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Tags: globalization | covid | dead | trade

Is Globalization Dead?

Is Globalization Dead?

Dr. Shan Nair By Thursday, 03 September 2020 10:27 AM Current | Bio | Archive

The coronavirus pandemic has impacted virtually every corner of the world other than perhaps Antarctica and caused ripple effects that extend to international supply chains, plunging the world into a recession.

Given these turbulent times, the question of whether or not globalization is dead has become more prominent than ever before.

In this article we suggest that globalization is in fact going to increase for good reason.

Trade Barriers

Many countries are responding to the COVID induced recession by taking measures to protect their domestic markets subject to WHO constraints. This entails giving incentives to help domestic producers and raising import duties, all to protect domestic employment.

A foreign company that previously sold into the market would thus need to consider setting up their manufacturing or service operations in that market in order to protect market share. For example, Japan recently declared a 220 billion yen ($2.1 billion) package, to help producers shift manufacturing from China to Japan.

As an example, for consumer related products, the sheer size of the populations of India and China will see their buying power create major consumer markets of the future. India is already promoting a “Make in India” campaign coupled with increases in import duties of many items to further the objective of protecting and sustaining in-country employment.

Under the “Make in India” campaign, the Indian government provides sector-specific subsidies for promoting manufacturing, such as capital subsidies on the manufacturing of electronics of up to 25% for 10 years. In addition, the Indian government has recently announced plans to allot 450 billion Indian rupees ($6.2 billion) to promote the electronics manufacturing industry domestically by giving production-linked incentives such as a capital subsidy, the aim being to attract manufacturers like Apple, Samsung, Huawei, Oppo, Vivo, Foxconn and others.

The Indian government has also opened up the defense industry to private sector participation thereby paving the way for foreign original equipment manufacturers (OEMs) to enter into partnerships with Indian companies. 100% Foreign Direct Investment (FDI) is now allowed in the local defense sector subject to government approval. Moreover, the Ministry of Defense (MoD) has announced it will introduce an import embargo on 101 items to boost domestic defense production.

Immigration Barriers

As we have seen, the U.S and many other “first world” countries have recently implemented stricter immigration controls. This has impacted not only unskilled workers but also highly qualified technical workers who are in short supply in the domestic market. As a result, companies are being forced to go to where these workers are and hire them.

For example, in the case of software engineers, companies have expanded into countries such as Poland, Ukraine, Russia, India and Philippines and have established subsidiaries specifically in order to hire these workers, something they may not have done previously.

Many companies including Apple, Facebook, Google, Microsoft, and Twitter are now looking to expand or invest more abroad. The restrictions on IT employees coming to the U.S on work visas has resulted in the outsourcing of more work to India. For example, at the peak of the COVID pandemic, in July and August 2020, Infosys, one of the leading IT outsourcing companies in India, won their largest single contract of $1.5 billion. At the same time, Infosys stock hit an all-time high owing to increases in outsourcing to India.

Similarly, Amazon has signed leases totaling 2.8 million square feet of office space in India in August 2020 to hire employees for its global and India operations. This is in addition to its largest office in the world, in Hyderabad, completed in August 2020.

Many highly skilled workers on temporary or annually renewable visas and work permits have been refused extensions or permanent residency and forced to return to their mother countries. As a result, their employers have had to make administrative arrangements to retain their talent by hiring them in their mother countries which otherwise they would not have had to do.

Fighting to Retain Market Share

When domestic markets get tough, market share can sometimes be protected by expanding into new markets. This is especially the case if there are no competitors currently in the target market, thereby giving a “first mover” advantage.

However, even with a “first mover” advantage, it is important to into take account local cultural norms both in terms of the market (for example, is price more important than quality?) and the way customers think and make their purchasing decisions. For example, while expanding to China, local cultural norms play a key role.

In China, offering even a small discount can boost sales. In addition, product packaging can also have a huge impact on sales. Chinese consumers may wait for a long time just to save on a particular item while those who cannot afford high-quality gifts will often buy a product with the nicest packaging within their price range. The region’s culture and marketing strategy may therefore need to be adjusted to accommodate these norms, so flexibility and an understanding of the individual market will be required.

Reducing costs and exposure in a recession

When the going gets rough and the perspective is that the environment will remain tough for a few years, companies invariably look to cut their variable costs without sacrificing customer service.

Often, people-related costs dominate the variable cost component of a profit and loss account. In these circumstances, setting up operations in foreign countries to hire equally skilled but lower cost personnel while also using local government incentives to minimize the upfront setup costs may be a good solution.

Concluding Thoughts

Globalization of successful businesses may, in fact, have received a boost from the COVID induced recession for the reasons mentioned above. However, understanding the spectrum of issues and opportunities associated with expansion and working flexibly to accommodate all of these variables are important to assure success.

It is important to recognize that regulatory requirements are substantially greater in countries outside of the U.S, and these must be identified and arrangements must be made to ensure that the foreign operations always remain in good standing. This is mission critical and therefore mature companies should rely and place value on expert country-specific advice and support.

Shan Nair is the president of Nucleus, a one-stop global expansion solution for businesses and a consultant on international expansion.

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The coronavirus pandemic has impacted virtually every corner of the world other than perhaps Antarctica and caused ripple effects that extend to international supply chains, plunging the world into a recession.
globalization, covid, dead, trade
Thursday, 03 September 2020 10:27 AM
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