Assignment ib- twists and turns in globalisation (autosaved)
- 1. Y KRISHNA MOHAN ID: 2012HZ58051 BIRLA INSTITUTE OF TECHNOLOGY AND SCIENCE Distance Learning Programme Division M.S. (Consultancy Management) 2012-13 Course – INTERNATIONAL BUSSINESS ASSIGNMENT-1 Q. Write an Essay on "What are the Twists & Turns in the Debate on Globalisation in the Wake of Current Crises?” INTRODUCTION 1. Globalisation is a common term for processes of international integration arising from increasing human connectivity and interchange of worldviews, products, ideas, and other aspects of culture. Advancement in transportation and telecommunications infrastructure, including the rise of the Internet, have been the major driving factors in globalisation and these have further increased the interdependence of economic and cultural activities. To state in abstract terms, it means, a business enterprise can carry out various processes of its business from different location across national boundaries i.e. the enterprise will procure from one country, manufacture in same or another country and sell the product in many countries. Thus resulting in Increased trade across national boundaries, Improvement of industrial base across countries, Increase in employment opportunities, Availability of better goods, Better competition in terms of quality and cost, Faster and wider spread of technology etc... However this arrangement also has certain disadvantages like Eradication of local industry, Increased dependence upon one country, Adverse economic condition of one country will affect the other country or countries, Health and environmental issues, Decrease in employment opportunities etc... 2. The concept of globalisation is driven by three forces – Economics, Expertise and Openness and global business enterprises locate to other countries based upon these three factors. In the process of business enterprises goes global, ramifications are felt in the sovereignty, economy, health, culture, education, political and technology fields of the host countries. There-by any regional effect, in these fields, either positive or negative, results in global ramifications. 3. The key characteristics of globalisation have been Liberalisation of international trade, Relaxation of FDI and Emergence of massive cross-border financial flows. This
- 2. Y KRISHNA MOHAN ID: 2012HZ58051 BIRLA INSTITUTE OF TECHNOLOGY AND SCIENCE Distance Learning Programme Division M.S. (Consultancy Management) 2012-13 Course – INTERNATIONAL BUSSINESS in-turn resulted in increased competition in global markets. This has been achievable with the combined effect of two underlying factors i.e. Policy decisions to reduce national barriers to international economic transactions coupled with impact of new technology, especially in the sphere of information and communications. These developments created the enabling conditions for the onset of globalisation. SCOPE 4. The scope of this essay is limited to the effects on globalisation due to economic factors; specifically due to the Subprime mortgage crisis in the Unites States in 2008 and the recent crisis in the EU. SUB PRIME MORTAGAGE CRISIS 5. Post WW-II, the western nations affected by the war adopted the Bretton Woods system, which was based upon two principles i.e. Fixed exchange rates and Capitalist economy. To oversee and encourage these principles two organizations i.e. GATT and IMF were created. In the process, to encourage trade and achieve perceivable growth, the western nations led by the US implemented financial deregulation. The three factors propelled internal growth of industry as well inter-nation trade (limited to US and Europe). However after about two decades of positive growth, further growth stagnated and subsequently growth rate in the US started to decline. This negative growth resulted in the breakdown of the Bretton Woods system. To cope with the negative growth financial liberalisation (in terms of reduction of lending rates) followed by deregulation of the capital markets (investment in derivatives in other nation markets) made available capital at low rates. Concurrently technological innovation resulting in the Internet revolution further helped in easier financial transactions for investments across markets. Thus to increase growth, the US and European countries introduced a host of macro and microeconomic measures without appropriate safeguards/regulatory mechanisms, by which stimulated the lending boom. In the absence of regulatory mechanisms financial institution made available excessive credit for the mortgage markets. This resulted in a boom in the construction market, while simultaneously spiraled into unrealistic inflation of the housing market. Post 2004, the burst of the dotcom bubble resulted in joblessness and eventually faltering of repayments of housing loans. Thus, the financial institutions having over exposure to the mortgage
- 3. Y KRISHNA MOHAN ID: 2012HZ58051 BIRLA INSTITUTE OF TECHNOLOGY AND SCIENCE Distance Learning Programme Division M.S. (Consultancy Management) 2012-13 Course – INTERNATIONAL BUSSINESS markets were left will little credit to undertake other financial operations declared bankruptcy. The bankruptcy of the financial institutions due the economic factors resulted in huge losses to the business enterprises, whose affect was felt across national borders. Only nations whose financial institutions had little or NIL exposure to the US financial instruments were able to absorb the initial shock due collapse of US and European markets and subsequently overcame the affects. EU SOVEREIGN DEBT CRISIS 6. The EU like the US had adopted measures such as financial liberalisation (i.e. reduction in lending rates) thereby encouraging high risk lending and decontrol of capital markets. With the opening of the capital markets of these countries, large amount of money was invested by global investors into the capital markets of these countries. The accumulated large fiscal balance encouraged some of the EU countries like Ireland to utilise these funds, available through low lending rates for increased investment in property markets. This resulted in a boom in the construction market, while simultaneously spiraled into unrealistic inflation. While, in Greece, the government generously increased the wages and pension benefits to the workers. Eventually when the household bubble burst, the governments were in a position to return the capital to the investors, thereby resulting in solvency of the governments. With the globalisation of finance among the 17 European countries forming the EU, the solvency problems of one nation affects other nations. However due the treaty signed by these countries, member countries are required to bailout the other countries which are in economic crisis. Further, factors like trade imbalances between member nations, joblessness, recession aggravated the financial strain among member countries resulting in the Sovereign Debt crisis. EFFECT ON GLOBALISATION 7. The crisis in the US and EU brought to the fore the following requirements to be adopted by the developed nations:- (a) Exercise stricter fiscal measures and regulations to control the cross border flow of capital and to reduce risk. Incorporate new models of corporate
- 4. Y KRISHNA MOHAN ID: 2012HZ58051 BIRLA INSTITUTE OF TECHNOLOGY AND SCIENCE Distance Learning Programme Division M.S. (Consultancy Management) 2012-13 Course – INTERNATIONAL BUSSINESS governance and business ethics to curb corporate and individual greed and excessive risk-taking. (b) Restrict market excesses by enforcing intervention of federal agencies to control capital markets. (c) Introduce measures of protectionalism. (d) Reducing government expenditure aqnd restructuring of the financial markets. (e) Innovation to increase jobs and thereby create economic growth. (f) Employing new dimensions for innovation viz…technology, off-shoring and outsourcing. (g) Exploration of non-traditional export markets and new sources of growth. 8. The causes for these crises squarely rests at the doorsteps of the respective governments, which failed to adopt corrective actions at the appropriate time as the situations were similar to those before the great depression of 1930. Some of the above requirements needed to be adopted by the US and EU will adversely affect liberalisation in the near future but would ensure gradual growth instead of exponential growth that were seen years preceding the crisis. 9. Towards ensuring such crises donot recur in future, a framework needs to be put in place for the international & regional organisations to independently monitor the performance of all nations, irrespective of affiliations, while simultaneously offering a level playing field to all nations towards ensuring sustained globalisation.
- 5. Y KRISHNA MOHAN ID: 2012HZ58051 BIRLA INSTITUTE OF TECHNOLOGY AND SCIENCE Distance Learning Programme Division M.S. (Consultancy Management) 2012-13 Course – INTERNATIONAL BUSSINESS CONCLUSION 10. The globally integrated enterprise is an inherently better and more profitable way to undertake business activities, but due the selfish and short-sighted approach by governments and pro-capital market institutions wanting to make a fast buck has resulted in collapse of the capital markets and in-turn the capital markets of the entire world. These activities result in discontentment towards globalisation. Such discontentment if left unaddressed might result in preferring governments which will impose strict regulations leading to heightened protectionalism. 11. While the globally integrated enterprise is a promising new actor on the world stage it is essential for leaders in business, government, education, and civil society to understand its emerging dynamics and help it mature in ways that will contribute to social, economic, and human progress around the world rather than being selfish and seeking profits for themselves . References: (a) Globalisation And Development - Current Trends. (b) The Impact of the Current Economic Crisis on Globalisation by Chartered Institute of Management Accountants. (c) The Subprime Crisis - A Primer. (d) Paper on Economic Crisis in Europe: Causes, Consequences and Responses.