The purpose of this paper is to analyze three drivers of globalization and how these drivers impact organizations, describe the risks associated with global investing and explain the importance of cultural sensitivity and ethics in global finance. Global Finance Environment Globalization is the increasing interconnectedness of economies, markets, and people across nations. Increasing globalization creates additional competition from around the world, which then affects both local jobs and company profits.
Globalization also has the potential to aise standard of living by allowing greater access to a wider range of products and services at more competitive prices (Crum, Brigham, Houston, 2005). One driver of globalization is globalization of markets. It refers to the merging of national markets into one huge global marketplace. Now selling internationally is easier due to falling barriers to cross-border trade. A company doesn’t have to be the size of these giants to facilitate and benefit from the globalization of markets. It is important to offer a standard product worldwide.
But very significant differences still exist between national markets like consumer tastes, preferences, legal regulations, cultural systems. These differences require marketing strategies in order to match the conditions in a country. To illustrate, Wal-Mart may still need to vary their product from country depending on local tastes and preferences. Another driver of globalization is globalization of production. It refers to the sourcing of goods and services from locations around the world to take advantage of national differences in the cost and quality of factors of production.
The idea is to compete more effectively offering a product with good quality and low cost. For example, Nike is considerated one of the leading marketers of athletic shoes and apparel on the world. The company has some overseas factories which has achieved a super production with low cost. Unfortunately Nike has been a target of protest and persistent accusations that its products are made in sweatshops with poor working conditions. The company has signaled a commitment to improving working conditions, but in spite of the fact, the attacks continue.
A third driver of globalization is falling barriers to trade and investment. The falling of barriers to international trade enables firms to view the world as their market. The lowering of barrier to trade and investments also allows firms to base production at the optimal location for that activity. Thus, a firm might design a product in one country, produce component parts in two other countries, assemble the product in another country and then export the finished product around the world. The lowering of trade barriers has facilitated the globalization of production.
The evidence also suggests that foreign direct investment is playing an increasing role in the global economy. Two risks associated with global investing are economic risk and political risk. Economic risk refers to a country’s ability to pay back its debts. A country with stable finances and a stronger economy should provide more reliable investments than a country with weaker finances or an unsound economy. Political risk refers to the political decisions made within a country that might result in an unanticipated loss to investors.
While economic risk is often eferred to as a country’s ability to pay back its debts, political risk is sometimes referred to as the willingness of a country to pay debts or maintain a hospitable climate for outside investment. Even if a country’s economy is strong, if the political climate is unfriendly, or becomes unfriendly, to outside investors, the country may not be a good candidate for investment (Investopedia, 2011). Cultural issues play a key role in the formation of global finance. Companies must remain sensitive to these concerns when preparing to do business overseas.
To broaden their scope some offer foreign language courses and cultural sensitivity training. Very few businesses can escape the need to at some point in time deal with foreign colleagues, clients or customers. Business is international and if an organization wants to develop and grow it needs to harness the potential an international stage offers. Twenty years ago British, European and American organizations doing business abroad had very little competition due to the lack of rival industrialized nations. Back then it was easy to do business “our way’.
Today some of the world’s largest economies include Japan, China, Mexico, Brazil, India and Korea. As a result there has been a small shift from “our way” to “let’s try and understand your way’. Why? Because western organizations are feeling the impact a lack of cultural sensitivity can and does have upon business performance. Culture comes in many shapes and sizes. It includes areas such as politics, history, faith, mentality, behavior and lifestyle. The following examples demonstrate how a lack of cultural sensitivity led to failure.
When coloring in 800,000 pixels on a map of India, Microsoft colored eight of them a different shade of green to represent the disputed Kashmiri territory. The difference in greens meant Kashmir was shown as non-Indian, and the product was promptly banned in India. Microsoft was left to recall all 200,000 copies of the offending Windows 95 operating system software to try and heal the diplomatic wounds. It cost them millions. The fast food giant McDonald’s spent thousands on a new TV ad to target the Chinese consumer.
The ad showed a Chinese man kneeling before a McDonald’s vendor and begging im to accept his expired discount coupon. The ad was pulled due to a lack of cultural sensitivity on McDonald’s behalf. The ad caused uproar over the fact that begging is considered a shameful act in Chinese culture. Personal values, just like cultural values, need to be considered when a company is forming its policies. Personal values are linked closely to cultural values and need to be viewed as such by a company. Generally, if a company is compliant with its employees’ cultural values, so also it will be with its employees’ personal values.
While personal values are just that personal, many personal values are shared in a way that cultural values are shared. Companies make efforts to be sensitive to people’s personal values via surveys and comment cards. As outlined, globalization of markets, globalization of production, and falling barriers to trade and investment drive global finance. Two risks to international investing are political risk and economic risk. It is important for organizations to be culturally sensitive to those they interact and do business with.