Impact of economic change on international business

Introduction

Last four years had seen a rapid, radical change in an international economic condition. The Global Economic change embodies the upgrading and degrading of any country’s living standard. Global economic changes affect the economic environment which includes level of employment, inflation, interest rate, taxation and exchange rate. Hence, implementation of economic policies has a strong direct effect on international business and that’s way when the International economic policies are framed they are framed with reference to international business. Internationally there are number of problems which had affected the international economy as well as national economy such as problem in international trade, diseases like bird flu, environmental condition such as disasters like tsunami in Japan, financial crisis etc. and for these reasons globally coordinated efforts are required like international public goods whose rules applies across the globe as a whole M., Ferroni and A., Mody, (2002).

Defining global economy

The term global or international economy refers to the combined world economy with a free and open transaction of labour, technology, goods and services; it is a picture of an interconnected international economy with an increased movement of capital. This concept could not be understood in isolation but parallel to globalization which is an integration of consumption and production in every market across the world. It is a clear view that globalization not only benefits the country globally but also do the betterment for the whole global economy. Today the international economy is considered as an economy with a common or combined market for all goods and services produced EconomyWatch.com.

Global economy at a glance

In 2010, the world economy in term of GDP was worth $74.007 trillion (PPP method) and expected to grow $78.092 trillion in 2011. Economic condition with in BRIC (Brazil, Russia, India and China) have posted 7 to 10 growth rate. These conditions of BRIC countries played a huge role in making the economic atmosphere for less wealthy nations as in many situations under developed and developing countries depend on economic wellbeing of developed countries M., Lanzeni, (2008). The global economic condition is mostly dominated by technological aspect; particularly computers, telecommunications, robotics, medical equipment etc. although the huge advancement has taken place in developed nations but this accelerated development of agricultural and industrial technology both is creating a complicated environmental problems. The growth rate for industrial production is estimated in 2003 at 3%.

Global economic change

Today the international system is under the huge structural change in term of both economic and political dimension. The international economy has combined its production and financial system to an extraordinary degree, which challenges the nation’s economic authority and creates demand for global organizations Pollins, B., (2007). The hasty economic development in various large emerging-market (LEMs) economies is responsible for such a radical change in the global economy. However the implications of these expansions for the management and performance of the global financial and economic system are controversial. On one side economic observers do predict the shift of economic power globally and on other side, it is claimed that US will stick it out to be the global superpower and will continue to dominate the international financial system and economy. According to G., Sachs, (2007) the main perpetrators for such a huge economic change in the world are BRIC (Brazil, Russia, India and China) countries and it is advisable to identify and adjust to these emerging global economy and financial changes.

Reasons for global economic change

Across the globe today economies are going through a huge economic modification process. The big economists has described this process by many different terms such as globalization, industrialization, structural adjustment, and some time even just economic change. Generally these changes occur due to the decrement of government involvement or from command to capitalist economies. It can be said that there are three coinciding mechanisms responsible for the world-wide economic change or adjustment process.

Shift of Command to capitalism economic environment.

Command economy is the economic system where price, supply and distribution are under government regulation and only government have an authority to decide about which good and services have to be produced and in what quantity it is also termed as centrally planned economy Ericson, R., E., (2005). On the other hand in capitalism type of economic system the capital is owned by the private owners and government role is very limited in this Swedberg, R., (2011). In real life case pure command and pure capitalism economy does not exist but a mixed economic system containing features of both capitalism and command economy is followed although economies may vary between command and capitalism economy. Today due to the globalisation the mixed economic system became imbalanced and tilted towards capitalism system of economy.

STRUCTURE

The sequence of policies designed to decrease the role of government and increase the role of private sectors.

Source: http://www.harpercollege.edu/mhealy/eco212i/lectures/command/command.htm

There are certain policies followed such as privatization in which government assets are sold to private owners, promoting competitions among private owners, leaving very limited role in government’s hand, reformation of price globalization of the economy, lowering the government budget and do less government spending which reduce inflation and promote private investment.

Privatization

Polices

Competition limited role of government

Price reformation promoting private investment

Source: author’s creation

BENEFITS AND PROBLEMS

There are some benefits and problems involved in the economy shift from command economy to the capitalism economy. Such as market based economy that is capitalism economy is always achieves more efficiency compared to command economy and very less resources are wasted but in negative sense initially there is a period of inflation, unequal economic distribution of income and unemployment Dave, S., (2007).

Free trade

Economists favour free trade and recently US congress and US president have supported the view for removing of trade barriers. It is not wrong to say that across the globe countries are decreasing there trade barriers. And many have even signed multilateral and bilateral agreements with other countries in neighbour or region.

Benefits and problems of free trade

As the income level of people keep on increasing their living standard also increases and for that they need and buy more luxury goods. Therefore countries producing luxury goods get richer as the demand for their produced increase overtime. People also get exposed to more variety of goods and services which is the biggest benefit of the free trade.

Free trade is the biggest means of competition and competition can be full of risk and particularly in the situation countries prosperity. Company also try hard to protect them self against free trade. And in that situation foreign goods can be more expensive as more tax is imposed. It also dangerous for the local producers as they have to face multinational business organizations and which ultimately pushes them to exploit the locals Pettinger, T., (2007).

Economic Development

But after all the reasons the biggest reason for the economic change is the overall world’s economic development. It is hard to define this concept but increase in GDP per capita is taken as the measure by the economists.

There were two main concepts taken as the reasons for economic development they are:

EXPORT ORIENTED INDUSTRIALIZATION:

It is the trade policy of the economy with the aim of speeding the industrialization process in the country with the help of exporting goods for which the nation had got the competitive advantage. This opens domestic market to other foreign markets some polices adopted under this are floating exchange rate, reduced traffic barriers and government supports. Certain countries like South Korea adopted it a lot Export-Oriented Industrialisation.

IMPORT SUBSTITUTION INDUSTRIALIZATION:

It is an important economic development program in which there is a dependence on import in some nations for development of local business within the very nation. This theory has been plasticized throughout 20th century by the developing nations by import substitution industrialization employment opportunities is increased for citizens, innovation increased in the countries, decrease in dependency on foreign countries and methods used against this change is import quota and protective tariffs Jim, B., (2003).

Impact of Economic change on international companies

International companies are the most important factor which backing up the globalization. So it affects the most to the economy and became the biggest part for its change. International companies do their operation at the cross point of foreign investment and international trade. They are also known as Multinational Corporation it is that type of firm which organize and control production in at least two countries Caves, R., E., (1996).

There has been a huge investment in recent years which had boomed the property and stock market and became a huge push for consistent growth of Europe and North America but beside these, investments have also brought a great economic development in Middle East, Africa and Japan.

Impact of economic change on SABIC and how management cop up through the situation

The SABIC enjoys goodwill as it has a strong brand image among Petrochemicals Company in the Gulf region. It has seen a huge profit in last two years and due to the backup by Saudi Government SABIC enjoys remarkable credibility and influence. The company have a huge size and incorporation which makes it reaps good economies of scale. However, some countries like China and Iran are involved in aggressive petrochemical production, which may jiggle the pricing policy in future.

Source: SABIC annual report 2009

The year 2009 was one of toughest challenge for the SABIC but all the challenges were well managed. Going against the environment of global economic disorder, SABIC turned up to a very praiseworthy performance with the increase in production by 4 % and increase in sales by 5 %. Although there is decrease in the profits due to the jiggling of the price caused by world’s economic slump but remarking the overall condition of the company the performance was strong throughout the year and it also proved the capacity to perform well out of pressure. This is all possible because of unique and capable board and members of the company as they given very powerful strategy on which company followed consistently in recent years. The management of the company had acquired to build the capability and global presence, and working with the aim to be the global leader in the field. Company and there management worked hard to improve their business process and invested a huge capital in the development of plant and distribution facilities, so as to efficiently exploit the growing demand. Company had also invested on employees with a view of motivation to their dedication and talent. The acquisition has always been a key asset for the company so it grows with the steady speed toward the awaited bold 2020 strategy. Company also invested in innovation with the view of providing clean, safer and sustainable products to the world. The innovation in the company looks beyond of just providing product but also looking ahead to interact with communities, stake holders and customers as well as relate themselves to the environment and various other ethical issues. With the new organization structure they are now capable of meet more of customer’s requirement and with very strong global buying power, improved process and policies made it possible for the company to further integrate the global functions SABIC annual report, (2009).

Conclusion and recommendations

It is important for any business organization to have a good and capable management team to deal with all type of situations and make a proper policy for future threat and opportunities and for the business expansion. The rough rise of the price have been the major cause of sever inflation throughout the globe. The nation’s inflation rate does vary but still developed and under developed countries both are facing economic fluctuations. Over the last few years the economy shown huge variation in the global condition in japan is faced deflation Zimbabwe has faced hyperinflation. Where as many measures can be taken to overcome these conditions at the micro level by the managers as well as on macro level by the society of international organizations one of the examples is introduction of Euro as the common currency in January at Western Europe region. With a good processed strategy and followed properly managers can easily cop up with any kind of financial or economic problem