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Global Business Business is , after governments, the most important institutional agent involved in the process of integrating world economies Modern business in the form of the limited liability corporation comes in a variety of forms depending upon which part of the world it originated in
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Global Business • Business is , after governments, the most important institutional agent involved in the process of integrating world economies • Modern business in the form of the limited liability corporation comes in a variety of forms depending upon which part of the world it originated in • The limited liability enterprise was particularly important during the early part of the industrial revolution-building of the railroads, opening of foreign trade, the development of modern banks • Business is a superior organizational form to markets, government or collectives in a wide range of instances—brings organization, risk finance, talent and technology under one umbrella—hierarchial direction of resources and tasks at much lower cost than either market or government could achieve
Ownership and Control • In modern business managers make the decisions but ownership of the assets and rights to profits are vested in different people-separation of ownership and control • In major industrial economies most business is owned by either individuals or other business ( including banks in many countries) • In many developing countries a lot of business is still state owned • Government owned corporations still important in some sectors in economies such as Canada in a few sectors (eg. Electrical utilities) but less important over time
Alternative styles of business • Modern business varies across the globe depending upon the link between managers, employees, shareholders and suppliers of finance • North American corporate model based on management direction with some loose control by shareholders (too loose maybe since Enron); employees have little direct say in the corporation • If management incentives aligned correctly with shareholders then managers should seeks to maximize the value of the enterprise to shareholders—what we sometimes refer to as PROFIT maximization
Profit Maximization and Business-Good or Bad? • There is a long line of economic thought which argues that profit maximization in conjunction with competition between business serves the greater social good • Argument developed by Adam Smith and others based on the idea that the most efficient use of societies limited resources is promoted by business trying to maximize profits • Also private(non government directed) business is widely believed to be a superior organizational alternative for most economic activity with notable exceptions (eg. Army, police, public health) where other social considerations dominate • Without profit incentive (the carrot) business has no reason to reduce costs or operate efficiently, BUT competition (the stick) is important as a limitation on the power of any single business enterprise (monopoly power)
Japanese and German style capitalism • Other business models different from the US-Anglo model however also important • Japanese use closely linked business groups called Kieretsu with a key bank playing an important role in each firm; boards of directors heavily overlapped--major problem in event of bankruptcy • European or German style capitalism also depends on bank provided finance as in Japan but firms run by boards with representation from unions, community and government—shareholders control over the firm is limited
Role of corporation in world economy • Corporations play a key role in the world economy • They are the major player in international trade as both exporters and importers (about 50 percent of world trade are actually transactions between related divisions of global firms • They are responsible for a large share of global investment (direct investment discussed below) • They are also responsible for the transfer of technology and know-how from one country to another
Blame the corporation! • Big business has always been a target for social critics—this remains true today( see movie The Corporation) • Corporations are blamed for low wages, layoffs, pollution, dangerous goods and products, poor working conditions, exploitation of children and women in developing countries and degradation of the environment • Undoubtedly in some cases this is true but one must always remember that the alternative—a state directed planned economy-suffers from most of the same problems • Modern regulation, the law and competition all place constraints on the ability of a corporation to exploit those whom it interacts with
Global Corporations are Big • Global corporations also called Multinational Enterprises or Transnational Corporations • In 2005 rankings place GE first in market value ($315 billion) but Exxon first in terms of sales $210 billion • They are huge employers as well • Rankings very volatile—move around every year—at one point Microsoft was largest US firm—not even in top 25 today
Some people compare corporations to countries: for example • Of the world's 100 largest economic entities, 51 are now corporations and 49 are countries. Suggestion is power of corporations much larger than that of nations • compiled by Sarah Anderson and John Cavanagh of the of the Institute for Policy Studies in their Report on the Top 200 corporations released in December 2000 (Corporations are in bold italics) • Data compiled as Rank, Country / Corporation based on GDP in case of country / and sales ($mil) in case of corporations • First 22 are countries but here is list of the next 50!
Does this make any sense? NO • Can’t compare sales to GDP or what we call VALUE ADDED • Value added for a company is equal to sales LESS purchases from other firms • GDP is the sum of value added across all firms in an economy • If you rank firms and countries by value added much different—only two of top fifty economies were corporations • In 2000 top 100 global corporations generated only 4.3 percent of global GDP
So power of corporations relative to states NOT increasing BUT • At sometimes we have to worry about monopoly in market through corporate concentration—eg. Microsoft –at global level this has raised considerable discussion about how to extend national competition policy which seeks control monopoly or cartel abuses to the global level • Note however that world’s biggest CARTEL in the world is OPEC—state organized monopoly—NOT corporate enterprise
Culture and Corporations • Widely asserted that modern corporation is US centric and responsible for creating global US based consumer culture –Nike, McDonald’s etc. • The role of US brands and US culture exports often emphasized by business critics • Undoubtedly true to a degree but US not the only party to this process –Japan, UK, France, Germany Italy etc. etc. all responsible for major global consumer brands (eg Sony) • Moreover as long as markets are competitive consumers are free to make their own choices—poor quality products will not survive in domestic or global market place
