China’s industrial revolution has grown to about ten times that of the Western world economies. Machines in China’s manufacturing industry operate on heavy energy power to generate growth. This has led to massive production at the lowest cost possible.
Fair Economic Policies
For instance, the Chinese challenge to the U.S is vigorous in both economic and demographic dimensions. The Soviet Union collapsed because its economic system was not efficient at all, a lethal flaw that was hidden for a while, because the Soviet Union never tried to compete effectively.
The global market China, on the contrary, has shown its economic prowess in the global arena. Its economy has grown 10 percent a year averagely for more than four decades now. China is leading in exportation and manufacturing globally, and it has accumulated more than $2.5 trillion on foreign reserves. China is a competitor to every manufacturer in the world today.
Regulations on Global Companies
Regulations are to monitor and control the activities of multinationals. Their operations should be aligning with the code of conduct outlined by the council of ministers of organizations of economic-operation and development (Author 1976, p. #).
Transfer of pricing is one of the main regulatory elements of this code. Transferred price helps when selling products or services between divisions and departments of one single firm, or between a mother company and its subsidiaries. Transfer price caters for the internal depreciation and the effects of exchange from one currency to another. If used appropriately, it helps to manage profit more efficiently. Transfer pricing is a method of moving goods and services from one country to another
Law of One Price
With the law of one price, a commodity produced with identical material and the same production method with the intention of being sold to the same category of consumers, should be sold equivalently everywhere in the world.
Purchasing Power Parity
Purchasing power parity is a condition of equilibrium in the global market. The principle is derived from the law of one price. According to this law, the exchange rates between two currencies should move to reflect changes in the purchasing power in relation to one another.
On the other hand, the code provides provisions on labour relation for these companies. In consultation with representatives of workers, the employees have a right to organize, not be intimidated and be given the chance to utilize their full capacity and their know-how from their country to the country in question without any prejudice whosever.
Charter for Good Corporate Behaviour 1996
Any firm wanting to establish in China must observe safe hygienic standards and provide a favourable and clean environment. This is in terms of providing appropriate working garget and well light working stations. Working manuals should be given to avoid accidents in the job areas (Haak & Hilpert 2003, p. #).
Any company that does not comply with these codes of laws and practices faces sanction, penalties or even total ban as the court deems fits.
In the laws stipulated in the brochure for Good Corporate Behaviour (1996), Member Governments must come up with local contact avenues for undertaking marketing activities, handling grievances and channels of addressing concerns of all stakeholders (Pecht 2007, p. #). Companies moving abroad must create at least 25 jobs. According to a Mexican law, nine out of ten workers taken by an employer must be Mexican. The same case applies to China (Price 2007, p. #).
There is security assessment for mergers and acquisitions to protect consumers from exploitation that comes with cartels. Companies must open bank accounts and deposits should be denominated in the local currency.
Reasons why Companies Globalize their Operations
There exist various reasons as to why companies move their production from one country to another. Genpact is a multinational company; it operates in China, Hungary, and Mexico among many other countries. Genpact was formally part of GE (General Electric) in Germany (Blackman 2000, p. #).
Financial incentives are one among many reasons why Genpact shifted from Germany to these countries, some of these incentives are reduction in taxation and low production costs. Furthermore, it is much better and cheaper to set up additional workstation in a foreign country rather than managing them all at home.
Many countries are renowned for their expertise such as Japanese technological engineering expertise, scientific design and ideas. That is why, one may find many companies moving to Japan to close the gap of resources where they are needed.
Advantages and Disadvantages of Multinationals
Advantages and disadvantages of globalization to a company depend on the country the firm wants to start its operations in. To have a competitive advantage, firm’s choice of a location must facilitate production of quality products at the lowest cost possible. It is advantageous to the host country because, before establishing in any given country, a multinational must carry out research and development. Findings from these activities aid the host government in implementation of policies.
Governments should allow foreign investments, since they are a source of employment to the local people. This sharpens their working skills and improves on efficiency.
Foreign investments act as a source of revenue to the government in terms of income tax and fee for registration and licensing. When companies locate operations abroad, they face difficulties not encountered locally. These demerits include additional efforts in managing geographically widespread operations, dealing with different languages, cultures, production standards, and different consumer preferences.
For a company to succeed, it must stand out by producing superior products and being able to acquire superior management skills. There could be a need to raise a massive amount of capital to fund massive production, and the local financial market may not be sufficient for that provision. Going global allows the company to raise capital and share the risk of the foreign operation while maintaining a relatively high degree of control. Decision-making control is maintained because the ownership is usually spread out over a large number of stakeholders. In most cases, globalization acts as a competitive tool. Entry to a foreign market transfers income from foreign rivals in that domestic market.
Curbing of competition both abroad and locally drives firms to go internationally. Local companies must compete in other economies. Globalization facilitates minimization of production costs. That is why they can lower prices as oppose to a firm that just operates within the local market (Axon 2007, p. #).
To the domestic businesses, multinationals may not be pleasant news at all. These foreign firms may have a competitive advantage over local entities, given their high production capability and advance technological expertise. This is the case in most third world economies. A good example to further elaborate this would be the Coca-Cola and the local beverage companies here in Germany (Gregory & Nollen 2009, p. #).
Wai (2009, p. #) states that if laws between countries are inconsistent, businesses have to come up with appropriate or suitable decisions on which laws to abide to, even before the commencement of their operations. However, this is not an easy task because it calls for government intervention, and a chain of bureaucracy procedures follows. Some of such laws are just anti-competitive. Failure to adhere to such conditions results in compulsory winding up.
Some governments discourage foreign investment in fear of their effluence on internal affairs. This is especially true in cases if the host country is experiencing some political instability (Axon 2007).