The Expected Benefits of Trade Liberalization for World Income and Development - Example

Introduction The term, international trade, refers to the trade in goods and services by various countries of the world across their territorial borders (Encyclopedia Britannica). International trade has become a critical tool for the survival of world economies. As an economic instrument of projection, protection and promotion of economic interests of the countries, in the capitalist world, the international trade has emerged as an essential part of economic diplomacy. Volume of share in the international trade shows the strengths of Gross Domestic Product (GDP) of a country (Antoine Bouët 2008 p,39). The basic and prime purpose of any business firm is to make a maximum profit (Doz, Y., & Prahalad, C.K. 1991). For some multinational companies it is difficult to operate due to the reasons of distance, dynamic and diversity. In order to reach this aim and to successfully compete effectively in an international environment the multinational enterprises pursue an appropriate strategy. Today the multinational companies adopt four basic management strategies to capture and maximize their profits in the international markets. These management strategies are called International Strategies, Transnational strategies, global strategies and Multi-domestic strategies (Barry, B., & Bateman, T.S. 1996.). For the sake of convenience to major strategies that is global and multi-domestic strategies are compared and contrasted with each other for the sake of bringing about their advantages and disadvantages, particularly in the Australian context. Global strategy The world has become global village. Nowadays the multinational companies of Australia like Pharmacovigilance / Drug Safety Associate and SAI Global Limited (www.saiglobal.com), with management operations in 25 countries. They are the applied information services company that helps organizations to manage risk, achieve compliance and drive business improvement. These Global companies are increasingly engaged on global level and are taking keen interest to operate their strategies operations globally in order to maximize their profits on sustainable basis. Technological revolutions, changing of product designs and manufacturing processes have eased the globalization strategy of multinational companies. There are different aspects of globalization strategy of these companies. The most important one is firm acquisitions and mergers of smaller firms in the other parts of the world. The other one is shifting of production units into those countries where raw material and labor is comparatively cheaper and the cost of production is very low in comparison with profits (Edwards, T., & Kuruvilla, S. 2005). The foreign markets are captured by these companies by virtue of the superiority of production technology, marketing, distribution and asset management technology. The multinational enterprises have the capacity and capability to negotiate with the host governments for relaxation of regulations such as taxes (Eaton, S.C. 2003). licenses and other rules. On the pretext of bringing in foreign direct investment (FDI) these companies have a bigger hand in the policy making process of the host governments. These companies claim that they contribute in the reduction of unemployment in the host countries and provide cheaper consumer goods in abundance to the masses of these countries. It can be safely said that globalization has become a unique vehicle for the multinational companies to earn regular profits from all over the world on simple pretexts of the policy options of the governments.Examples of such multinationals are Lipton and Nestle whose products are being manufactured and marketed all over the world. Advantages, 1- FDI FDI stands for Foreign Direct Investment. In this strategy all the multinational companies in order to preserve their interests and achieve their goals attract raw material from smaller companies, for this purpose they establish industries and also provide infrastructure like construction of roads in order to have easy access to these industries. According to this strategy the multinational companies also carry out various development projects. 2- Employment When these multinational companies establish industries in various areas in order to utilize the raw material, human resource is also required to work in those newly established industries. In this way the ratio of unemployment decreases as maximum number of laborers get various jobs in these industries. 3- Poverty alleviation When the maximum number of unemployed persons gets jobs in these industries, for carrying out the development projects, the poverty ratio also decreases. Hence the living standard of the poor is improved. 4- Gender balance The women and the men get equal opportunities to develop their capacities to the full extent as equal opportunities of jobs are provided to them on equal footings, hence maintaining gender balance in the work place and in the society. 5- Health improvement When the poor are employed in influx the poverty is alleviated to a greater extent. This improves the poor conditions of the general people. Good quality products are provided at a cheaper price to the poor employees by such companies. These companies also provide health facilities to the poor people. Hence the provision of health facilities to the grass root level improves the health standards. 6-Environment Such companies work in different environments. As working in continually changing environment can pose a danger to the company so, experienced managers are employed to take account of all the factors which pose threat to the company. Hence these companies always establish their industries in such environment where they confront minimum risks and can avail maximum opportunities. 6- CSR CSR stands for Corporate Social Responsibility. CSR requires that all the multinational companies establishing their business in other countries should observe local rules regulations tax regimes and contribute in the philanthropy projects of increasing the literacy in the country and should also work for the improvement of environment of that country. In this way CSR is a useful manner in which globalization as a strategy can have a big advantage both for the host country and the multinational (Lazarova, M., & Caligiuri, P. 2001). Disadvantages 1- Capital flight The biggest disadvantage of globalization strategy of the multinationals for the host countries is that the capital formation cannot take place in the host country on sustainable basis. This have been statistically analyzed and proved that host countries lose their net capital in the process of foreign direct investment of multinationals. These companies mine bigger chunk of the profit and take them to their headquarters in the first world countries and invest them in the international banks again having their headquarters in the rich countries. In this way capital flight takes place from poorer to the richer countries. 2- Brain drain As a consequence of getting better jobs in the multinational companies the educated youth of the poorer host countries are lost. Most of the highly educated and motivated young lot does not remain available for jobs to the local institutions, local governments and local businesses. The top notch educated people ultimately get migrated to the headquarters of these multinational companies as a consequence of getting even better salaries. 3- Economic dependence The host countries become dependant on multinationals for heavier taxes and duties. In this way these countries heavily depend upon multinationals that in their turn make interventions in the taxation, banking, fiscal, monetary, exchange rate and interest rate policies of these governments. As result distortions occur at various levels of government policy and political issues crop up. Multi-domestic strategy Multi-domestic companies like Australian Telefonica with its headquarters in Melbourne, Boral, Brambles or Westfield are such companies which are different in their operations and management strategies in the following ways. Product customization In comparison with global strategy, the multi-domestic company emphasizes upon the product customization according to the requirements and demands of the customers in different countries, cultures and regions of the world. Product customization is aimed that satisfaction of the customers all around the world according to their tastes and flavors and the companies have to specialized according to the regional demands of the people. Local decision making decentralized control Contrary to the global strategy wherein the decision making is done uniformly at the headquarters and the same products are supplied all over the world, in the multi-domestic strategy the foreign markets are kept under control by local decision making and decentralized decision making is done at the local level of regional countries. This is a big advantage of multi-domestic strategy in comparison with the global strategy. In this way the dynamics of the local markets are kept abreast with. Effective when large differences exist between countries However the bigger disadvantage of multi-domestic strategy while comparing with global strategy is that sometimes the cost of production under multi-domestic strategy of manufacturing, operation management and marketing can be quite bigger then the one under global management strategy. The multi-domestic strategy can only be good cost effective when there are large differences between the countries where multi-domestic companies operate (Korabik, K., Lero, D., & Ayman, R. 2003). Product differentiation, local responsiveness, minimized political risk, minimized exchange rate risk. However the big advantage of multi-domestic management strategy is that the products are very well differentiated from each other as per specifications and requirements of the customers and different parts of the world. The products and their companies get better local responses and the profits of these companies remain at maximum level for most of the times. These companies have local political support and are less exposed to the risks of exchange rate. Therefore in view of above features of advantages and disadvantages, the multi-domestic companies are different and at the place of better advantage from the global companies. Sources. 1-Encyclopedia Britannica; international Trade. 2-Antoine Bouët (2008),The Expected Benefits of Trade Liberalization for World Income and Development: Opening the "Black Box" of Global Trade Modeling. 3- Barry, B., & Bateman, T.S. (1996). A social trap analysis of the management of diversity. Academy of Management Review, 21, 757-790. 4- Doz, Y., & Prahalad, C.K. (1991). Managing DMNCs: A search for a new paradigm. Strategic Management Journal, 12, 145-164. 5- Eaton, S.C. (2003). If you can use them: Flexibility policies, organizational commitment, and perceived performance. Industrial Relations, 42(2), 145-167. 6- Edwards, T., & Kuruvilla, S. (2005). International HRM: National business systems, organizational politics and the international division of labour in MNCs. International Journal of Human Resource Management, 16, 1-21. Kerr, C. (1983). The future of industrial societies. Cambridge, MA: Harvard University Press. 7- Korabik, K., Lero, D., & Ayman, R. (2003). A micro-macro approach to cross-cultural work-family research. Paper presented at the European Academy of Management, Milan, Italy. 8- Lazarova, M., & Caligiuri, P. (2001). Retaining repatriates: The role of organizational support practices. Journal of World Business, 36(4), 389-401. Read More