The Effect Of Globalization And Business

Published Date: 02 Nov 2017

Introduction

Economist over the years felt that developing countries was full of market a failure which was the core cause of slow growth and development. They believe that the only way developing countries could development is for government to intervene and correct theses market failure which would allow developing countries to escape the trap of poverty. But then again the thinking change and economist believe that government failure was even a more dangerous problem, and the best thing that government could do is to give up any pretense of steering the economy. The harsh reality is that neither of these approaches proves to hold up in the real world, while some policies such as import substitution, planning and state ownership did produce some results over time they lead to great failure and economic crises. With such poor rate of success in the past the road to industrialization for developing countries has gotten even rougher. With the advent of globalization and the implementation of new rules and regulation by international organization such as the world trade organization (WTO) has limit the policies space available to developing countries. Developing countries have argue that policies utilized by the now develop country during their industrialization period are no longer available to them in the new globalize world. This paper seek to address the impact of globalization more specifically new trade laws has on industrial policy pursued by developing countries. In addition with the improvement of technology the world has become closer together this has led to a more concentrated environment. Multinational corporations is control the markets out the world. The concentration of firms has also contributed in reducing the policy space of developing countries. The issue of business concentration and its impact on industrial policies pursued by less develop countries would also be discuss. The paper goes on the address the policies options that are left develop countries and how developing countries could make use of them.

Literature review

Industrial policy in its whole entirety could mean a number of things Rodrik 2004 define industrial policy as government and the private sector learning about underlining cost and opportunities and engage in strategic coordination. Maggie 2008 defines industrial policy as policies that try to improve the free market outcome, aim at modifying the production structure and the export sector of an economy. Perhaps the more common definition of industrial policy is by Robert Reich who defines industrial policy as the coherent and plan use of government tax subsidy procurement and capital instruments to encourage investment and disinvestment in a manner consistent with growth and minimization of social cost, industrial transformation and dislocation. All of these definition has one thing in common they all speaks to government intervention to achieve growth, the need for industrial policy has increase because national market has become more concentrated; global production international trade and technology has become more and more dominated by transnational corporation (Mehdi Shafaeddin 2008). The global market is changing rapidly and production has become more knowledge intensive, the policy space available to developing countries has been greatly reduced mainly due to the conventional view. Such view has been greatly reflected on the conditionality impose on many developing countries by international financial institution and to a large extent GATT (General Agreement on tariff and trade) and WTO (World Trade Organization). This view has been propagated through the Washington consensus, which fail in many developing countries with a across the board policy and general import substitution policy. The failure of the top down approach to industrial polices through which one size fit all policies are drawn up at the international level then imposed on developing countries beg the question whether there is a need to rethink industrial policy. There are two polar views on industrial policy the neo-liberal position and the neo structuralist position. The neo-liberalist takes the conventional inward approach to industrial policy they focus on the shortcomings and inefficiencies of this conventional approach during the period of 1950-1980. On the other hand the neo structuralist would argue for a revival of industrial policies; including the option of infant industry protection for industrially lagging countries. The policy propose by the neo structuralist is manly based on the success on the east Asian Tigers more commonly known as the East Miracle. They emphasize the disappointing of Latin America and Africa in the period of structural Adjustment, liberalization and deregulation. The position of this paper is not reflective of the neo liberals or the structural but take a in between position. Which the implication of the changes of the global economic climate and what implications this would have on the policy options available to less develop countries in the 21st century.

Evolution of industrial policy

Before going on with the discussion of industrial policy and the impact of the global economic climate, it is only fair to take a look at the evolution of industrial policy to get a better understanding of the advantage and disadvantage less develop countries face in the 21st century. Tilman Altenburg (2011), "overtime, the perception of industrial policy has experienced several pendulum swings, from widespread acceptance during the phases of mercantilism in the 16th to 18th centuries and import-substituting industrialization between the 1950s and 1970s to outright rejection during the 1980s and 90s." Industrial policy as defined earlier is a direct attempt by governments to intervene in the economy in the promotion of certain sectors that it believes can be beneficial in future and can contribute positively to growth in the economy. Historically, as Altenburg (2011), argues there have been varying perceptions of what Industrial Policy entails. Traditionally industrial policy involved direct government intervention in the promotion of certain sectors or the enactment of import restrictions so that certain sectors can develop. With the exception of the East Asian industrial policy have had mixed result. During the mid-1980s and after the influence of neo-liberal ideology dominated which government involvement in the economy instead relying on the market forces to guide the economy

Reasons for new industrial policy

Jean imps and Romain wacziarg (2003) examined the pattern of sectorial concentration and diversification in a large cross section of countries. They uncover an irregular in their data as poor countries get richer sectorial production and employment becomes less concentrated and more diverse. This process seems to continue until relatively late in the development process the production process tends to become more concentrated. What is significant about this finding is that it goes against the standard intuition of the conventional approach to comparative advantage. The logic behind comparative advantage is specialization in that countries would have liberalize trade would specialize in the production align with their comparative advantage. That is countries would produce and export the product that they produce at a lower opportunity cost than another country and export that product. This was imply as the engine of growth for industrializing countries jean Imps and Wacziarg Findings suggest otherwise. Whatever the driving force on development maybe it seems to be moving away from the conventional approach of comparative advantage and specialization. The new ideology is to acquire mastery over a range of export rather than concentrating on what one does best. The question remains why some countries are able to diversified their export basket and acquire new compare advantage while some fail to do so. The argument put forward by Rodrick 2004 is that market prices cannot reveal the profitability of resource allocation that does not exist. Even if a country has done its Washington consensus homework, good macroeconomic stability, well define property rights, market intervention are minimal trade restriction and far in between. The entrepreneurship require spurring growth would not take place because of the inability of market prices to reflect the profitability of resource allocation that does not exist. Rodrick outline two key externalities that blind the incentive for production diversification, information externality and co-ordination externality.

Information externality

This type of externality deals with discovering economic cost structure in that discover of new activities must be produce at a low enough cost to be profitable. Entrepreneurs must be able to experiment with new product line they must, take advantage of new technologies develop abroad and adapt them to local condition. A process Hausmann and Rodrik 2004 Describe as self-discovery, to look at it from the prospective of the entrepreneur if he fail in his attempt he must shoulder the loses of his failure by himself but if he is successful he have to share that success with other entrepreneurs who potential would follow this new idea and flock the market. In the limit of free entry entrepreneurship of this kind produce private cost and social gains, therefore it is not surprise that low income countries are not teaming with entrepreneur involve with self-discovery. It is fair to note that this type of discovery is different from research and development discoveries. The idea is not to come up with new product but involve discovery that a well establish product on the world market can be produce locally at a very low cost. What you would finds is countries with similar resources endowment specializing and producing different products, once one look beyond very broad aggregates such as labour intensive commodities. Example Bangladesh export hats while Pakistan export virtually none, conversely Pakistan has a well establish export soccer ball industry while Bangladesh lack a significant soccer ball industry. It is difficult to tie these patterns of specialization to comparative advantage they are more likely the result of self-discovery attempts follow by initiative entry.

Co-ordination externality

Many large scale investments require investment in other large projects to be successful. The coordination of upstream and downstream investment is necessary for certain industries to be profitable. An individual producer contemplating whether to invest in a greenhouse needs to know whether there is an electricity grid he can access nearby, irrigation is available, logistics and transport networks are in place, quarantine and other public health measure are put in place to protect his plants from his "neighbor" pest and his country has been marketed abroad as a dependable supplier of orchids. All these services have high fixed cost and are unlikely to be produce by private individuals. Unless they are assured that they would be enough green houses to demand their services in the first place. This is a classic coordination problem, more generally coordination failure can occurred whenever new industries exhibit scale economies and some of the input are not tradable.

Coordination externality doesn’t necessarily need subsidization this is major difference between coordination and information externality, overcoming these externality do not need to put train on the government budget. It is logically with coordination externality if all the investment is made simultaneously all them end up profitable. Therefore none of the activities need to be subsidies, unless there is additional reason like non pecuniary externality. The trick is to get these investment make in the first place firm A would make this investment if firm B make this investment.

New industrial policy in a neo liberal world

There are two approach approaches to industrial policy, the neoliberal approach and the structuralize approach. The neoliberals are advocates of the Washington consensus, and to some extent the WTO rules. According to this orthodox approach industrial policy has no space in economic development. The WTO limit the use of industrial policies and the developing countries aim at limiting it even further in the DOHA round trade negotiations. Then there are other scholars who believe that industrial policy is an important tool of economic development.

The conventional approach and WTO rules

Starting from the early 1980s there have been changes in the views of industrialization favoring neoliberalism, which state that government involvement in the economy such be minimal. Government intervention such ben limited to providing health care, education, security etc. the argument is that the development of a country such be left to the market forces; trade liberalization would change the structures of incentives to the export sectors and attract private investment including foreign direct investment in areas a line with a country’s comparative advantage, which would lead to industrialization and growth (shafaeddin 2006).

This process however comes with its own limitations in enhancing industrialization in developing countries; it increases the risk and vulnerability to the decision made by global firms. The impact of MNCS and the concentration of industries on developing countries would be discussed later on in this paper.

The world trade organization (WTO) limits the policy space of developing countries in a number of ways including the following;

The agreement on trade related investment measures (TRIMS)

Under these agreement WTO members has agreed not to apply certain investment measures related to trade in goods that restrict or distort trade. The TRIMS agreement violate certain measures that violates the national treatment and quantitative restrictions and requirement of the general agreement on tariff and trade (GATT) .

The trim agreement restriction entails:

Achieve a certain level of local content

Produce locally

Export a given level/ percentage of goods

Balance the amount/percentage of import with the amount/percentage of export

Transfer technology or prosperity business information to local persons

Balance foreign exchange inflows and outflows.

This agreement went into effect 1 January 1995 and has no expiry date.

The agreement of trade related aspect of intellectual property rights (TRIPS)

This agreement restrict the transfer of technology to developing countries and their development of generic drugs by protecting intellectual property rights, limiting the use of patented technologies or product. Patents are restricted for a minimum of 20 years and restrict the government ability to demand that a firm license the patent to another firm.

There are three main features of this agreement.

Standard- In respect of each of the main areas of intellectual property covered by the TRIPS Agreement, the Agreement sets out the minimum standards of protection to be provided by each Member. Each of the main elements of protection is defined, namely the subject-matter to be protected, the rights to be conferred and permissible exceptions to those rights, and the minimum duration of protection.

Enforcement-The second main set of provisions deals with domestic procedures and remedies for the enforcement of intellectual property rights. The Agreement lays down certain general principles applicable to all IPR enforcement procedures

Dispute settlement- The Agreement makes disputes between WTO Members about the respect of the TRIPS obligations subject to the WTO's dispute settlement procedures

The TRIP agreement came into effect on 1 January 1995, is to date the most comprehended multilateral trade agreement.

The general Agreement on trade in services (GATS).

This agreement expose domestic services companies to sever competition on from well establish foreign companies through requirement for the "most favor nation" and "national treatment "in the use of inputs, local employees and access to the local market.

The agreement on subsidies and countervailing measures (ASCM)

The agreements restrict the use of subsidies for supporting domestic industries and export expansion except for agriculture products. The impact of the ASCM agreement on manufacturing production and export is not less serve than the other three. Subsidization has been one of the major instruments available to developing countries for infant industry protection and exports expand. This instrument was greatly utilized by the East Asian during industrialization period. Now under the WTO rule the subsidies for export expansion and increasing export capabilities (ASCM article 3 and 8). Article 3 of the ASCM prohibits subsidies from being paid to firms (except for agriculture product) contingent upon export performance or upon the use of domestic up imported goods (input). Subsidies entails, direct subsidy, currency retention, preferential internal transport and freight charges on export shipment as against domestic shipment, and preferential provision of "imported or domestic shipment and preferential provision of imported or domestic product or services for use in the production of exported goods (ASCM annex 1). The implication of this agreement is that countries cannot, support its infant industries, whether or not for export either specifically or across the board once the subsidy is tied to export performance.

Most of the WTO agreements are the result of the 1986–94 Uruguay Round negotiations, signed at the Marrakesh ministerial meeting in April 1994. There are about 60 agreements and decisions totaling 550 pages. The policy space of developing countries is not being limited only by the WTO rules but IFIS and international donors. Therefore even if some policies are implementable in under the WTO rule structural adjustment programmes (SAP), stabilization programmes or even bilateral donors may not permit a developing country to implement it.

Opposing views

One of the leading advocates for new industrial policy Dani rodrick argues that markets does not leads to industrialize alone. The government needs to intervene in to correct information and co-ordination failures (mention at in the first part of this paper). He believes that this can be done through a discovery process by which private and public sectors come together to solve problems, including those that is cause by market failure each learn about the constraint and underlining cost faced by the other in a productive sphere. In such a process government and firms learn and underline cost and opportunities and engage in strategic co-ordination to remedy market failure that restricts self-discovery. The problem with rodrik approach is that it assume what is require is already done or well be done (fait accompli). Other opponent of neo-liberalism like Lall 2004 refers to the rapidity and complexity of technical changes, globalization and market failure in capability building requires direct and indirect government intervention. Both the selective and functional government intervention is requires correcting market failure which creates obstacles to capability building for industrialization and development. He also adds that attracting FDIs require local capability building which is the reason why only handful developing countries are able to attract FDIs, but the extent to which FDIs contribute to industrialization is limited. He advocated for need for increasing policy space for developing countries, he concluded that it is not feasible to upgrade and develop the necessary capabilities with the restriction impose by the WTO rules. In contrast to Lall Singh and Wade 2005 argue for some changes in the WTO rules to provide developing countries with some special treatment (SDT). They believe that the top down approach needs to be restructure to allow a new framework which would allow for differential treatment to developing countries

Business concentration an implication for industrial policies pursued by less develop countries

The increase dominance of Multi-National Corporation in the production of world trade have significant bearings on the policy of developing countries. A global firm has a number of advantages over new comer firms of developing countries. Firstly it has home based advantage relating to technology, experience, market information, market and distribution channels, economies of scale etc. secondly it could benefit from networking and collaboration with other firms. (Best 1990) found that networking takes place with firms own affiliates which allow it to obtain cheap inputs, technology intermediate products, distribution channels etc. Tran’s national corporation (TNC) global activities allow it to expand to enjoy economies of scale, scope and agglomeration. Firms collaborate with other firms through, international consortia, cross licensing agreement, long term supply purchase contracts, joint ventures, strategic and technological alliances and subcontracting. Collaboration would another firms would allow for sharing of activates such as research and development, production facilities, marketing, distribution and input procurement, product development and design without necessarily requiring the firm to invest abroad for these activities (Best 1990 and Porter 1990). This would put TNC in a Favorable position competitive position than new firms in developing countries.

The share of top firms in global production and trade

Activities

Number

Percentage

All output

200

28

Industrial output

1,000

80

World trade

500

70

Mooney 1999

The importance of the largest industrial enterprises (in or around 2000)

The share of large firms with employees more than 20,000

Description

Total

10,000

Total

100

25

Number of firms

18,540

8.8

5.1

0.5

0.13

Employees (in million)

100.5

77.7

68.0

27.6

7.30

Sales (billion)

2,108.5

76.0

66.8

21.7

6.40

Shafaeddin 2005

Table 1 and table 2 above is not complete meaning they don’t include all companies but they give a good representation of the degree of concentration of firms at the global level. According to (shafaeddin 2006) 945 companies that’s 5.1 percent of the companies survey and the largest 100 firms account for over two-thirds and over one fifth of total sales of companies survey respectively further a majority of the large companies are located in main developed countries more specifically the united states. For example half of the companies with 20,000 or more employees are located in the USA accounting for 62 per cent of total sales, 22 percent in six European countries (the United Kingdom, Germany, France, Switzerland, Italy and Netherlands) 8% in japan and 19% in the rest of the world. In recent years the size of TNC has increase due to merger and acquisition, for example one third of the largest us companies (fortune 500) listed in 1980 where merge by 1990 and another 40 percent where merge by 1995 (Shafaeddin, 2006b). Large global firms dominate almost all industrial activities as well as services and have control over technology which is safe guard by the WTO rules.

The advancement and sophistication of technology which is becoming more specialize, this would mean that skills has to become more firm specific and the learning period for developing countries is expand. In addition to that new technologies are usually control by TNC which means the barriers to entry has been set even higher. While the role of government in economic activities has shrunk in the past two decades the role of TNCs has increase due to economic liberalization. Large firms not only co-ordinate their activities outside the market but they shape the market and create barriers to entry for new entrants. The increase cost of technology, the increase time for learning these are factors that contribute to need for government of developing countries to engage in infant industry protection. Under the new WTO rules this has become virtually impossible, restricting the policy space on developing countries even further while the need for such policies has increase

Concluding remarks

Over the century industrial policies have evolve, the failure of the Washington consensus has led to the rethinking of industrial policy. With developing countries now industrializing in a more globalize and integrate world being a gift and a curse, but the reduction of the policy space available to developing countries has been greatly reduce. This is largely attributed to new regulation of the WTO coming out of the Doha round which made pursuing certain policies illegal, the TRIP, TRIM, GATS and ASCM agreements are the most restrictive. Infant industry protection and subsidization has become more difficult and in some cases virtually impossible. That is one of the major policy instruments that developing countries utilize to growth their industry. With the exception of china no country was able to industrialize without the use of infant industry protection. Most of the now develops countries made full use of the type of instrument during their industrialization period. In addition TNCs are dominating the global market increasing market and industry concentration through technological advancement and mergers and Acquisition. This has put new firms in developing countries at a great disadvantage, in an era where infant industry protection is so difficult. So we have WTO rules including structural adjustment programmes and donor agencies regulations at one end and TNCs at the other end choking the life of industrial polices out of the developing countries