 19-33 Deciding on the Global Program Marketing Promotion Strategies Companies can either adopt the same communication strategy they use at home or change it for each market 19-34 Deciding on the Global Marketing Program Price Strategies Uniform pricing is the same price in all markets but does not consider income or wealth where the price may be too high in some markets or not high enough in other markets Market-based pricing is the price that markets can pay but does not consider actual costs Standard markup pricing is a price based on a percentage of cost but can cause problems in countries with high costs 19-35 Deciding on the Global Marketing Program Distribution Strategies Whole-Channel View Seller’s headquarters organization supervises the channel and is also a part of the channel Channels between nations move the products to the borders of the foreign nations Channel within nations move the products from their foreign point of entry to the final customers 19-36 Deciding on the Global Program Marketing Distribution Strategies Differences Within Countries • • Numbers and types of intermediaries Size and character of retail units 19-37 Deciding on the Global Organization Marketing Typical management of international marketing activities include: • Organize and export department with a sale manager and staff • Create an international division organized by geography, products, or operating units • Become a complete global organization 19-39 The advantages of globalisation (an economic view) The economic benefits that greater openness to international trade bring are: ♦ Faster growth: economies that have in the past been open to foreign direct investments have developed at a much quicker pace than those economies closed to such investment e.g. communist Russia ♦ Cheaper imports: this is down to the simple fact that if we reduce the barriers imposed on imports (e.g. tariffs, quota, etc) then the imports will fall in price ♦ New technologies: by having an open economy we can bring in new technology as it happens rather than trying to develop it internally ♦ Spur of foreign competition: foreign competition will encourage domestic producers to increase efficiency. Carbaugh (1998) states that global competitiveness is a bit like golf, you get better by playing against people who are better than you. ♦ Increase consumer income: multination will bring up average wage levels because if the multinationals were not there the domestic companies would pay less. ♦ Increased investment opportunities: with globalisation companies can move capital to whatever country offers the most attractive investment opportunity. This prevents capital being trapped in domestic economies earning poor returns. Disadvantages of globalisation The negative drivers of globalisation included culture which is a major hold back of globalisation. An example of how culture can negatively affect globalisation can be seen in the French film industry. The French are very protective of this part of their culture and provide huge grants to help its development. As well as government barriers market barriers and cultural barriers still exist. Also a negative aspect to a countries development is war e.g. tourism in Israel fell by 40% due to the latest violence. Corporate strategy can also be a negative driver of globalization as corporation may try to locate in one particular area. Another negative driver of globalisation is “local focus” or “localisation” as it is termed in Richard Douthwaite’s book “Short Circuit”. Douthwaite (1996) believes that globalisation can and should be reversed. He also believes that localisation is the way to do this. He defines localisation as “not meaning everything being produced locally but it means a better a balance between local, regional, national and international markets and thus bring less control to multinational corporations”. Another step to reverse globalisation would be for governments to club together to curb the power of multinational by negotiating new trade and treaties that would remove the subsidies powering globalisation and give local production a chance. Douthwaite also states that the global economy is itself nothing less than a system of structural exploitation that creates hidden slaves on the other side of the world and also that the North should allow the South to produce for itself and not just for us (North). So it can be seen that Douthwaite is very opposed to globalisation especially that part of it exploited by multinational corporations. Further arguments put forward against globalisation by Mr. Lawton include that it actually destroys jobs in wealthy advanced countries. This is due to the lower costs of wages in developing countries. Multinationals will move to areas of lower wage levels at the drop of a hat e.g. Fruit of the Loom. Also this ability to relocate has meant that wage levels of unskilled workers in developed countries has actually fallen relatively speaking. This is down to the fact that one now needs skill and knowledge in developed economies to survive. Also there is the loss of sovereignty that globalisation brings. Many antiglobalisation believers state that nations are loosing their identity and selling their soul. Then there are environmental factors of globalisation as described earlier. These are becoming more and more controversial. Technology, though usually viewed as a positive aspect of globalisation, also has some negative points. Jeffry Sachs (The Economist, June 24th 2000) argues that technology is now what divides the world. Sachs states that 15% of the world’s population account for nearly all the world’s technological advances. This has to be a concern if developing economies are ever going to catch up. Many countries, almost 30% of the world’s population, are technologically excluded (this means not only that they do not innovate but also that they cannot adopt new technologies). In recent years some countries, such as Taiwan, South Korea and Israel, have become top rank innovators and with this their economies have flourished. This would indicate that perhaps the best way to tackle world poverty is to provide aid through education and technology.