Globalization and Firm Expansion in Foreign Markets

Introduction: Globalization as a Double-Edged Sword

The objective of this paper is to advance knowledge on globalization by using empirical evidence to examine its impact on the expansion of firms in foreign markets. Drawing on a range of academic literature, the paper argues that globalization acts as a double-edged sword: it is both beneficial and detrimental to firms with respect to acquiring foreign markets. Firms are therefore required to design effective business strategies and innovations in order to capitalize on the market opportunities offered by global markets while carefully managing the inherent risks and threats that globalization presents (Amonrat & Patriya, 2007).

Market Opportunities and Competitive Threats for Global Firms

As firms extend their businesses beyond their home countries to access markets, services, and resources across borders, the positive and negative effects of globalization increasingly affect them. Globalization is defined as an ongoing economic, social, and political process among nations (Clougherty, 2001). Global events affect almost all firms, and as firms enter international markets, they must contend with complex and diverse issues arising from globalization. Loecker and Goldberg (2014) argue that firm performance within a global market environment is grounded in performance theory. Typically, firms face global competitive threats that intensify competition in the global marketplace. While firms must navigate global market uncertainties, global competition simultaneously assists them in improving their business performance. The theory of comparative market advantage also holds that firms should specialize in the products and services in which they can derive a competitive edge (Clark & Knowles, 2003). For example, firms in India have specialized in the production of IT products and services, while China provides low-cost labor for U.S. companies. Many U.S. firms therefore outsource their IT functions to India and their manufacturing activities to China, thereby benefiting from global market opportunities.

"The World Bank found that wages have generally been rising faster in globalizing developing countries than in rich ones, and faster in rich ones than in non-globalizing developing countries. The point is that the fastest wage growth is occurring in developing countries that are actively increasing their integration with the global economy." (Brooks, Weatherston, & Wilkinson, 2012, p. 314)

Amonrat et al. (2007) argue that globalization delivers increased market and investment opportunities to firms. The development of information technology and the removal of investment barriers have provided firms with opportunities to seek international markets and derive substantial investment opportunities globally. Globalization has also assisted firms in outsourcing their production to various locations, enabling lower operating costs and allowing firms to offer products at more competitive prices. Furthermore, globalization has enabled firms to access many previously untapped markets worldwide. With advances in information systems and communication, firms are able to achieve greater efficiencies in their business operations (Czuchry & Yasin, 2001).

Despite the immense benefits associated with globalization, Chetty (2014) argues that firms' expansion into international markets is fraught with risks and uncertainty. For example, firms face complex planning decisions when expanding internationally, including whether to operate independently or to partner with other companies. In many Asian and Latin American countries, governments have mandated that foreign companies wishing to establish operations must form business partnerships with local firms before being permitted to operate.

Brooks, Weatherston, and Wilkinson (2012) contend that globalization is gradually eroding permanent employment opportunities, as many employers are exploiting the advantages of globalization to tap contract labor across the globe, thereby reducing full-time employment. Increasingly, employers outsource work to other countries through contracting arrangements, causing full-time employment categories to decline. This trend is particularly prevalent among service-based industries. For example, one-third of people working in the European Union are employed as contract workers, and the situation is especially pronounced in the United Kingdom, where employers offer contract positions to over two million people. This employment model is likely to intensify in the future, as the internet has enabled employers to source labor globally and to use this access to lower labor costs. Although such strategies have allowed firms to reduce operating costs and increase profitability, the rise of contract employment has reduced the number of permanent employment opportunities available to workers in home countries. Many U.S. companies, for instance, prefer establishing manufacturing operations in Asian countries such as China and India to minimize labor costs. This shift has left many workers globally with temporary rather than permanent employment (Courtney, 2001).

Despite these shortcomings, Awuah and Amal (2011) argue that globalization enables firms to pursue international business strategies that offer wide market opportunities across the globe. Reductions in trade barriers have facilitated business among nations. The overall impact of globalization, however, remains contested. While some argue that firms derive immense benefits from globalization, others believe its effects are predominantly negative. Using Chile as an example, many small and medium-sized enterprises (SMEs) have been exposed to international competition, which has helped them achieve better performance and generate employment for their populations. Similarly, globalization has helped firms in India gain comparative market advantages in the software industry.

"Conditions do seem to improve in many countries over time. In Vietnam, it has been estimated that wages have increased five-fold in recent years. Developing countries such as India, China, Vietnam, and Bangladesh have all benefited from global production." (Brooks, Weatherston, & Wilkinson, 2012, p. 314)

However, the success of Asian companies in international markets is partly attributable to the support they receive from their governments.

Interactions Between Transnational Corporations, Governments, and Global Institutions

One of the most significant impacts of globalization is the increased interaction among governments, transnational corporations, and global institutions. Governments across the globe have facilitated globalization through the formation of institutions such as the European Union, the World Bank, the World Trade Organization, and the OECD (Deardorff & Stern, 2002). The interactions of these global institutions have established common standards — such as electrical and patent standards — that break down trade barriers among nations. At the industry level, globalization has increased global production, strengthened global brands, and intensified competition among firms. Transnational corporations such as Coca-Cola, McDonald's, Adidas, and Toyota have established a presence across the globe in both developed and developing countries. Globalization has also facilitated increased cross-border mergers and acquisitions, enabling transnational corporations to access global mass markets and enhance their competitive advantages. Many transnational corporations have formed alliances and partnerships with other multinational corporations worldwide in order to operate successfully in global markets (Farnham, 2005).

Globalization has also facilitated greater interaction among governments to support international business transactions. The European Union, for example, has become a political and economic organization comprising 28 member states. It has promoted cooperation among member governments to maintain environmental standards and has enabled the free movement of goods and services across its internal borders.

Conclusion

This paper has investigated how globalization affects the expansion of firms in foreign markets, identifying both the benefits and the shortcomings of globalization. The study concludes that the benefits firms derive from globalization — including greater market access, cost efficiencies, and improved competitiveness — outweigh its shortcomings, provided that firms develop appropriate strategies to manage the associated risks and uncertainties.

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