All Companies Involved In International Flows Of Capital Must Reasons for Globalization

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Reasons for Globalization

Many companies go global and move their business overseas. They do their business abroad for different reasons. These companies adopt a reactive or defensive approach to stay ahead of the competition. Some of them take a proactive or aggressive approach to achieve the same objective. Most of them adopt both methods to avoid undercutting their competition. To stay competitive, companies move as quickly as possible to gain a strong foothold in certain major world or emerging markets with products customized to the needs of the people in the areas they plan to establish. Most of these global markets are attracting companies with very good incentives for new capital investment. Some reactive or defensive reasons to go global are:

(1) Trade barriers

(2) Customer demands

(3) Globalization of competitors

(4) Rules and Restrictions

In the case of trade barriers, companies move from exporting their products abroad to manufacturing abroad to avoid the burden of tariffs, quotas, procurement policies, and other restrictions. Companies respond to customer demands for effective operations and product assurance and reliability or/and logistics problem solutions. Most foreign customers, who seek access to suppliers, may request that supplies be localized to increase product flow. Companies usually comply with that request to avoid losing business. For globalizing competitors, companies are aware that if they leave companies abroad without challenge or competition, their investments or foreign operations in global markets may be so strong that competition will be difficult. Therefore, they try to act quickly. Most companies may have home government regulations and restrictions that are inconvenient and costly, limiting expansion, encroaching on companies’ profits, and making their costs uncontrollable. So there is reason for companies to move to different market environments with some overseas operations. Proactive or aggressive reasons to go global include:

(a) Growth opportunities

(b) Economies of scale

(c) Incentives

(d) Resource assessment and cost savings

Many companies prefer to invest their surplus profits to expand, but are sometimes limited by the maturity of the markets in their area. So they look for new markets overseas to provide such growth opportunities. Therefore, these firms, in addition to investing their surplus profits, try to increase efficiency by utilizing their underutilized resources in human and capital assets such as management, machinery and technology. Firms seek economies of scale to achieve higher levels of output at higher fixed costs to reduce per-unit costs. They want to maximize the use of their production equipment and spread high research and development costs over the product life cycle. Some developing countries that need to improve and develop through capital infusion, skills and technology voluntarily offer incentives such as fixed assets, tax exemptions, subsidies, tax holidays, human capital and low wages. These companies find these incentives attractive because of their increased profits and reduced risk. Caution: Repatriation of profits and foreign exchange risk due to instability in the leadership of these developing countries should be considered in negotiations. Availability of raw materials and lower operating costs in financing, transportation, lower wages, lower unit costs and energy are attractive in terms of resource access and cost savings. Most companies move their headquarters abroad to avoid the high taxes of their respective countries and other costs associated with business operations in those countries.

Companies must develop strategies, design and operate systems, and work in strategic alliances with people, different companies, and countries around the world to ensure sustainable competitive advantage. Global management and management functions are often shaped by prevailing conditions and ongoing stable and volatile events in the world. Some countries take advantage of these companies, but when companies realize that they are being exploited, they must learn how they can be used in those different cultural environments to make the most of their profits.

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