Is the current economic crisis destroying International Business? Does it have an upside to it? What can international businesses do to survive? What can the government do for the various failing international businesses that cut across nations?
This essay will begin with the definition of key terms. The paper will then analyze the negative and positive effect of the economic crisis in various international businesses focusing on General Motors. This paper also explains how General Motors could have done it differently, explaining how economic barriers in general were avoided in the past and what solutions can be applied to the current climate, examining solutions proffered by scholars.
DEFINITION OF TERMS
FREE TRADE
Free trade is a “pattern of imports and exports that would result in the absence of trade barriers” (Wild et al, 2006, 178).
The repeal of Corn Laws in 1846 created a new world order which impacted the growth of free world economy (Andrew, 2003). David Ricardo established the theory of free trade international trade that was adopted by Britain 23 years after his death in 1846. This policy solved Britain’s growth problems, turning it into a world workshop (Robert, 2004), it has been said that “Ricardo conquered England as completely as the holy inquisition conquered Spain” (Keynes, 1936). This same policy has slowly been crippling international business in Britain and also Britain’s international businesses in other companies. In 1977, former US treasury department official William Cline estimated that trade had been the cause of 39% of the increase in wage inequality over the previous 20 years (Peter, 1999, www.twnside.org)
PROTECTIONISM
Protectionism has been defined as “government policy which seek explicitly to benefit domestic producers” (Morrison, 2006, 324). It is “the collective governmental restriction and measures that limit ability to sell abroad or make it difficult to buy from foreign suppliers” (Daniels, 2007, 223) This policy increase the demand of domestic products, because exports have been reduced (McKenzie, 2000)
CURRENT ECONOMIC CLIMATE
Describing the global economic climate, Robert Kiyosaki (2009) says, it is a ‘hot air balloon’ with too much air that tore it open on August 6 2007, then presently, central banks are putting more hot air (debt) to preserve it from crashing -”depression” (p,28)
INTERNATIONAL BUSINESS
International business is referred to “all commercial transactions – private and governmental – between two or more countries” (Marios et al 2007,p 9)
GLOBALISATION
Globalization, as Alex McGillivray (ft.com, 29/30/2009) explains, is one of those catchy terms that acquires its own momentum. It sums up our perception of living in a world that is getting ever smaller and more interconnected, yet we rarely pause to interrogate its meaning.
Daniel (2009) writes that it is the relationship between people that cuts across borders.
This two evidence, suggests, that globalization is the growth of the world; socially, economically, intellectual, in culture, beliefs, to mention a few. As we become aware of the external forces that surround us, we try to reach out and control this external force, causing relations from one end of the world to another.
BARRIERS
As far back as when Adam Smith questioned the logical basis for mercantilism, the dichotomy of choosing free trade or protectionism has been an issue for trade policy makers (Helen et al, 1989)
The present economic climate tends to rebuke the idea of a free market. Authoritative reports from WTO and Global Trade Alerts shows that countries are adopting trade-distorting measures and reducing their willingness to liberalize the financial market. G20 nations are currently breaking their ‘no protectionism’ protest, affecting 80% of all categories of goods and implementing 60-trade harming measures (ft.com 6/11/2009). (Turner, 2008) reinforces the anti free trade attribute of the crisis, and says protectionism was a battle ground for the 2008 Unites States presidential election. Some of the general barriers posed by this climate are:
FINANCIAL SECTOR
The crisis enlightened international businesses about the essential role the financial sector has to play on the economy. (ft.com, 27/11/2009)#. The Federal Deposit Insurance Corporation# records over 120 failed banks in just 2009 alone (www.fdic.gov). with a reduced number of banks, the standing banks are left with more work, and so little money, because though they have novel customers, the new customers do not have money to put in the bank, due to layoffs from their employers.
ENERGY SECTOR
Since the farmers will have problems from getting loans, the production of bio fuel will be affected, since most of its components are made on a farm, this has lead to other barriers, such as the investment on energy being postponed (ft.com 10/12/2009)
LUXURY BRANDS INDUSTRY
Luxurious spending will be runt, because people have to prioritize, they are now aware that they have to put down a larger percentage for the mortgage and will want to keep to their house, instead of buying a Gucci bag. Bain forecasted in the financial times of November this year that luxury goods will fall 8% unexcited than last year (ft.com 10/12/2009)
AGRIBUSINESS SECTOR
Since the crisis lowered the GDP of countries, companies in the agricultural industry will be affected negatively because, consumers will be less willing to consume products. But this effect will be relatively less because people need to eat; the businesses that will be affected in this sector will be restaurants and take outs.
Farmers will also have miniature access to loans because the financial sector has also been affected by the crisis.
REAL ESTATE SECTOR
People don’t have enough money to buy houses because banks are not willing to give out mortgages, so houses that were completed before the crisis will lack buyers. By December 2009, the financial times reported that “UK real estate defaults double to £30bn” (ft.com 10/12/2009)
CASE STUDY: GENERAL MOTORS: AUTOMOTIVE SECTOR
One sector that has really been affected by the crisis is the automobile sector, in Mexico, the sector fell by 44 percent during the first half of 2009 (ft.com, 19/11/2009). General Motor’s sales in Europe as at July 2009 had dropped by 20% (ft.com 8/12/09).
Some of the barriers faced by this company in the present crisis are:
DIMINISHING GLOBALISATION
Globalization is central to international Business, in this prove climate it is been threatened in three ways (ft.com 10/11/2009) : “first it will reduce willingness to liberalize financial markets…it will undermine the credibility of free market capitalism this will affect not just finance, but, quite possibly, trade and direct investment as well…finally, it will worsen the performance of the world economy”
This is because, frankly, free trade is no more about comparative advantage as it was initially made to be, but has become a means of reducing costs to exploit profit. Translational corporations use free trade to relocate; this reduces wages in their countries and stimulates credit bubbles, therefore destroying the world economy (Turner, 2008). Now that countries are adopting protectionism, they will collect it difficult to outsource and will begin to fail.
TERRORISM
Another challenge is “the management of international terrorism risk” (Andrew, 2009, 251). This horror on international business could come through politics in the form of protectionism. A good example is the issue General Motors had with the German Government (ft.com 17/11/ 2009) #
DESTROYED Mark IMAGE
The bad publicity that was gotten by General Motors when it dragged its requested aid from the German government is going to retract time to regain (ft.com 10/12/09), General Motor’s decision not to sell OPEL to Canada’s Magna is raised a social plight, GM has been a huge victim in this crisis, its image is being ruined, to add to this, GM is said to have threatened the German Government, that it will hold on to OPEL, and this will lead to Insolvency. GM is asking for state aid, but this will ultimately increase tax on citizens and so is not the best plot to Solve GM’s problems (ft.com 17/11/ 2009).
EMPLOYEE’S CONFIDENCE
One of the barriers the crisis has brought upon General Motors is the sense on insecurity as far as employment is concerned. employees thought they had the best jobs, that nothing could take away from them, except they fault in performing their jobs, but they realized that the company
Had the right to take their means of leaving away from them and collect a huge amount of their tax money while at it. This will push people to self employment, and in the long run, General Motors being left to search for qualified personnel. This could probably only result to resentment, because after the crisis, there will be persons looking for jobs, that are qualified for such jobs.
FEWER WORK FORCES
This is closely linked to the above barrier, due to a lot of job losses, less work will be done, and productivity will be reduced
General Motors would have adopted the reach taken by France’s president Nicolas Sarkozy towards Peugeot and Renault, taking only three million Euros and closed no plants and not make staffs redundant during the bailout term (ft.com 10/12/09)
STEPING STONES FOR OTHER AUTOMOTIVE COMPANIES
The barriers this crisis caused for General Motors were stepping stones for other businesses in the automotive sector. Tata has the opportunity to grow from its domestic crash due to the low demand for its cars in 2008 and has used Jaguar and Land rover to bounce back (ft.com, 8/12/09)
EXEMPTIONS FROM CRISIS
Though international businesses are suffering, the ’smaller cap companies’ are the winners of this recession, having increases in six folds like Quintain, and also other companies like Minerva, getting refinancing to complete development that attracted private equity interest (financial times, 13/10/ 2009)
POSITIVE EFFECT
“Emerging market carmakers must thank their lucky stars for the crisis. For it has given them chances to obtain previously closely guarded western technology at knock-down prices.” (ft.com, 19/11/2009) Countries like China and Beijing are beneficiaries of this crisis in the automobile sector. Geely (China) is recently offering to catch Volvo (Ford’s brand) for a third of its value ticket ten years ago. The screech of Intellectual Property true has been shifted with desperation for survival, and emerging markets are at the receiving end. (ft.com, 19/11/2009)
BAILOUT
One plan, international Businesses have gained greatly from this crisis, is the granting if bailout by governments. This could be in form of Loans, Investments, and even suppose issuance of money, Robert Kiyosaki, eloquently described how president bush authorized 700 billion dollars to TARP#, this money was given to the biggest banks in the United states, but it was taken from the tax payer’s pocket, into the hands of the corporations that initiated the crisis. Though the money was given to benefit the banks to lend out to citizens, the government has not followed through with the tax payers money, in Robert’s opinion, it is honest one rich man paying another, from the money of the poor. “the bank bailout money was really honest a rich friend bailout, employed to cover those friends’ mistakes and obvious fraud, not to save the economy” (Kiyosaki, 2009, 24)#. In this sense, the financial crisis has had a definite effect on international corporations.
Loans are also being given to aid growth. The European Union (EU) authorized a loan by the European International Bank (EIB) to Saab Automobile in order to engage in Research and Development on Energy saving cars. This was done to promote GM’s (Swedish brand) sale to Koenigsegg Automobile (ft.com, 19/11/ 2009).
THE BEUATY OF GROUP WORK
This crisis has seen the coming together of companies and government, with one goal in mind: survival. Beijing automobile industry has invested 275 million Euros with Koenigsegg, in a deal to expand Saab (ft.com, 19/11/2009), also industries like FAW#, Dongfeng, shanghain automotive industry and changan are being encouraged by Beijing to consolidate the Automobile and steel sector (ft.com, 19/11/ 2009)
SPRINGBOARD FOR THE GROWTH OF OTHER COMPANIES VIA ACQUISITIONS
“China is set to find a toehold in the North American car market through Sichuan Tengzhong Heavy Industrial Machinery’s acquisition from General Motors of Hummer, the hulking symbol of Americans’ fading love affair with gas guzzlers.” (ft.com, 19/11/2009), also, General Motors is selling Saturn to Penske Automotive group (ft.com, 19/11/ 2009), the companies acquiring these cars will gain a lot: they have been sold in a cut down notice, the companies will have Intel on the product they have bought, and when the crisis is over, they could sell it for a much more higher price, making over 100% profit. These companies will grow because they are expanding (size, market, employees)
SURVIVAL OF THE FITTEST
Though the crisis was initiated the descend of a lot of great companies and financial institutions, the economic crisis will also test the durability of other organizations, and those organizations that pass this test, will rip the value of customers when the crisis is over.
WHAT CAN BE DONE?
Past economic crisis have been solved in deferent ways, “early intervention by central banks is more effective in limiting their spread than later moves” (Steve, 2007). all countries still adopt this method, the Dutch Central Bank intervened in the DSB bank explain in October 2009 (financial times, 13/10 2009)#. Steve also gives an economic report on how intervention has helped in the United States: During the DOT.COM crash in 2000 the federal reserve and the United States central bank cut interests rates throughout 2001, gradually lowering rates from 6.25% to 1 % to stimulate economic growth. The long-term capital management crisis of 1998 was saved when the federal government called leading United States banks and asked them to invest 3.65 billion dollars in LTCM, the federal government also made an emergency rate cut in October 1998, this made the market stable. During the United States stock market atomize of 1987 the government used “circuit-breakers” to limit program trading and allow authorities to suspend all trades for short periods. When the United States savings and loan institutions collapsed in 1985, the United States government was financial liable because it insured may individual deposits, the government setup the Resolution Trust Company to remove over and sell any S&L assets that it could, the cost of the bail-out eventually totaled about 150 billion Dollars. Also the ‘new deal’ by Franklin Roosevelt saved the United States from the great depression of the 1930’s by introducing extensive regulation of financial markets and the banking system via the creation of Securities and Exchange Commission (SEC). Lastly due to the failure of Overend and Gurney (a key London Bank) in 1866 a unique role was given to the bank of England to become a ‘lender of last resort’ saving Barings from the crisis of 1890.
In THOMAS’ (2000) opinion, there should be a “noteworthy re-affirmation of rules-based market policies throughout individual economies…a revival of the principles of open trade…” an agenda that reduces tariff and non-tariff barriers, extends the laws that influence, trade in services, Intellectual Property, and liberalize investment “… and explore ways to ensure that trade respects environmental, labour, and human right issues”. (p 244) But this was what crippled the economy in the first place, due to the connectivity of one country to the other; one country’s failure would be the failure of all. I am not against free trade, but free trade with so much enthusiasm and swiftness will be uncertain, countries should trade freely with the protection of their countries in mind
Financial authorities always came to our rescue before the point of an economic crisis, (George, 2008), but the bankruptcy of Lehman Brothers on Monday, September 15, 2008, was a different case, (George, 2008).
George (2008) presents ‘an economic recovery program’ a solution should as first prevent at all cost a situation where the weight of accumulated debt will sink the banking system and push the economy into depression, this could be done by “creating money to offset the contraction of credit, recapitalizing the bank system, and writing off or down the accumulated debt in an shipshape manner” (George, 2008, 171). He proposes a policy package of five major components;
A fiscal stimulus package to moderate the downturn. A thorough overhaul of the mortgage system, there should be minimum foreclosures; there should also be a systematic change that will not have the deficiencies of this fresh mortgage system, and George (2008) advocates for the modification and adoption of the Danish System, where the service companies (agents) retain s credit risk. He also proposes a recapitalization of the banking system, there should be a regulation of credit conditions and money supply, and regulations must not only be subjected to institutions occupied in credit creation. He also believes in an innovative energy policy, writing it could play a role in fighting recession and deflation. Lastly George (2008) writes about the reform of the international financial system, explaining that the destiny of the US is ‘interconnected’ with the rest of the world and since the International Financial institutions are centered around the United States and the Washington consensus, it has a vital task to shelter other countries (periphery) from this crisis and allow them to participate in fiscal policies.
Lawrence (International Trade Journal, 18/11/2009)# proposes a network flow model of international trade. he writes that countries should manage their international trade through the ‘variable compensation tax’ (VCT) he explained that present tariffs are administered in a mercantilist fashion to increase trade surpluses, but what countries should do is to
” repeal all tariffs and non,-health/safety import restrictions” (p11)
for instance, when its trade deficit reaches five percent, it should be raised by another five percent, and if it has more than five percent in surplus, it should be reduced by tow percent, therefore producing a balance.
Also, protectionism can never be the solution because “consumers pay higher prices, have less choice among products, have limited amount of products and have diminutive quality or products improvement” (Cortes 2000, 286). Local companies know that consumers have shrimp choice and are no more concerned about consumer opinion; YouGov turnover from the UK dropped 12 percent due to less demand for consumer behaviour data (Financial times, 13/10/2009). For instance protectionism on agricultural products will only burden consumers and taxpayers (Zietz, 1993).
Another good arrive to the crisis, will be the restructuring of the financial system that is going on because a “more efficient capital mobilisation and price discovery, and more liquid financial markets, confer enormous benefits to the economy” (ft.com, 27/11/09)
CONCLUSION
General Motors have had it all during this crisis, bankruptcy, bailout, job cuts, and sell out. This has been its barriers to growth in this economic crisis. Government plays a broad role in removing or reducing these barriers now and in future.
This current climate allows everyone (from common individuals, companies to governments: stakeholders) to pause and seek what went unfavorable and develop from that point, some business will come out of this crisis stronger, some weaker and some will be destroyed by this same crisis. In other words, the above evidence suggests that the present climate has posed barriers, as well as positive outcome (stepping stones) for businesses in the International Environment, affecting some sector further than others.
REFERENCE
ARTICLES
Adam, T. (2009, November 9) “economy: northern residence brunt of crisis” financial times. Accessed 19/11/2009
Andrew, W. in Skockholm and John, R. in London (2009, October 21) “EIB loan opens the door for SAAB sale” financial times. Accessed 19/11/2009
Beattie, A., (2009, September 14) “G20 nations break ‘no protectionism’ disclose” financial times. Accessed 6/11/2009
Bernard, S. in Toronto and Patti, W. in shanghai (2009, October 9) “GM sells hummer to chinese company” financial times. Accessed 19/11/2009
Daneshkhu, S (2009, November 13) “Stockpiles keep companies cautions”. Financial times. Accessed 10/12/2009
Financial Times (2009, October 30) “Auto technology grab” financial times. Accessed 19/11/2009
Financial times (2009, September 1) “Crisis confirms importance of financial sector” financial times. Accessed 27/11/09
Harvey, F. (2009, September 20) “recession results in steep fall in emissions” financial times. Accessed 10/12/2009
Hunter-Tilney, L. (2006, February 25) “In brief – A brief history of globalisation.” financial times. Accessed 29/30/2009
Joe, L in Mumbai (2009, May 29) “Tata push for land rover in India” financial times. Accessed 8/12/2009
John, R. (2009, June 5) “GM sells Saturn to Penske” financial times. Accessed 19/11/2009
John, R (2009, July 9) Motor industry correspondent “GM Europe sales fall 20%” financial times. Accessed 8/12/2009
John, R and Anousha, S (2009, December 10) car making: a fork in the road. financial times. Accessed 10/12/2009
Kathrin, H., in Beijing (2009, March 23) “Beijing drives consolidation of auto mobiles and steel sectors” financial times. Accessed 19/11/2009
Kurt, L. (2009, November 16) “German taxpayers should not bear Opel burden” financial times. Accessed
17/11/2009
Martin, W. (2008, October 10) “Financial crisis tests durability of globalisation” financial times. Accessed 10/11/2009
O’Doherty, J. (2009, October, 13) “YouGov swings into loss as recession knows demand” financial times. Accessed 13/10/2009
Steen, M., (2009, October 13) “Dutch state takes over after bank run” financial times. Accessed on 13/10/2009
Steve, S., (2007, September 3) “Financial crisis: lessons from history” BBC News. Accesses in 10/11/2009
Thomas, D. (2009, October 13) “Decent Underpinning helps companies bounce back” financial times. Accessed 13/10/2009
Thomas, D (2009, December 4) property correspondent “UK steady estate defaults double to £ 30bn”
BOOKS
Andrew, L. (2009) “Trends in international terrorism against businesses targets” in Kevin, I and Sheena, D (ed) “Contemporary challenges to international businesses”
Andrew, M. (2003) “free trade and its reception 1815-1960: freedom and trade” [EBook] volume 1, Routledge, NY
Cortes, A., (2000) “government intervention in International trade” in Monir, H.T “International Business, theories, policies and practices” Pearson Education Limited, Harlow
Daniels, J.D., Radebauch, L.H and Sullivan, D.P (2007) “international Business Environment and Operations” Upper Saddle River, N.J.: Pearson/prentice hall.
George, S. (2008) “the demolish of 2008 and what it means: new paradigm for financial markets” originally published in the US as “the new paradigm for financial markets by public affairs” the Banner of the Public Affairs Press.
Helen, V.M., and David, B.Y (1989) “between free trade and protectionism : strategic trade policy and theory of corporate trade demands” [EBook] International Organisation, vol.43, no. 2 pp 239-272
Keynes, J. M, (1936) “the general theory of employment, interest and money” Harcourt Brace, NY
Kiyosaki, R. T. (2009) “Rich dad’s conspiracy of the rich: the eight new rules of money” first edition. Hachette book group. NY
Marios. I.K., and Spyros, H. (2007) “International business: a global perspective” [EBook] Amsterdam, Boston, Elsevier,
McKenzie, E (2000) “the American economic system : analyzed and advocated” in Magnusson, L “free trade and protectionism in America: 1822-1890: Restatement of protectionism” [EBook] Volume 4, Routledge
Morrison, J. (2006) “The international business environment: global and local marketplaces in a changing world”
Thomas, D. (2000) “where do we go from here” writing in MacDonald, L. I “free trade: risk and rewards” [EBook] Published for the McGill Institute for the Study of Canada by McGill-Queen’s University Press, c2000
Turner, G., (2008) “Credit crunch: housing bubbles, globalisation and the world wide economic crisis” Ann arbour, MI Pluto Press, London
Wild, J. J, Wild, K. L, Han, J. C. Y (2006) “International Business: the challenges of globalisation” 3rd ed. Pearson Education Inc, New Jersey
Zietz, J. and Valdes, A. (1993) “the growth of agricultural protection” in Takatoshi, I and Krueger, A.O “trade protectionism” [EBook]. University of Chicago press
LECTURES
Group three presentation on the effect of the recession on the Agric business sector 13/11/2009 (University of Essex)
PUBLICATIONS
Briskin, L.E (1989) “A network stride model of international Trade” International Trade Journal: summer 89, vol 3, issue 4. P375-388, 14p
Roberts, L. F. (2004) “David Ricardo: theory of free international trade” volume 9, number 2, Economics insights.
WEBSITES
http://www.fdic.gov/bank/individual/failed/banklist.html
Peter. C (December, 1999) “free trade theory takes a beating; in the wake of economic crisis in Latin America, East Asia and Russia, arising chorus is questioning the orthodoxies of trade liberalisation” (online) http://www.twnside.org.sg/title/1980.html
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