Globalization Vs Internalization

1. Introduction

Globalization in the 21st Century had irreversibly and profoundly altered the economical, social, political, and educational landscape. The modern business market is often driven by a composition of a series of combined and interacting forces such as globalization, trade-free agreements and liberalization and the revolution of technology. With the aid of technology, globalization had eradicated country borders, making location, space and time irrelevant. The competitive advantage of every new age company is dependent on constant innovation and the clever utilization of new technologies. With this in mind, this paper discusses and examines the necessary factors to achieve success in international business.  

2. Globalization and Internationalization

Globalization and Internationalization are two terms that had been used inter-changeably and are often confused as one. But in fact, globalization and internationalization are entirely different concepts.  Daly (1999) asserts that internationalization is the prevalent significance of international trade, relations, treaties, alliances etc, between and amongst nations. On the other hand, globalization is the effective removal of national borders for the purpose of economical benefits. It is the integration of many national economies into one global economy (Daly, 1999).

Globalization is a strategy and a route for business development. It is the examination of the bigger picture, and should be viewed as the end goal for many businesses with worldwide target audience. Internalization, however, should be an important to be completed to achieve successful and profitable globalization.

As stated by Jin (2017), globalization without proper internalization would result in setbacks for trade and world economic integration. Globalization on itself erodes national borders and structures too rapidly for the different economies to cope or follow through. However, when coupled with internalization, globalization would allow for a slower exchange of information and innovation, so that the different economies will take the time to learn how to work together. Internationalization is, in essential, a highly vital tool for successful globalization.

3. Global Business Environment

The global business environment has a direct and indirect effect on how multi-national firms conduct their operations and business strategies. Individual business environments consist of cultural, political, legal and economic characteristics that differ greatly from country to country. When each individual business environment acknowledges and accepts globalization, each business environment are integrated to form the global environment.

3.1 Institutional Based View

Traditionally, the competence of a global business environment was often driven by two main paradigms – Industry-Based View (which is characterized by Porter’s Five Forces) and Resource-Based View (characterized by VIRO Framework). However, in recent years, Institutional-Based View had transformed how companies determine the competitive advantage required to remain successful in the global business environment.  

Scott (1995) defines institutions as regulative, normative, and cognitive activities and structures that govern the social behavior and provide stability and meaning to it. Institutional-Based View operates under formal and informal strictures in the global business environment.

3.1.1 Formal Institutions

Formal Institutions are defined as official and clearly stated rules in a society that affects the businesses. Examples of formal institutions are laws, regulations, property rights, trade agreements and contracts. They are governed and determined by authority or the organization. Formal Institutions tend to change over time to meet the requirements of the ever-changing external environment. They are instilled and structured to achieve desired behaviour from individuals and organizations.

A basic example of such formal institutions affecting the global business environment would be corporate governance in Asia. Asian Countries have a long history of colonialism and as such greatly affects corporate governance in terms of legality. Countries like Hong Kong, India, Malaysia and Singapore have their legal roots from the British colonialism while countries like Thailand and Philippines have their roots in the French legal systems. However, countries like China, Taiwan, South Korea and Japan has German legal systems. A multi-national company having businesses spanning the width of Asia would have to be very clear of the limitations and possibilities of the different types of legal systems and hence modifying or maneuvering the company’s activities around these legal systems.

Another example of a formal institution would be foreign investments laws in the various countries. A change in company laws and liabilities of corporations lowered the required initial capital for starting a company in China, attracted more Small and Medium Enterprises and single investors to enter into the China’s economy.

3.2.1 Informal Institutions

Informal Institutions are self-imposed implicit restrictions that people of a particular society adhere to govern their relationship with others in the same society or outside of it. The rules of these informal institutions are brought down through generations by teaching and imitation. Unlike formal institutions, because of their origin source, informal institutions are harder to change and even harder to have a complete change over a large group of people. Examples of informal institutions include culture, traditions and social norms.

Informal institutions are more prevalent in Asian global business environment than anywhere else in the world.  A clear example of this would be trust-based business transactions that are commonly seen in Asian countries, where agreements between companies can be made based solely on trust without any formal contract. Another example of informal institution would be family-owned businesses whereby ownership of the company is difficult to clearly regiment.

3.2 Resource-Based View

One of the two traditional key factors that influence competitive advantage in the global business environment is Resource-Based View. The Resource-Based View is a model that view internal resources the vital key to successful multi-national company. Famous authors supporting this view such as Barney (1991) believes that individual companies should look at their own internal resources to determine the sources of competitive advantage instead of externally.