Introduction
Multilateral bodies play a regulatory role in the global economic environment by acting as higher authorities than their member country governments. They serve to provide a level playing field for all member states or increase the cumulative economic competitiveness of the regional blocks they cover.
This paper appraises the European Union and the World Trade Organization in the context of the global economic environment. It further looks at how Foreign Direct Investment and Multinational Corporations influence international business growth. Finally the paper examines opportunities and threats in the global business environment and how best organizations should respond to the identified challenges.
Importance of World Trade and the World Trade Organization in the development of Global Business Opportunities
World trade facilitates specialization of countries and companies by making it possible to acquire commodities not produced inside a country. World trade also allows countries and international companies to move surplus commodities to areas that a facing a high demand. Different countries have different capacities to produce commodities and possess a diverse mixture of the economic factors at their disposal (Wade, 2003).
Therefore at a given time, a country enjoys an advantage while another faces a disadvantaged bargain when trading a given commodity in the international market. To protect domestic markets and earnings, countries impose restrictions to trade of certain commodities. Additionally, countries also compensate producers within their jurisdiction for the cost of production to a given extent to make the pricing of the commodities favorable in the domestic or international market.
To create a level playing field for international trade, the World Trade Organization and its predecessor GATT were formed. The World trade Organization (WTO) is an agreement of member countries on common rules and regulation that govern international trade at a near global level.
The WTO acts as a forum where trade disputes between member country governments are settled. The WTO continues to accept new memberships in form of countries and nongovernmental organization. The increase in membership comes with new issues and goals for the WTO.
In order to protect their local industries, governments impose importation quotas on goods that disrupt local prices because their international price is lower than the local price. These quotas give a defined volume of imports that allowance to a country without inflating supply levels and hurting local prices.
Even when the price margin of domestic and international prices is desirable for importers, they cannot continue to import after the import quota limit has been reached. As a result, demand of the good in the international market, made up by importers, lowers and so does the international price.
To free up trade and promote development the GATT 1947 agreement and its successor the WTO 1995 agreement generally rule out quantitative restrictions in international trade. To this end, the agreements allow the use of duties, taxes or other charges to regulate trade (Mattoo and Subramanian, 2008).
The WTO aims to realize a transparent non-discriminatory import/export regulation tariff applied only at the border exit or entry. The WTO agreement emphasizes the importance of trade as a vehicle for achieving sustainable development. It covers goods, services and intellectual property.
Agreements under the WTO have changed the global business environment and created new opportunities of international trade. Companies that were previously unable to increase their imports because of import quotas now have a chance to import as they wish in cases where their host countries have agreed on WTO conditions of reducing or eliminating tariff and non-tariff barriers to international trade. Opening up of new markets through WTO memberships has enlarged the international commodity market (Barfield, 2001).
In addition, the WTO has facilitated an inter-country dispute resolution of trade matters through its appellate body. A dispute-settlement system offering an incremental conflict resolution mechanism forms the center of the international trading order (Howse, 1999).
It is made up of the Appellate body is based in Geneva, Switzerland that was established in 1995 in order to properly regulate international trade that is characterized by international trade disputes among non-governmental organizations and member country governments. International companies facing unfair trade practices have a fall back option on their governments to take up the issue of the dispute with the accused government to the WTO (Shaffer, 2001).
Breakdown of international trade barriers has promoted the emergence of knowledgeable companies that can freely conduct business in parts of the world that were previously inaccessible, tapping into the various knowledge repositories and trading commodities in quantities that could not be attained before the actualization of WTO agreements.
The role of Foreign Direct Investment (FDI) and Multi-National Corporations (MNCs) within the context of international business growth
Foreign Direct Investments flowing to host countries through Multi-National Corporation mainly lead to a growth in international business by directly increasing the flow of capital among nations, and import and exports of goods in form of raw materials and finished products (United Nations, 2002).
Foreign Direct Investment forms a core part of the massive private investments that energizes economic growth around the globe (Dabour, 2000). FDI acts as an agent that facilitates the generation and transplanting of technology, administrative skills and associations of domestic economies to world markets.
Empirical and theoretical evidence has shown that an increase in foreign direct investment leads to a sustainable economic growth. However, to sustain the growth of FDI there should be sound domestic saving performance. FDI is attracted to developing countries that demonstrate a high marginal productivity rate of capital as long as individual investments in the host country seem less risky (Froot, 1993).
FDI is a form of capital movement across nations and provides unique links of integration of domestic companies in the host country with the global market. FDI move technological expertise to areas that have resources but lack the technology to exploit these resources. As a result, new economic production centres form up and add to the overall competitiveness of the global business environment (Dabour 2000).
When Multi-National Corporations are productive, they add up to the average value of workers in their host countries in the same industry (Wan 2010). In addition to improving the overall value, FDI facilitates the transfer of technology that raises the stock of expertise in the host country through labour training programs and new forms of organization and managerial practices. The transferred technology leads to the development of more competitive domestic companies that grow to cover an international market.
The resulting increase in productivity and growth of economies increases the demand for more goods and services and therefore leads to international business growth.
Apart from introducing new technology directly to the host countries, FDI facilitates the diffusion of technology and human capital development that occurs through collaborations and positive externalities of Multinational Corporations (Saggi, 2002). Multinational Corporations have linkages with domestic firms and these linkages provide avenues for the diffusion of t the technology.
Existence of multinational corporations in the host country increases the available demand for resources within the countries and this serves as an incentive for increased production of the productive resources. Presence of multinational corporations therefore leads to a clustering of related companies to satisfy the production demands of the multinational while others set up to enjoying economic benefits brought by the establishment of the multinational corporation in the domestic country.
The increased concentration of companies, attracts the establishment of markets to facilitate the trade among the companies within the locality and outside. The amalgamation of clustered markets around the world contributes to the overall growth of international business.
Apart from contributing skills and capital to develop domestic markets, Multinational corporations perform a crucial role of breaking international trade barriers and allowing free trade of commodities in the international markets. MNC do not directly break the barriers of trade, instead they influence their host countries to allow them preferential treatment on importation or export of commodities. The MNC therefore provide domestic commodities either modified or in their raw form to the international markets at tariff free prices (Wan, 2010)
In some cases, domestic products fail to reach the international market due to a lack of or poor standardization that does not meet the international market demand. FDI through MNC in such countries brings about new capacities to meet the market demands and make domestic commodities more competitive (Blomstom and Kokko, 2003).
Moreover, the MNC provides an increased market presence through its subsidiaries and head companies in other parts of the world. Therefore, MNC perform the crucial role of moving technology and best practices to the countries without such capacities. Successful shift of resources from areas of production to areas of consumption forms the core of international business.
The transfer of international business best practices also happens in the realm of corporate social responsibility. The global presence of MNC allow them to obtain a first-hand reaction of their ethical or non-ethical business practice and are therefore at a better position to understand the significance of the pursuance of their business strategies in relation to the effect on the communities in their production locations.
MNC play a mentorship role to domestic companies, when they choose to observe ethical business practices that embrace the universal concept of social responsibility, and directly contribute to sanctification of the international business environment and indirectly through stream of the best practices to other companies in their host countries (Wan, 2010)
Key Issues Associated with the continued process of European Union Economic and Political Integration
Germany, France, Italy, Belgium, Netherlands and Luxembourg were the first countries to form the European Union in 1957. As of 2004, the European Union (EU) was the largest integrated grouping of the world having a population of 490 million people. The formation of the EU has led to an improvement in the economic prospects of the region. Trade among EU members makes two-thirds of the total volume of trade in the EU (Dalimov, 2009).
The success of the EU has come with political and economic misgivings among member countries. New states joining the EU appreciated the new passport for their population and saw it as a positive event that will result to a rapid economic growth of these countries.
The populations of the newer members of the EU therefore demonstrated enthusiasm to the new prospects presented by the integration. However, polls conducted in the EU members states during the integration of the newer member states indicate that populations of countries with superior economies in the EU were opposed to the additional integration (Dalimov, 2009).
The refusal to support a further integration of the EU arise out of the fact that increasing welfare in new member states to match that of existing states happens at the expense of the economically stronger countries. The newcomer countries depend on the economically advanced countries to pull them up economically.
Integration also increases the available labour pool and increases competition for employment opportunities especially for the stronger economies of the EU that attracts huge numbers of immigrants looking for employment. On the other hand weaker economies in the EU see a decrease in unemployment rates as majority of their populations move to other member states in search of jobs.
The increase of labour supply has led to a decrease in labour compensation and brought up the need for special training for the population, as a result new instabilities have taken place in the employment sector within the EU. Each additional member of the EU brings in an increased supply of labour both employed and unemployed (Dalimov, 2009).
The 15 strong economies of the EU do not have an economical reason to celebrate the further expansion of the EU because as it stands, they account for up to 90 per cent of the total revenues of the EU.
Economic theory also disfavours the stronger states as it suggests that the less developed economies start posing higher economic growth rates than the stronger economies as they rely more on them. This forms a feeling of a parasitic relationship, among the members falling on the opposite ends of the level of development (Wallace, Wallace and Pollack, 2008).
The successful integration of the EU demands that further integration occurs so that countries continue to enjoy the benefits of economic integration. From the current level of integration, further integration can only move towards a unification of economies and states according to the principle of convergence in addition to further expanding the membership.
The EU faces the pressure to expand further and such an expansion is only possible through integration of other regional blocs with substantial economic power outside the traditional boundaries of the EU (Dalimov, 2009).
The integration with non-traditional EU members brings out new political challenges in form of different systems of governments presented by new potential members. For example, the Turkish government prioritized the fastest entry into the EU however; it faced obstacles because it is a Muslim state while the majority of EU member states are Christian.
The difference in state religion brings out a conflict of ideologies that curtails effective unification of states under one economic and political leadership. The gravity of religious matters was ruminated in 2006 by the postponement of the integration of Turkey into the EU indefinitely (Wallace, Wallace and Pollack, 2008).
The EU will face economic stagnation if it does not economically integrate with other regional groupings. The size of the EU necessitates integration with a similar sized economic block as global competitiveness continues to factor majorly in the polity of the EU.
Unfortunately increased expansion of the EU and unification of member state government function results to the erosion of individual state sovereignty. The democratic space within the member states shrinks as state authority in some sectors of the economy are transferred to a higher authority in the EU such as monetary and immigration control (Royo, 2005).
The loss of sovereignty has led to the creation of nationalist parties that are opposed to further expansion of the EU. These parties advocate for the adoption of anti-integration mechanisms such as the restriction of entry of foreigners to the EU labour market, with the inclusion of new Member states. Nationalist are also opposed to the dissolving of national currencies and the adoption of the euro (Dalimov, 2009).
The overall convergence of the EU faces challenges from the stagnation of individual countries in the implementation of policy reforms in their domestic economies (Wallace, Wallace and Pollack, 2008). The stagnation occurs in economic performance, reform of key economic sectors and political structures.
A major cause of the stagnation is in the lack of a political will that is encouraged by nationalist ideologies against unification. The current division of member states into developed economies and developing economies further exacerbate the overall convergence of the union. Although the overall political structure of the EU drives a move towards overall competitiveness of the region, true progress lies in the commitment and implementation of reforms within individual economies by governments at the domestic level (Royo, 2005).
The challenge of making all member states to pursue reforms of their key economic sectors and political organization is the most difficult one facing EU leaders. Without a real commitment to reforms by domestic polity and actual implementation, convergence of the EU is a mirage and the lack of progress will make the EU less competitive as it is now and result to a paralysis of institutions governing the EU (Royo, 2005).
Main Opportunities and Threats Evident Within the Global Business Environment
The global business environment is characterised by ever changing factors that influence decision-making of companies and their overall competitiveness. Opportunities for business growth arise in the tearing down of geographical barriers of trade through advancements in communication technology (Markusen, 1995).
Companies are also developing new competitive advantages in having multinational presence that assists them in tapping into knowledge clusters that exist outside their home countries. The advent of a knowledge economy has meant that competitiveness is not only in having a geographical presence, but market intelligence from all over the globe and in fulfilling the unique needs of each market.
Therefore, multinational companies cannot continue to impose business systems from their home countries to their host countries without factoring the local market structure and culture. Shrinkage of international distance through telecommunication gives domestic consumers options to enjoy international commodities at fair prices and no multinational can act independent of this fact (Markusen, 1995).
The democratization of the majority of the countries in the world through globalization and the liberalization of Foreign Direct Investments in most countries has expanded the market for raw materials and finished products for companies engaged in international trade as well as increasing the pool of available labour and capital.
It is much easier to navigate the international trade environment and concepts like outsourcing are making even previously local companies to assume international presence. Firms now have an opportunity to reorganize their supply chains and production systems to tap into the opportunities presented in the new global business environment (Kohlbacher, 2008).
Threats facing the global business environment include internal threats to sovereignty of individual countries, global pandemics that restrict the movement of labour, new security issues brought about by adoption of new technology and political movements that advocate for the nationalism ideology. Global business environment is now hypercompetitive showing short periods of advantage that are upset frequently by unforeseen threats (Kohlbacher, 2008).
Businesses respond to the above challenges by shifting their risk assessment strategies. It is no longer viable for companies to avoid certain countries because of terrorism threats. New threats affect the overall viability of the company and require a risk analysis that differentiates risks and uncertainties.
Business assign probabilities to risks and can therefore position to mitigate the risk however, appropriation of uncertainties is impossible. Business cannot solely rely on their governments to manage global threats and in some cases governments’ response to threats add up as more business environment challenges (Kaynak, 1993). Businesses now approach the issue of uncertainty of threats with a four-step approach to decision-making.
Making a prediction of the occurrence of the threat then obtaining further information about the uncertainty, balancing uncertainties through common business methods such as diversification, controlling or influencing events that shape up the uncertainty and finally increasing the organization’s flexibility of responding when the uncertainty occurs (Enderwick, 2006).
Conclusion
The international business environment is characterised by an ever-changing nature of opportunities and threats for transnational companies. Multilateral bodies have a higher authority than their member countries and exist mainly to improve the overall business environment or make their regional blocs competitive. Therefore, actions by these bodies directly affect the structure of the global business environment and affect how marketers of respective companies make decisions regarding production and distribution strategies.
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