Economics management help : Globalization in an economy

Question 1)

What is meant by the terms globalization? Analyze to an industry given in case study on the 7 inter rated factor that have contributed to the spiraling growth in globalization. At the same time, there are also ideas of anti globalization forces to slow the globalization process. Provide discussion on these factors as well as to that particular industry discussed.Globalization’ is commonly used as a shorthand way of describing the spread and connectedness of production, communication and technologies across the world. That spread has involved the interlacing of economic and cultural activity.  Rather confusingly, ‘globalization’ is also used by some to refer to the efforts of the International Monetary Fund (IMF), the World Bank and others to create a global free market for goods and services. This political project, while being significant  – and potentially damaging for a lot of poorer nations – is really a means to exploit the larger process. Globalization in the sense of connectivity in economic and cultural life across the world has been growing for centuries. However, many believe the current situation is of a fundamentally different order to what has gone before. The speed of communication and exchange, the complexity and size of the networks involved, and the sheer volume of trade, interaction and risk give what we now label as ‘globalization’ a peculiar force.Globalization involves the diffusion of ideas, practices and technologies. It is something more than internationalization and universalization. It isn’t simply modernization or westernization. It is certainly isn’t just the liberalization of markets. Anthony Giddens has described globalization as ‘the intensification of worldwide social relations which link distant localities in such a way that local happenings are shaped by events occurring many miles away and vice versa’. This involves a change in the way we understand geography and experience localness. As well as offering opportunity it brings with considerable risks linked, for example, to technological change.  It has been examined from the case study that the process of the globalization has motivated Bharti Airtel to enter in China with an aim of outsourcing their operations for the production of mobile phones and fixed landlines in to Chinese manufactures to gains from the advantages which arise from outsourcing and focus on their core objectives.

Bharti Airtel Ltd is the market leader in the Indian telecom industry. Airtel’s telecom model has proved to be very effective for emerging markets. Airtel had established itself as a dominant player in India with its innovative business processes and strong brand, but was witnessing tapering growth because of increasing competition and saturation of the more lucrative urban markets. China is far more advanced which will allow the Bharti Airtel to be able to offer products of superior quality at competitive prices. This would allow the company to be able to allocate more time on their core business which is that of service provider in mobile and landline telecom services in India and outside as well.

It is very clear that there are 7 inter rated factor that have contributed to the spiraling growth in globalization such as

• Increase in and expansion of technology.
• Liberalization of cross-border trade and resource movement.
• Development of services that support international business.
• Grow thing consumer pressures.
• Increased global competition.
• Changing political situation.
• Expanded cross-National Cooperation.Increase in and expansion of technology– It is clear that vast improvements in transportation and communications technology—including the development of the Internet—have significantly increased the effectiveness and efficiency of international business operations.  China is far more advanced when it comes to the technology available, the quality of infrastructure in China, and the lower level of bureaucracy as compared to India and so on. It is not just the labor cost but the technology which is available in china too provides the producers in the nation the comparative advantage the exports oriented policy of the Chinese government ensures that the taxation in the export oriented is at lowest possible levels along with various form of support given to them. The corporate tax rate in China is at 25% and that compared with India is at 33.2175% which is again an advantage for outsourcing operations in China.  Add to it the high end technology which is available in China which improves the efficiency of production in terms of the number of units manufactured in China as compared to India. Additionally the cost of manufacturing in the telecom and IT equipments in China are further 40% in China with the same quality being produced in India. It can be said this factor is positive for the telecom industry such as Bharti Airtel because the cost of manufacturing in the telecom and IT equipments in China are further 40% in China with the same quality being produced in India. This factor is considered as positive for the Telecommunication Industry to outsource their operations in the Country China because China is far more advanced when it comes to the technology available, the quality of infrastructure in China, and the lower level of bureaucracy as compared to India and so on. Moreover, the technology which is available in china too provides the producers in the nation the comparative advantage which shows this factor plays a positive role in the Telecommunication Industry.

Liberalization of cross-border trade and resource movement– Over time most governments have lowered restrictions on trade and foreign investment in response to the expressed desires of their citizens and producers.  In addition, the General Agreement on Tariffs and Trade, the development of economic blocs such as the European Union, and other such facilitating mechanisms has provided increased access to many foreign markets. The political influence of China is increasing globally, and the political relations of China can be improved in future with the US, APEC and the nation could sign a Free Trade Agreement with ASEAN (CIA-China, 2011). But the political relation of China with Taiwan is pretty patchy at this time and at the same time the co-ordination between the central and the local authorities is lacking. Social unrest could increase with rising corruption, poverty and inequality in China and the issue of Tibet could get highly volatile for China to politically manage.

Development of services that support international business– Services provided by government, banks, transportation companies, and other businesses greatly facilitate the conduct and reduce the risks of doing business internationally. This factor is very important during the expansion of the Bharti Airtel because before the expansion every company needs some services offered by the governments, banks, companies and other businesses greatly facilitate the conduct and minimize the risks of accomplishing business internationally. For example: The company should adopt “Licensing” as a model for their collaborative arrangement with the Chinese manufacturers which should be a non exclusive one allowing Bharti Airtel to have a control over the choice of their outsourcing partner in the future as well if one does not perform well enough (Dong & Glaister, 2006). This would allow the company to have fast start up of their outsourcing operations in China at much lower costs than in India as explained in previous sections. This would the company to be able to concentrate on their core operations with leaving the actual manufacturing of products which would be outsourced.

Growing consumer pressures– Because of innovations in transportation and communications technology; consumers are well-informed about and often able to access foreign products.  Thus competitors the world over have been forced to respond to consumers’ demand for increasingly higher quality, more cost-competitive offerings. This factor becomes significant for the Bharti Airtel to respond to the growing consumer pressures throughout the world. In general, respond to the demand of the consumers is very difficult because consumers generally look for the higher quality and more cost competitive offerings. It is difficult for the Telecommunication Industry to respond to the changing needs of the consumers every time because of enhanced global competition.

Increased global competition– The pressures of increased foreign competition often persuade firms to expand internationally in order to gain access to foreign opportunities and to improve their overall operational flexibility and competitiveness. This factor has also encouraged Bharti Airtel to outsource their operations in China with an aim of outsourcing their operations for the production of mobile phones and fixed landlines in to Chinese manufactures to gains from the advantages which arise from outsourcing and focus on their core objectives. This factor is considered as positive for the Company Bharti Airtel because increased global competition forced the Company to expand their operations in China in order to gain foreign opportunities and to enhance their operational competitiveness and flexibility. For e.g. This inter related factor of globalization has helped the Company Bharti Airtel in gaining foreign opportunities and improving operational flexibility and competiveness. In general, increased global competition makes the Telecommunication Industry to look for the increased opportunities and operational competiveness and flexibility.

Changing political situation – The transformation of the political and economic policies of the former Soviet Union and the People’s Republic of China has led to vast increases in trade between those countries and the rest of the world.  In addition, the improvements in national infrastructure and the provision of trade-related services by governments the world over have further led to substantial increases in foreign trade and investment levels. The political influence of China is increasing globally, and the political relations of China can be improved in future with the US, APEC and the nation could sign a Free Trade Agreement with ASEAN. But the political relation of China with Taiwan is pretty patchy at this time and at the same time the co-ordination between the central and the local authorities is lacking. Social unrest could increase with rising corruption, poverty and inequality in China and the issue of Tibet could get highly volatile for China to politically manage. This factor is considered as negative for the Company because changes in the economic and political policies of the former Soviet union and the People Republic of China has led to huge enhancements in trade among those countries and the rest of the world. It becomes complex for the telecommunication industry to accomplish the trade among those countries and the rest of the world.

Expanded cross-National Cooperation – Governments have increasingly entered into cross-national treaties and agreements in order to gain reciprocal advantages for their own firms, to attack problems jointly that one country cannot solve alone, and to deal with areas of concern that lie outside the territory of all countries.  Often, such cooperation occurs within the framework of international organizations such as the United Nations, the International Monetary Fund, the World Trade Organization, and the International Bank for Reconstruction and Development. The Chinese Government plays a dominating role in the industries in China which does not allow them the desired autonomy. Although the overall management style in china is pretty similar to that of India’s and time is of prime importance in China so actually the company would find it comfortable to deal with the Chinese management. This factor is considered as negative for the Telecommunication Industry because it is very clear that the Chinese government plays a very dominating function in the industries of China which does not permit the telecommunication industry the desired autonomy.  Criticisms of the Globalization

Anti- globalization forces have protested both peacefully and violently as they press for legislation and other means to stop or slow the globalization process.  Issues of threats to national sovereignty, increasing income inequality, and environmental harm are addressed in the Point—Counterpoint sections found throughout the text.

Threats to National Sovereignty

Many citizens fear that a country’s participation in multilateral agreements will diminish its sovereignty and freedom from external control and curtail its ability to act in its own best interests.  In particular, people in small countries worry that dependence on larger countries for sales and/or supplies, as well as the presence of large international firms, will make them vulnerable to the demands of parties against which they are essentially powerless.  In addition, people the world over are concerned that globalization will bring the homogenization of products and traditional ways of life—including language and social structure. In fact, this factor also fears the Country China to participate in the multilateral agreement with the Bharti Airtel because they think after entering into any kind of multilateral agreement will diminish its sovereignty and freedom from external control and curtail its ability to act in its own best interests.

Economic Growth

Clearly, economic growth can result in both positive and negative consequences, including damage to society and the environment.  While globalization can, in fact, support the sustenance of natural resources and the maintenance of an environmentally sound planet, unless the positive consequences of globalization keep pace with the negative costs of economic growth, the sustainability of economic improvement on a worldwide basis will, at best, be problematic. It is very clear that, when Bharti Airtel enters into the China for outsourcing, the economic growth due to outsourcing may be affected by both positive and negative consequences comprising damage to the environment and society.  The company can face control problems with reference to the quality of the product manufactured and the cultural differences could play a big role here. The Chinese Government plays a dominating role in the industries in China which could have some issues in the future

Growing Income Inequality

Off- shoring, the process of shifting domestic production to a foreign country for the purpose of serving the home market at a reduced cost, speeds up the process of altering the relative economic discrepancies between the two countries involved.  Thus, even if the overall global gains from globalization are positive, there remains a continuing challenge to bring about the positive gains in ways that minimize costs to the losers. This is the factor which made the Bharti Airtel to shift the domestic production to a foreign country for the purpose of serving the home market at the reduced cost and speeds up the process of changing the significant economic discrepancies among the two countries involved.

Question 2)

Exchange-rate regimes are either fixed or floating, with fixed rates varying in terms of just how fixed they are and floating rates varying with respect to just how much they are allowed to float. Discuss the various factors that determine the exchange rate and provide illustrative example of each. Besides identify three business implications of the exchange rate.

The floating exchange rate is a market-driven price for currency, whereby the exchange rate is determined entirely by the free market forces of demand and supply of currencies with no government intervention whatsoever. Broadly, the floating exchange rate regime consists of the independent floating system and the managed floating system. The former is where exchange rate is strictly determined by the free movement of demand and supply. For managed floating system, exchange rate is also determined by free movement of demand and supply but the monetary authorities intervene at certain times to “manage” the exchange rate to prevent high volatilities.

For a fixed exchange rate, the government is unwilling to let the country’s currency float freely, and they state a level at which the exchange rate will stay. The government takes whatever measures that is necessary to maintain the rate and prevent it from fluctuating. There are two methods which exchange rate could be applied to the price of currencies, a fixed exchange rate and a pegged exchange rate. Under the fixed exchange rate system, a decrease in the exchange rate which is infrequent is called revaluations. While an increase in the exchange rate are called devaluations. A devaluation in a fixed exchange rate will cause the current account balance to rise, making a country’s export less expensive for foreigners and also discourage import by making import products more expensive for domestic consumers,. This will leads to an increase in trade surplus or a decrease in trade deficit. The opposite happens in a revaluation.

FDI in Indian Telecommunications Industry is likely to face a hike from the current 49 percent to 74 percent as has been announced by the Union cabinet on 2005. For that, the Union Cabinet will take into account the concerns of security agencies and the left parties

This rise in the foreign direct investment in the telecommunication market in India will enable companies like Bharti Tele-Ventures and Hutchison Essar to modulate the foreign stakes in their companies that have already acquired a range between 67-69 percent of their assets. Considering the unnerving growth in the telecom industry in India which accounted for around 30 percent every year, the Union Cabinet decided for the hike in foreign direct investment as it will facilitate the capital inflows in the industry. The mobile segment acquires the largest share in the Indian telecom market as it has been estimated to witness a double rise in the past 2 years.

It is very clear that Exchange-rate regimes are either fixed or floating, with fixed rates varying in terms of just how fixed they are and floating rates varying with respect to just how much they are allowed to float. The progressive transformation of telecom technologies and products has resulted in a large decline in world-wide telecom costs and emergence of a variety of new markets and opportunities. Due to these developments, the telecom sector has become connected with a growing number of activities, and has emerged as a major modernizing and dynamic influence in several parts of the world. An efficient and widespread telecom network is increasingly becoming a necessary infrastructure to utilize and develop various technologies, and to achieve both economic and social goals. Prices are an important means to achieve policy objectives. The telecom sector’s objectives cover a wide canvas which includes enhancing efficiency and flexibility of operation, financial viability of the sector, promoting investment and innovation, stimulating demand and competition, addressing unfair competition, and meeting social objectives such as universal provision of telecom services at fair and reasonable rates. For achieving these objectives, there is an increasing focus on efficient cost-based pricing, with a forward-looking perspective. At the same time, flexibility of prices and competitive pressure on prices are also emphasized. Price floors and ceiling, together with unbundling of the various services, have been considered for addressing the issue of unfair competition. Higher peak-time prices are used to better manage demand, and subsidized prices might be required to achieve social objectives such as providing universal access to telecom.

International Accounting Issues

The major differences between the cultures and business management in India and China are given as follows –

• In the Chinese markets there could be a language barrier as China is a predominantly Chinese or Mandarin speaking nation. For Bharti Airtel, they would definitely experience would be the role which the government plays in there as company would be facing a high degree of control which the Chinese government over the businesses.
• China is far more advanced when it comes to the technology available, the quality of infrastructure in China, and the lower level of bureaucracy as compared to India and so on.
• The tax rates too are going to be lower in China as the corporate tax rate in China is at 25% and that compared with India is at 33.2175% which is again an advantage.

In general there are various factors which determine the exchange rate such as Non intervention: currency in a floating-rate world, Intervention: currency in a fixed-rate (or) managed-rate world, The role of central banks, Black markets, Foreign exchange convertibility and controls, Exchange rates and purchasing power parity, Exchange rates and interest rates and other factors in exchange-rate determination.

The migration plan for Bharti Airtel in China should be that of being pretty minimal as the company would need only a limited amount of staff and infrastructure for their operations in China (Wang, 2003). Here the company would need to send in their quality experts to their china division to ensure that the quality of product they are procuring are of the desired quality. In addition to it their production experts needs to be there who would be responsible for providing the input about what quality of products are actually required by the company in the Indian markets. Other administrative employees would be required as well and most importantly the language interpreters are needed in this market along with some local staff to ensure that smooth migration in the Chinese set up of doing business.

• The company must develop their office in China before they start to look out for an outsourcing partner in China at 0^th Month;
• The company must get the tenders from the Chinese manufactures after issuing a complete tender about the product required and its specifications by 1^st month;
• The bidding process must be completed and the contract should be awarded and with and with all meeting pertaining to the requirements must be done by 2^nd month;
• The first batch must arrive at the Airtel’s China warehouses by the end of 3^rd moth and after all necessary quality checks and inspections it should be dispatched for India where it must reach by the end of the 4^th month;

Interestingly, there are other models of competition without privatization. China Telecom, one of the world’s major Public Telecommunication Operators (PTOs) is still fully state-owned. Both China and Vietnam followed similar policies of competition without privatization. Competition has been allowed between ministries of the governments. Participation of foreign investors has been allowed through joint ventures. Both these countries have been very high achievers in terms of progress of telecom sector^. ‘The key underlying factor is the will of the state to invest in, and prioritize, telecommunication development

Foreign exchange controls are various forms of controls imposed by a government on the purchase/sale of foreign currencies by residents or on the purchase/sale of local currency by nonresidents. When it comes to the accounting practices in China, it will not matter much to Bharti Airtel as they are just outsourcing their products from China so that they need to do is to make payments to the vendors in China. The foreign exchange rate of China too is not a worrying sign at China keeps a tap on its exchange rate with keeping it pegged within a limit. As on 5^th December, 2011, 1 Chinese Yuan was valued at 8.12 INR. The company must develop their office in China before they start to look out for an outsourcing partner in China at 0^th Month. The company must get the tenders from the Chinese manufactures after issuing a complete tender about the product required and its specifications by 1^st month. It can be said that the Telecommunication Industry must have Foreign Exchange Controls because the bidding process must be completed and the contract should be awarded and with and with all meeting pertaining to the requirements must be done by 2^nd month. The first batch must arrive at the Airtel’s China warehouses by the end of 3^rd moth and after all necessary quality checks and inspections it should be dispatched for India where it must reach by the end of the 4^th month;

Black Market: The IMEI (International Mobile Equipment Identity) number is a unique identifier typically used to stop stolen phones from accessing a network even if the SIM card is changed. It can also be used by authorities to track certain individuals. This is a particularly relevant point in India, which has a thriving black market for cloned devices typically imported from China. One of the main drivers behind the introduction of the legislation was the Mumbai terror attacks, which took place in 2008, almost one year ago to the day. The terrorists are understood to have used black market mobile phones to remain in contact. It can be said that Black Market impacts the determination of the Exchange Rate.

Exchange Rates and interest rates: The exchange rate of the currency in which a portfolio holds the bulk of its investments determines that portfolio’s real return. A declining exchange rate obviously decreases the purchasing power of income and capital gains derived from any returns. Moreover, the exchange rate influences other income factors such as interest rates, inflation and even capital gains from domestic securities. While exchange rates are determined by numerous complex factors that often leave even the most experienced economists flummoxed, investors should still have some understanding of how currency values and exchange rates play an important role in the rate of return on their investments.
China has a robust GDP growth rate with over 9% growth achieved in the last decade consistently. It has highly favorable economic policies by the government which has resulted in high FDI inflow in the nation with the highest. The economic environment is dominated by the state owned enterprises and the unemployment levels in China are rising. At the same time a real threat of deflation is looming on the economy. China the highest Current A/C surplus which can be detrimental in long run, and also the state run enterprises may face stringent competition from private companies. The increasing inflation rates in China could negatively impact the cost of production in China this is the main reason which make the company Bharti Airtel to calculate the exchange rates and interest rates. For Example: Here the company would need to send in their quality experts to their china division to ensure that the quality of product they are procuring are of the desired quality. In addition to it their production experts needs to be there who would be responsible for providing the input about what quality of products are actually required by the company in the Indian markets.

The three business implications of the exchange rate are Marketing Decisions, Financial Decisions and Production Decisions.

Marketing decisions – Exchange rate changes can affect demand for a firm’s products, both at home and abroad. This is very true changes in the exchange rate could impact the demand for the products of the company both at the home and abroad. The foreign exchange rate of China too is not a worrying sign at China keeps a tap on its exchange rate with keeping it pegged within a limit. As on 5^th December, 2011, 1 Chinese Yuan was valued at 8.12 INR. It has been examined that the foreign exchange rate of the China too is not a worrying sign at the China and maintains the tap on its exchange rate with keeping it pegged within a limit. China is far more advanced which will allow the company to be able to offer products of superior quality at competitive prices. This would allow the company to be able to allocate more time on their core business  which is that of service provider in mobile and landline telecom services in India and outside as well.

Production decisions – Firms may choose to locate production operations in a country whose currency is weak because initial investment there is relatively inexpensive; it could also be a good base for exporting the firm’s output. After the product being received and sold in the Indian markets the feedback must be taken and sent back to China for the next batches which would continue. The company with their manufacturing being outsourced to China would have a chance to concentrate on their core activities.

Financial decisions – Exchange rate fluctuations can affect financial decisions in the areas of sourcing funds (both debt and equity), the cross-border remittance of funds, and the reporting of financial results. It is important to evaluate the current costs, performance level and other criteria for Bharti Airtel when it comes to doing business. Presently the company is manufacturing mobile phones from its manufacturing unit in Tamil Nadu where it also produces it fixed line equipments apart from buying in the other finished products. With the highest Current A/C surplus which is at 305.4 billion US$ could impact the currency advantage in china as it is slowly expected to phase out. The overall environment is China is pro investment and the single party government system in China is ensuring that there is no opposition their policies. Though at times it can be problematic for companies, but all in the entire environment for doing businesses in China is exceedingly positive.

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