Effects of Globalization on Small Enterprises Essay

The business world has witnessed a transformation in past years. Technological innovations, cultural progress, and connectivity have all influenced the habits and customs of businesses all across the world. Globalization has been behind this change, fuelling the revolution and shaping the businesses and society of today. Globalization is defined as â€Å"the process of interaction and integration among the people, companies, and governments of different nations, a process driven by international trade and investment and aided by information technology.† This process has had effects on culture, society, business, consumer habits, and more. Globalization has also had notable effects on small businesses and economists anticipate more effects to come. Globalization is a phenomenon that has been present for many years and has a long history. It really began to take effect after World War 2; this is described as the resurgence of globalization. Certain agreements have driven globalization, notably the North American Free Trade Agreement (NAFTA) which was signed in 1994 creating a trilateral trade bloc. Since, globalization has become rampant and has greatly influenced trade, competition, and small businesses. Globalization’s impact on small businesses has been both negative and positive. This impact can be seen on the macroeconomic level and affects gross domestic product greatly, as small businesses contribute largely to GDP. However, globalization has created multinational corporations with untold power – which has received a plethora of criticism and accusations of corruption and bribery leading to a significant disadvantage for small businesses. However, these days, globalization has made it possible for small enterprises to finally outsource certain tasks, thereby increasing productivity, lowering prices, and becoming more competitive against their contenders. Ultimately, each country has unique issues when it comes to market globalization and must adopt varied measures to combat these difficulties. Economists are able to project trends using different variables to understand what will come in the future and act accordingly. Globalization has provided solutions to certain problems small businesses faced while introducing new problems in their wake. Effects on the Macroeconomic Level Globalization’s impact can be felt on the macroeconomic level. The development of integrated economies creates changes on the aggregate economy of countries which affects a multitude of phenomena ranging from unemployment to price levels. These changes have an especially impactful effect on small businesses as multinational corporations pose threatening competitors and are able to offer lower prices. Conversely, globalization has also provided larger markets with untapped potential. The advantages and disadvantages posed by globalization upon small businesses each have negative and positive consequences and shape business and trade today. Globalization breaks down barriers and encourages trade among different countries. This, in turn, provides many new potential customers, suppliers, and partners – each with different needs to be met. The increased possibilities can be useful for small businesses to gain new customers and create brand loyalty. However, globalization can also go awry for small businesses. With expansion and rampant trade as the status quo, multinational corporations can infiltrate different countries and eradicate small, local businesses that had once dominated the area. A concrete example of this is the effect Walmart often has on their locales. Ana Kasparian, co-host of the talk show, The Young Turks, asserted, â€Å"If you bring in a Walmart†¦ those local businesses are gone.† For instance, after a Walmart opened in Chicago, 82 small businesses in the area closed within two years. Joe Persky, an economics professor at the University of Illinois Chicago, illustrated the occurrence saying, â€Å"No matter which direction you go from Walmart, there’s a very high rate of business closures in the immediate vicinity, and the further away you get there’s less and less.† Multinational corporations, with brand names that are recognized world-wide, become more popular than intimate, local businesses. In this way, globalization can replace small businesses and have a dangerous effect on the security of small business owners. The creation of international markets can be attributed to today’s globalized economies and small businesses benefit greatly. Industry Canada reported that in 2002, 84% of exporters were small businesses. This is especially beneficial as technological innovations and increased connectivity have allowed countries to manufacture more goods and services than they can consume and exportation provides a new market for increased consumption of these goods and services. Open trade also allows for countries to specialize in the domains in which they have what economists refer to as â€Å"comparative advantage.† When countries specialize in the fields which pose the lowest opportunity cost, this increases productivity and minimizes loss, which creates efficiency and synergy for all parties. Globalization allows for small businesses to export. In the past, importing and exporting was only a possibility for large corporations as they could absorb the cost. Now, globalization has become accessible – even to small businesses – which allows them to compete on the international scale. Consequently, small businesses are able to focus in the areas where they thrive, producing goods and services efficiently, and positively contributing to their country’s gross domestic product and overall productivity; increased productivity is an indicator of a superior quality of life. The negative effects of globalization are often felt most intensely in developing countries. The opening of borders increases emigration from developing countries and it is often the country’s most productive, educated, and innovative members of the population who leave the country to explore opportunities elsewhere. This phenomenon is described by economists as the â€Å"Brain Drain† and can strip a developing country of the most talented members of their labour force, throwing them into an even larger disadvantage compared to developed countries. This migration means that small businesses have less human resources to choose from, rendering them less productive. Corporate Money in Politics Globalization has created multinational corporations with power in various countries and enormous wealth. This wealth gives these multinational corporations advantages that many argue are unfair. Corporate money in politics is a topic of wide discussion in the present economic circumstances. In 2010, the court ruled in the case of Citizens United v. Federal Election Commission that money is â€Å"political speech.† This ruling allowed for corporations to provide unlimited donations to political campaigns. Since, many have protested the influence corporate money has on political decisions, saying that corporations donate to politicians to get certain benefits – a term coined as â€Å"legalized bribery.† This bribery was revealed in a New York Times investigation which found that a Walmart built in Mexico in 2004 bypassed certain zoning regulations which prohibited any building near ancient pyramids. The report announced, â€Å"Walmart was a corrupter offering large pay-offs to get what the law otherwise prohibited†¦ It used bribes to subvert democratic governance – public votes, open debates, transparent procedures. It used bribes to circumvent regulatory safeguards that protect Mexican citizens from unsafe construction.† The most powerful claim in the story was that Walmart used money to gain an advantage against fellow competitors: â€Å"It used bribes to outflank rivals.† Small businesses do not have the financial assets to compete with multinational corporations in terms of political donations. Since these donations often have significant consequences in political decisions, small businesses find themselves disadvantaged as they do not have the same financial or political power as multinational corporations. In this way, globalization has had a negative effect on small enterprises. The power disparity creates an uneven footing for small businesses and forces them to remain in the shadows of large, multinational corporations. Investments Investment is defined as â€Å"the conversion of money into some form of property from which an income or profit is expected to be derived.† Globalization has also impacted investments greatly in past years. Since the world has become more connected, individuals and corporations have begun allocating their resources to foreign investments at a rapid pace. Foreign direct investments (FDI) are defined as â€Å"flows of money into a country that purchase a lasting stake in an enterprise for a foreign investor.† Now, many people hold shares or investments in companies originating in countries other than their own. These investments are significant as they affect the gross domestic product of countries. Additionally, the manifestation of foreign direct investments is especially important to small businesses as they do not thrive in this field. Individuals and corporations are more willing to invest in multinational corporations with long histories, reputable names, and monetary excess. Small businesses, which are less known, are less likely to receive assets in the form of investments as people view this type of investment as risky since they do not feel they know as much about the company and the future profitability of their investment. This largely contributes to the low survival rates of small businesses. Industry Canada’s findings reveal that only 51% of small businesses survive beyond five years. Contrarily, multinational corporations have much longer life spans. For instance, Coca Cola was founded in 1886 and continues to be a household name and an extremely profitable enterprise. The lack of foreign or domestic investments in small businesses is hugely disadvantageous to small businesses in the global market and international economy. This is a domain in which small businesses are still far less developed than large, multinational corporations. Outsourcing and Pricing In the past, outsourcing, a means to reduce costs by allocating certain tasks to outside suppliers rather than completing the tasks within the company itself, was reserved for big corporations as it was extremely expensive and small businesses did not have the financial assets to take on such a task. This meant that large corporations could greatly reduce their costs of production, hence reducing the price of the good or service and rendering themselves more competitive and even more favoured by consumers over small businesses. These days, that is not the case. Technology has transformed and progressed enormously in recent years. This has allowed small businesses to outsource jobs in a cost-effective manner, which reduces their costs, increases their productivity, and renders them more competitive. Now, outsourcing is a real possibility for small businesses. Outsourcing is often international; globalisation has hence played an important role in this phenomenon. â€Å"More small businesses are outsourcing tasks these days because technology has advanced to the point of professionals being able to work from anywhere in the world, coupled with the availability and accessibility of extremely qualified professionals who have decided or been forced to leave the corporate world,† Laura Lee Sparks, owner of Legal Marketing Maven, says. â€Å"These freelancers come on board as subcontractors and save the small business owner the burden of paying overhead associated with payroll taxes and expenses such as health insurance and worker’s compensation, as well as the space constrictions that growing a company in-house can present.† Small enterprises focus on outsourcing three major types of jobs. The first are jobs that require highly skilled, or executive, expertise. These jobs are outsourced to analysts outside of the company who can provide insight into the situation and give constructive feedback. The second type of job that is often outsourced by small businesses is highly repetitive tasks. Menial tasks are outsourced so that the workers of the enterprise can focus on strategic and tactical decisions and focus on the big picture of the company rather than bother themselves with unnecessary distractions. Lastly, small businesses often outsource jobs that require specialized knowledge. This outsourcing is increasingly important since globalisation has increased competition. In order to survive, and especially to thrive, businesses must find ways to produce goods and services in the most cost effective way possible. Consumers are always looking to buy the product for the lowest price and the highest quality possible. By outsourcing and reducing costs, small businesses have become attractive options for consumers looking to make a cost-effective purchase of goods or services. In this way, globalization has positively affected small businesses by giving them an avenue to rival against multinational corporations. Outsourcing overseas is even more profitable for small businesses. Products made overseas are much cheaper since the minimum wage laws in different countries vary and are often much lower in certain countries. Additionally, the worth of currency in more developed countries counts for significantly more than the currency in other countries, making the cost of salaries and production much lower. For instance, many American businesses choose to have production operations run in China because of the cost effectiveness of this decision. Wage laws in China are extremely deregulated, allowing businesses to underpay their workers. Although this poses significant moral dilemmas, from an economic point of view, it is very profitable for small businesses who can now exploit this means of saving money. Since this has become an option for small businesses, they have become greater rivals and much more competitive in the international marketplace. Globalization has opened this door for small businesses and provided an avenue for increased wealth. Policy Issues and Recommendations When it comes to market globalization, every country has their share of policy issues and problems. Canada has three main issues that slow down their SME’s in confronting the challenge of market globalization. Firstly, the Canadian monetary policies have affected the value of the Canadian dollar resulting in reduced competitiveness. The goal intended for the Canadian monetary policy was to limit inflation, while ignoring Canada’s global objectives such as the competitiveness of the dollar on markets and job creation. As a result, Canada has interest rates that are higher than their competitors, which unfortunately creates overvalue in the Canadian dollar. Secondly, increases in investment in both tangible and intangible technologies are needed for the competitiveness of SME’s. Canadian enterprises competitiveness, results from the transfer of new tangible production technologies, such as plant and equipment. However, Canada should also gain competitiveness from intangible technologies, such as management and staff training, as well as new forms of internal and external organization. This equal investment of intangible and tangible technologies will result in the creation of partnerships, which in the long run will connect small and large enterprises while provoking innovation and maintaining flexibility among members. Thirdly, access to information is an important factor that the Canadian SME’s are lacking. SME’s need management that is well informed about different markets and international competition, so that human and organizational resources can effectively reply to the opening up of markets. Subsequently, Canadian SME’s need a new macroeconomic policy, an equal investment in tangible and intangible technologies, and access to information about specific markets, in order for them to meet the new challenge of the global economy. The globalization of SME’s has various different implications for policy issues at a national, local, and international level. Below is a table that describes the possible country initiatives suggested for each policy issue on a national and local level. Policy issue Possible initiative Start-ups and competitiveness Emphasize international competitiveness in start-up assistance and targets. Information access First-stop and one-stop shops that can advise both domestic and foreign clients. Management Advisory consultancy programmes to integrate international advice. Technology International technology exchange programmes. Finance Export finance and guarantee programmes. On the national and local level, Canada needs to focus on proper plans, strategies, and policies. As previously stated, Canada needs to focus on their information access, their management, and increasing their competitiveness. Given these initiatives, it is important to focus on programmes that are cost-effective in order to increase international competitiveness and avoid destructive competition between borders. A management and human resource development programme will give training in skills specific to international activities such as export management. For example, the Kunto programme in Finland works by first analyzing the SME’s needs, strengths, and weaknesses, and then teach how to develop export markets. Other programmes such as information access, gives the SME an advisory service to help them with information about regulations, market conditions, etc. For example, the Canadian Business Service Centres provide a central point of contact for SME’s when seeking information, and also work with the private sector. Canada could benefit from these programmes, and many more, when dealing with national and local policies towards SME’s. However, on an international level, SME’s will need to recognize the dynamic of the entrepreneurial engine of growth that they provide. SME’s need better development of better infrastructure and once again, finding the best programmes and practice policies. Below is a table that describes the possible initiatives suggested for each policy issue on an international level. Policy Issue Possible initiative Access to information Work toward common standards and formats for the provision of government information. Access to markets   Establish simple notification procedure facing market access problems. Business incorporation Examine future requirements for legal recognition of emerging structures. International finance Convene a forum of SME finance-providers to investigate feasibility. Competition policy Continue work to establish international comparability and recognition of competition law principles. General and future trends Although SME internationalization is difficult, based on the eighteen OECD countries, and eight Asian economies, there has been a final analysis made for general trends and key features of SME globalization. Firstly, SME’s contribute between 15 and 50 per cent of exports, between 20 and 80 per cent of SME’s are exporters, and they contribute between 25 and 35 per cent of world manufactured direct exports. Secondly, SME internationalization has been found to be greater in smaller open economies and less in larger, and more self-contained economies. For example, in large economies such as France, SME’s contribute 30 per cent of exports. However, in small economies, such as Denmark, SME’s contribute 50 per cent of exports. Additionally, in countries for which information is available, SME’s have increased their international role. For example, in Finland they increased their share of exports from 17.8 per cent in 1987 to 23 per cent in 1991. Also, approximately 10 per cent of SME’s are engaged in foreign direct investment, and 10 percent or more of foreign investment is attributable to SME’s. Lastly, less than 40 per cent SME’s are reasonably protected from any effects of globalization. Now that we know the general trends of all international SME’s we can look at the specific trends for Canadian SME international activity and compare where we stand amongst the general trends of SME’s. First of all it is important to know that there are three main types of Canadian SME exporters. The first is the opportunist exporter, where a firm adopts a mostly reactive strategy, with little resources devoted to pursuing international opportunities. The second is the exporting SME in transition, where the firm is in the process of moving toward a more sustained and consistent approach to international activity. Lastly, the professional exporting SME is a firm that is committed to sustained international activities, which is a more professional approach. In Canada, about 14 per cent of manufacturing SME’s export products, but most of the products only export less than 20 per cent of their production, and most of that percentage goes to the United States. However 2 per cent of those SME’s have increased their exports to other countries besides the United States, and can be recognized as fully global. Approximately 25 percent of manufacturing SME’s, and 20 per cent of general SME’s are at risk of being directly exposed to increased international competition, and thus unlikely to survive in their present form. The remainder of SME’s which is around 27 per cent, are already exporting or they have export potential, and thus globalization creates new opportunities. After having read the general trends analysis of international and Canadian SME’s, one may ask themselves, what will happen in the future? Unfortunately there isn’t enough statistical information to establish a baseline of present level and pattern. However, with the available information, there has been an estimation of likely trends. It is suggested that the level of SME globalization will continue to increase, and there are 5 reasons why it is expected to do so. Firstly, international trade opportunities will increase as a result of WTO (world trade organization) agreements, along with a number of international agreements for trade liberalization and reduction of non-trade impediments. Secondly, as the level of globalization of industry increases, so will the level if SME globalization. Thirdly, there will be a self-generating expansion. The learning-by-doing is likely to help accelerate the process of SME globalization. Furthermore, technological advances in communications and computing will continue to make it easier and cheaper for SME’s to operate internationally. Lastly, globalization of SME’s is not a policy itself, however it is an important factor in economic development. Governments can be expected to pursue policy initiatives to increase global competitiveness of their SME’s. These five factors are likely to affect the three main industry groupings in different ways. SME’s in mature conventional industries and markets are likely to be able to grow at a rate slightly exceeding that of world trade growth. Restructuring in the mature global industries and markets is likely to limit the potential for SME’s to grow at more than the rate of growth of world trade. Additionally, the opportunities for international growth in excess of the trade growth rate are most likely to be taken by larger firms that organize smaller and more specialized SME’s. In conclusion, SME internationalization will proceed faster than the rate of growth of domestic SME’s, and it is also predicted a structural shift in importance toward new and niche markets. Conclusion Small businesses have made many adjustments due to the effects of globalization. Globalization has provided avenues for increased productivity and competitiveness but has also pushed small businesses into dilemmas, including competing against multinational corporations. Small businesses have played a significant role in the makeup of various countries’ economies and will continue to play an important role. However, now, it is important to study the effects of globalization in thinking of future steps and goals in small businesses. Globalization has had both negative and positive effects on small businesses. More than ever, it is important to learn how to take advantage of globalization and operate in the international marketplace.