Globalization, Competitiveness, and Governability: The Three Disruptive Forces of Business in the 21st Century

© The Author(s) 2019

Ricardo Ernst and Jerry HaarGlobalization, Competitiveness, and Governabilityhttps://doi.org/10.1007/978-3-030-17516-0_1

1. Why the Three Forces

Ricardo Ernst¹   and Jerry Haar²  

(1)

Georgetown University, Washington, DC, USA

(2)

Florida International University, Miami, FL, USA

Ricardo Ernst (Corresponding author)

Email: ernstr@georgetown.edu

Jerry Haar

Email: haarj@fiu.edu

Globalization, Competitiveness, and Governability are the Three Disruptive Forces of Business in the twenty-first century. Presently, the previous sentence is simply a statement and one can argue the basis of stating it. Thus, as you read on, you will realize that the statement under discussion is more of a fact. We establish that globalization, competitiveness, and governability are not only disrupting business in the twenty-first century but also that there is a symbiotic relationship between these three forces, resulting in an impact on the economic and business environment far greater than the effects of any of these three individually.

Following its birth in the nineteenth century and its post-World War I decline, the globalization process has gained new strength in the last third of the twentieth century and early twenty-first century. This is due to advances in transport, IT and communication developments, and the spread of the idea that the basis for economic development is a free market. It is a cross-border phenomenon affecting economic, political, technological and cultural relations while giving rise to interdependent relations between states, companies, organizations, and individuals. Globalization has thus resulted in a rapid reduction in barriers to the movement of ideas, capital and people, the opening of new markets, and the government’s withdrawal from the economic arena.

Globalization affects every country regardless of its economic, political or social situation. In this context, as states endeavor to adapt their policies to new demands, companies deploy strategies to attain an increasingly globally integrated production system. The globalized world forces us to seek and develop appropriate ways to undergo this process. Today, discussions about the advantages and disadvantages of globalization are insignificant and unimportant in the face of the great need to determine the essential conditions for countries, companies, and individuals to really benefit from it.

Competitiveness has thus become essential in achieving that aim. Therefore, it represents the response to and results from the opportunities offered by globalization. It is the answer to the challenge resulting from increased competition in the global market, as well as the solution which makes it possible to correct the inefficiencies not permitted by globalization due to the magnitude of their consequences and the speed and irreversible nature of their evolution.

The dynamics of globalization , accentuated by the technology phenomenon, have indeed increased commercial and financial operations and, therefore, also the competition in those markets. On this basis, globalization requires the transformation of production systems and the adoption of strategies to foster stronger competitiveness .

However, both globalization and competitiveness are governed essentially by market forces that force the introduction of significant changes aimed at increasing efficiency so that a better use may be made of the advantages of globalization (i.e., the traditional invisible hand). Responsibility for bringing about these changes lies not only with the private sector but also with the government (i.e., the visible hand).

Governability is one of the factors that ensure the establishment of a competitive environment . Governability includes not only the governing body of a nation, state, or community, but also the governing structure of the companies. This does not involve disbanding the institutions or structures that comprise it, but rather understanding how they operate and affect companies’ fields of maneuver which might, depending on the case, ensure that such companies become fully integrated in a dynamic global society brimming with opportunity while in others create serious obstacles to reach the efficiency levels required to compete in a globalized market. Therefore, business in the twenty-first century requires an explicit recognition for the need of a handshake between the visible and invisible hands as illustrated in Fig. 1.1.

Fig. 1.1

The interlinks of the visible hand and the invisible hand

1.1 Globalization and Competitiveness

To better explain the impact of these invisible and visible factors and observe their interconnectedness, we take a drill-down approach with globalization ; that is, we deal with the country, the industries within the country and the firms existing in the industry as shown in Fig. 1.2.

Fig. 1.2

Levels of evaluation for the impact of globalization

There is a major difference in approach to competitiveness between companies and countries. As Michael Porter , famous guru in the field of competitiveness stated—companies compete on market share and profitability while nations compete in providing a platform for operating at high levels of productivity and therefore attracting and retaining an ample investment in those activities that support high returns to capital and high wages .¹

Michael Porter had also stated that the productivity of a country is ultimately set by the productivity of its companies. An economy cannot be competitive unless companies operating there are competitive, whether they are domestic firms or subsidiaries of foreign companies. However, the sophistication and productivity of companies are inextricably intertwined with the quality of the national business environment …to competing on competitive advantages arising from superior or distinctive products and processes.²

Garelli mentioned in 2008 that globalization evolves in waves (Fig. 1.3). As globalization increases pace with the increasing technology and decreasing barriers, the companies face a challenge to evolve along with it. The ability of companies to handle this challenge will be a deciding factor in their survival.

Fig. 1.3

Waves of globalization evolution (Garelli , S. [2008]. The New Waves in Globalization and Competitiveness, in IMD World Competitiveness Yearbook 2008, pp. 35–39)

Thus, it is the government’s task to provide companies with a business environment that facilitates them for growth. Governability in terms of business policies, FDI policies, corporate tax regulations , environmental regulations and international relations, to mention a few, decide the efficacy of businesses to compete in a globalized environment.

1.1.1 Interconnected Competitiveness

In order to keep pace with transformations led by globalization in the industry, the companies undertook two major modifications in their business strategies: (1) They sought to achieve critical size and gave higher priority to external growth through mergers & acquisitions. They also multiplied the number of cooperation agreements and alliances while making internal organizational changes. (2) They refocused on strengthening the activities of the firm where they initially had a dominant position. Globalization has made it mandatory for the countries to improve economic efficiency to effectively compete globally. Globalization has also changed traditional indicators of competitiveness, based on the new information.

Especially in the areas of employment, trade and competition, the challenges raised by globalization deserve an in-depth analysis thus making competitiveness a prime concern for governments and the firms. However, the differing goals of the reference levels—the firm and the country—may serve as a barrier in measuring competitiveness . For instance, while a country’s primary goal would be to improve living standards of the citizens and provide security, a firm’s primary goal is to make profits and maximize shareholder value.

1.1.2 Internationalization of Production

The various elements that contribute to the manufacturing of a product (capital, labor , technology, raw materials, intermediate goods, distribution) may come from many sources; countries and firms are now so interdependent, and the links between them so complex, that it is sometimes quite difficult to determine exactly where the various elements come from. There is no better example than the multiple sources of inputs in global automobile manufacturing.

1.1.3 Pattern of International Trade

The main, though not the sole consequence of the growth in trade has been increased intra-industrial specialization—itself the result of the greater integration of the world economy, which goes hand in hand with the growing demand for differentiated products with a higher and higher technology content.

1.1.4 Growing Interdependence of the Various Levels of Globalization

Direct investment flows generate exports from the countries making the investment; these exports are accompanied by transfers of technology and know-how, and capital movements (e.g., equity investments , international loans, repatriated profits, interest, royalties). Similar linkages could be identified in areas other than that of direct investment.

Two other developments can also be identified: First, trade is no longer virtually the sole vehicle of globalization, since direct investment, although quantitatively smaller, now has a major role. Second, the emergence of an intangible component, especially services , in international transactions is one of the salient developments over the past ten years. There have been multiple misconceptions about competitiveness and globalization that have gradually been debunked such as: competitiveness depends exclusively on relative costs and prices, competitiveness should be measured by export performance or that competitiveness is mainly a static concept.

1.2 Globalization and Governability

1.2.1 Government Responses

Historically , the policy-makers seldom took globalization into consideration, being hesitant in accepting certain consequences of the same and have played catch-up with it by taking up adjustment measure and promoting international relations as per requirements. They have realized that the effect of their policies should be global. Reduced independence of nations to functions in isolation may be the reason behind an increase in the number of international agreements on the environment , health, research, and technical standards. Cross-economic science and technology programs are compelling not just countries, but even private parties to cooperate.

Thus, a need for uniformity and standardization arises which gives birth to geographical and global arrangements such as the European Union , the North American Free Trade Agreement (NAFTA), the ASEAN in South East Asia and MERCOSUR in Latin America. By such unions, countries seek stability in trade and commerce and can follow a steady strategy for internationalization. As a result of this growing interdependence, national policies are less effective when they are out of line with one another. This is an aspect of globalization that may often be perceived as a constraint on national independence and a loss of sovereignty.

Moreover, being aware of the negative effects of globalization , the policy-makers intend to counter them even as preemptive measures; an example would be to bail out private banks in a bad-state economy to avoid bankruptcies which would disrupt the trade in the entire region or an international financial system. Similarly, the 1987 stock market crisis led the policymakers to tighten control over financial markets and create more regulations for secure compliance in the finance industry. Thus, after the awareness, the policy-makers assisted domestic firms by regional economic development, financing research or even pro-business labor and environment policies so as to make them capable of competing globally.

However, the assistance also creates a conflict with policies intended to support international cooperation or protection of domestic firms such as policies related to antidumping, import quotas and bans, customs, export-related agreements and subsidies, intellectual property rights , technical standards, bilateral trade agreements and R&D programs to mention a few.

Thus, even though there have not been major changes in the traditional economic systems, MNCs continue to implement multinational strategies, leaving the smaller firms to conduct business in domestic markets. Considering the trends that we observed previously and the forecasts by WTO, broad changes in global economic environment are expected to take place. Thus, without fully knowing the consequences of each change instigated by the ripples of globalization, both defensive and aggressive approaches against it should be explored by the policy-makers.

1.2.2 Globalization’s Critical Imbalances

But what if it weren’t as stable a trend as it appears? We should consider that seeming improbability and examine the possibility that financial crises may accelerate the transition to a global economy with more balanced trade , capital flows , and consumption.

An in-depth examination of currency trade can perhaps throw some light on it. A trade of denominated currencies across various financial economies is called cross-border arbitrage. The same arbitrage assists in understanding the differences in the cost of production across these economies. Arbitrage opportunities have increased with globalization as more economies are gradually becoming open. Transaction costs have decreased and purchasing power parity (PPP) is more even than ever. However, labor rates vary significantly over the world and that is what enables the multinational corporations to save huge costs and thus, they outsource the jobs to the countries with maximum cost benefits.

This brings us to the balancing effect. Developed economies desire less consumption and less costs to be more financially sound and achieve trade surplus while developing economies need higher currency rates to have competitive PPP and thus, have more consumption, more capital inflow and affordable trade deficit . For this, extreme cooperation between the governments involved in trade is required with agreements and policies in place to facilitate transactions healthily.

However, such policy implementation is not as easy as it seems. For instance, the government in the developed countries must respond to the demands of voters who desire to put domestic firms first, or in general, want their own country ahead in the policies because of not being completely aware of the effects of globalization. The citizens wish their governments to have more expenditure for social programs such as health care , security, and employment and may consider outsourcing business or aiding external economies as a negative to that effect. This presents a dilemma for the policy-makers as to whether to please the voters or consider the economic stability and assist the trade partners in need at the risk of the country’s fiscal deficit . As we have seen in the case of Greece , Portugal , and Spain , these European economies are facing crises which may lead to great economic instability in Europe, and at some point, even International Monetary Fund (IMF) or any global financial institute may show unwillingness to bail out.

Therefore, everything comes down to the policy decisions of the government. For instance, a trade war such as the one sparked by the Trump administration affects the economic balance in a globalized environment . Such trade wars bring uncertainty in cross-country business environments and create a cycle of retaliation, thus, disrupting the trade cycles around the world. Such steps also create fluctuations in exchange rates and capital flows , worsening geopolitical tensions. The impact of such trade wars can only be speculated and not accurately predicted.

1.2.3 Possible Responses to Globalization

For the policymakers to be able to respond to globalization successfully, an in-depth understanding of the domestic and international factors discussed above is required. The only way for the individual economies to succeed is to coordinate their trade strategy with the partners and allies. The domestic firms and MNCs operating inside a country are both affected by globalization. Thus, micro-organizational strategy is inevitable to facilitate the macroeconomics of the country, as they both need to go hand in hand with each other to reap the benefits of globalization.

To restate, the government’s policies should be coherent with both, the internal macroeconomic environment and the external economic scenario of the trade partners. As the invisible hand , the demand and supply mechanism will be determined by the global customer base, the governments should understand that there are costs associated with every market, be it domestic or international. Thus, government has to consider the efficiency of all the markets that interact with the economy before making any policy decisions.

1.2.4 Corruption: A Major Obstacle to Globalization

A country’s ability to take advantage of globalization is occasionally tremendously affected by a single factor—corruption . The IMF has acknowledged the hinderance that corruption has proved to be and is actively battling against it. Corruption makes a country vulnerable to unstable economy as it affects the political environment of a country and reduces inflow of FDI as MNCs try to avoid the corrupt bureaucracy and increases the risk of currency crises.

Especially for international investors, payment of bribes and government extortion is the same as additional costs and taxes . Even the competition becomes skewed as some foreign firms which follow a different belief of ethics capture vast business by paying bribes which, a more ethical company may wish to avoid. However, if a country allows corruption to run rampant and infiltrate the business environment of a country, it loses millions of dollars in lost opportunity with prospective companies seeking to invest in the economy. Research indicates that there is an inverse relationship between the corruption index and inflow of FDI . Thus, if a country is highly rated in terms of corruption , the inflow of FDI decreases dramatically. It is analogical to decrease in FDI due to implementation of certain tax policies except that, unlike a tax, government does not earn any revenue by corruption. This topic will be explored in detail in Chapter 4.

1.2.5 Globalization’s Effect on Politics

As we discussed earlier, globalization compels economies to consider the political environment of their trade partners. Thus, on occasion, politically integrated organizations operate at a higher level than the state itself. For instance, the United Nations, the European Union , the IMF , the World Bank and the World Trade Organization implement policies or regulations that the member countries must follow mandatorily. For example, the Anti-Dumping Agreement or the Trade-Related Aspects of Intellectual Property Rights (TRIPS), as enforced by the WTO makes sure that the member countries get an even playing field in trade . Even Non-Governmental Organizations (NGOs) such as Greenpeace , may also influence government policies related to pollution through manufacturing plants which, in turn, indirectly affect the business environment .

Primarily, globalization affects three main political dimensions of a country namely: (1) Economy, (2) Culture, and (3) Law. According to Global Policy journal (www.​globalpolicyjour​nal.​com), globalization has created the largest free market in the history due to advances in technology, communication, and international policy. It has also spawned numerous international financial institutions such as Asian Development Bank, European Development Bank, and New Development Bank that do not belong to any specific country. This of course, creates tremendous opportunities for investors, but it also affects the local employment within each