Globalisation and international investment

GEM-Chem

Management

Investment

Globalisation

Best resolution: 800x600 pixels


THE POLYMER BOOKSHOP® CD-Books & CD-Articles on Polymer Science, Technology & Marketing
CD-Articles & CD-Books	Companies' news	PU applications

Two articles in this section:

1-Globalisation and International investment

2-Globalisation, its worrying aspect

1-Globalisation and International investment

Globalisation is a business strategy which has made fans as well as foes.
To its fans, it has a dynamic meaning, closely associated to the spread of industrial development, entrepreneurial opportunity, wealth and social prosperity.
Its foes relate it to the tarnished concept of neo-colonialism.
In this article, we expose a concise description of the strategies business people and companies may follow to penetrate international markets. In this context globalisation is related to developing international markets with the aim of investing in such markets. The new products are solely absorbed by the new markets.
We begin with the assumption that a company is a source of a new product, at least new to the market it eyes for or, an original service, and, it aims at expanding its business activities in countries other than the one where it already possesses production lines.
In general the two basic steps to follow are:
a-Identification of the market and build up of a core business.
b-Investment in technical centres and manufacturing facilities.

1- Single handed approach
The company should first assess whether its product or service stands a good chance to be absorbed by the markets under consideration. Questions such as consumer acceptance, availability of industrial infrastructure to process its products, if semi finished items are concerned, should be addressed. Visits to potential accounts aiming at closing a business, in foreign countries, can be performed directly by the business owner, or any of his associates, without the help of local representatives. Prior to the visits, the company executive, director or the exports manager, will have to search for the details of the potential buyers to be visited and locate the names of key persons to be contacted. Trade directories provide adequate information on companies established in various countries. Sometimes, additional information can be obtained from the trade representations of those countries as well as from business people who have already had some field experience and contacts. Nowadays, the internet provides very useful informations. A good homework is necessary before any business trip is started. Telephone, fax, e-mail contacts confirming the date and time of the meeting are prerequisites. All should be directly addressed to the person with whom the meeting will be held. Of particular importance are good telephone communications on the details of the meeting. A sort of working atmosphere, even by telephone has to be established. Such a visit can be paralleled to the visit of any trade representative to a customer in his own country. The basic differences are:
a- Different social and labour cultures.
b- Different language.
c- Expensive travel arrangements.
d- Commercial transactions and shipment methods, the costs of which have a toll on profit margins.
In addition, the presentation of the products or services, during the meetings, must be thoroughly prepared. Slides, overheads, relevant folders and samples whenever possible, all contribute to an effective presentation and consequently, sale of the products and services. All the costs incurred in such business trips constitute both risk and investment. They cannot be recuperated, from this particular endeavour, unless the business is closed either in the short or medium term. Usually most of the investment is in travelling expenses, in order to keep the contacts alight even after the conclusion of commercial transactions. The above approach should be applied whenever small markets are concerned or, whenever the sales volumes do not justify the costs associated with running a local office. It is of course a low risk strategy when the products are sold to a central national purchasing agency on the basis of international tenders. This supposedly protective as well as globalisation avert approach of certain governments, reduces the efforts of business people and hinders the development of the local industry. It only protects the jobs and interests of the very few government employees who work for the state. The single handed approach to development, is inefficient if it is attempted on large markets, since only few of the potential clients can be consistently reached. Furthermore, the costs involved in traveling will certainly justify working through a local agent or setting up a sales office in order to build a core business. Addressing now, globalisation in the shadow of this business strategy, it can be said that, working single handedly in potentially large markets, offers little contribution to the local well being in terms of job creation and industrial development. The approach is rather directed towards closing spot businesses, which favour the supplier himself more than the country where the products are exported to. To conclude, it is worth stressing that a single handed approach towards developing a market can be regarded as the first step prior to establishing locally a representative office.

2- Trading through an agent, broker or distributor.
In order to avoid frequent trips as well as investing in a local office with the aim of developing the market, the presence of a company in a foreign market can be transferred to the care of an independent agency. An agency is a local trading organisation which derives a profit from the sales of products manufactured by third parties. The profit or commission, as it is usually called, is calculated as a percentage of the turnover generated by the agency as a result of the sale of the product. The advantages of being represented by an agency are:
a- Avoidance of costs related to running an independent office and having employees in the pay roll at an early stage of the business.
b- More frequent communication and visits to potential accounts.
c- The language and mentality gaps are easily bridged through the presence of a country's native in the market.
d- The provision of a more efficient service to the customer as well as a better feed back on market trends and needs through the permanent availability of a representative in the market.
The agent's main objective is to deliver the business results he committed himself to reach on an annual basis. On the other hand, the company should provide him with the necessary tools, training and support in order to carry out his task efficiently. Although the agency is an independent company which acts as a link between customer and mother company, a sort of loose supervision should exist. Regular telephone communications, visits of the agent to the mother company with or without customers, as well as visits by the company's sales personnel to the agency followed by visits to customers are essential methods of managing agents. Annual agents' meetings contribute to the exchange of information between agents of different countries. Among the major services provided by the agent is the integration of his network within the company's reach. This is also the main issue upon which the choice of the agent should be made. In other words, his line of commercial businesses must match or overlap with the company's business and, very obviously, the agent should not represent the interests of any other company with the same line of products. Agents want also to make a profit in addition to covering the expenses they incur by running an office and paying for customer visits. Even if the sale of the product from a single company provides him with good profits, an agent will always try to acquire more agencies to increase his profits. This is perfectly fair. The names of agencies can be obtained from trade representations, business contacts or publications on a country's business community. The relation between company and agent is sealed by a contract which can be renewed after a certain period of cooperation. There is a tendency, on behalf of the company, to be willing to terminate the agent's involvement as soon as the business picks up since this situation justifies an investment in premises and work force. The issue is primarily an ethical one, unless the cooperation between the two parties is uneasy if, solely, the agent at fault. In this case the work atmosphere may be detrimental to the business as a whole and the termination of the cooperation can be justified. If the company is eager to start up its own organisation in the specific market, it can reach a financial settlement with the agent. It is obvious that an agent is not a member of the manufacturing company, therefore he has no within its organisation, in contrast to a local office where its members look forward to promotions and career evolution.

3-Set up of sales office
If a company wants to penetrate a market through the expansion of its own organisation internationally, instead of using the services of an agent, then opening a local sales office is the strategy to follow. It is of course a more dynamic approach than making use of an agent's services. The key issues are operating costs, related to running a sales office and hiring the right, local personnel who will be able, to effect a sales turnover as soon as possible. It is even better to buy or build an office instead of renting one, since in the long run the value of the premises usually appreciates and contributes positively to the book value of the business. Again, when sufficient core business will be generated to support the operation independently , the office will operate much more efficiently than an agency, since all its members are part of the organisation, the sole purpose of which is the sale of the company's own products. On the other hand, employees of a sales office look also forward to a career within the company and should therefore be managed differently. In contrast to an agent whose work is focused towards his own business profit. Furthermore the presence of a sales office lays the ground for faster future investments, like technical centres, plants and manufacturing facilities. A sales office should be run as an independent business entity, with full profit and loss responsibilities. Usually, national sales offices tend to employ much more manpower than would an independent agency which is, in general, more profit oriented. It is therefore better to employ few, but motivated and highly paid people, with budget responsibilities, rather than opting for the dangerous alternative of having lots of people, intricate organisation structures and low salaries. In addition the employees should be frequently trained. They should also be in touch with their colleagues in the company's various offices and headquarters.

4-Joint venture with local business or direct investment in manufacturing sites
As soon as the regional market has been developed,and, the core business as well as the projected business turnover justify an investment in production lines the decision should be taken to proceed further either with or without local partners. In the former case, the share in the investment costs is diluted, but the share of the technology holder in the venture must be such that he retains control of the company, otherwise the endeavour may be likened to licensing or transferring the technology. In this case, the control of the company is virtually given up. The advantage of having local partners is the support they provide through their contacts, advice and, essentially the local colour they impart to the venture etc. However the investment is not only production lines, research laboratories and offices. People who will run the assets and convert them into productive and profit generating entities must be found locally. They must also be trained. The operational control of the company, should be the result of good management, devoted to the company itself. Manning the company by a majority of expatriates to retain its control is an approach which often arouses the disdain of locals. Furthermore by investing locally, either in a joint venture or entirely on its own, a foreign company shows that in addition to the satisfaction of its shareholders it contributes to the welfare of the local work force, industry and nation, in general, through its contribution to the country's taxation system. This is one of the major assets of this specific aspect of globalisation.

2-Globalisation, its worrying aspect

In the previous article globalisation has been associated to business cooperation, international investment and, the development of national industries and economies. However, there is also a rusty and disturbing side to the coin.
The bright aspect of globalisation is tarnished when it becomes synonymous to outsourcing. A very simple example is that of a company, operating in a developed country. This company produces a product requiring a component Z in its final assembly. The manufacture of this component is subcontracted at OEM's spread all over the country. Some subcontractors receive a larger share of orders than others but still, all run their businesses successfully and, have employees on their payrolls. The possibility exists that the subcontractors buy minor consituents of Z from other manufacturers. It won't be unusual either, if every manufacturer squeezed the price of his supplier for his own benefit. This picture of the manufacturing, negotiating, selling and buying loop is an important pillar of the country's economy and a major component of the welfare of a section of its population. However, suppose, it is decided, by the company's management, that the final product can be manufactured in a less costly way and, therefore generate a better profit margin when component Z is imported from manufacturers based in a country where the working force receives a fraction of the salaries of the local employees and, where the state, expects a minimum of social contributions, taxes and insurances from its citizens and industries. If this strategy is satisfied, the immediate consequence is that the OEM's, producers of component Z, will come across financial problems unless they diversify their business activities. The most extreme and eventually, dramatic consequence, is that some of the OEM's stop their activities, shut down their facilities and lay off their employees.
Even if a minority of the OEM's were to go banckrupt, would also be a disaster to several people and to many families. Such events, would result in a reduction of the purchasing power of a corresponding section of the population, among them perhaps buyers of items including component Z, which by now is subcontracted in a country with a cheaper workforce. An extreme case, would be the transfer of the whole manufacture of the product abroad. In other words the product with all its components, will be made in a developing country, with its country of origin, becoming a net importer. It is obvious that the above example can also reflect the situation in a division of a multinational, which, for the sake of enhancing its profits decides to transfer the manufacturing facilities of one of its products to a "cheap" country.

Who profits from this aspect of globalisation?
The example above, clearly suggests that the winners from the manufacturing or trading shift, from expensive to cheap countries are the profit takers. In this bracket are, of course included, the company's owners, its shareholders, if a stock exchange quoted company is concerned, and, finally, its top executives who will collect the profits at the expense of the workers' and low level employees' jobs and wellbeing. There are also silent winners. It can be easily thought of the workforce in the country where the company has transferred its activities and, perhaps of the consumer who will buy the same product, this time imported, at a lower price. The validity of the latter argument, however cannot, be fully guaranteed, since profit maximisation is the name of the game. This game, when well played is neither illegal, nor is it a new one. Even before its formalisation, in print, by Adam Smith, in the " Wealth of Nations", history, exposes several examples, of social ups and downs, which forced industries to relocate from country to country because of their chase for profitability. Reference can be made to the spinning and weaving industries and the upheavals it subjected northern europe to, in the middle ages.
But is it fair to look far in the past, standing on the pedestal provided by an era so advanced as ours, or does history repeat itself, for the sake of profit maximisation.
It seems as if history is repeating itself, but at the same time our society has evolved and in its own bumpy way tends to suppress the extremes of the past. We may compare the situation, of the labourers of England's industrial revolution age, so vividly described by Karl Marx in his "Das Kapital", to the low paid and badly treated children labourers and prisoner workers of some far eastern countries.
Fortunately, and as a result of our world's social evolution, multinationals subcontracting in third world countries treat their workforce well. They also contribute to the development of such countries.
In any event, this argument does not give solace to those who have lost their jobs to low paid employees in cheaper countries. Multinationals are still eager to have their products manufactured by low paid employees to increase their profits even if they have to amortize new investments.
Is there a need for a pressure group to stand against profit maximisation when it is the result of greed and disproportionate obsession for profitability, if it can be defined, or is it the role of the democratic system to automatically do so by instituting trade rules, quotas and industrial policies, fairer to companies and to their employees.
Trade agreements can still be a viable tool to dissuade, local industries tempted by outsourcing or, threatened from the flux of unfairly cheap imported goods, the added value of which comes, solely, from low paid labour.
Unfortunately, such situations are anticipated too late, by governments and political institutions.

Is there an end to globalisation?
The answer is yes, but it might not be very near. After the second world war, imports to Europe from Japan were the cheapest. Those days are gone. Imports from Japan no longer compete with products made in Europe or the USA on a price basis but, primarily, on quality grounds. Furthermore, Japanese multinationals have their own manufacturing sites, in Germany, the UK, the USA. Japan's development has been supported by protectionist policies backed by a nationalistic consumer mentality. But international trade has contributed, slowly, to the collapse of such trade barriers. Japan was followed by Taiwan, Hong Kong and Korea as sources of cheaply manufactured goods. But their times have also elapsed. Those countries can no longer be considered as potential threats to european and american jobs. The development of their economies has lead to a local cost of living that, very often, exceeds the cost of living of the most expensive european countries. Now the attention of multinationals, industrialists and profit maximisation followers, turns to China, India, Thailand, Vietnam etc. even if cheap countries still exist in Europe. The latter will mature very fast to become attractive in the long term. Sooner or later, the abrupt development era of all those countries will come to age. However, one can still think of Africa, which despite its deep social problems and political unrest has an appreciable potential in order not to escape from the globalisation game. The end game, as far as one can see, will start taking shape when the cost of living and workers' salaries will become even all over the world. In other words when the globe will ressemble a single country and, when products, high and low tech, will compete only on quality grounds.

The articles have been written by Dr Demosthenes Kyriacos, President & CEO,
GEM-Chem, E-mail: dk@GEM-Chem.net, phone: +32-2-7710649
D.Kyriacos has worked at Upjohn, GE and ICI in international TS, Sales and Marketing.
He holds a B.Sc.(Distinction, Honours, Univ. award of Chemistry) from Alexandria, a M.Sc.course,(ICI scholarship award) in Polymer Technology and, a Ph.D. from Loughborough (UK).
D. Kyriacos is the founder of DK Business Group and GEM-Chem.

Deny Kyriacos: LinkedIn profile

GEM-Chem compose and publish CD-books and CD-Articles
on Polymer Science, Technology and Marketing.

GEM-Chem implement projects on company organisation, return
to profitability, international marketing, technology and science.

GEM-Chem