Globalisation Essay (1390 words)

Nowadays it is a very common phenomenon to expand business globally. When there is a

demand for a good that a particular country does not have or cannot produce, the process of
globalisation begins (Crayton 2016). Global business simply means a firm that participate in
global economic activities. It can also means the action that a business from domestic country
expand to foreign country (Peng 2017). The objective of this paper is to determine the
definition of global business, recognise the four sequential phases model to expand business
globally and discuss the advantages and disadvantages of each stage. According to Williams
et al. (2017), there are four sequential phases model of globalisation which are exporting,
cooperative contracts, strategic alliances and wholly owned affiliates.

The first stages in the phase model of globalisation for domestic businesses to globalise their
business is through exporting. Exporting happens due to domestic companies produce the
goods and market it to clients in other countries (Williams et al. 2017) and it has become the
most common form of globalisation (Kuivalainen et al. 2012). There are many advantages by
using export to globalise business. First of all, the firm can speedy entry to foreign market by
using this phase model of globalisation (Czinkota et al. 2009). Based on a research done by
Tuhin & Swanepoel (2017) , it showed that exporting can be a profitable way to globalise the
business as it spread the risks and helps domestic company to reduce the degree of
dependency of sales in its home market. Besides, this phase model of globalisation lead
domestic company to growth their business further as through exporting they will have a
better ability to control their business activities in foreign country (Czinkota et al. 2009).
Exporting is not without disadvantages, the main disadvantages of exporting is that most of
the exported goods are impose with tariff and non-tariff barriers such as tax, quotas,
government import standards and others (Peng 2017). Moreover, the second disadvantages
for exporting is that it require a high transportation fees (Czinkota et al. 2009). Both export
barriers and high transportation fees can cause the final price for exported goods to increase
and this may affect the sales for the business as well. In addition, the domestic company will
also face many barriers through this phase model of globalisation. For example, domestic
company need to identify foreign suppliers and clients and finding retail outlet, all of these
processes can be expensive and take time (Czinkota et al. 2009).

The second stages in the phase model of globalisation is known as cooperative contract.
Cooperative contract simply means an agreement between domestic company and foreign

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company which allow foreign business owner to operate that business in his or her country by
pays a royalty fee to domestic company (Williams et al. 2017). Two types of entry mode
under cooperative contract are licensing and franchising. Under a licensing contract, domestic
firm (licensor) permits another firm (licensee) to use its brand name, sell its service or
product and produce its product in a specific foreign country by receive royalty payments
(Czinkota et al. 2009). The primary advantage of licensing is that without investing more
capital, companies can earn additional profits (Peng 2017). For example, if there is an
increase in the sales in foreign market the royalties paid by the licensee to the licensor will
also increase. Furthermore, this phase model helps domestic company to avoid from tariff
and non-tariff barriers because the goods are producing within the foreign country (Williams
et al. 2017). Besides, by using this entry mode licensors can finance their globalisation
expansion (Wild & Wild 2019). This is because licensees need to contribute equipment and
investment financing as most of the licensing contract require them to do so. Thus, it is good
for licensors who lacks capital and managerial resources but want to expand their business
globally. Licensing is not without disadvantages. The biggest disadvantage by using this
method to expand business globally is that the difficultly to control over the operations of
licensee in foreign country (Czinkota et al. 2009). Besides, it is risky for licensor if the
licensing contract involve access to significant technology or proprietary business knowledge
to licensee and this may create competitors to them (Peng 2017). In addition, the domestic
company’s entire reputation and goodwill may be damaged by the behaviour of a single
licensee in foreign market and it is very risky (Sherman 2003).

On the other hand, franchising is the granting of the right by one party (franchisor) to another
party (franchisee) to do business in a prescribed manner (Czinkota et al. 2009). Which means
that franchisor permit the franchisee to have the right for accessing into franchisor’s business
system and franchisee need to comply with the rules that franchisor has set. According to
Williams et al. (2017), the main advantage of franchising is a various way of support to
operate the business will provide by franchisors to franchisees. For example, franchisors will
provide training to franchisees, help them in advertising and marketing and provide them
evidence to operate the business in a specific place. Next, enter to franchise business that
offers a known brand name has a lower failure risk rate and it is easier for the business to
gain profit (Salar & Salar 2014). In despite of the numerous advantage of franchising, there
also have disadvantages by using this phase model of globalisation. When franchisors’
businesses is selling to franchisees who are far away in foreign country they might face a loss

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of control for their business (Williams et al. 2017). Moreover, franchisees need to comply
with the strict rules that established by franchisors in order to operate the business (Salar &
Salar 2014). If franchisee fail to follow the rules, franchisor will have the rescission right to
stop franchisee to continue operating franchisor’s business.

Strategic alliances are in the third stages of the phase model for globalisation. Strategic
alliance is defined as interfirm cooperation between companies aimed to create competitive
advantages and develop new capabilities by the joint development of goods, technologies and
services (Jinyeong 2018). Joint venture is the most common strategic alliance. Joint venture
happens when more than or equal to two existing parent companies work together and create
one new corporate entity (Peng 2017). Similar to the advantages of licensing and franchising,
one of the advantages for joint venture is it can be the entry mode that helps business to avoid
tariff and non-tariff barriers (Williams et al. 2017). Another advantage is the expenses and the
risks of that business is shared between two companies (Czinkota et al. 2009). As a result, if
there is a business failure both companies’ losses can be minimise as they only bear part of
the expenses and risks for that business. However, the profits gain from that new corporate
entity also need to be shared with between both companies (Williams et al. 2017). Next,
conflict may occur between joint venture partners if they have an equal ownership which is
“50-50 joint venture” which means that neither partner’s managers have equal power within
new corporate entity (Wild & Wild 2019). To avoid this conflict, they can establish unequal
ownership such as “60-40 joint venture” or “70-30 joint venture” and the partner who have
higher ownership have the right to make final decisions.

Follow by the last entry mode of globalisation, which is wholly owned affiliates. Wholly
owned affiliates simply mean the parent company have 100% ownership over the subsidiary
located in foreign country (Peng 2017). The main advantages by using this phase model to
enter foreign market is that the parent company have completely control power over the
foreign subsidiary (Williams et al. 2017). Which also means that all of the profits obtained by
foreign subsidiary will go the parent company. In addition, the parent company can get a fast
and direct feedback from the foreign market by build or buy foreign existing company
(Czinkota et al. 2009). Although, this phase model provide many advantages for companies
but it is not without disadvantages. The biggest disadvantage for this phase model is that it is
the most costly phase model to entry foreign market (Wild & Wild 2019). According to
Williams et al. (2017), it is also the riskiest phase model of globalisation as the parent

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company need to take all of the risk. Which means that the losses for the parent company can
be immense if there is a business failure.

To sum up, there are total four sequential phases model of globalisation which are
exporting, cooperative contract, strategic alliances and wholly owned affiliates. Each of the
stages in the phase model of globalisation have its advantages and disadvantages. Hence, it is
important for company to understand and evaluate the risks and benefits for each phases
model of globalisation before select the most suitable entry mode for their business to expand
globally.

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References

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Czinkota, M, Ronkainen, I, Moffett, M, Marinova, S & Marinov, M 2009, International

business, Wiley, viewed 24 August 2019, <http://search.ebscohost.com/login.aspx?
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Sherman, AJ 2003, ‘Franchising & Licensing : Two Powerful Ways to Grow Your Business
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Tuhin, R, & Swanepoel, JA 2017, 'Export behaviour and business performance: Evidence
from Australian microdata', Department of Industry, Innovation and Science,
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