Globalization: Strategies for the Business World

Globalization: Strategies for the Business World
Ever since the invasion of technology and telecommunications, we are seeing
mankind’s efforts of bringing the world closer together. As we continue to evolve into
the world of e-mails, internet, chat rooms, video conferencing, and other advanced forms
of communication, globalization is ever increasingly becoming a hot-debated topic for
nations around the world.
Globalization involves the growing integration of economies and societies in an
international environment. This includes “exchanges of currencies, capital movements,
technology transfer, international travel and migration, and in international flows of ideas
and information.”1 While many welcome the increasing competition, globalization is
promoting, others are cynical and are observing the inequalities in global wealth.
In spite of the controversial debate concerning the positive and negative effects of
globalization, small and large businesses alike are going global in hope of bringing forth
economic opportunities and rewards. Yet as great this sounds, companies must
understand that due to the complexities of economic systems between different countries,
their strategies involving the financial, investing, and the operational aspect of their
business must be refined as they globalize.
In domestic markets, especially in the U.S., companies are familiar with the
common functions of finance such as budgeting, cost control, and internal auditing. But
as companies go global, finance in itself becomes more complex and provides challenges
for chief financial officers (CFOs). They must not only consider the divisional
Le Pere, Garth, “The Positive and Negative Consequences of Globalization,” Ministry of Foreign
Affairs 2007: 1-5.
differences but also the complications brought on by currency, tax, and country risks.
Some multinational firms take advantage of institutional differences through wise
financing decisions. For example to increase financing in the internal capital market,
multinational firms exploit tax and borrowing cost differences by “borrowing
disproportionately in countries with high tax rates and lending the excess cash to
operations in countries with lower tax rates…[and] by carefully timing and sizing the
flows of profits from subsidiaries to the parent.”2 This gives them a competitive
advantage in countries when financing for local firms becomes very expensive.
Having an internal capital market also offers many risk-management options to a
firm; “instead of managing all currency exposures through the financial market, global
firms can offset natural currency exposures through their worldwide operations” as a
form of minimizing risk.3 Besides financing in the internal capital market and managing
risk globally, CFOs can add value as they globalize by improving their capital-investment
decision process; “in order to improve the quality of valuations, AES required managers
to incorporate sovereign spreads into their discount rates. Sovereign spreads measure the
difference between the rates at which two countries can borrow in the same currency, and
they are widely tacked on to discount rates in order to adjust for country risk.”4 Even
though the formal methods of valuation and capital budgeting work well in domestic
markets, they must be refined as companies globalize.
Besides the need to improve financial strategies, firms that plan to go global,
should also be strategic in their global investments; China’s financial institutions, for
Desai, Mihir A. “The Finance Function in a Global Corporation,” Harvard Business Review Jul 2008:
Desai, 109.
Desai, 110.
example, are now looking abroad for their own investment opportunities but must focus
on advancing their skills and global experience.
Many factors drive the overseas expansion of Chinese enterprises. China’s
government has loosened foreign-currency controls, streamlines the approval
process for overseas investments, and encouraged banks to provide capital.
Private equity firms, mainly from the West, are offering access to additional
capital and proposing investment opportunities to Chinese business leaders. 5
The shift from investment target to investor came suddenly and many Chinese
institutions are not fully prepared for their new role…three of China’s four
largest banks now rank among the global top ten in their industry by market
capitalization…China’s two largest insurers are now in the global top ten…those
IPOs gave Chinese financial institutions the cash needed to shop the world for
Opportunities where China can extract expertise and strategize their approach into
globalization involve, partnering with foreign banks and being proactively
selective to better extract value for the company. By partnering, China could
build institutional experience in international management, and use their skills
and capabilities of their foreign partners to upgrade their own in areas such as
consumer finance and structured finance.7 In addition to partnering, Chinese
institutions can “use their investments to gain exposure to foreign markets
through joint ventures and other forms of collaboration” and with that exposure
they can recruit outside talent to fill key positions at home for areas like risk
Hirt, Martin, and Gordon Orr, “Helping China’s companies master global M&A,” McKinsey Quarterly
Dec 2006: 39
Ngai, Joe, and Yi Wang, “Global Investment Strategies for China’s financial institutions,” McKinsey
Quarterly Jun2008: 1.
Ngai, Joe and Yi Wang, 3.
management.8 These strategic steps are what will give China as well as any other
country, great opportunities to create successful global institutions.
As stated before, in order to adapt to the strenuous demands of the global
markets, a multinational firm must be able to carefully strategize their financial
and investment opportunities. Furthermore, a company must be able to strategize
the operational aspect of their businesses especially when dealing with global
partners; “the company’s success is increasingly tied to its ability to orchestrate
and integrate the efforts of hundreds of global partners.”9 Since multinational
firms have businesses, at times through mergers and acquisitions, and do business
in many countries around the world, there must be a common ground in which the
many global partners work efficiently. Going global requires global
collaboration; it is a new and important source of competitive advantage. Firms
are now helping train partners through programs to build their communication
skills so that managers can learn to motivate and coordinate team members who
are from different cultures. For example in China, “the centralized decision style
of many Chinese companies can be a major obstacle to strong and well-informed
coordination. It works well at home, where business systems are relatively
straightforward. But as Chinese companies send executives into global markets,
decisions made at the center may be tardy and less well informed.” 10
Communication is vital when multinational firms have divisions in other
countries. To minimize the confusion among global teams, firms must create an
Ngai, Joe and Yi Wang, 2.
MacCormack, Alan and Theodore Forbath, “Learning the Fine Art of Global Collaboration,” Harvard
Business Review Jan 2008: 25
Hirt, Martin and Gordon Orr, 42.
infrastructure, a set of standards and regulations for sharing data for smoother
teamwork among isolated teams.11 Also, firms should test different collaborative
methods with the intention that teams from different cultures could match their
different strengths and methods with their assigned tasks.
While cultural gaps in management style and practice might never be fully
overcome, they must be actively managed (and make the most of) the skills on
both sides. The more explicitly these differences are acknowledged and the
more actively they are addressed in day-to-day operations, the less likely it is
that they will seriously impede the building of trust and collaboration. 12
Multinational companies that make strategic investments in the collaborative
efforts of their business do and will have a competitive advantage to other firms.
As firms begin to go abroad with the purpose of taking advantage of the
vast economic opportunities, it becomes evident that what might have worked in
domestic markets do not work with the complexity of the international markets.
Companies that are serious about globalization must refine their organizational
structure and strategize to accommodate their business to the different economic
systems of the world. Once adapting to the global demands of international
business, multinational firms can profit from the opportunities offered by
MacCormack, Alan and Theodore Forbath, 25.
Hirt, Martin and Gordon Orr, 43.
Works Cited
Desai, Mihir A. "The Finance Function in a Global Corporation." Harvard Business Review
86.7/8 (July 2008): 108-112.
Hirt, Martin, and Gordon Orr. "Helping China's companies master global M&A. (cover story)."
McKinsey Quarterly (Dec. 2006): 38-49.
Le Pere, Garth. “The Positive and Negative Consequences of Globalization.” Ministry of Foreign
Affairs 2007: 1-5.
MacCormack, Alan, and Theodore Forbath. "Learning the Fine Art of Global Collaboration."
Harvard Business Review 86.1 (Jan. 2008): 24-26.
Ngai, Joe, and Yi Wang. “Global Investment Strategies for China’s financial institutions.”
McKinsey Quarterly (Jun. 2008): 1-3.