GLOBALIZATION:

Globalization means several things to several people. For some it

is a new paradigm-a set of fresh beliefs, working method and
economic, political and socio-cultural realities in which the
previous assumptions are no longer valid. For developing
countries, it means integration with the world economy. In simple
economic terms, globalization refers to the process of integration
of the removal of all trade barriers among countries. Even
political and geographical barriers become irrelevant.

MULTINATIONAL COMPANY:

A company which has gone global is called a Multinational

company. An MNC is therefore, one that, by operating in more
than one country, gains through Research and Development
(R&D), leading to substantial production, marketing and financial
advantages in its costs and reputation that are not available to
purely domestic competitors. The global company views the
world as one market, minimizes the importance of national
boundaries, raises capital and market wherever it can do the job
best.

To be specific a global company has three characteristics:

1) It is a conglomerate of multiple units (located in different parts

of the globe) but all linked by common ownership.

2) Multiple units draw on a common pool of resources such as

money, credit, information, patents, trade names and control
systems.

3) The units respond to some common strategy.

e.g: Nestle International, IBM, GE, Mc Donald, Ford, Shell, Philips,
Sony and Unilever etc.

There are several reasons why companies go global. The primary

motive for going global is that there is money in the overseas
market.
The other reasons for seeking international markets are:

1) One reason could be the rapid shrinking of time and distance

across the globe thanks to faster communication, speedier
transportation, growing financial flows and rapid technological
changes.

2) It is being realized that the domestic markets are no longer

adequate and rich. Japanese have flooded the U.S market with
automobiles and electronics because the home market was not
large enough to absorb whatever was produced.

3) Companies that develop attractive new products sell them first

in their home markets. Sooner or later, foreigners may learn
about these products. At this stage, most companies would
export the products or service rather than produce it abroad. But
as foreign demand grows the economics of foreign production
changes. Eventually, the foreign market becomes large enough
to justify foreign investment.

Benefits from MNC’s:

Benefits from MNC’s can be studied under two broad heads:

1) Benefits to the host countries and

2) Benefits to the home countries

Benefits to the host countries- To the host countries, MNC’s are

likely to bring the following benefits:

i) Transfer of technology, capital and entrepreneurship to the

host country

ii) Improvement of the host country’s balance of payments

iii) Creation of local job and career opportunities

iv) Improved competition in the local economy and better

utilization of available resources
v) Greater availability of products for local customers

vi) Greater access to high quality managerial talent that tend to

be scarce in host countries, particularly the developing ones

vii) Encouragement to world economic unity and through that,

political and economic integration- all resulting in world harmony.

Benefits to home countries:

The following benefits are likely to accrue to the home countries-

i) Acquisition of raw materials from abroad, often from a steadier

supply and at lower prices than can be found domestically

ii) Technology and management expertise acquired from

competing in global markets

iii) Export of components and finished goods for assembly or

distribution in foreign markets

iv) Inflow of income from overseas profits, royalties, licensing

fees and management contracts

v) Job and career opportunities at home and abroad in connection

with overseas operations.

Problems brought by MNC’s-

A major fall-out of the MNC’s is that the host country is likely to

loose its economic sovereignty since it is not able to control all
that an MNC does.

The host nation may also experience some loss of control over its
own economy. The MNC’s actions are guided partly by world wide
needs then internal needs of the host nation. Thus, some actions
may not be consistent with what is desired by the host nation.

The host country may also have a feeling that its labour is being
exploited by the MNC’s higher wages paid by them, not
withstanding, companies in the host nation have a grouse that
they are forced to pay higher wages to the workers. They also
resent the competition thrown in by the MNC’s.

World Trade Organisation-

The World Trade Organisation (WTO) was established on 1st

January 1995. Governments had concluded the Uruguay Round
negotiations on 15th December 1993 and ministers had given
their political backing by signing the Final Act at a meeting in
Marrakesh, Marocco in April 1994. The ‘Marrakesh Declaration’ of
15th April 1994 affirmed that the results of the Uruguay Round
would ‘strengthen the world economy and lead to more trade,
investments, employment and income growth throughout the
world’. The WTO is the embodiment of the Uruguay Round results
and the successor to the General Agreement on Tariffs and
Trade(GATT).

The WTO has larger membership then GATT. The present number
of members stands at 135. India is one of the founder members
of the WTO.

Functions-

WTO is based in Geneva, Switzerland. Its functions are

administering and implementing the multilateral (having many
sides) and plurilateral (more than one) trade agreements which
together make up the WTO.

Acting as a forum for multilateral trade negotiations.

Seeking to resolve trade disputes.

Overseeing national trade policies and

Cooperating with other international institutions involved in

global economic policy making.

The WTO agreement contains some 29 individual legal texts

covering everything from agriculture to clothing, and from
services to government procurement, rules of origin and
intellectual property. Added to these are more than 25 additional
ministerial declarations, decisions and understandings which spell
out further obligations and commitments for WTO members.

Difference between GATT and WTO-

WTO is not a simple extension of GATT. On the contrary, it

completely replaces its predecessor and has a very different
character. The major differences between the two bodies are the
following:

1) The GATT was a set of rules, a multilateral agreement, with no

institutional foundation, only a small associated secretariat which
had its origins in the attempt to establish an International Trade
Organisation in the 1940’s. The WTO is a permanent institution
with its own secretariat.

2) The GATT was applied on a ‘provisional basis’ even if, after

more than 40 years, governments chose to treat it as a
permanent commitment. The WTO commitments are full and
permanent.

3) The GATT rules applied to trade in merchandise goods. In

addition to goods, the WTO covers trade in services and trade
related aspects of intellectual property.

4) The GATT, while was a multilateral instrument, by the 1980’s,

many new agreements had been added of a plurilateral, and
therefore, selective nature. The agreements which constitute the
WTO are almost all multilateral and thus, involve commitments
for the entire membership.

5) The WTO dispute settlement system is faster, more automatic

and thus much less susceptible to backlogs, than the old GATT
system. The implementation of WTO dispute findings will also be
more easily assured.

‘GATT 1947’ continued to exist until the end of 1995, thereby

allowing time for all GATT members to accede to the WTO and
permitting an overlap of activity in areas like dispute settlement.
Moreover, GATT lives on as ‘GATT 1994’, the amended and
updated version of GATT 1947, which is an integral part of the
WTO agreement and which continues to provide the key
disciplines affecting international trade in goods.

The WTO structure-

The structure of the WTO is dominated by its highest authority-

the Ministerial Conference. This body is composed of
representatives of all WTO members. It meets at least every two
years and is empowered to make decisions on all matters under
any of the multilateral trade agreements.

The day to day work of the WTO is entrusted to a number of

subsidiary bodies, principally, the General Council also composed
of all WTO members, which is required to report to the Ministerial
Conference. The General Council also convenes in two particular
forms- as the Dispute Settlement body and the Trade Policy
Review body. The former oversees the Dispute Settlement
Procedure and the latter conducts regular reviews of trade
policies of individual WTO members.

The general council delegates responsibility to three other bodies

viz- the Councils for trade in goods, trade in services and trade
related aspects of IPR.

The Council for goods oversees the implementation and

functioning of all the agreements covering trade in goods, though
many such agreements have their own specific overseeing
bodies.

The other two councils have responsibility for their respective

WTO agreements and may establish their own subsidiary bodies
as deemed necessary.

The Committee on Trade and Development is concerned with

issues relating to the developing countries and especially to the
‘least developed’ among them.
The Final Act.

Eversince the GATT was established after the Second World War,
it has been striving hard, along with the World Bank and the
International Monetary Fund to achieve international economic
cooperation.

The Uruguay Round, attended by 123 countries, at Marrakesh,

Moroco, is called as the Final Act, where all the participating
countries signed an agreement on 15-4-1994.

The major provisions of the Final Act related to agriculture,

sanitary measures, helping least developed countries, TRIPS,
general agreement on trade, and anti-dumping measures-

1) Agriculture- seeks to reform trade in agriculture and provide

the basis for market oriented policies, thereby improving
economic cooperation for importing and exporting countries alike

2) Sanitary Measures- concerned with application of food and

safety and animal and plant health regulation. It stipulates that
all measures be based on science, should be applied only to the
extent necessary to protect human, animal or plant life

3) Helping least developed countries- appropriate mechanism

related to the availability of food and the provision of basic food
stuff in full grant form and aid for agricultural development

4) Clothing- to secure the integration of the textile and clothing

sector, where much of the trade is currently subjected to bilateral
quota negotiations under the Multi-Fibre Agreement

5) TRIPS (Trade related aspects of IPR)- relates to provisions and

principles, addresses different kinds of IPR’s and lastly
enforcement

6) GATS- General Agreement on Trade in Services- the

agreement contains three elements
i) A frame work of general rules and disciplines

ii) Addressing special conditions relating to individual sectors-

finance, telecommunication, air transport etc.

ii) Schedules for market access commitments.

7) Anti-dumping measures- greater clarity in the method of

determining that a product is dumped. It sets out criteria for
determining the injury caused to a domestic industry by the
dumped product and the procedure to be followed in initiating
and conducting anti-dumping investigations

MERGER

Mergers and acquisitions are external growth strategies. They

have been regular features of corporate enterprises in all
developed countries.

Combination of two or more firms is known as merger. It may be

brought about in two ways-

1) Acquisition of one business unit by another

2) Creation of a new company by complete consolidation of two

or more units

Types of Merger

Mergers may be differentiated on the basis of activities which are

added in the process to the existing product or service line.

Mergers may bring about ‘horizontal’ or ‘vertical’ diversification.

A combination of two or more firms in the same business or of

firms engaged in certain aspects of production process is known
as ‘Horizontal Merger’.
A combination of two or more business units which are not
closely related to each other in respect of technology, production
process or market is known as ‘Vertical Merger’.

Techniques of Merger, acquisition or take over

Mergers may take place with a cooperative, friendly approach on

the part of the combining firms or it may be accomplished by one
firm through a bid to take over another with a hostile approach. A
friendly merger takes place when two companies agree upon the
benefits of the merger and work together to achieve it. It results
in negotiated acquisition of one firm by another. A hostile merger,
often called take over, involves one firm acquiring control over
another firm that resist it. This is generally done by purchasing in
the open market a sizable amount of shares of the target
company.

What motivates mergers?

1) To attain higher growth rate than is possible through internal

growth strategy

2) To bring about an increase in the price earnings ratio and

market price of shares

3) To purchase a unit for better use of investible funds

4) To have quick access to resources already developed by

another firm through R&D

5) To reduce competition by acquiring competing firms

6) To fill the gap in the existing in the product line

7) To add new products- diversified

8) To secure tax advantage by acquiring other firms with

accumulated losses which can be set off against the current or
future profits (depreciation)
9) To improve the efficiency of operations and attain higher
profitability

10) To improve the stability of earnings and sales and avoid

business fluctuations

11) It is cheaper to buy or acquire an existing firm than to build a

new business, plant or market from scratch

Who benefits from mergers?

An increasingly large number of mergers and acquisitions are

taking place in the recent decades in the industrial countries,
unmistakably show that executives a strong preference for
mergers, rather than internal growth as convenient means of
corporate growth, achieving market entry, diversification and
means of improving operational efficiency.

Why are mergers not always successful?

They have not been successful in many cases from the point of
view of management. Merger should stem from corporate
strategy as a means of achieving corporate goals. Many a times
this does not happen.

Mergers are more risky than internal growth strategy.

Pricing of acquisition is characterized by an attitude of

recklessness and on occasions there is considerable overpricing
and high premiums paid by acquiring firms.

Failure of mergers is often due to facile assumption that

management expertise can be carried over from one type of
activity to another. Human problems and complex structuring of
organizational relations are sometimes beyond the capability of
the management of acquiring firms.

JOINT VENTURE
When two or more independent firms mutually decide to
participate in a business venture, contribute to the total equity
capital and establish a new organization, it is known as a Joint
Venture. As a growth strategy, joint venture may be regarded as
a cross between internal and external growth. Firms within a
country as well as firms in different countries may participate in a
joint venture.

Why are joint ventures promoted?

As a strategy joint ventures may offer several advantages. A

number of studies in the United States have shown that the main
purpose of joint venture within the country were controlling,
influencing or reducing competition and / or influencing suppliers.
Generally, joint ventures between companies within a country
may take place for one or more of the following reasons:

It may enable new technology to be introduced more

conveniently

High risks involved in new ventures may be reduced through joint

ventures

Small firms joining hands may be able to compete with larger

organizations

Firms in different countries may also find it beneficial to jointly

establish a new enterprise for different reasons for e.g:

The amount of capital outlay to be made by the respective

parties may be less than what it would be otherwise for any one
of the parties

The import content of a project may be conveniently financed by

foreign equity participation

Entry of Multinational Corporation is rendered easier by joint

ventures in developing countries as host governments generally
do not favour foreign companies setting up branch
establishments or subsidiaries
Increased sales through joint ventures help in reducing
production and marketing cost

Problems of joint ventures

Promotion of joint ventures, particularly those across national

borders, requires careful consideration of the terms and
conditions relating to equity participation, voting rights, dividend
remittance and management control. Often there are legal
restrictions on foreign investment. For instance, the Foreign
Exchange Regulation Act has led down limits of permissible
foreign share holding in Indian Companies. Differences in culture
and differences in the stages of economic development of the
countries to which the parties belong are also known to have
created problems for joint ventures across national borders. Joint
ventures between unequal partners often tantamount to quasi-
mergers and may attract antimonopoly regulations.