Globalization

Hitt et al refer to globalization as the international integration of commodities, capital and labor markets (1997). The benchmark in the determination of globalization is integration. Globalization is not a new concept and it has been a driver of trade between different cultures. Economists argue that there have been key events in the world that have influenced the speed of integration. The two major events have been world wars I and II. The second half of the 20^th century was characterized by accelerated integration whereas the inter-war periods were marked by dramatic reversals which sometimes had costly consequences. Globalization is often influenced by flows of capital and labor across different frontiers. After World War II, there was a record growth in trade between different countries and companies that was marked by an increase in exports by over 8% per annum between the 1950s and 1970s. Growth however slowed down due to oil price shocks and inflation which was as a direct consequence of monetary expansion and inadequacies in macroeconomic adjustment policies. Innovations in information technology (IT) were responsible for the rapid growth in trade which was characterized by over 6% increase in exports in the 2000s. Despite a small lull in growth in 2001 due to the dotcom crisis, integration has continued to occur at a very rapid rate in the last decade.

The major players in the first wave of globalization after WWII were European countries and Japan. The stimulus for Japanese growth was reconstruction after the world war and the Korean War. The US was the largest market for Japanese exports. Integration continued as exports from Japan found their way into European markets and then to Asian newly industrialized economies (NIEs). After 1960, the six NIEs crafted an outward oriented strategy which helped increase their exports to the European and other western markets. World merchandise exports from the Asian NIEs grew from 2.4% to 9.7% after these policies were put in place. Initially, the exports mainly consisted of textiles and later were expanded to include IT products and consumer electronics.

The influence that the US had on the global market after WWII slowly eroded with entry by other countries leading to increased competitiveness. In 1965, a boost in intra-North American trade came in the form of an automotive agreement between the US and Canada. The decrease in North American influence on the global market was primarily due to fluctuations in commodity prices as well as the nature of exchange rates. This decrease in trade volumes was an opportunity for middle-eastern oil producing countries. This influence was however short lived as oil prices shrank marginally in 1993. After the disintegration of the Soviet Union and the end of the Council of Mutual Economic Assistance (CMEA), the share of merchandise exports between Western Europe, North America and Japan was 70%. Factoring in the six NIEs, total merchandise exports were 80% of global trade. After 1993, the influence of Japan began to fade due to increased competition from the NIEs and China. The creation of the North

American Free Trade Agreement (NAFTA) in 1994 did not help to reverse the downward trend that had led to decreased influence of North America in global trade; neither did continued European integration, which had expanded to include central European countries and the Baltic States, halt decrease of European influence. Among the key factors that led to decrease in the industrial countries were the fast rise of China, boom in commodity prices and the recovery of Commonwealth of Independent States. The boom in commodity prices led to increased influence of Africa, central /southern America and the Middle East. Initially, African and middle eastern countries traded mostly in minerals.

China is expected to be the world largest merchandise exporter having diversified its portfolio in not only exporting labor intensive products like toys and footwear, and textiles into consumer electronics, IT products, and iron and steel. These shifts in global business are what encompass globalization. There are three blocs that are considered when discussing global business trends. The first is the old industrial countries that have liberalized trade under the General Agreement on Tariffs and Trade (GATT). The second comprises of the Soviet Union, China and eastern European countries that have centrally planned economies where state owned firms followed government directives on production and the last is developing countries that gained their independence after WWII. These groupings are however not absolute as a number of governments have chosen a mixture of either characteristics like intervening in order to stimulate industrialization. The outcome was import-substituting policies that relied solely on non-tariff barriers and high tariffs in order to protect domestic industries. It is no surprise therefore that industrial countries increased their trade in the global markets whereas centrally planned and developing economies decreased theirs.

Understanding global economics and the factors that affect them is an important concept for any company looking to take advantage of increased integration. To better understand how globalization affects companies, a case of Toyota is made. In the early days of formation, Toyota benefited greatly from visionary leadership. In continuing with its rich heritage, the company has had steady leadership starting with Sakichi and Kiichiro Toyada. In the subsequent years, the company has been run by Fujio Cho. It is important to understand that part of the reason for the success enjoyed by the company over the years has been due to steadiness in management that has not experienced any major upheavals. As Toyota operates in over 80 countries world wide, harmonization of its operations is an important factor in maintaining profitability. One of the major reasons for success is that the company has been able to read the dynamics in different markets and capitalize on them. Presently, cultural homogenization has been one of the reasons why Toyota has been able to be the leader in motor vehicle manufacturing despite other companies experiencing problems due to upheavals in the global market. Markets in China, India and Brazil are still relatively untapped by the company. In these countries, the middle class own cars as status symbols which means that increased population will translate to increased need for more cars. Toyota realizes this and the company has been able to develop a large number of different models that satisfy a large number of people.

Another reason for the success enjoyed by Toyota knows how to capitalize on scale economies. The company has opened manufacturing plants in low-cost countries and then shipping them off to the markets either as complete products or parts for assembly. The company has also exploited scope economies by establishing joint ventures with other manufacturers ensuring that parts can be shared across product lines hence reducing investments in creation of different parts. Toyota has centralized its technological developments meaning that all global operations can be monitored from a singular location and any problems that may arise can quickly be dealt with.

Toyota has taken advantage of deregulation in order to enter new markets. This was the case when the company entered into China. After trade barriers were lowered in that country, Toyota immediately set a base of operations that has seen the company grow in that market. Initially, the company chose to set up joint ventures and alliances with existing manufacturers in the country. This was because the Chinese economy was a closed one and foreign investors found very many barriers to entry in that market. However, the country realized that in order to move forward in this globalized economy, foreign investors would have to be welcome. The presence of strong international competitors meant that the company had to develop superior, cheaper products. Kiichiro Toyada admitted that the presence of ford in the market influenced how Toyota chose to do its business. He claimed that the desire to compete at the level that ford were competing at was a key pillar in molding Toyota’s fabric. This culture of competitiveness was what drove Toyota to desire to be the leading automobile manufacturer in the world, a position that had been GM’s (Inoue, 2007).

Toyota has had three globalization programs between 1995 and 2010. The major issue in the three programs was localization of its products. In order to solve this issue, the company decided to place manufacturing plants close to their intended markets. The end result was that the company was able to gauge the market’s responses to their products. This made Toyota more adaptive to local needs and also increased its flexibility in approaching its products. In the US for example, the company was able to make changes to the Lexus brand which made it more acceptable to the customers (Dawson, 2004). Another example was the development of the Yaris, a small car that targeted customers in the European market. In a move to regionalize its core activities, the company classified its market into three profit bases. These were North America, Europe and Japan. These bases were then given more autonomy such that they could make decisions specifically for their markets. The outcome was that the sales networks became stronger while local manufacturing ensured increased capacity. In the end, the company was able to cut costs while increasing production volumes and making market-specific products informed by trends in the specific markets. Experts point that although most companies prefer to fragment and localize their activities, there has been loss of a global identity. However, this pitfall was avoided by Toyota as no downside was witnessed from fragmentation. The company’s global executives regularly visit manufacturing plants and also have a large team of marketing executives which help in maintaining a close-knit relationship between the parent corporate and the fragments.

Toyota’s quest for globalization is mainly focused on North American and Japanese markets. There are risks that are associated with this strategy. While the company continues to project a global outlay, the volumes of products that are sold in these two markets indicate that they form its core markets. More than half of the automobiles that were sold by the company in the last ten years have been to these two markets. Experts advise that the opportunities present in these two markets are very low as they are both mature if not saturated. In this regard, the best the company can do is to maintain the sales that they already have and hope that they can make more sales from their direct competitors. The risk involved in depending heavily on these markets is that the company may be exposed should the countries experience economic downturns. In the 1990s, the slowdown of the Japanese economy was the stimulus that led to the company adopting a globalization policy. The targets that the company has set may be hard to reach if more effort is not put in attempting to substantively tap into other markets. This is assuming that sales in both the North American and Japanese markets hold steady. Any downturn in these markets would mean that the company would be further away from its projected targets. All in all, the mere presence of the company in all continents suggests that it truly is a global one.

Globalization is driven by innovations in technology, change in economic policies and nature of the political landscape (Daniels et al, 2013). In the larger scale, improvements in inventions such as better infrastructure have made Toyota to improve its products while lowering the costs of production. The improvement in connectivity among many countries, from rail to air has made the movement of products easier. Containerization of international ports has improved shipping. Improved connectivity between customers and companies through information technology means that information is more readily available and easily accessible. Developments in cellular connectivity and the internet have greatly simplified dissemination of information and socio-political and economic transformation. Information technology has also led to the creation of new and improved products. The modern methods of production have ensured that there is consistency in the products created and they can be safer. Just-in-time methods of production have made Toyota products more efficient. Improvements into the products have also made the shift from oil to renewable sources a little bit smoother. Hybrid vehicles are on the rise as people look to curb the destructive use of the environment (Ludwig, 2012).

The link between the political environment and globalization is far more complex that any other relationship. The dissolution of empires and the Cold War helped in molding the world into first, second and third clusters. The initial fragmentation of the world ensured that the global economy became fragmented. The construction of the Berlin wall and the Cuban missile crisis are also some political occurrences that had a profound effect on the global economy (Ingham, 2004). Through all these however, economic integration still took place. Globalized companies like Toyota survived these crises but were in no way unaffected by them.

The discussion into the globalization of Toyota has been centered on the assumptions that the risks the company faces can be diluted by its presence in different frontiers. While this may be true, it is important to discuss the conditions under which the performance of the company can be affected. First, any economic conditions that adversely affect the Japanese economy are bound to hurt the competitiveness of the company. Coupled with downturn in the North American and European markets, the company could lose a very large share of its market. The second factor is fluctuation in exchange rates. In particular, the Japanese yen, the US dollar, the Euro and the British pound. Stability in these key currencies is important for globalization. The third is the company’s ability to realize efficiencies in production and implementation of capital expenditure. Management decisions that could affect the plans of the company to perform at the highest level in a timely manner would greatly affect the level of globalization the company targets. The fourth is changes in government policies, regulations and laws that touch on the way that the company does business. Such laws may include environment protection laws, vehicle emission laws, vehicle safety laws, vehicle fuel economy laws and laws that might affect the company’s future legal proceedings and litigation.

The fifth factor is political instability in markets where Toyota has set base. This could particularly be of importance as the political landscape is closely related to goodwill. In cases where upheavals occur, the company may substantially lose its investment as well as gateway to other markets. It is therefore very important that the company bases of operation be in corridors to other markets and in areas where security of operations is guaranteed. Another factor is the company’s capacity to develop and achieve acceptance of new products. As the world continues to develop at a very fast pace, with new inventions and ways of operation changing, it is prudent that Toyota be on the frontline to innovation in order to remain relevant and to grow. Other factors may include labor strikes, interruptions in transport systems, work stoppages, any unforeseen events that may occur in areas where the company has set its base of operations and major errors in products where a recall may be necessary (Hyde, 2009).

In conclusion, the major drivers of globalization can be summed up as economic and political policies. In the former, deregulation of markets and reduction or elimination of international trade restrictions and financial transactions are the major stimulants to globalization. Currencies are no longer a big issue as they have become convertible. However, fluctuation in exchange rates between the major currencies can be a negative in stimulating international trade. In the latter, major political events like the world wars, creation and fall of empires and border conflicts are some of the major determinants of globalization. For any company to be successful in global trade, a balance must be struck to ensure that the operations of such a company are not hindered by any avoidable occurrence. This means that enough information must be on hand before any decision can be made. As discussed above, information technology is one of the drivers of globalization as it has made people and businesses to be better connected. This means that producers can be in touch with their consumers in order to make better products. Competition for existing and new markets makes Toyota a perfect example of a globalized entity. With other automobile companies employing newer ways of production and as they produce improved products, the future of Toyota will be determined by the application of a set of truly globalized policies.

References

Daniels, J., Radebaugh, L. & Sullivan, D. (2013). International Business: Environments and Operations, 14th ed. New York: Pearson Prentice Hall.

Dawson, C. (2004). Lexus: The Relentless Pursuit. Singapore: John Wiley & Sons (Asia) Pt

Hitt, M. et al (1997). International Diversification: Effects on Innovation and Firm Performance in Product-Diversified Firms. The Academy of Management Journal 40 (4): 767–798.

Hyde, J. (2009). Toyota’s 1st in safety recalls for 1st time. Detroit: Detroit Free Press

Ingham, B. (2004). International economics: a European focus. Pearson Education.

Inoue, K. (2007). G.M. narrows sales gap with Toyota on non-U.S. demand. Bloomberg.com. Retrieved 2013-11-05.

Ludwig, S. (2012). Toyota kills electric car plans, says ‘capabilities of electric vehicles do not meet society’s needs. VentureBeat. Retrieved 2013-11-05.